The following is a guest blog post by David McAdams, professor of economics at the Duke University’s Fuqua School of Business and author of the forthcoming book, “Game-Changer: Game Theory and the Art of Transforming Strategic Situations”. This article, titled “How Time Warner can win its CBS showdown”, originally appeared in the (Durham NC) Herald-Sun on Aug. 29, a few days before Time Warner Cable settled its retransmission dispute with CBS.

Since Aug. 2, Time Warner Cable has blocked about 3 million of its customers in New York, Los Angeles, Dallas and other areas from receiving their local CBS broadcast. The cable giant is balking over the network’s demand for higher fees to retransmit CBS programming.

Most industry watchers seem to agree that Time Warner is likely to lose this showdown, giving in to CBS sometime around the start of the NFL season in early September. But with new tactics and a little strategic imagination, Time Warner can turn the tables on CBS and win. Here’s how.

It starts with a seemingly submissive announcement by Time Warner chairman and CEO Glenn Britt:

“The CBS blackout ends today. Despite all our misgivings at the unfairness of this deal, we will accept CBS’s demand to charge our subscribers $2 per month to view its broadcast programming over our cable network.”

This might seem to be admitting defeat, but then Britt adds the following condition:

“There’s just one thing. We believe that subscribers who don’t want to watch CBS over our cable network shouldn’t be forced to pay this unreasonable fee. Everyone pays the same amount for most channels, because that sort of pricing typically allows us to negotiate lower rates. But when a channel goes off the deep end and refuses to accept a reasonable price, only those who want the channel should be forced to pay.”

CBS would never willingly accept this deal, as many cable subscribers would undoubtedly “opt out” and view their favorite CBS programs for free through a standard rooftop antenna. But what can CBS do? Undoubtedly, CBS’s chief Leslie Moonves would come out and decry the notion of giving customers an opt-out option as a “sham,” as he has in the past, but there’s a problem.

Now that Time Warner has restored CBS programming and even accepted CBS’s demand for $2 per month, CBS is in an awkward position. If access to CBS programs really is so valuable to cable subscribers, as the network has insisted all along, how can CBS demand that they be forced to pay?

Certainly, if CBS were to take a hard line and withhold its permission to rebroadcast over this issue – thus triggering another blackout and denying all Time Warner subscribers access to CBS programming because they insisted on charging people who don’t even watch CBS over cable — CBS would now be the one in the hot seat. Knowing this, Time Warner would now be the one comfortable to “wait it out” as long as necessary.

In the end, CBS would have no choice but to accept an opt-out clause for Time Warner’s cable subscribers, or else back down and accept a lower per-subscriber fee. Time Warner would not only “win,” but also lay the groundwork to control cable content costs while avoiding disruptive blackouts in the future.

The recipe for cable-company victory is actually quite simple:

1. Allow every channel to charge whatever it wants. However, if a channel’s demand is “unreasonable,” only accept if the channel also agrees not to charge for subscribers who opt out.
2. If the channel insists on charging everyone, refuse but do nothing. Force the channel to block its own transmission so that customers understand that blackouts are not Time Warner’s fault.
3. Inform subscribers of their opt-out options and make sure that the opt-out process is simple and transparent. If few subscribers opt out of a channel, you will have learned that that channel’s demand wasn’t so unreasonable after all. But if many do opt out, you’ll have a powerful argument in hand when the next negotiation rolls around.

If cable companies like Time Warner (and satellite-TV providers like DirecTV) stick to this strategy, content providers like CBS won’t have an incentive any more to demand fees that even they believe are beyond what most subscribers are willing to pay. That’s a good thing for Time Warner, and a good thing for consumers as well.