Sinclair, Mediacom Play Hardball

Neither Rocco Commisso or David Smith are exactly shrinking violets. The former bootstrapped a cable operation from castoff systems; the latter drove a movement to reform the nation's digital broadcast transmission standard.

And so it goes that the standoff between their respective companies, Mediacom and Sinclair, continues unabated. A federal judge this week refused to step in, leaving Sinclair free to pull its broadcast signals off of Mediacom cable systems unless the cable operator ponies up.

The dispute involves a retransmission-for-cash clash. Mediacom, the No. 8 cable company based in bucolic Middletown, N.Y., carries the signals of 22 Sinclair broadcast stations on its Midwestern systems per a retrans deal that ends Nov. 30. Sinclair, the scrappy 58-station group with headquarters in sleepy suburban Baltimore, wants to get paid for those signals in the retrans arrangement going forward.

Months of negotiations stalled out in early October when Mediacom sued Sinclair in U.S. District Court for the Southern District of Iowa, accusing the station group of antitrust violations. The legal action, according to an Associated Press report, was a maneuver to stop Sinclair from moving its stations over to DirecTV, which agreed to pay Sinclair for every cable subscriber poached. The lawsuit alleged that Sinclair violated the Sherman Act by tying payment for all 22 stations to carriage for any of them.

"Throughout our retransmission consent negotiations, Sinclair has insisted that all of its stations in our footprint be bundled in a single package without consideration to the differences in the markets of the various stations. We believe this all-or-nothing scheme violates antitrust law," Commisso said upon filing the suit. "We believe that Sinclair is holding our customers hostage in the Des Moines market in exchange for carriage of other stations in markets half a continent away."

Last Tuesday, Judge Robert Pratt concluded that Mediacom's lawsuit against Sinclair was "unlikely to succeed on the merits of its antitrust claim.

"The Court is reluctant to force Sinclair to maintain a business relationship with Mediacom when both parties clearly contemplated, and agreed to, a termination provision," Judge Pratt said. "Mediacom will not likely succeed in its attempt to establish an illegal tying arrangement because Mediacom is not being coerced into carrying the tied stations."

The stations involved in the dispute include Fox affiliate KDSM in Des Moines and KGAN (CBS) in Cedar Rapids, Iowa; WYZZ (Fox) in Peoria, Ill.; WSMN (Fox) in Madison, Wis.; WUCW (CW) in Minneapolis; WICS (ABC) in Springfield, Ill.; KDNL (ABC) in St. Louis; WTWC (NBC) in Tallahassee, Fla.; WTVZ (MNT) in Norfolk, Va.; plus duopolies in Pensacola, Fla., Greenville, N.C., Lexington and Peducah, Ky.; Nashville; Birmingham, Ala.; and Milwaukee.

The judge noted that it's not as if Sinclair hadn't noticed that cable-only networks get subscriber fees--monthly payments from a cable operator based on head count, e.g., 30 cents a subscriber. The arrangement was born in the early days of cable TV, when cable operators were scrounging for content and cable-only networks couldn't make it on ad revenue alone. Broadcasters, on the other hand, traditionally "consented" to allowing cable operators to "retransmit" their signals. Now, with broadcast bucks tied up in digital and hi-def plants, and cable using hi-def content as a carrot to generate incremental revenue, broadcast stations want in on the game.

Following the court ruling, Sinclair said it was ready to pull its stations off Mediacom systems come Nov. 30. (Sinclair said 800,000 of the 1.4 million Mediacom subscribers would be affected; Bear Sterns put the figure at 625,000). AP subsequently reported that KDSM in Des Moines was running ads encouraging viewers to call DirecTV if they wanted to keep getting the station. The wire service also reported the Mediacom filed a notice of appeal saying it would take the case to the 8th U.S. Circuit Court of Appeals.

Bear Stearns analyst Victor Miller said the ruling may boost the broadcast argument for retrans fees.

"After five retransmission cycles, local TV broadcasters may finally have the leverage to get paid for their signals," Miller said. "And for pure-play companies, like Sinclair, retrans dollars could ultimately be an important revenue stream that will not vacillate with the ad cycle."