$2.4 Billion Sought : Viacom Sues HBO and Time, Claims Predatory Tactics

Viacom International, whose Showtime pay television service has long been an underdog to Home Box Office, Tuesday sued HBO and parent Time Inc. for trying to illegally muscle out competitors.

Seeking $2.4 billion in damages, Viacom said Time’s vast cable system has given unfair preference to HBO and Time’s other cable channel, Cinemax, and has refused to air competing services such as Showtime. The suit, filed in U.S. District Court in Manhattan, also accused HBO of using its competitive clout to tie up the best movies offered by the Hollywood studios, thus blocking their use by other pay-TV services.

The suit contended that Time and HBO have violated federal antitrust laws “by engaging in . . . predatory and exclusionary acts and strategies designed to increase the costs of their rivals, raise barriers to entry and expansion, and otherwise entrench themselves as monopolists.”

Time responded that it considers the suit to be “totally baseless” and said it expects to be vindicated after a vigorous defense.

The publishing and entertainment conglomerate noted in a statement that many of the allegations “rehash issues that have been periodically raised for more than a decade.”

On several occasions, Time said, “the Justice Department has reviewed many if not all of these allegations and repeatedly concluded that no action was warranted.

“The timing and content of Viacom’s suit are curious, inasmuch as Showtime has initiated and aggressively pursued practices it now condemns. Particularly ironic is the allegation of Viacom--itself a significant cable operator--that all cable operators are local monopolists, a claim we strongly dispute.”

Many observers of the cable television industry said they were not surprised that Viacom has challenged Time. Combined, Time’s pay services have 2 1/2 times the viewership of Showtime and the Movie Channel, Viacom’s two pay channels.

According to figures published in January by Paul Kagan Associates, a research firm in Carmel, Calif., that follows the cable industry, HBO has 17 million subscribers, or 45.7% of the market. Its companion channel, Cinemax, holds 16.2% of the market, with 6 million subscribers. Showtime has 6.7 million subscribers, or 17.8%, and Movie Channel, with 2.7 million subscribers, has a 7.3% share.

Named in the suit in addition to Time and HBO were American Television & Communications Corp., which is 82% owned by Time and is the nation’s second-largest cable operator; and Manhattan Cable Television, which operates the only cable system serving Lower Manhattan’s 370,000 homes. Viacom’s cable operation is the nation’s 10th-largest system.

At issue in the case are several practices that have earned the cable business a reputation as a “very nasty, strong-arm business,” in the words of one longtime observer of the industry.

One notable practice is “tiering,” in which a cable operator requires customers to buy one cable channel before it can buy another. In its suit, Viacom said HBO has “induced and coerced” cable operators in certain local markets to require subscribers to buy HBO and/or Cinemax before they may purchase Showtime and/or Movie Channel. As a result, Viacom said, its business has suffered.

Another issue is “time lock.” Under that practice, Viacom alleged, HBO has used its power to induce cable operators not to promote Showtime and the Movie Channel during the three two-month periods each year that HBO is heavily marketed.

Also involved is “exclusivity,” in which a company such as HBO or Showtime locks up exclusive rights to a studio’s movies for showing over the pay TV channels.

The suit was filed by Viacom International and Showtime Networks, both subsidiaries of Viacom Inc.

The suit put actual monetary damage to Viacom at no less than $800 million. Under antitrust laws, damage awards are tripled. The amount actually sought is $2.4 billion. Viacom also seeks to have Time barred from any further anti-competitive actions.

Stock in both Viacom and Time fell in composite New York Stock Exchange trading. Viacom shares dropped $1.375 to $53.375; Time sank $1.125 to $115.

This is not the first time that bigness has come under fire in pay television. In 1981, a federal judge in New York pulled the plug on Premiere, a national pay television network formed by Getty Oil Co. and four major film studios, just two days before it was to be launched.

In blocking the network, the judge agreed with government attorneys that the venture probably would violate the Sherman Antitrust Act because the participating film studios planned to withhold their motion pictures from competing pay TV services for nine months after being licensed to Premiere.

Less Original Programming

Most of the programming on HBO and Cinemax consists of recently released theatrical motion pictures, often purchased from studios on an exclusive basis. HBO also recently has concentrated on producing original programming, including movies and comedy and musical specials. It recently aired “Murderers Among Us: The Simon Wiesenthal Story” and produces an annual “Comic Relief” special that raises money for the homeless.

Showtime’s most prominent original programming was “It’s Garry Shandling’s Show,” which it recently sold to Fox. It concentrates almost exclusively on acquiring theatrical motion pictures.

Viacom also operates four advertiser-supported programming channels, including MTV: Music Television, and Nickelodeon.

A handful of Viacom and Showtime executives formerly held top posts with HBO.

They include Viacom President and Chief Executive Frank J. Biondi, who joined HBO in 1978 and eventually became president and chief executive. Winston H. (Tony) Cox, chairman and chief executive of Showtime Networks Inc., at one time was also president of HBO. Matt Blank, executive vice president of marketing for Showtime, held a similar post at HBO.

One Wall Street analyst, who declined to be identified, said the presence of the former HBO executives at Viacom lent some credibility to the suit. “If anybody should know, it’s Frank Biondi,” he said.

Larry Gerbrandt, an analyst with Paul Kagan Associates, said the case could be viewed as “an isolated incident, . . . a legal squabble.” However, he noted, there is the far broader issue of Time’s plan to merge with Warner Communications Inc.

Itself a cable system operator and movie maker, Warner would give Time additional clout by giving it control of more subscribers and programming.

“It depends on how the whole issue of competition plays itself out (after the merger),” Gerbrandt noted. “Viacom has been concerned over the Time-Warner merger and what that means for broader access to markets.”

At one time, Warner owned half of Showtime but sold its share to Viacom, then its partner in the venture. Warner, which still carries Showtime over its cable systems, was not named in the suit.

Although the suit mentions the merger at great length, a spokeswoman for Viacom told Reuters that “it is not Viacom’s intention to enjoin the Time-Warner merger.” And Viacom pointed out in a statement that its lawsuit has been in the works for “over a year.”

Observers noted that the complex case, which has been assigned to U.S. District Judge John Walker, is likely to take years to resolve.

“Essentially, the complaint calls into question the whole history of the pay TV and cable TV business over the last 20 years,” said a source close to HBO. “It’s an enormous amount of territory to cover.”

“This will be an enormously complicated case to try,” said John Higgins, financial editor of Multichannel News, a New York-based publication that tracks the cable industry. “The discovery process is going to take years because of the intricacy of the charges” and the number of cable systems involved.