Kagan Analysis Shows Wide Value Gaps in Basic Cable Networks.

MONTEREY, Calif. -- Basic cable networks and the main multichannel TV platforms are entering a new era of tension over channel carriage fees. The reason is a growing disconnect between fees that platforms pay for channels and the audience levels channels deliver.

There were 138 nationally-distributed basic cable networks as of late last year and all want to receive ever more cash. In the most recent boom period stretching between 1994 and 1999, some 47 channels launched, according to Kagan Research. Yet viewership per channel is declining due to audience fragmentation.

Last week, women's basic cable network Lifetime regained carriage on EchoStar's DISH Network satellite platform-after being removed for a month in a bitter dispute when both sides could not agree on terms for renewing carriage.

"I think one fallout will be pushback from the platform operators when pressed to carry new channels," says Derek Baine, senior analyst at Kagan Research. "The platforms will want to put newcomers on expanded basic tiers, where extra fees to subscribers cover carriage costs. But the channels want to be in the core basic package to maximize audience circulation for advertising. This climate is much different than five years ago when industry launched spin-off digital channels that negotiated carriage without too much blood letting."

"Kagan Data Services: Economics of Basic Cable Networks 2006" estimates the average fee is 22 cents per channel per month in 2004 (excluding the pricey ESPN), up from 17 cents in 1995. All those nickel and dime channels add up. In 2005, platform operators paid on average $19.64 per month for channels in their basic offering, according to Kagan Research newsletter "Cable Program Investor." This wholesale rate is subject to markup as platforms must cover the cost of infrastructure and operations.

Regardless of audience levels, the oldest channels tend to have the highest carriage fees while up-and-comer channels - given they made cut-rate carriage deals at launch just to get shelf space - tend to be lower.

The accompanying table demonstrates the wide range of audience delivery efficiency of channels when their carriage fees are divided by their average audience levels. The industry average for 10 representative channels is $441 per viewing household per year. While a 25 cent carriage fee per home per month translates to only to $3 per year, the figure swells because carriage fees pile up from many households that don't watch the channel and thus add nothing to the viewership side of this metric's equation.

To interpret the metric, understand that the lower the dollar amount in this figure, the more value the channel is for cable operators. That's because the channel is getting relatively high viewership for a relatively low carriage fee.

The table also quantifies the murderous cross currents platforms face. Due to escalating per-channel carriage fees and fragmenting audiences, the compound annual growth rate (CAGR) of the metric of annual carriage fee divided by all-day household viewing has increased at a double-digit rate for five basic cable networks going back to 1995. This means platforms are getting less audience bang for their carriage bucks.

Regarding disconnects in carriage fees and audience levels, the below-average $270 per household figure for Fox News (launched in 1996) means the News Corp. channel is a bargain for MSOs in comparison to $957 for CNN (launched in 1980) which is suffering ratings woes. Lifetime, the object of the month-long impasse with DISH Network, weighs in with a below-average $209. In the Kagan data table, CNBC tops the list with a sky-high $1,857, a function of its affluent audience tuned to its daytime financial news. So CNBC's wealthy viewers are more valuable than a general audience.

The imbalances are likely to change slowly because channel carriage deals typically run 5-10 years. As a result, the window for readjustments-and the potential for flare ups-is limited. Going forward, Baine feels platforms will be more inclined to hold or cut fees for channels that are a poor value, rather than offer big fee increases for channels that are relatively underpaid. "There could be some newer channels with ambitious forecasts for higher carriage fees that become very disappointed," he says.

The existing channel with the most ambitious upgrade plan is Comcast's Outdoor Life Network, which aims to reposition itself with more expensive sports (see Sept. 23 Kagan Insights available free at www.kagan.com).

About Kagan Research, LLC.

Kagan Research consulting and publishing services offer exclusive financial data and analysis, relevant market advisories and expert 5- to 10-year projections on cable and DBS, broadcast television and radio, movies, entertainment and sports, digital, wireless and Internet technologies and media finance and law.