Report: CBS to benefit most from retrans

Sanford C. Bernstein analysis of industry hot topic

NEW YORK -- Broadcast retransmission revenue will have the biggest earnings effect on CBS Corp. out of all entertainment conglomerates owning a broadcast network, but Disney and News Corp. will also see some benefit, according to the analyst team at Sanford C. Bernstein.

In a broad-ranging report on retrans, which has been in the industry spotlight, they said the retrans opportunity is accretive to 2010 earnings by 2% at Disney, 7% at News Corp. and 20% at CBS.

In "Sizing Up the Retrans Battle Royal," the Bernstein team estimated that the owned and operated stations of the broadcast networks will manage to get average affiliate fees of 70 cents per subscriber in the medium term, meaning over a three to five year period.

"However, unlike consensus, we are doubtful that the notion of "reverse retrans" (i.e. the station owner sharing their retransmission revenues) will be a meaningful contributor to conglomerates in the medium term for a variety of reasons," the report said. "For one, many station affiliation deals appear at least four to six years away from coming due with their partners so the issue appears moot for a while."

Also, unless station owners allow the broadcast networks they are affiliated with to negotiate on their behalf, "many station owners are undersized to take on their bigger distribution partner to extract "conglomerate-like" pricing deals," the Bernstein team said.

Finally, the Bernstein analysts are "deeply concerned that the value of future must-have sports rights deals like the NFL, NBA, NCAA, MLB and Olympics will be bid up as both sides recognize the inherent value of live premium sports content," thereby reducing any retrans upside. The NFL and MLB contracts expire after the 2013 season, and the NBA deal after 2016. But the NCAA basketball tournament may provide "an interesting test case should it exercise its option to exit its contract this year," the Bernstein report suggested.

It also listed the three big retrans showdowns coming up later this year:    
* Disney's ABC-Time Warner Cable in August
* News Corp.'s Fox-Cablevision in October
* and Fox-Dish Network around the same time.

"These high profile battles will ensure that Retrans remains a central controversy for broadcasters and pay TV investors," Bernstein analysts Michael Nathanson (media/content) and Craig Moffett (distributors) said.

What are the factors that decide who wins out in retrans/carriage showdowns, which have become particularly intense as of late?

According to the Bernstein analysts, in the end it comes down "to a simple and brutal calculus. Who can cause whom the most pain?"

They argued that "a large geographically-diversified broadcaster (think ABC) will always hold the upper hand against a smaller regional distributor (think Cablevision)." Conversely, a large, geographically-diversified cable operator like Comcast will trump a smaller broadcasters, such as Belo.