Time Warner Cable drops CBS in NY, LA and Dallas over fee dispute

LOS ANGELES — Three million Time Warner Cable customers in New York, Los Angeles and Dallas lost access to CBS programming in a fee dispute Friday, threatening their ability to watch popular shows like "Under the Dome" or see Tiger Woods pursue his 8th win at the Firestone Country Club.

The nation's second largest cable operator said that CBS refused to have productive negotiations, which were repeatedly extended after their previous deal expired at the end of June.

As Friday's blackout stretched past a couple of hours, it appeared consumers would be caught in the crossfire for some time.

"It's become clear that no matter how much time we give them, they're not willing to come to reasonable terms," Time Warner Cable said.

Multiple stations that carry CBS programming in New York and Los Angeles were replaced around 2:15 p.m. Pacific time with a message from Time Warner Cable saying that CBS had "demanded an outrageous increase" in the fees it demands to carry its TV stations' signals.

CBS said it regretted Time Warner Cable's decision, calling it "ill-advised." The broadcaster said it asked for an extension, but that Time Warner Cable didn't agree to it.

Most of the cable subscribers affected live in New York, Los Angeles and Dallas, but customers in other markets also lost signals.

About 2.5 million Time Warner Cable customers also lost access to Showtime, the premium channel that carries shows such as "Dexter." TMC, FLIX and Smithsonian channels — all owned by CBS Corp. — also went dark.

In its message to subscribers, Time Warner Cable said it would replace the lost programming with shows from Starz Kids and Family temporarily.

The fight centers on the rising fees that TV station owners like CBS charge cable and satellite companies to retransmit their content. Research firm SNL Kagan estimates retransmission fees will reach $3 billion industrywide this year and double to $6 billion by 2018.

SNL Kagan analyst Robin Flynn said that figure could be revised upward soon as TV station groups merge to gain leverage at the bargaining table. For example, Tribune Co. announced plans to buy Local TV to form a group of 42 TV stations last month.

Earning revenue from pay TV subscribers is crucial to CBS's growth prospects, analysts say. Even though CBS sends its signal out over the airwaves for free to anyone with an antenna, about 85 percent of its viewers watch TV through a pay TV provider. Such fees ensure the company is not so reliant on advertising dollars, which rise and fall with the economy.

Even as the dispute lingered on, both companies posted healthy quarterly earnings this week. Time Warner Cable grew its net income 6 percent to $481 million, or $1.64 per share, as revenue rose 3 percent to $5.6 billion.

CBS grew net income 11 percent to $472 million, or 76 cents per share. CBS's revenue also grew 11 percent to $3.7 billion thanks in large part to the fees that are in dispute with Time Warner Cable.

Jonathan Atkin, an analyst with RBC Capital Markets, said TV distributors are taking a stand because programming costs are going up about 10 percent this year, an increase that's too high to pass onto customers.

"They feel pressure when some of these cost drivers are going up the way they are," Atkin said. "They do need to show some teeth and try to negotiate something better."