Programmer/Distributor Cable TV Bundle Deals In the Era of Digital Content Delivery Alternatives

The programming “bundles” that the cable television industry offers requires consumers to purchase a pre-packaged group of networks in order to gain access to any one network. Generally, distributors require customers to purchase basic, expanded basic and premium tiers. The basic tier often includes local broadcast stations and educational, governmental, and public access networks, as mandated by the Federal Communications Commission (FCC) under “must-carry” laws. (See, Implementation of the Provisions of the Cable Communications Policy Act of 1984, 50 FR 18637-0.1: “Basic cable service is the tier of service regularly provided to all subscribers that includes the retransmission of all must-carry broadcast television signals as defined in ”76.55 to 76.61 of the rules.”)

An expanded basic tier typically contains the most popular networks. Distributors offer several premium tiers for a higher fee, including networks such as HBO and Showtime, as well as genre-specific packages (e.g., sports, children's programming).

Distributors make money by charging subscribers a monthly fee based on their tiers, which increases in cost based on the number of networks included in the tier, and the number of packages purchased. Programmers make money through license fees charged to distributors, usually based on a per-subscriber basis per network licensed. The more subscribers receiving the network, the more license fees are paid. Programmers also make money through advertising, which rates are dependent on how widely a network is distributed.

The contracts between programmers and distributors generally dictate how distributors will carry the licensed networks. These provisions often specify the tier on which an individual network must be carried, or require that it be packaged with other comparable networks. If a programmer has a very popular network, it can bargain for the inclusion of that network, and possibly its other, less popular networks, on a distributor's “most widely distributed” tier (i.e., the tier with the most number of that distributor's subscribers). Contracts may also contain a “penetration” requirement, either in addition to or instead of “tier” or “packaging” requirements. A “penetration” requirement may mandate that a particular percentage of a distributor's subscribers receive a specific network. Under this scenario, the distributor carries the network however it wants, but ensures that the required percentage of its subscribers receives the network. Provisions regarding how a network is carried are the backbone of contracts between providers and distributors.

Challenging Bundles

The programmers' practice of licensing networks as a bundle has been attacked before, as an unlawful “tying” arrangement in violation of '1 of the Sherman Act (15 U.S.C '1). For example, in Brantley v. NBC Universal, 675 F.3d 1192 (9th Cir. 2012), a class of cable and satellite subscribers filed suit against a group of programmers and distributors, alleging that the programmers' practice was anticompetitive. The subscribers sought to compel programmers and distributors to sell channels separately. In Brantley , the “injury” alleged from the act of bundling networks was that such conduct “limit[ed] the manner in which Distributors compete with one another in that Distributors are unable to offer a la carte programming, which results in ' reducing consumer choice, and ' increasing prices.”

The U.S. Court of Appeals for the Ninth Circuit upheld dismissal of the plaintiffs' claim, concluding the bundling arrangement was a “freedom” of “contracting parties,” and that any resulting reduction in consumer choice or increase in cable prices was “fully consistent with a free, competitive market” and not plausibly indicative of “anticompetitive” behavior.

In 2013, another antitrust suit was filed against the programmers, this time by distributor Cablevision, which alleged that programmer Viacom was bundling its more popular networks with its lesser-watched networks, in violation of the Sherman Act. Cablevision Sys. Corp. v. Viacom Int'l, 13 Civ. 1278. Cablevision asserted in the litigation that its licensing agreement, which required Cablevision to contract for dozens of Viacom's networks to obtain “four commercially critical” networks, had prevented Cablevision from purchasing content from other programmers.

In June 2014, the U.S. District Court for the Southern District of New York denied Viacom's motion to dismiss, finding sufficient allegations to support an “inference of anticompetitive effects.” The outcome of this case may greatly impact the economics of the bundle: If Viacom's strategy is found to be “anticompetitive” and the programmer bundle forced to be broken, it may reduce the number of networks a distributor chooses to license and, therefore, the fees it pays (and presumably, the fees its customers pay).

Cutting the Cord

Consumers who watch only select networks in the bundle have only one meaningful alternative to paying for channels they don't watch: to “cut the cord” and opt out of cable altogether. Distributors have therefore pursued new initiatives to keep these customers. In April 2015, Verizon launched a pared-down (in number of networks and in price) “custom” cable TV bundle, likely hoping lighter cable bills will keep customers plugged in. The “custom” bundle, however, notably omits the ESPN networks. ESPN, the leader in sports broadcasting and longtime pillar of Verizon's basic cable bundle, sued Verizon over this new product.

