Retransmission has the TV biz abuzz

6:06 PM PST 02/09/2010 by Larry Gerbrandt, AP

Consumers worrying about potentially rising subscription rates

A miracle cure for the Great Ad Depression or a substance more addictive than crack cocaine? Either way, "retrans" has the biz all abuzz -- and consumers beginning to worry.

That's because this year will see a series of license-fee negotiations among the Big Four nets and cable, satellite and telco operators, and depending on how healthy the payments to the broadcasters eventually are, already cash-strapped American households will be paying up to $5 billion more a year.

This new curative for what ails the bottom line of broadcasters -- known officially as retransmission consent -- was a product of the Cable Act of 1992. It gave each commercial broadcast station the choice of opting for "must-carry status" or to engage in negotiations for carriage on local cable systems. The regulations were later amended to cover satellite providers as well.

The way the rules have played out largely has been along the lines of ratings and network affiliations. Stations with low ratings, usually indies and low-power stations, opt for must-carry. That means cable operators must carry the stations on their broadcast tier, and no money or other form of compensation changes hands. Stations with negotiating leverage -- usually those affiliated with one of the Big Four networks -- can opt to work out retransmission deals, which usually carry terms of three years.

In theory, cable operators can refuse to negotiate payments, and thus the station would get dropped from the cabler's lineup. In practice, in an environment where every cable operator has at least two competitors in every market (think DirecTV and Dish) and possibly a third (think Verizon's FiOS or AT&T's U-Verse), the issue is not whether to pay retrans fees but how much to fork over.

In the first round of retrans negotiations, the cable industry drew a line in the sand and refused to pay cash for carriage.

The mounting tension between broadcasters and MSOs eventually was broken by Fox, which offered to launch an entertainment cable network in exchange for a monthly license fee of 25 cents per subscriber per month -- and FX was born. ABC followed suit with ESPN2; NBC launched America's Talking, the predecessor to MSNBC. Scripps-Howard used retrans to launch Food Network and HGTV, and Hearst-Argyle got better deals for Lifetime, in which it owned an interest. CBS, which famously had walked away from the cable programming business after several expensive and unsuccessful forays, kept insisting on cash but ultimately wound up getting nothing for its O&O stations.

In subsequent years, cable and satellite operators have quietly done some cash-for-carriage deals, usually with broadcasters with regional footprints, with monthly per-sub prices in the 10-20 cents range. By the end of the first decade of the 21st century, however, the cable and broadcasting markets have matured. More than 90% of all U.S. TV households now subscribe to a multichannel service, and virtually every programming niche is occupied, making it harder for new networks to succeed.

For years, broadcasters have grown increasingly envious of cable programrs' twin revenue streams of license fees and advertising and their ability to ride out short-term downturns in the ad economy and even ratings declines. Cash rolls in based on contract terms and doesn't fluctuate based on ratings.

Disney arguably is the most acutely aware of the advantages of dual revenue streams, with ESPN alone commanding in excess of $4 per sub per month and financially outperforming its much more high-profile broadcast sibling ABC.

Still, just as it did with the original set of retrans negotiations during the 1990s, Fox recently has led the charge for beefing up broadcasting's cash compensation. In December, it took on Time Warner Cable in a tussle that grew increasingly public and rancorous but likely will garner Fox a cash license fee per sub for its O&Os rising from 50 cents to $1 a month by the end of a six-year term. And this is in addition to the estimated 38 cents/sub/month FX rakes in from carriage license fees.

The exact amount each network owner will get will depend on the number of cable and satellite subs in their owned-and-operated markets, but the deals could result in cash inflows ranging from $150 million-$200 million in the early years to $300 million-$400 million per network over time. If the Fox deal gets replicated across all 102 million households subscribing to basic service and across the affiliates of all four major networks, the national tab could run in excess of $1 billion this year and approach $5 billion by 2016. Add in the license fees paid for the legacy networks born of prior retrans deals, and the total could double.

The reality is that no cable or satellite operator is going to absorb the expected increases in retransmission fees; they'll simply pass them on to consumers.

With basic cable service rates running around $46 a month, another $2 a month (four networks x 50 cents) would equate to a 4% increase in subscriber bills and would continue upward over time.

A few billion in extra subscriber payments at a time when the government is racking up trillion-dollar deficits might seem inconsequential, but there is growing concern that with unemployment running at 10%, even small increases in basic rates will cause subscribers to flinch. They'll either downgrade from high-margin premium services such as HBO, Showtime and Starz, or worse, they'll decide to disconnect altogether.

Larry Gerbrandt, a media analyst for more than 25 years with companies such as Kagan and Nielsen, begins a regular commentary on showbiz numbers with this piece. He is a principal at Media Valuation Partners, which provides strategic consulting, research, valuation and expert witness services. He can be reached at larry@mediavaluation.com.
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