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Summary:

Smaller cable networks might see their negotiation leverage being stripped away, as cable companies commit more of their programming spend to “must carry” channels. That’s one key takeaway from AT&T’s recent negotiations with Crown Media for carriage of the Hallmark Channel and Hallmark Movie Channel.

hallmark

Smaller cable networks might see their renegotiation leverage being stripped away, as cable companies and other pay TV providers commit more of their spending to “must carry” channels like ESPN, TNT, Discovery and CNN. That’s the key takeaway from AT&T’s negotiations with Crown Media for carriage of the Hallmark Channel and Hallmark Movie Channel.

AT&T allowed its contract with Crown Media to lapse, essentially dropping the Hallmark cable networks when the deal expired at midnight on Sept. 1. According to JP Morgan Chase analyst Imran Khan, “there has been no sign of progress toward reaching a deal,” suggesting that AT&T might not bring those stations back to its U-verse pay TV service.

The decision to let the deal lapse might not be too surprising, as most subscribers probably won’t even notice that the Hallmark-branded channels have disappeared. In a consumer survey that JP Morgan Chase conducted in April, neither the Hallmark Channel nor the Hallmark Movie channel cracked the top 50 list of “must carry” networks. That means that less than 10 percent of respondents said they would change pay TV providers if the network disappeared.

While cable companies have done a good job of bundling a diverse group of networks as a way to give consumers a wide range of programming to choose from, that intense fragmentation means that very few networks establish a significant audience. As industry heavyweights, such as Time Warner and Disney, push ever more-expensive packages of their cable programming, the smaller networks will lose leverage to negotiate their own deals. As a result, they could see less favorable deals or risk being dropped altogether.

The average amount that consumers pay for their cable subscriptions has increased about 8 percent over the past year. While some of that increase comes from the adoption of premium cable packages and value-added services such as HD DVRs, the top pay TV firms have increased their basic subscription rates anywhere from 3.7 percent to 7.1 percent during that time. Those types of increases are untenable, especially in a weak economy. Last quarter, the cable industry saw the number of pay TV subscribers decrease for the first time ever, as 200,000 households decided to cut the cord and do away with their cable bills altogether.

Rather than run the risk of alienating more subscribers with ever-higher cable bills, pay TV providers may begin to look more closely at their programming spend and deciding which content is most important to retaining its existing subscriber base and attracting new subs.

Stacey Higginbotham at GigaOM reported earlier this year that some smaller cable companies, like Broadstripe, were already evaluating their content mix more closely due to the cost of content. But the fact that AT&T may drop Hallmark shows that even big-name pay TV providers are also taking a closer look at which content is worth paying for, and which isn’t.

Related content on GigaOM Pro: How Online Video Is Shaping the Next Round of Retrans Fights (subscription required)

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  1. Davis Freeberg Friday, September 3, 2010

    The more that AT&T tries to force consumers to accept inferior products, the greater the opportunity for smaller cable operators to steal market share from them. I’d love to use Uverse myself, but have two fundamental problems. #1 they force me to buy TV with the internet. If they decide not to carry the Hallmark channel, ESPN or any other channel, consumers have limited ways to protest. Unless they are willing to give up the high speed internet, they are stuck with a bunch of useless channels that may or may not be relevant. The 2nd reason (and even more importantly for me) is that they won’t let me choose what kind of DVR I want to bring to their TV service. It’s great that they’ve spent all this money building a neat DVR, but how much would it really harm them to support cablecard functionality like Verizon at least does? It’s not like there are so many TiVo subscribers out there that they’d even miss the revenue. But instead of letting consumers pick their preferred operating system in the living room or giving them choice to robust on demand content like Netflix, Blockbuster or Amazon, they are burying their heads and trying to force people into a one size fits all entertainment package. Let me choose my channels, let me choose bytes and/or video, let me pick how I want to organize my media content and you’ll win a customer. Try to make me give up my TiVo and I’ll stay a happy OTA customer who doesn’t give away $75 a month on television. Already, the smaller cable companies have embraced these choices and will win business by allowing choice even if they may not have the same financial resources to fight the incumbents.

  2. One of the ways for smaller cable networks to compete is to accept that they cannot demand a higher price from cable TV companies AND use that to their advantage. They could make the sales pitch, “Listen. We provide the same kind of content as X channel for less. Carry us and save money.”

    And I think it is only a matter of time before Congress sticks its nose into this. What cable TV companies pay cable TV networks gets passed right along to consumers. It would surprise me if members of Congress might entertain the idea that prohibits cable TV companies from paying anything to cable TV networks. Right now, many cable TV networks make more off of their carriage fees paid by cable TV companies than they do from advertising. By all looks of it, this trend is likely to continue. In fact, I think TMC (Turner Movie Classics) which runs no commercials (if I’m getting things right in my head) makes all of its income from carriage fees. If what I predict to happen in Congress happens, I could see Congress giving cable TV networks a choice of either no TV ads or no carriage fees. One or the other but not both.

    Another thing that kind of confuses me is why PBS isn’t demanding the highest carriage fees of all. PBS could completely support itself off of carriage fees (no more annoying donation drives!) and every single cable TV company would be too afraid not to pay it. PBS still has clout with a huge section of the population and it should know that cable TV companies would have to carry them or face political and social consequences.

    1. Mistyping.

      I typed:
      “It would surprise me if members of Congress…”

      Meant to type:
      “It wouldn’t surprise me if members of…”

      I really wish NewTeeVee would enable us to edit our posts after we post them for when we do things like the above. So many other places allows people to edit their posts that is just seems bizarre that NewTeeVee doesn’t let us. Come on, NewTeeVee guys and gals, join the 21st Century!

  3. A great example of remaining relevant. When the Hallmark Channels were created they were going after a niche. That’s what everyone was doing back then. Food network, Home network, this network, that network. Some have gone on to get a good market share and large following – others have not. Crown has failed to provide value to the Carrier so off they go.

    This is a fabulous opportunity for the IPTV platforms to pick up a niche. While Hallmark didn’t have a huge committed following they did have some. IPTV would let them reach into their viewers homes directly. This would take some out of the box thinking by Crown which I hope they are prepared to do.

    IPTV services are always looking for content so they may have a good fit.

  4. So, all cable will be sports and anything else like cooking shows iptv? The hardest drug commands the best price and distribution and shoves everybody else out of the way.

  5. You wouldn’t by chance have and post that JP Morgan list would you? Would be very interesting to see.

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  8. where the heck are the cooking channels — this is the reason I pay for cable to get them. If they don’t come back I will rethink my package and perhaps just cancel.

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