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The Baltimore Sun

The bitter standoff that left cable subscribers in the Midwest and South without the NFL playoffs and American Idol this month could eventually spill into the living rooms of television viewers across the country.

It's part of a burgeoning battle between cable operators and broadcasters that's been brewing for 15 years but now faces its biggest test yet. At issue is whether cable operators will pay for something they've always received free: local television news broadcasts and the network affiliations that come with them.

Local network programming has been available for free over the airwaves since the signals came by way of rabbit ear antennas. And when cable began growing in the late 1970s and early '80s, local television stations and the network affiliates that came with them became staples in cable lineups at no charge.

That arrangement was status quo for decades. Cable operators wanted to give their customers local stations they were familiar with while also persuading them to pay for a host of new channels like MTV and ESPN. In exchange, local broadcasters expanded their reach through cable, which meant more people could see the advertising sold on local network affiliates.

Their relationship began crumbling a few years ago when competitors such as satellite television providers began paying broadcasters for the local content. Coupled with an eroding advertising base because of an increasingly fractured media, broadcasters such as Hunt Valley-based Sinclair Broadcast Group now insist that cable operators pay for local content or lose the channels. Cable systems - which have seen their stranglehold on paid television erode during the past few years - say it's not fair to charge them for what they always received free.

The stalemate could leave more cable subscribers without their favorite programs, raise prices for cable television and force viewers to fiddle with those TV rabbit ear antennas again.

Sinclair, one of the nation's largest owners of independent television stations, pulled channels like Fox and ABC this month from cable systems in Des Moines, Iowa, and Pensacola, Fla., among others. Sinclair couldn't agree with cable operator Mediacom Communications Corp. on a price to air those stations. It has left some 2 million viewers without popular shows on their cable systems. And it has become a closely watched dispute since Sinclair and other broadcasters are negotiating with several cable companies over similar fees, including in the Baltimore area.

A 1992 federal law that was designed to spur more competition in the cable industry, create added consumer protection and protect local programming planted the seeds of this industry battle.

The 1992 law prohibited cable companies from carrying local stations without permission and gave broadcasters an opportunity every three years to negotiate for fees, advertising time or additional channel access.

"The reality is that the cable business was built on the backs of local broadcast signals, and we don't think it's unreasonable for broadcasters to be modestly compensated for value programming like a Lost, a 24, and the Super Bowl," said Dennis Wharton, a spokesman for the National Association of Broadcasters, a trade group in Washington.

But only in the past few years have broadcasters sought cash from cable companies. The market landscape has shifted in broadcasters' favor as cable operators face competition not only from satellite providers but telephone companies also delivering television signals.

Cable operators aren't budging. They argue negotiations are increasingly reaching impasses because of broadcasters' demands, ultimately hurting customers. As a result, some in the cable industry are calling for reforms in the so-called retransmission consent rules.

"The spirit of the [1992 cable] law was to protect the local voice of the local broadcaster in the local market," said Amy Cohn, executive director of public affairs for Atlanta-based Cox Communications, the nation's fourth-largest cable provider. "While it sounds good on paper, it's been distorted."

Still, with financial pressures mounting, broadcasters are pushing harder for the fees, analysts say. (Tribune Co., the parent of The Sun and more than 20 television stations, declined to comment.)

CBS, for instance, said it is inevitable that the network would receive cash for its content. Leslie Moonves, president and chief executive officer of CBS Corp., told analysts this month that the company is negotiating with three cable operators and could eventually earn "hundreds of millions" in retransmission fees in 2009.

"The trend has been increasing for broadcasters to dig in and fight for those revenues," said Robin Flynn, an analyst at Kagan Research, a media research and consulting firm.

Station owners nationwide are expected to collect $225 million in retransmission fees this year from cable and satellite operators as well as telecommunications companies, according to Kagan Research. That revenue is expected to generate $1 billion in 2009.

A recent report by Wachovia Capital Markets estimates that four major broadcast groups - Sinclair, Gray Television, Hearst-Argyle Television and LIN TV - could earn collectively about $163 million in retransmission revenue during the next five years.

The cable industry was a "monopoly," said Duane Lammers, chief executive officer of Nexstar Broadcasting Group Inc., a Texas company that operates 49 television stations in 11 states. "It changed when the direct satellite companies were able to extend their offerings of local stations into so many markets. It gave us some leverage we never had."

Analysts say Nexstar made the first major inroads in 2005 when it pulled six stations from cable systems in small markets in Texas, Missouri and Louisiana after cable operators there refused to pay cash to carry local stations. The standoff lasted almost a year until the disputes were resolved.

Now a majority of cable operators carrying Nexstar's stations pay cash, which is expected to generate nearly $50 million over the next five years. The company declined to name specific cable operators paying cash due to confidential agreements.

Cable operators aren't impressed by recent developments.

The nation's largest cable provider, Comcast Corp., is negotiating retransmission fees with Sinclair. Time Warner Cable said Friday night that it reached a deal with Sinclair. If an agreement is not reached with Comcast, 3 million customers, including those in the Baltimore area, could see Fox and other local networks pulled from their cable systems in March.

Comcast, like other cable operators, contends that it spends money obtaining and producing content, such as the local news, and making investments in technology. Giving into broadcasters' demands would lead to higher cable bills for customers, cable operators argue.

"With straight cash for carriage, there's a reason to pause because we haven't paid that in the past," said Pete Abel, vice president of corporate communications at St. Louis-based Suddenlink Communications, a cable operator serving 1.4 million customers.

Disputes have been common over the years, but it is rare for broadcast companies to pull programming because the stakes are so high. Broadcasters risk losing advertisers and viewers, while cable companies can lose subscribers to competitors.

But some broadcasters have done just that in smaller markets.

When Sinclair yanked 22 local stations from cable systems in 13 states Jan. 6 after negotiations failed with Mediacom, analysts described the dispute as one of the largest yet involving transmission fees. In response, Mediacom handed out thousands of free antenna kits in Des Moines and Cedar Rapids, Iowa, its largest affected markets.

When Mediacom was founded in 1995, the eighth-largest cable provider did not pay to carry local stations, said Chairman and Chief Executive Officer Rocco B. Commisso. But he is resigned to those payments now.

Still, Mediacom says Sinclair is asking for fees that are too high, while Sinclair argues it is asking for less than what cable companies pay other networks, such as Disney. "I don't have an issue of paying something," Commisso said. "We're beyond that. My issue is whether [the pricing] is discriminatory or not."

Sinclair has been at the forefront of pursuing cash for carriage. Sinclair said revenues from retransmission fees were expected to total $25 million in 2006, up from $3.5 million two years ago.

"We expect retransmission fees in all of our markets," Barry Faber, Sinclair's vice president and general counsel, said in a recent conference call. "What cable does is they have no particular right to that program, and they take that programming and they resell it," Faber added.

Despite calls by national and state legislators to resolve the matter through binding arbitration, Sinclair is holding its ground. The company has warned Mediacom customers that the fight could last for a long time. And with such fights getting bigger, cable providers and broadcasters seem to agree the battle could only get more aggressive when the next round of negotiations begins in 2008.

As Lammers, of Nexstar, put it, "It's going to be an amazing fight to watch unfold."

hanah.cho@baltsun.com

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