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All is Not Well with the 'Basic Cable' Model

Investors lowered their expectations for 'basic cable' network values a notch, rattled by incidents of channels abruptly losing chunks of carriage and worries about a potential deceleration of growth for carriage fees. In recent years, basic cable networks sported lofty valuations, evidenced by the $2.7 bil. sale of BET in 2000 and Fox Family Channel (now ABC Family) for $3.7 billion in 2001.

But recent high-profile disputes over fees multichannel platforms pay to channels are contributing to change. Earlier this year, EchoStar Communications' DISH Network dropped women-oriented Lifetime and Outdoor Life Network -- although both were later restored.

"The perception has changed from a wholly-distributed network being an invaluable 'crown jewel' of the media business to a gem of potentially uncertain value when channel carriage contracts come up for negotiation and aren't automatically renewed," says Kagan Research senior analyst Derek Baine. Fully distributed means carriage in 80 million cable/satellite households, out of 94 million total multichannel households.

"Lifetime is a perfect example," Baine notes. "Five years ago, no one would ever have thought a cable or satellite platform would drop a channel as big as Lifetime. But earlier this year EchoStar did just that. Eventually Lifetime's carriage was restored but only after a very acrimonious battle."

Cable TV operators � which on average in 2005 paid 22 cents per month for each basic cable channel � have become less willing to fork over higher carriage fees at contract renewals. They are also faced with big carriage rate demands from over-the-air TV broadcasters. And cablers see that TV programs are increasingly non-exclusive, with availability via download on handheld devices such as Apple's iTunes and on websites.

Finally, mushrooming numbers of cable networks � Kagan Research tracked 58 national channel launches from 1994-2003 � mean more overlap in channel content and increased audience fragmentation, notes Baine. The result is cash flow margins for channels have been rising � up 10 points over the past decade to around 35 percent � while cash flow from cable operators' TV channel business has declined over the past 10 years. "Cable operators are digging in their heels because they are tired of the value shifting from cable to the programmer," Baine explains.

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