Basic necessity makes TBS' basket case.
The combined license fees for TBS and TNT alone shot up from the current four-year total of $350 million to $890 million for the new contract, which kicks off with the 1998-99 season. Stern knew that Turner was desperate to make the deal, and not only because NBA games tend to deliver pumped-up Nielsens, particularly among young males.
The key reason that the NBA contests became "must-have programming," as Harvey Schiller, president of Turner Sports, put it at the press conference, is that TBS is now locked into hammer-and-tong negotiations with cable operators as it tries to extract hefty license fees from them for the first time since TBS' bow as a nationally distributed service in December 1976.
There are less than seven weeks to go before TBS officially changes its identity on Jan. 1, 1998, from superstation to basic-cable network, a move that will allow it to tap into a possible $100 million in new revenue from cable systems. As a superstation, TBS suffered the handicap of being able to derive income from only one revenue stream, the sale of advertising time on its programming schedule.
TBS has drawn up a five-year contract, which - to take one typical example - demands a non-negotiable payment of about $3 million in the first year from a cable operator that services 1 million subscribers. The op would pay an additional $240,000 a year for each of the next four years under TBS' plan, topping off at a license fee of $3.9 million in year five. That translates to a monthly fee of 25[cents] a subscriber - more than cable systems pay for Lifetime or Family Channel, but less than their monthly fee for TNT (about 50[cents]) or USA (about 33[cents]).
Cable operators will get a big chunk of that license fee back in two barter minutes an hour to sell to local advertisers, Turner says. When TBS was a superstation, operators received no barter time.
These local spots sound great, but all they've done is to put Turner at loggerheads with many cable operators, who wonder where the new ad dollars will come from.
Turner's argument is that the commercial time will generate new cable revenues, because TBS operates so much like an independent TV station it'll siphon off most of its ad dollars from local broadcast stations.
The counter-argument by cable operators is that TBS' program strategy is really closer to that of general-entertainment cable networks like USA, TNT, Lifetime and Family Channel, and so will end up merely cannibalizing the ad revenue base of its cable-channel rivals. "TBS is asking us to guarantee its license fees," says Gerald McKenna, VP of strategic planning for Cable One (formerly Post-Newsweek Cable), "but we're supposed to take all of the risks on revenues from ad sales." Cable One is the 17th-largest multisystem cable operator in the U.S.
McKenna says he's asked Turner to "guarantee our cable systems a certain percentage of local ad sales," a rebate from TBS that would kick in only if the systems failed to reach a sales figure agreed upon by both parties. Although reps from Turner Broadcasting declined to comment for this article, one source says Turner would be foolish to sign such a guarantee because it would end up subsidizing local sales executives, even those who may be incompetent.
Jeff Abbas, senior director of programming for Adelphia Cable, a top-10 MSO, says he's proposed to TBS that the contract include a clause allowing the parties to reopen negotiations after six months if the two commercial minutes fail to increase the cable system's local sales revenues in the Adelphia markets.
But Turner is standing rigid on the 25[cents] a month, because of the most-favored-cabler clause in TBS' contract with John Malone's Tele-Communications Inc., entered into last year when Time Warner merged with Turner Broadcasting. According to that clause, if just one cable operator gets a lower rate than 25[cents], TCI's rate would also drop to that level, forcing TBS to take a huge bottom-line hit.
The exception to the minimum rate is for cable systems with fewer than 3,500 subscribers, which, because they lack the technological capability to insert local commercials, get a 20% discount up front. But Matt Polka, president of the Small Cable Business Assn., says that even with a 20% discount, small operators won't be able to pass the extra cost of TBS onto their subscribers, because satellite distributors like DirecTV are already pulling customers away from cable by charging lower rates.
Hard to say no
Still, it's highly unlikely small systems will reject the Turner deal and drop TBS, Polka says, because their subscribers "would run them out of town on a rail" if the network was purged from the channel lineup.
Although TBS' Nielsens have slipped in recent months, the network is still one of the highest-rated in all of cable, boasting a lineup of about 100 or so Atlanta Braves games a year, Nascar races, broadcast premieres of movies like "Dumb & Dumber" and "The American President," forthcoming sitcom reruns such as "Friends" and "The Drew Carey Show," plus a full schedule of NBA playoff games.
Rating the game
And if one of the small systems decided to get rid of TBS, Polka says Turner would retaliate by jacking up the rates for CNN, TNT, Headline News, Cartoon Network and other program services owned by Turner's parent Time Warner.
Yet despite Turner's enormous clout, the company hasn't yet announced any deals with cable operators, save the ones with its sister company Time Warner Cable and with TCI, which owns a 9% stake in Time Warner Inc.
"Right now, Turner and the cable operators are engaged in an elaborate game of chicken," says one executive of a top-10 MSO, who requested anonymity. "But as soon as the first operator caves in, all of the lemmings will follow. The only question is: Will (the operators) be entering the promised land, or will they be tumbling off a 200-foot cliff?"