Time Warner Goes to War

The Conan O'Brien signing was a small piece of a content plan from Time Warner CEO Jeffrey Bewkes, reports Peter Lauria: squeeze cable distributors by making his networks must-see assets.

Conan O’Brien may not realize it, but Cablevision, Comcast, and DirecTV all had a hand in his hiring at TBS. Recruiting the red-headed humorist with a Harvard degree is clearly an offensive move by TBS’ parent company, Time Warner, in the ongoing war with cable and satellite television distributors over ever-escalating programming costs.

And make no mistake about it, the two sides are at war. Network owners like Time Warner, whose stable of cable channels includes HBO, TNT, and The Cartoon Network, and cable distributors such as Comcast have always had a healthy antagonism towards each other, but over the last few years the working relationship between the sides has gotten downright hostile as program suppliers seek to squeeze more cash from carriage fees—or the amount of money paid to broadcast a channel—and distributors look to cut costs wherever possible. Last year, News Corp.’s threat to pull Fox from Time Warner Cable (a separate company from Time Warner, which is now squarely a content company), Scripps’ blackout of Food Network and HGTV for Cablevision subscribers for three weeks and Disney’s dropping of ABC from Cablevision during the first 15 minutes of the Oscar ceremony in February were all the result of carriage fee disputes.

“Yeah, Conan is such an incredible piece of programming,” snarls a distribution executive, “that NBC saw fit to drop him.”

By adding O’Brien to a lineup that includes Major League Baseball, original series like Tyler Perry’s House of Pain, and Lopez Tonight, Time Warner is trying to both provide justification to increase the amount it charges distributors to carry TBS and insulate the network from the threat of blackout.

“They are trying to make TBS a must-carry network,” says someone who speaks regularly with Time Warner CEO Jeffrey Bewkes.

Watch Conan’s Basement Talk ShowPeter Lauria: Conan’s Smart DealWith advertising revenue in steep decline as consumers migrate to the Web and mobile platforms, increasing carriage fees has become a primary source of revenue growth for cable network owners. For Bewkes, the need is even more pronounced: After spinning off AOL and its aforementioned distribution division, Time Warner’s cable networks are the lone growth area left in the company, and the steady cash flow generated by carriage fees helps offset the financial declines in the Time Inc. magazine empire and the hit-and-miss nature of its movie business.

Bewkes knows that the best way to increase a network’s value is to invest in original programming, which is one reason why he’s shelled out more than $200 million for HBO’s The Pacific. Sources close to Bewkes say to expect more big original programming investments from Time Warner’s cable networks. The beauty of O’Brien, who sources say is getting between $10 million and $15 million upfront, as well as complete ownership of his show, is that he comes equipped with a built-in following that will immediately establish him as one of TBS’ biggest franchises, even if he less than the 2.5 million viewers per night that NBC considered a huge failure for The Tonight Show.

“Conan is exactly the reason why people subscribe to cable,” says Turner Entertainment Networks president Steve Koonin. “He helps us have the healthiest TBS brand possible, and if you can grow that you can grow the business.”

Koonin declined to comment on Bewkes’ invest-to-grow mentality or additional programming that TBS might buy or develop except to say that the Time Warner CEO “understands what we need to do to grow the business and let’s us go do it.”

After growing into a $1 billion-plus business during the last decade, TBS has hit a bit of a wall, though it still ranks as a top ten cable network with close to two million average nightly viewers. Net advertising revenue is expected to decline to $673 million this year from $687 million last year, underscoring the importance of carriage fee increases to a network’s growth, where revenue is expected to increase to $607 million this year from $580 million in 2009, according to estimates from SNL Kagan. But even TBS’ carriage fee rates appear to have reached a plateau. The network, which has around 100 million subscribers, charged cable distributors 19 cents per subscriber in 2000. That number grew to 37 cents by 2005 and 49 cents by 2009, but is only expected to inch up 1 cent this year to 50 cents per subscriber.

Bewkes’ hope is that O’Brien’s hiring will serve as a catalyst to reinvigorate a network best known for airing Everybody Loves Raymond, Sex and the City, and Family Guy reruns.

“If TBS can squeeze an extra five cents or 10 cents per subscriber, that’s a lot of money over the life of a contract agreement,” says another company insider.

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The plan could backfire. O’Brien is an unproven entity in a timeslot other than 12:30 a.m., going up against competitors like Comedy Central’s Jon Stewart and Stephen Colbert, not to mention Adult Swim on the Cartoon Network, all of which target the same 18-49 year old male demographic. Moreover, Stewart and Colbert, both of whom average between 1 million and 1.5 million viewers per night, feature profiles remarkably similar to O’Brien—namely ironic white men in their late 40s. While the conventional wisdom is that O’Brien will make TBS stronger conceptually, another failure on the order of The Tonight Show could actually weaken the network.

Already, cable distribution executives are taking swipes at O’Brien in preparation for what they expect to be a large increase in carriage fees from TBS in contract negotiations.

When asked if TBS was now a must-carry network with O’Brien onboard, one cable distribution executive sarcastically said, “Yeah, Conan is such an incredible piece of programming that NBC saw fit to drop him.”

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Peter Lauria is senior correspondent covering business, media, and entertainment for The Daily Beast. He previously covered music, movies, television, cable, radio, and corporate media as a business reporter for The New York Post. His work has also appeared in Avenue, Blender, Black Men, and Media Magazine, and he's appeared on CNBC, Bloomberg, BBC Radio, and Reuters TV.