Smaller Cable Networks at Risk of Being Squeezed Out?

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 (s dis), TNT (s twx), Discovery (s disca) and CNN. That’s the key takeaway from AT&T’s (s T) negotiations with Crown Media (s crwn) 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 (s jpm) 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 (s TWX) and Disney (s DIS), 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.

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