sub dissent

The fallout continues. Six months after the January launch gaffe, lower-than-dreamed-of penetration rates have made necessary a whole new round of payment negotiations between the new specialty services and the cable companies as both sides scramble to reconfigure their original business plans.

With the financial health of the specialties at stake, the production community has a vested interest in how negotiations shake out. Significantly less fees paid to the specialties by the cablecos may trickle down the pike as less money for production, and already, there is grumbling amongst production folk that budgets are too close to the bone for productions in process.

It’s rumored the specialties need to be paid for 70% penetration from the cablecos to follow through with the budgets in-place. Currently, actual penetration is estimated at between 50% to 60%, although sources say the population-dense but channel-saturated Southern Ontario is averaging 40% to 50%.

To date, Canada’s two biggest cable operators, Rogers Communications and Shaw Communications, which cover about 60% of the market, are paying fees based on the actual number of subscribers.

While negotiations continue, the specialties, which understood they were to be made whole by Rogers, already have less in-pocket than they expected when they went to air Jan. 1. (The ‘make whole’ concept is a term left over from the launch of the first tier back in the ’80s. Services relegated to that tier, complaining that they weren’t reaching as many eyeballs as they did on basic, were compensated by the cablecos paying them for 100% of subscribers, and ‘made whole.’)

Penetration projections ranged from 80% to 95% early last year, based on the assumption the specialties would be added to the first tier and have access to its established audience.

When the idea for a second tier surfaced last October, ‘it blew the wheels off everybody’s financial model, but we were told by Rogers we would still be made whole and that quelled the uproar,’ says a source who asked not to be identified because negotiations are in progress.

Payment was as expected for January and February, but sources say that in March, the specialties were taken by surprise when the fee received from Rogers was based on a significantly lesser percentage than the make-whole concept indicates.

One source pegs the payment scale at 81% penetration, but Rudi Engel, executive vp, Rogers Cable TV, says the services were paid for the actual number of subscribers in March. Since negotiations are underway, he won’t say what the payment percentage was, only that it was not 81%.

But sources say specialty execs were led to believe they would be made whole even after the launch disaster, when Michael Allen, vice-chairman, regulatory affairs for Rogers, told an industry conference that Rogers stood by its intent to pay them for 100% of its subscribers. At press time, Allen had not returned a request for an interview.

Engel isn’t familiar with exactly what was said at the time, but says ‘there were no commitments made to any services. It’s an incorrect conclusion they’ve come to in terms of us promising to make them whole. That was obviously the commission’s intent, but the landscape has changed pretty drastically since then. Both the services and ourselves have to deal with it in as constructive a way as we can.’

Ken Stein, senior vp, corporate development and regulatory affairs for Shaw, says he believes Allen’s speech may have been misinterpreted. ‘What he said was that this was the case based on 80% penetration. We’re not anywhere near that.’

Shaw is currently paying the specialties for the actual number of subscribers that have taken the service. Prelaunch, the deal on the table was a 75% floor, meaning that the services would have been paid for 75% penetration regardless of the actual number of subs, and made whole when they reached 75%.

The deal was contingent on all the services signing, and since some wanted actuals as the measure for payment, contracts were put on hold until penetration numbers could be nailed down. Penetration numbers, where they stand now, nullify the original offer, says Stein.

‘That deal was based on the fact that we knew we weren’t dropping below 60%. There was no deal in place for lower than 60%,’ says Stein.

Sources say talks with the larger cable companies are revolving around a 70% floor. The services would be paid actuals until 61%, which would be belled to 71%, 62% to 72% etc., with 85% the make-whole bullseye.

Neither Shaw nor Rogers are currently paying premiums on the fee-per-subscriber plan. A premium scale is up for negotiation, says Engel. ‘At the end of the day, there may be other parts to the equation and we’ll look at it retroactively, but it’s too soon to say.’

With only about 10% of the specialties’ revenue base coming from advertising, and their main source of revenue contributing significantly less than expected, clearly the original revenue projections for the services have taken a hit.

David Kirkwood, director of sales and marketing for MuchMusic, speaking for Bravo!, says reduced revenue from the cablecos is putting increased pressure on the services to find other revenue sources like merchandising or video sales.

What is of concern to the specialties is that the trapping process for the services is far behind the rate of subscriber rejection. The no-votes are being counted against the payment percentage, but none of the cable companies have been able to trap fast enough to have every home that has canceled the service cut off.

‘A significant number of subscribers are still getting the service and we’re not being paid for them,’ says a source.

Stein confirms that not all traps have been installed. ‘Trapping takes time. We’re going to keep going to the point where we’ve got everybody taken care of.’

On the distribution end, Stein is optimistic that repackaging the services something like a u.s. superstation will bring penetration up in the long run. Already the wheels are turning in new packaging directions, with Rogers, Shaw and CF Cable announcing their new company, CableSat, at the Canadian Cable Television Association conference last week. CableSat will deliver 16 pay-per-view channels in Eastern Canada Sept. 1. Service in Western Canada is still being negotiated.