In ESPN v. Verizon Services Corp., 15-651391, filed in state Supreme Court, New York County, ESPN seeks to “enforce [Verizon's] contractual obligations to [ESPN],” “enjoin [Verizon] from unfairly depriving [ESPN] of the benefit of its bargain,” and “require [Verizon] to pay damages to [ESPN] in an amount consistent with (but not limited to) relevant provisions in the parties' agreements.” According to ESPN, its contracts “clearly provide that neither ESPN nor ESPN2 may be distributed in a separate sports package.” Verizon, however, has a different view, as noted in a statement reported by CNN: “Consumers have spoken loud and clear that they want choice, and the industry should be focused on giving consumers what they want,” and Verizon is “well within [its] rights under [its] agreements” to offer customers these choices.

Generally under New York law, whether a contract provision is “ambiguous” is a question of law for the court. Similarly, interpretation of an “unambiguous” contract is a question of law to be addressed by the court. But the court must avoid interpreting a contract in a manner that would be commercially unreasonable, or contrary to the reasonable expectations of the parties.

New York law provides that a contract is ambiguous only if “the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” HarperCollins Publishers v. Open Road Integrated Media, 7 F.Supp.3d 363 (S.D.N.Y. 2014). The existence of ambiguity in a contract is determined by examining the contract as a whole, the relationship of the parties and the circumstances under which the agreement was executed. In the ESPN case, there is little doubt that both parties will contend their interpretation is unambiguously correct, but ultimately it will be a question for the court.

Verizon's move is an obvious attempt to maintain its position in the face of shifting consumer preferences. However, this is not the first time a media giant has adjusted its business model to keep pace with changing media. For example, in Boosey & Hawkes Music Publishers v. Walt Disney Co., 145 F.3d 481 (2d Cir. 1998), the plaintiff, an assignee of composer Igor Stravinsky's copyrights that included a grant of distribution rights to Stravinsky's composition “The Rite of Spring” for use in the Disney motion picture Fantasia , filed suit in the Southern District of New York seeking a declaratory judgment that the terms of a 1939 license agreement forever restricted Disney's distribution of Fantasia to certain types of movie theaters, and not by any other means.

In that case, the U.S. Court of Appeals for the Second Circuit reversed, holding that the contract language restricting distribution was ambiguous. In remanding the case for a trial to determine the scope of the agreement's distribution rights, the appeals court noted that “a result which deprives the author-licensor of participation in the profits of new unforeseen channels of distribution is not an altogether happy solution.” Nonetheless, the appeals court recognized it is “more fair and sensible than a result that would deprive a contracting party of the rights reasonably found in the terms of the contract it negotiates.” In other words, basic principles of contract interpretation determine the parties' rights. Indeed, regardless of the circumstances, how much and how soon a company can evolve will be restricted by the court's interpretation of the contract.

Conclusion

Future contracts between distributors and programmers may break the cable bundle in order to prevent alternatives, like online video distributors, from leading customers away. But for now, the existing contracts are key: When the plain, ordinary meaning of the contract lends itself to only one reasonable interpretation, that interpretation controls. If a contract prohibits certain types of network packaging, or requires certain penetration levels of distribution, those provisions cannot simply be avoided without consequences (or renegotiation for greater exchanged value). However, as the Boosey & Hawkes decision noted, if a contract is “reasonably read” to allow certain conduct, “the party benefitted by that reading should be able to rely on it,” while “the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation.”

David L. Yohai is co-head of Weil Gotshal & Manges' Complex Commercial Litigation practice, an approximately 130-attorney group spanning Weil's U.S. and international offices. Theodore E. Tsekerides, a partner based in Weil's New York office, has represented clients in federal and state courts throughout the country and has acted as coordinating national litigation counsel. This article originally appeared in the New York Law Journal, an ALM sibling of Entertainment Law & Finance.

The digital revolution has invaded all things media: Music stores gave way to digital downloads and now audio streaming; video rental shops have all but disappeared; and subscription video-on-demand streaming services have exploded. However, as technological advancements force most of the entertainment industry to evolve or become extinct, the traditional cable TV bundle continues virtually intact. Yet, according to a 2014 Nielsen report, while the average U.S. television-watching home receives 189 channels, TV watchers consistently tune in to just 17. And a steady stream of customers has cut the cable cord altogether in favor of accessing content from alternative sources.

