Memo 1O

To: Director, Content Acquisition

From: Chief Operating Officer

Re: Retransmission Negotiation

We are in continued negotiations with one of the major broadcast network affiliates on the West Coast over retransmission fees and have not been able to reach an agreement. The current contract ends on August 31 of this year. The current retransmission fee is $1 per subscriber per month. The network affiliate is demanding $1.25 per month and has cited the fact that it has just picked up rights to broadcast the NFL games for the local franchise. We have counter-offered $1.05 per subscriber, but this was immediately rejected. We currently have 810,000 cable subscribers in the affiliate's market, which makes up about 52 percent of all households in the area. Other households have either cut the cord or are using a competing service (DirecTV, Dish Network, or Verizon). All of our competitors in the market have contracts with the network affiliate through the end of next year. Based on past experience in other markets, our analysts estimate that losing access to the network affiliate will cost us 3 percent of our customer base within the first week, and another 2 percent if the dispute lasts a month. The network affiliate will lose some revenue as well since half of its viewers will lose access to its programming.

Should we accept the $1.25 monthly fee? What should our negotiating strategy be, and how do you anticipate the affiliate will respond?