Should Fox Become a Pay TV Network? (Analysis)
News Corp.'s Chase Carey says Aereo might force the network to convert, but many questions remain unanswered as to the viability of such a move.
The future of the TV industry might be determined by math geeks.
Ten days ago, News Corp. president Chase Carey prompted analysts to race to their spreadsheets upon his word that Fox might consider turning itself into a pay TV network should Aereo — the new service that transmits broadcast network signals online — continue its legal streak of success.
Now analysts are weighing in on whether that would be good or bad for Fox. The latest breakdown comes from Robin Flynn at SNL Financial, who in a report titled "The Economics of Allowing Aereo" lays out some numbers. Flynn estimates that the top five broadcast network owners will reap more than $9.2 billion in retransmission fees from 2012 through 2016, which works out to an average of about $368 million per network per year. (Other analysts such as Michael Morris at Davenport & Co. have forecast that Fox is collecting $472 million in payments from affiliate stations and retrans fees this year.)
Given those numbers, can a network like Fox do better by converting itself to a pay TV subscription service?
Flynn points out that while retrans fees paid to TV stations will rise to $3.02 billion per year, multichannel operators will pay cable networks, regional sports networks and premium networks $44.5 billion in affiliate fees.
By Flynn's estimation, Fox gets a retrans fee per subscriber per month in the $1-$2 range, but a cable network like ESPN gets about $5.50. At least at the moment, Fox generates ratings that are three times the size as ESPN's, so the hope at the newly-named 21st Century Fox might be that its fees from cable and satellite providers could blossom.
That's a prospect that leads a Forbes columnist to read Flynn's report, and assuming a $3 per subscriber rate, to estimate that Fox could be in line for $3 billion more in carriage fees from pay TV distributors if it chooses the so-called "nuclear option."
One of the big questions then -- but not the only factor in the calculus -- is what Fox stands to lose in advertising from going to a pay TV model. As much as a big TV network enjoys its retrans fees, it has more at stake from its advertisers. According to Flynn, from 2012-16, the broadcast networks currently stand to make $9.2 billion in retrans fees but $91.8 billion in advertising revenue. That's 10 times as much.
If Fox's ad revenue only declines by 15 percent — the percentage of households that don't subscribe to a pay TV service — that trade-off might be worth it. After all, it's a $645 million knock in ad money compared to $3 billion more in fees, according to Forbes math. But of course, that doesn't factor in the loss of local advertising and the increased costs of programming without affiliates doing stuff like news. The trigonometry also changes substantially if pay TV begins losing subscribers due to heavier cable and satellite TV bills or if Fox's viewership drops more than 15 percent. That's because there's no guarantee that the same proportion of viewers will watch American Idol should the program be regulated to stations in the double or triple digits on the cable dial and without local news providing promotional lead-ins. Fox could essentially become FX with sports.
Other analysts have reached a similar conclusion.
"While a subscription-only model would ensure that a greater percentage of subscribers indirectly pay affiliate fees in the very long run, in the shorter term, significant ad dollars would be lost because of the reach disadvantage of fee-based channels," wrote analyst Brian Wieser at Pivotal Research Group.
There's also the unanswered question of whether jumping off the over-the-air system in hopes of raising the $1 sub rate to a $3 sub rate is really a better financial move than just competing against Aereo, which offers its service for $8 to $12 a month. The networks could presumably beat that price plus throw in a wider range of on-demand programming if they so chose and the math worked out.
In fact, in response to a question from an analyst on whether he would buy Aereo, Dish Network chairman Charlie Ergen said, "My gut feel is ultimately, broadcasters could do that themselves. If Aereo was legal, they could -- broadcasters could ultimately do that themselves. And then that becomes very difficult from an Aereo perspective to compete against the content owners themselves."
Finally, there are the non-math questions that analysts will have a tough time figuring out: How much latitude does a broadcast network really have in escaping the current system? Contracts with producing partners and sports leagues might present some difficulties that haven't yet been fully considered. A network like Fox might also spark a labor backlash if breaking towards cable means paying less residuals. These considerations were hinted at this week in an amicus brief lodged in the Aereo dispute by some non-broadcasters in Hollywood.
Indeed, there could be good reason why the future of the TV industry won't be determined by math geeks at all.
E-mail: [email protected]; Twitter: @eriqgardner