To avoid being left on the cutting room floor, certain cable industry leaders are pursuing strategic initiatives to appeal to the cord-free generation. These changes stand to significantly alter the longstanding relationship between programmers and distributors. But the existing contracts between programmers and distributors may limit the type of changes that either party may make, and when. While it's “prime time” for change among consumers, the black letter law of contracts may keep the bundle strings tied tight.

Cable Tier Contracts

The programming “bundles” that the cable television industry offers requires consumers to purchase a pre-packaged group of networks in order to gain access to any one network. Generally, distributors require customers to purchase basic, expanded basic and premium tiers. The basic tier often includes local broadcast stations and educational, governmental, and public access networks, as mandated by the Federal Communications Commission (FCC) under “must-carry” laws. (See, Implementation of the Provisions of the Cable Communications Policy Act of 1984, 50 FR 18637-0.1: “Basic cable service is the tier of service regularly provided to all subscribers that includes the retransmission of all must-carry broadcast television signals as defined in ”76.55 to 76.61 of the rules.”)

An expanded basic tier typically contains the most popular networks. Distributors offer several premium tiers for a higher fee, including networks such as HBO and Showtime, as well as genre-specific packages (e.g., sports, children's programming).

Distributors make money by charging subscribers a monthly fee based on their tiers, which increases in cost based on the number of networks included in the tier, and the number of packages purchased. Programmers make money through license fees charged to distributors, usually based on a per-subscriber basis per network licensed. The more subscribers receiving the network, the more license fees are paid. Programmers also make money through advertising, which rates are dependent on how widely a network is distributed.

The contracts between programmers and distributors generally dictate how distributors will carry the licensed networks. These provisions often specify the tier on which an individual network must be carried, or require that it be packaged with other comparable networks. If a programmer has a very popular network, it can bargain for the inclusion of that network, and possibly its other, less popular networks, on a distributor's “most widely distributed” tier (i.e., the tier with the most number of that distributor's subscribers). Contracts may also contain a “penetration” requirement, either in addition to or instead of “tier” or “packaging” requirements. A “penetration” requirement may mandate that a particular percentage of a distributor's subscribers receive a specific network. Under this scenario, the distributor carries the network however it wants, but ensures that the required percentage of its subscribers receives the network. Provisions regarding how a network is carried are the backbone of contracts between providers and distributors.

Challenging Bundles

The programmers' practice of licensing networks as a bundle has been attacked before, as an unlawful “tying” arrangement in violation of '1 of the Sherman Act (15 U.S.C '1). For example, in Brantley v. NBC Universal, 675 F.3d 1192 (9th Cir. 2012), a class of cable and satellite subscribers filed suit against a group of programmers and distributors, alleging that the programmers' practice was anticompetitive. The subscribers sought to compel programmers and distributors to sell channels separately. In Brantley , the “injury” alleged from the act of bundling networks was that such conduct “limit[ed] the manner in which Distributors compete with one another in that Distributors are unable to offer a la carte programming, which results in ' reducing consumer choice, and ' increasing prices.”

The U.S. Court of Appeals for the Ninth Circuit upheld dismissal of the plaintiffs' claim, concluding the bundling arrangement was a “freedom” of “contracting parties,” and that any resulting reduction in consumer choice or increase in cable prices was “fully consistent with a free, competitive market” and not plausibly indicative of “anticompetitive” behavior.

In 2013, another antitrust suit was filed against the programmers, this time by distributor Cablevision, which alleged that programmer Viacom was bundling its more popular networks with its lesser-watched networks, in violation of the Sherman Act. Cablevision Sys. Corp. v. Viacom Int'l, 13 Civ. 1278. Cablevision asserted in the litigation that its licensing agreement, which required Cablevision to contract for dozens of Viacom's networks to obtain “four commercially critical” networks, had prevented Cablevision from purchasing content from other programmers.

In June 2014, the U.S. District Court for the Southern District of New York denied Viacom's motion to dismiss, finding sufficient allegations to support an “inference of anticompetitive effects.” The outcome of this case may greatly impact the economics of the bundle: If Viacom's strategy is found to be “anticompetitive” and the programmer bundle forced to be broken, it may reduce the number of networks a distributor chooses to license and, therefore, the fees it pays (and presumably, the fees its customers pay).

