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NEW YORK (Reuters) - Small independent cable networks could be forced to sell themselves to larger media conglomerates in the next 12 months as their profits are squeezed by pay TV operators looking to cut programing costs.
The lifeblood of networks are the fees that cable, phone and satellite operators pay for the right to televise their programs. Such programing fees are often the largest costs to the operators.
Programing costs are expected to rise 7 percent this year due to pressure from large media groups that own broadcast networks. These media titans -- Walt Disney Co, News Corp, NBC Universal -- are demanding cash for the right to carry the big broadcast networks, ABC, CBS, Fox and NBC.
Standalone cable networks, such as Outdoor Channel, Hallmark Channel or even a mid-sized group like Scripps Networks, are likely to suffer because they lack the leverage of Walt Disney, which can negotiate higher fees for its cable networks in tandem with the threat that it will withhold its ABC network from an operator's subscribers.
Disney did exactly that when it threatened to pull ABC from Cablevision Systems Corp just before the Oscars broadcast began.
Scripps Networks Interactive Inc saw the writing on the wall last year when it took over Travel Channel in a deal that valued the network at nearly $1 billion, nearly 40 percent higher than the most optimistic estimate.
The deal allowed Scripps to bulk up in the face of tougher negotiations with operators.
Scripps CEO Ken Lowe told Reuters there is a possibility of consolidation due to the more difficult negotiating environment. "If you look at the Comcast/NBC deal you realize there is going to be safety in numbers. It's going to be very difficult to be a standalone network," he said.
Scripps has been seen by Wall Street as a potential target for companies like Time Warner Inc and Viacom Inc but Lowe would only acknowledge that his company is just as likely to be a buyer of smaller networks.
Smaller networks have even less leverage. "We have no negotiating hand. It means independent programmers are barely a step ahead of what I would call polite begging," said Michael Schwimmer, chief executive of Si TV, an independent network which targets U.S. Hispanics and reaches 30 million U.S. households.
"The cable operator will say 'Gee, I'd love to carry your programing but I've given all my money to the broadcasters,'" he added.
Schwimmer led a group of small networks on Capitol Hill earlier this month to urge regulators and Congress to fix what they said are out-dated programing rules that give broadcasters an unfair negotiating advantage as owners of essential programing such as the Super Bowl or the Olympics.
These tensions come as the top U.S. cable operator Comcast Corp seeks regulatory approval to buy a controlling stake in NBC Universal.
The small networks point to comments by CBS Corp Chief Executive Les Moonves who said in June he expects cable operators to reduce payments to smaller networks in order to pay for the right to carry broadcast networks. By squeezing smaller networks, operators want to avoid raising prices for their subscribers.
If the networks don't agree to lower fees, operators could just drop them from their services. Crown Media's Hallmark Channel went dark on AT&T Inc's U-verse TV on September 1 when the two sides failed to reach a deal.
Smaller networks that lack negotiating leverage are frequently underpaid, said Hallmark Channel Chief Executive Bill Abbott.
"We don't get to benefit from our value like many of our market competitors and that's primarily due to the fact we don't get to play the retransmission card," said Abbott, referring to retransmission consent, which allows broadcast networks to charge operators for the right to carry those networks.
"We are susceptible to being dropped or not being paid as high a market rate as our competitors," he added.
In 2005, Hallmark explored the possibility of a sale but didn't get a price it liked. The pressures are much sharper now.
"Cash for retransmission consent does add to the burden, and the independent networks just don't have the leverage," said Collins Stewart analyst Thomas Eagan.
Scripps' Lowe said programing negotiations had become "harder and harder" in part due to the addition of retransmission fees.
The difficulties of small networks plays into the hands of media bankers, who since the downturn in advertising have placed a premium on the dual revenue streams of affiliate fees and advertising that cable networks traditionally offer.
"The dual revenue stream will be a big driver in consolidation," said Scott Singer, an investment banker at boutique outfit Bank Street. "Those large media companies that are too advertising-dependent will want more programing fee revenue.
Reporting by Yinka Adegoke; Editing by Derek Caney