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Scripps Seeks Affiliate-Fee Increase

9/19/2008 8:00 PM Eastern

Scripps Networks Interactive chief financial officer Joe NeCastro said that its flagship cable channels Food Network and HGTV will have a slew of affiliation deals to renew by the end of next year, and that cable, satellite and telco TV operators should prepare to pay a lot more for those popular networks.

At the Goldman Sachs Communacopia conference here Thursday, NeCastro said that about three-quarters of its Food Network and half of its HGTV network-affiliation deals will expire by the end of 2009.

NeCastro said that SNI already has started mapping out its strategy and hopes to have five or six of those affiliation deals completed before the end of next year.

He said that one advantage is that HGTV already established a new rate card with the two largest cable operators in the country, Comcast and Time Warner Cable. “We feel like we are in a pretty good position for the balance of that network’s affiliation deals,” NeCastro said.

He also pointed out that affiliate fees currently represent about 20% of total revenue for the networks, far below some other programmers. He added that in the next three to five years, the goal is to grow affiliate fees closer to 30% of total revenue.

According to SNL Kagan data, Food Network is receiving affiliate fees of about 8 cents per subscriber per month, while HGTV gets about 11 cents. In response to a question, NeCastro said, “[25 cents] is certainly achievable at HGTV over the period.”

He conceded that there is a risk that distributors will resist increases, but he added that the gap between what the networks are receiving and what they are worth is large.

“This is a once-in-a-decade opportunity,” said NeCastro. “We really do have to get the value reflected. We’re willing to be aggressive in that. It adds a little risk, but I think it’s a high-stakes game and we need to play hard this time.”

Scripps CEO Ken Lowe added that the networks have been a bargain for cable and satellite operators for years. They were initially free, and Scripps didn’t begin charging a fee until 2004. And he said that the channels also generate strong local ad sales for the MSOs.

“We have been a very good partner for the MSO and satellite providers and we will continue to be a good partner,” Lowe said. “At the same time, we have fulfilled our end of the bargain — that is, we took a network that was for free and invested a lot of money. Food is one of the hottest cable networks in terms of ratings.”

Investors appeared encouraged: SNI’s stock closed Sept. 18 up 5.3% ($2.07 per share) to $41.23 each.

September