Cutting the Cord

Consumers who watch only select networks in the bundle have only one meaningful alternative to paying for channels they don't watch: to “cut the cord” and opt out of cable altogether. Distributors have therefore pursued new initiatives to keep these customers. In April 2015, Verizon launched a pared-down (in number of networks and in price) “custom” cable TV bundle, likely hoping lighter cable bills will keep customers plugged in. The “custom” bundle, however, notably omits the ESPN networks. ESPN, the leader in sports broadcasting and longtime pillar of Verizon's basic cable bundle, sued Verizon over this new product.

In ESPN v. Verizon Services Corp., 15-651391, filed in state Supreme Court, New York County, ESPN seeks to “enforce [Verizon's] contractual obligations to [ESPN],” “enjoin [Verizon] from unfairly depriving [ESPN] of the benefit of its bargain,” and “require [Verizon] to pay damages to [ESPN] in an amount consistent with (but not limited to) relevant provisions in the parties' agreements.” According to ESPN, its contracts “clearly provide that neither ESPN nor ESPN2 may be distributed in a separate sports package.” Verizon, however, has a different view, as noted in a statement reported by CNN: “Consumers have spoken loud and clear that they want choice, and the industry should be focused on giving consumers what they want,” and Verizon is “well within [its] rights under [its] agreements” to offer customers these choices.

Generally under New York law, whether a contract provision is “ambiguous” is a question of law for the court. Similarly, interpretation of an “unambiguous” contract is a question of law to be addressed by the court. But the court must avoid interpreting a contract in a manner that would be commercially unreasonable, or contrary to the reasonable expectations of the parties.

New York law provides that a contract is ambiguous only if “the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” HarperCollins Publishers v. Open Road Integrated Media, 7 F.Supp.3d 363 (S.D.N.Y. 2014). The existence of ambiguity in a contract is determined by examining the contract as a whole, the relationship of the parties and the circumstances under which the agreement was executed. In the ESPN case, there is little doubt that both parties will contend their interpretation is unambiguously correct, but ultimately it will be a question for the court.

Verizon's move is an obvious attempt to maintain its position in the face of shifting consumer preferences. However, this is not the first time a media giant has adjusted its business model to keep pace with changing media. For example, in Boosey & Hawkes Music Publishers v. Walt Disney Co., 145 F.3d 481 (2d Cir. 1998), the plaintiff, an assignee of composer Igor Stravinsky's copyrights that included a grant of distribution rights to Stravinsky's composition “The Rite of Spring” for use in the Disney motion picture Fantasia , filed suit in the Southern District of New York seeking a declaratory judgment that the terms of a 1939 license agreement forever restricted Disney's distribution of Fantasia to certain types of movie theaters, and not by any other means.

In that case, the U.S. Court of Appeals for the Second Circuit reversed, holding that the contract language restricting distribution was ambiguous. In remanding the case for a trial to determine the scope of the agreement's distribution rights, the appeals court noted that “a result which deprives the author-licensor of participation in the profits of new unforeseen channels of distribution is not an altogether happy solution.” Nonetheless, the appeals court recognized it is “more fair and sensible than a result that would deprive a contracting party of the rights reasonably found in the terms of the contract it negotiates.” In other words, basic principles of contract interpretation determine the parties' rights. Indeed, regardless of the circumstances, how much and how soon a company can evolve will be restricted by the court's interpretation of the contract.

Conclusion

Future contracts between distributors and programmers may break the cable bundle in order to prevent alternatives, like online video distributors, from leading customers away. But for now, the existing contracts are key: When the plain, ordinary meaning of the contract lends itself to only one reasonable interpretation, that interpretation controls. If a contract prohibits certain types of network packaging, or requires certain penetration levels of distribution, those provisions cannot simply be avoided without consequences (or renegotiation for greater exchanged value). However, as the Boosey & Hawkes decision noted, if a contract is “reasonably read” to allow certain conduct, “the party benefitted by that reading should be able to rely on it,” while “the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation.”

David L. Yohai is co-head of Weil Gotshal & Manges' Complex Commercial Litigation practice, an approximately 130-attorney group spanning Weil's U.S. and international offices. Theodore E. Tsekerides, a partner based in Weil's New York office, has represented clients in federal and state courts throughout the country and has acted as coordinating national litigation counsel. This article originally appeared in the New York Law Journal, an ALM sibling of Entertainment Law & Finance.