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Old Deals Burden Big MSOs

10/13/2002 8:00 PM Eastern

As they work through their big merger, Comcast Corp. and AT&T Broadband are balking at AT&T's affiliation deals with both Starz Encore Group LLC and Gemstar-TV Guide International Inc.'s interactive program guide.

AT&T and Comcast maintain that if the current long-term agreements for Starz Encore, the TV Guide Interactive EPG and with billing vendor CSG Systems Inc. "continue to apply" after the merger, it "may materially adversely impact" the merged MSO's financial performance.

Those disclosures were buried in a 725-page S-4 filing that AT&T Comcast Corp. made with the Securities and Exchange Commission on Oct. 4.

The stakes with respect to Starz are high for AT&T and Comcast. Under the unusual — and now controversial — 25-year affiliation deal between AT&T and Starz, the MSO will owe the premium programmer a $360 million flat fee next year.

A year and a half ago, Starz sued AT&T to enforce that contract. The litigation has been stayed until this coming January, the recent SEC filing also disclosed.

Officials at Comcast, AT&T Broadband and Starz Encore declined to comment last week.

Shell: Confident

Gemstar-TV Guide CEO Jeff Shell said he's not worried about the AT&T Comcast filing for two reasons. He said he has "a positive relationship" with both MSOs, and is "in continuous discussions about how to broaden our business relationship."

Secondly, Shell said, "Comcast has the right to fold AT&T under their contract when the merger closes, and we fully expect that they will."

It is likely that AT&T Comcast will inherit AT&T's programming deals because the merger is a stock deal and not an asset sale, several MSO sources said. An asset purchase allows the acquirer to avoid any liability for contracts the seller had reached prior to the sale.

But a combined AT&T Comcast would be far and away the largest MSO in the country with 22 million subscribers. (AOL Time Warner Inc. is second with 10.8 million customers.) With that kind of clout, AT&T Comcast could press programmers to renegotiate their deals.

Several programming executives said they expect Comcast to bitterly contest AT&T's affiliation deal with Starz. AT&T has been battling with the premium service over the 25-year pact, inked in 1997 by predecessor Tele-Communications Inc. and its Satellite Services Inc. subsidiary.

"If I were Comcast, I would absolutely rip it up," one veteran of premium services said.

At the time the deal was done, Starz was a division of Liberty Media Corp., then a unit of TCI. In July 2001, the premium service filed suit against AT&T, seeking to enforce their carriage agreement.

Comcast might have a bargaining chit in its relationship with Gemstar-TV Guide, as its relationship with rival IPG consortium TV Gateway Inc. provides some leverage in its negotiations.

Comcast is a partner in TV Gateway with three other MSOs — Adelphia Communications Corp., Cox Communications Inc. and Charter Communications Inc. —and ITV player WorldGate Communications Inc.

Starz suit delayed

Back in July 2000, the MSOs said they would invest a combined $24.5 million in the project, but so far the rollout of the TV Gateway IPG has been limited.

The unprecedented TCI-Starz pact was forged on John Malone's watch. It calls for TCI — and now AT&T — to pay Starz huge fixed annual fees.

The flat fees started in 1998 at $270 million, and were to rise to $360 million next year, increasing at the rate of inflation after 2003.

According to the Oct. 4 SEC filing, action on the long-pending Starz lawsuit has been stayed until January, "with a requirement that the parties attempt to mediate the dispute." Of course, the court-ordered stay, until Jan. 31, also delays potential resolution of the lawsuit until after AT&T's merger with Comcast is completed.

Back in 2001, AT&T informed Starz it didn't plan to comply with the old TCI agreement, so the programmer went to court looking to collect $44 million it claimed the MSO owed it.

In the Oct. 4 filing, AT&T Comcast said that the affiliation deal AT&T inherited for Starz also "may require Broadband to pay two-thirds of Starz Encore Group's programming costs above levels designated in the term sheet."

That unique escalator clause means AT&T has to help foot the bill for some of the theatrical films Starz buys. The $44 million that AT&T was withholding was for those so-called "excess programming costs."

The SEC filing also noted that in 1999, AT&T predecessor TCI inked a 10-year deal with Gemstar for interactive program-guide services, designating TV Guide as the interactive guide for AT&T Broadband's systems.

The filing states that "the price, terms and conditions of the Starz Encore term sheet, the TV Guide agreement and the billing agreement may not reflect the current market."

Whither Oxygen?

AT&T has been in a protracted legal dispute with billing-services provider CSG over their contract, which expires at the end of 2012. This summer, CSG sued Comcast for allegedly interfering in the vendor's ongoing fight with AT&T.

Because of that pending litigation, a CSG spokeswoman declined to comment last week on the SEC filing.

Programmers continue to wonder about how the post-merger AT&T Comcast will deal with its two sets of affiliation agreements. One of the issues is what happens to networks such as Oxygen, which now have carriage deals with AT&T, but not with Comcast.

"At this point, it [the merger] doesn't have a significant impact on Oxygen," a spokeswoman for the women's network said.

One cable-network chief said that the fate of programmers such as Oxygen depends on the channel-alignment strategy AT&T Comcast ultimately adopts.

If the merged MSO opts for uniform lineups across various markets, some networks could gain wider distribution, while others could lose their current low-channel slots.

 

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