Retransmission Fees Key as TV Industry Consolidates
The debate rages on as more consolidation in TV stations takes place.
A TV station revenue source that barely existed a decade ago is triggering a slew of recent merger deals — and more heated words about its legacy.
In 2008, “retransmission consent” fees — the money that TV stations receive from cable and satellite providers for the right to carry their signals — made up only 4.5% of Nexstar Broadcasting’s revenue.
Last year, the total climbed to14.5% for the Irving, Texas-based broadcaster. It helped that Nexstar bought 18 more TV stations last year, strengthening its leverage against pay-TV providers in their negotiations.
“It diversifies our revenue,” says Perry Sook, CEO of Nexstar, which now owns 72 stations nationwide and has deals for 19 more. “Scale matters just to even the level playing field. Without retransmission fees, we’d look more like the newspaper business rather than TV business.”
Following a similar logic, two newspaper giants — Gannett and Tribune Company — also agreed to buy buckets of TV stations from their competitors in recent weeks. Analysts read their deals as an overt declaration to Wall Street that their futures were no longer tied to publishing. But it was just as much about enlarging their TV operations, the pursuit of “scale” that Sook speaks of.
“We become a true super group,” Gannett CEO Gracia Martore told analysts on June 13, when it agreed to buy Belo’s 20 stations. (Gannett owns USA TODAY.)
Retrans fees have been controversial since they were first paid by cable companies in the mid-2000′s. The law that gave birth to retransmission consent was passed in 1992, but cable companies didn’t pay — and local stations didn’t seriously begin negotiating for them — until years later. And each round of negotiations, typically held every three years between a station and its distributor, triggers more fretting about whether they should exist at all.
But all sides of the debate are stepping up their efforts to steer the future of retrans fees as they continue to skyrocket. They are expected to more than double from $2.36 billion last year to $6.05 billion in 2018, according to industry research firm SNL Kagan.
Typical retrans fees range from a few cents per subscriber per month to a little less than $1 received by larger network affiliates. By 2018, retrans revenues will be equivalent to about a little less than a quarter — 23% — of the expected $26.2 billion in TV station ad revenues, the Kagan study says.
“At some point it has to stabilize, or it’s just not sustainable,” says Andrew Rosenberg, Time Warner Cable’s senior vice president of content acquisition.
Cable companies claim that the fees are a result of outdated regulations waiting to be scrapped or reformed. Over-the-air TV is free for rabbit-ear antenna owners, and cable companies should not be compensating broadcasters for it, they say.
Broadcasters, a group that includes TV networks and their affiliate station owners, insist their content is more popular than cable channels. The payment goes to fund operations, including paying networks for prime-time shows and producing local news and sports, they say.
“Since cable companies re-sell our local TV stations as part of their program packages to consumers, local stations deserve to be fairly compensated for the value of our product,” says Dennis Wharton, executive vice president of communications for the National Association of Broadcasters.
At Nexstar, retrans revenue rose 64.2% to $23.8 million in the first quarter this year, outpacing the more modest 32.6% growth in advertising. Other broadcasters report similarly increasing rates.
On the other side, DirecTV’s retrans payments are anticipated to rise 600% per subscriber from 2010 to 2015, says Susan Eid, executive vice president of government and regulatory affairs at the satellite TV provider.
CONSOLIDATION IS KEY
Consolidation in the TV business is a catalyst in driving retrans fees higher, says Robin Flynn, a senior analyst at SNL Kagan. With a more favorable financing market, TV station owners have been on the acquisition prowl, and having more stations engenders greater bargaining leverage. “TV business has become very hot in the last year to 18 months,” she says.
About $9.1 billion worth of TV stations have been bought so far this year vs. $1.9 billion in all of 2012, according to Kagan. As of June 20, 160 stations have changed hands vs. 97 sold in all of 2012.
“Consolidation has definitely accelerated demand by networks and affiliates for more retrans consent,” agrees Matthew Polka, CEO of American Cable Association.
Broadcasters say their higher cost of buying from TV networks — either as a separate fee or a cut of retrans fees — leaves them no choice but to seek more from distributors. Sports programming, in particular, has become more expensive, Flynn notes.
Polka says the cycle of rising payments would end if federal regulators reform the rules regarding retrans fees. “If they’re overpaying for programming, consumers shouldn’t be forced to pay for it,” he says. “They are paying more because they know they can force the payment down to consumers.”
Though few can deny ever-escalating cable bills, figuring out how rising retrans fees trickle down to consumers remains a tricky issue for all sides. Cable providers would argue that it’s a cost passed down to their customers, all the while they receive the brunt of consumers’ ire.
“When content companies raise prices, they’re not the ones that irritate consumers. They see the bill from cable companies,” says John Bergmayer, an attorney at Public Knowledge, a Washington, D.C.-based public advocacy firm specializing in technology issues. “It’s a pocketbook issue.”
NAB’s Wharton says only about two cents of every dollar in cable revenue account for retransmission consent.
Meanwhile, all parties, including consumers, must deal with the possibility of station blackout that looms over protracted negotiations for higher fees
An NBC affiliate’s programming was pulled for Time Warner Cable subscribers in the Corpus Christi market for about five months starting in December 2011 — thus no Super Bowl for its viewers — until both sides gave in a little and hammered out a new retrans agreement in May 2012.
Time Warner Cable faces another round of national negotiations with CBS, following the expiration of their contract in June. Wishing to avoid CBS going dark in TWC’s channel lineup, the parties have agreed to continue to air CBS programs while negotiations continue.
CBS, whose retrans payments rose 62% in the first quarter, is seeking to roughly double the total to about $500 million this year.
So far this year, relative peace has reigned. There have been 22 cases of blackouts nationwide, down from 91 and 51 in 2012 and 2011, respectively, according to American Television Alliance, a coalition of pay-TV providers that seek to raise awareness of the retrans issue.
Pay-TV providers have pitched several solutions, generally centered around avoiding blackouts.
ACA’s Polka says the industry is willing to continue to pay broadcasters under a set of reforms. A broadcast company should only be able to negotiate on behalf of its own stations, not for others with which it has a contract for “shared services,” including procurement of retrans fees.
“We think any kind of coordinated negotiations like that should be banned,” he says.
Cable providers have also lobbied lawmakers to force broadcast stations to continue to air shows during retrans negotiations even after contracts expire.
That’s an unfair leverage, Nexstar’s Sook says. “What incentives do they then have to negotiate in good faith? More time of viewing was lost due to power outage than blackouts,” he says.
Pay-TV providers also want to be able to “import” a station from another market if an affiliate decides to go dark, a practice currently prohibited by federal rules. “Viewers in Burlington would have no interest in Scranton, Pennsylvania,” Sook says.
A baseball-style third-party arbitration — in which both sides pitch one offer and letting the arbitrator choose — also could be “a sensible reform,” Public Knowledge’s Bergmayer says.