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Time Warner Cable offers unconventional deal to end CBS blackout

The Time Warner Cable office is shown in Carlsbad, California November 5, 2012. REUTERS/Mike Blake
The Time Warner Cable office is shown in Carlsbad, California November 5, 2012. REUTERS/Mike Blake

By Liana B. Baker and Sinead Carew

(Reuters) - Time Warner Cable Inc Chief Executive Glenn Britt sent a letter to CBS Corp CEO Les Moonves on Monday offering a controversial new proposal to end the blackout of CBS shows in large TV markets including New York and Los Angeles.

Britt proposed selling CBS to customers as a single channel on an "a la carte" basis, an idea dismissed by CBS as a "sham."

The exchange was the latest development in a contentious public battle between the No. 1 rated U.S. broadcast network and the No. 2 cable provider that has left millions of customers unable to watch the summer hit "Under the Dome" and live sports that airs on CBS such as golf.

As the blackout that began late Friday stretched into its third day, rival TV provider Verizon FiOS said it was receiving requests for service from Time Warner Cable customers who couldn't watch CBS.

To end the standoff, Britt said Time Warner Cable could offer customers the chance to pay for the CBS network "a la carte," an idea viewed as risky in the U.S. cable industry.

"Rather than our debating the point, we would allow customers to decide for themselves how much value they ascribe to CBS programming," Britt said.

CBS, meanwhile, called the proposal "a sham" and "a public relations vehicle designed to distract from the fact that Time Warner Cable is not negotiating in good faith."

Time Warner said it was "disappointed" by a "lack of responsiveness" from CBS.

"Our efforts to get CBS programming back for our customers are sincere, and we have offered two proposals to accomplish that, while CBS has offered nothing in return," the company said in a statement.

Media companies like CBS sell packages of channels to operators, a common practice in the cable industry. CBS cable channels such as Showtime also went dark in the dispute with Time Warner Cable because the company negotiates its programming deals in one bundle.

Letting customers cherry pick the channels they want could cut revenue of media companies. Needham & Co estimated in July that the cable industry including media content providers could lose 50 percent of its revenue, about $70 billion, if the a la carte was widely adopted.

Time Warner Cable said CBS could choose the price for the a la carte channels and the broadcaster could collect all the revenue.

This is not the first time Time Warner Cable has used this tactic. In 2007, Britt offered to sell NFL games separately to customers when his company could not agree to terms to carry the NFL Network cable channel.

"A la carte is never going to happen," BTIG analyst Rich Greenfield said. CBS added that "anyone familiar with the entertainment business knows the economics and structure of the cable industry doesn't work that way and isn't likely to for some time."

Time Warner Cable also offered to increase the fees it would to pay to CBS but it did not elaborate on the specifics.

RBC Capital Markets analyst David Bank estimates that CBS currently receives $1 per month, per subscriber and is seeking to double that to $2 per subscriber.

The latest proposal from Time Warner Cable would not include digital rights, which it said CBS had provided to other cable companies. Those rights include CBS's premium channel Showtime's digital app, which competes with HBO GO, said a source familiar with the matter.

FiOS READY

Recent history shows these fights can hurt pay TV providers, who lose subscribers when they sign with rivals. Last summer, satellite operator DirecTV said its cancellation rate increased when Viacom's networks including Nickelodeon and MTV went dark for 10 days.

Cablevision blamed its 15-day blackout of Fox in 2010, which deprived its customers of most of the World Series, for its loss of many of the 35,000 subscribers during that quarter.

Verizon FiOS, one of Time Warner Cable's fiercest competitors in New York, said it was receiving "an increasing number of requests for service from Time Warner Cable customers unable to watch CBS content."

Verizon spokesman Bill Kula did not specify how many Time Warner Cable subscribers had contacted FiOS. He said that FiOS, a fiber based service that competes with cable operators for television, Internet and telephone customers, feels "very well positioned to take advantage of the situation."

Verizon's FiOS service has been one of Time Warner Cable's biggest threats in New York, and has made serious inroads against the cable company in local markets such as Staten Island, said Moffett research analyst Craig Moffett.

He estimated that Time Warner Cable competes with FiOS in about 14 percent of its footprint nationally, with about half of that overlap from their head to head competition in New York City. FiOS also has a presence in Dallas, another Time Warner Cable market that is blacking out CBS.

ISI analyst Vijay Jayant said Time Warner Cable will lose some customers in the dispute but it is too early to tell how many will depart.

(Reporting by Liana B. Baker and Sinead Carew in New York and Lisa Richwine in Los Angeles; Editing by Gerald E. McCormick and Andrew Hay)

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