Facing a backlash from TV viewers furious at the prospect of losing "SpongeBob SquarePants" and "Dora the Explorer," two media giants reached a new programming agreement that keeps those popular cartoon characters on the channels of the country's second-largest cable operator.
Viacom Inc. had threatened to pull 19 of its cable channels, including Nickelodeon, MTV, VH-1 and Comedy Central, from the Time Warner Cable Inc. systems at midnight Wednesday when their previous two-year contract expired.
At midnight in New York, minutes into the new year, Viacom granted an extension that allowed the two sides to keep talking. They then clinched a deal. The New Year's Day accord avoided a blackout of Viacom's programming in 13.3 million homes in the U.S. served by Time Warner Cable Inc., including nearly 2 million in the Los Angeles area.
Details of the new contract were not immediately available.
The resolution came after a long day of squabbling as each side accused the other of greed, and irate customers jammed Time Warner Cable's call centers, saying they wanted their MTV and Nickelodeon. The reaction from viewers was stoked by Viacom's costly media campaign in print and on television, much of it targeted at kids.
"Demanding that our customers pay so much more for these few networks would be unreasonable in any economy, but it is particularly outrageous given the current economic conditions," Time Warner Cable Chief Executive Glenn Britt said early Wednesday. "Huge price increases like what Viacom is demanding threaten the ultimate value of cable TV."
Viacom had purchased newspaper advertisements, featuring a tearful Dora the Explorer, and placed an on-screen crawl on its channels to alert viewers to the impending programming blackout. The ads encouraged viewers to complain to Time Warner Cable.
The tactic worked -- parents reported having to soothe children who were upset over the prospect of not being able to watch their favorite shows on Nickelodeon, including "SpongeBob SquarePants."
"Our family will cancel Time Warner if a suitable agreement is not reached," threatened Debra Cooper, a mother of two who lives in San Diego. "I admit SpongeBob's laugh drives me nuts, but he is part of our family, as is George Lopez, 'Home Improvement,' 'i-Carly,' and all the rest."
Cooper said she called Time Warner Cable twice Wednesday to lobby for the channel. The company was inundated with calls, and executives from both companies put their holiday plans on hold to return to the negotiations.
Neither side had much to gain if Viacom had withheld its programming. One media analyst described the potential scenario as "mutually assured destruction" that could lead to Viacom losing advertising revenue and Time Warner losing subscribers.
"Viacom's cable networks are among the most popular on cable television," Michael Nathanson of Bernstein Research wrote in a research report Wednesday. He said about 25% of all cable viewers tuned in to Viacom channels throughout the day.
Nathanson said that the affiliate fees paid to Viacom by cable operators, including Time Warner, were "underpriced" when compared with those paid for other channels.
According to research firm SNL Kagan, Viacom's MTV receives about 32 cents per subscriber a month from cable operators, while Nickelodeon receives an average of 45 cents a month. Operators pay 86 cents a month per subscriber for the Disney Channel, which commands a higher fee because it runs commercial-free.
In contrast, sports channel ESPN receives an average of nearly $4 per subscriber a month. Viacom said it was seeking a modest increase of about 23 cents a month per subscriber.
That adds up to a rate hike of about 12% for the package of Viacom cable channels. Time Warner estimated that amount would increase its payments by $39 million a year.
"We are not asking for unreasonable increases," Philippe Dauman, chief executive of Viacom, said before the post-midnight breakthrough was reached. "All of our networks put together cost less than the regional sports networks that they provide."
Time Warner pays Viacom about $300 million a year for its programming, Nathanson estimated in his report. He said Viacom payments represented 7.9% of Time Warner Cable's video programming costs.
On Wednesday, investors cheered Viacom's tough stand, driving up the media company's stock 85 cents to $19.06 a share. Time Warner Cable's stock fell 31 cents to $21.45.
The dispute underscored how important cable affiliate fees have become to cable programmers, such as Viacom, particularly during an economic recession and a downturn in advertising revenue.
"A 12% increase on a multiyear deal doesn't seem that significant," said Derek Baine, an analyst with SNL Kagan. "But the challenge is we are in a difficult economic climate and it's getting harder for the cable operators to pass these costs along to consumers."