CASE ASSIGNMENT: Time Warner/Viacom
Countdown to a Blackout
Why is Dora crying? That was the question readers were faced with when they opened the New York Times and LA
Times on December 31, 2008. Viacom, owner of the Nickelodeon television channel where Dora the Explorer shares
the stage with SpongeBob SquarePants and many other favorite children’s television stars, purchased full-page
advertisements of the cartoon adventurer with a tear streaming down her cheek clutching her frightened looking
sidekick, Boots the Monkey. The image was accompanied by this alarming message: Time Warner Cable is taking
Dora off the air tonight along with 19 of your favorite channels. Throughout the day, viewers of Viacom channels
saw a ticker running across the bottom of their television screens alerting them to the impending blackout, and in the
face of Viacom’s aggressive media campaign, Time Warner found its call centers swamped by angry customers,
many the parents of distraught children, demanding that Time Warner keep the Viacom channels on the air, or else
they might look for another cable provider.
Time Warner is the second largest cable provider in the United States with approximately 13.3 million
subscribers. Viacom is one of the largest providers of cable TV channel programming, including MTV, VH1, BET,
Spike TV, Nickelodeon, and Comedy Central. Viacom’s media campaign came at the climax of a growing dispute
between the two companies as the agreement under which Viacom granted Time Warner the rights to broadcast its
channels would come to an end at 12:01 on January 1st. If Time Warner did not come to terms with the programmer,
Viacom threatened to pull its channels. To renew the contract, Viacom asked Time Warner to pay an additional $37
million per year for its programming on top of the $300 million it was already paying—roughly a 12 percent rate
increase. At the time, Viacom’s programming constituted about 7.9 percent of Time Warner’s programming costs.
Viacom argued that given the estimated 25 percent of cable viewers who tuned in to Viacom channels over
the course of a given day, the amount that Time Warner was paying left Viacom’s programming well underpriced in
comparison to other channels. Costs for the Disney Channel amount to about 85 cents per subscriber per month, and
ESPN costs about $4. In contrast, Viacom’s MTV would cost 32 cents and Nickelodeon would cost 45 cents per
month. Viacom’s rate increase would amount to a monthly cost of about 23 cents per subscriber, a sum they claim is
modest in comparison to the likes of ESPN’s subscriber costs, especially considering that it would cover Viacom’s
Time Warner responded that in the current economic environment, such a rate increase could not be
justified. As the company said in response to Viacom’s media campaign, the majority of any rate increase would
likely have to be absorbed by customers. Furthermore, Time Warner pointed out that in many cases, Viacom was
offering the same programming that it was threatening to pull from Time Warner on the Internet for free. Time
Warner argued that a rate increase would have its customers subsidizing Viacom’s Internet programming, even
going so far during negotiations as to threaten to provide customers a way to connect their laptops to their cable
boxes and to stream programs from the Internet onto their TVs.
Fortunately for customers (or perhaps unfortunately, depending on how much of the cost they end up
having to shoulder), in the midst of negotiations, Viacom agreed to suspend its decision to pull its programming, and
the two companies were able to come to terms shortly after midnight when their previous contract expired.
Traditionally, network programmers hold the upper hand in disputes over programming costs, but in this instance
neither Viacom nor Time Warner could afford the fallout of a protracted channel blackout. Viacom’s bid for
increased subscription fees is not unique; as advertising revenues decreased over the course of the year, many
network programmers looked to cable providers for higher fees to fund increasing programming costs. Any sort of
blackout, however, would have greatly hurt whatever ad revenue Viacom was already generating. For Time Warner,
while increased fees would be unpleasant, a blackout could send increasingly wary cable customers to competitors.
In the end, no blackout occurred, and Dora was able to stay on the air.
SOURCES: Meg James, “Viacom, Time Warner Cable Settle Contract Dispute,” LA Times, January 2, 2009; L. Gordon Crovitz, “Consumer Choice
Saves ‘Dora the Explorer’” Wall Street Journal, January 5, 2009; Bill Carter, “Time Warner and Viacom Reach Agreement on Cable Shows,” New York
Times, January 1, 2009; Melissa Block, Robert Siegel, Meg James, “Dora Roped into Viacom-Time Warner Fee Spat,” All Things Considered, NPR,
December 31, 2009, www.npr.org/templates/story/story.php?storyId=98912395 (accessed January 15, 2009).
1. What is the channel arrangement between Viacom, Time Warner, and consumers? Who are the
Viacom is the owner of several television channels, and therefore it is a content producer. Viacom has a channel
agreement with Time Warner, which is an intermediary between Viacom and consumers that provides Viacom’s
content though Warner’s large cable network. Warner pays a certain fee to each one of the producers who provide
entertainment through their network. Consumers in this channel arrangement pay a monthly fee to Time Warner in
order to receive Viacom’s product through the commodity of Warner’s cable system. According to the article,
Viacom has switched to multiple distribution channels, as besides offering its content through cable providers,
Viacom has also established a direct channel with consumers by making its content available on the internet.
2. What is the channel conflict between Viacom and Time Warner?
There is a vertical conflict between the two parties. Time Warner is a major distributor of Viacom’s products. Both
entities have great channel power, and there isn’t a defined channel captain in this relationship. Viacom attempted to
force a rate increase claiming Warner was paying less to Viacom than it was paying to other television channels
such as ESPN. On the other side, Warner claimed that increases in Viacom’s rates would have to be absorbed by
consumers, which would probably cause a decline in the number of cable subscribers given the state of the
economy. Moreover, Warner pointed Viacom’s direct distribution of its media content through the internet as a
competing force that could be the beneficiary of a possible decline in Time Warner’s cable subscribers. Despite the
disagreement, the two parties are extremely interdependent as Warner accounts for 25 percent of Viacom’s cable
viewers, and a blackout of Viacom’s content in Time Warner’s cable network could cause the company to lose
costumers to other distributors. The relationship between Viacom and Time Warner looks like a loveless marriage in
which the parties are only together for secondary interests. This channel currently looks faded to failure as the two
parties would probably break apart if they had means to replace each other. That opportunity is likely to arrive to
one party sooner or later.
3. Obviously the conflict between Viacom and Time Warner has strained their relationship. If you were in
charge of one of these companies, what steps would you take to improve their channel relationships?
Companies are moving towards relationship marketing as opposed to discrete transactions since there are benefits in
maintaining these relationships. Time Warner already cultivates relationships with customers who are contracting
their cable services in relatively long-term basis. The same strategy has to be approached with suppliers as the
company is not producing all the content its clients demand. At a certain point Time Warner will have to give in
because Viacom is already investing in directly distributing its products through streaming, which has good
prospects. If Time Warner cannot increase Viacom’s rates, it will probably have to offer another way to strengthen
their relationship. Time Warner could, for example, use its distribution channel to help Viacom promoting its
products. Comcast, for example, features certain movies and TV series in its “On Demand” outlet, which is probably
due to an arrangement between the producer and the distributor. Trust has to be reestablished, which might have to
be done through a long term contract if the parties can agree in terms.