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Retrans: What's At Stake for Stations

10/31/2008 8:00 PM Eastern

Fifteen years after its adoption by Congress, broadcast retransmission-consent remains a highly charged topic. Why? Because, at long last, broadcasters are succeeding in getting cable operators to compensate them for carrying broadcast signals. This has prompted significant elements of the cable industry to respond by threatening to seek relief from the next FCC and the next Congress.

There was no screaming by cable, by the way, when the satellite companies and telcos started paying cash to broadcasters. But now cable itself is being asked to pay and faces the prospect that its unjustified competitive advantage is going away. Most cable companies, including many of the very most powerful, have quietly recognized that the jig is up and have agreed to reasonable terms. A few holdouts continue to wage quixotic rear-guard actions, allegedly on behalf of the consumer, and the smaller operators are complaining that retransmission-consent is going to ruin them.

Whenever a fight like this breaks out, regulators and consumers almost always declare both sides to be evil and greedy. What regulators and consumers need to know is just this: broadcasters are fighting not for a few incremental dollars but for their very lives.

Without retransmission consent revenue to fuel competitive programming payments, all premier programming will migrate exclusively to pay television. If you doubt that statement, think Monday Night Football. ABC invented the franchise in 1970 and carried it for 36 years. But for the last decade or so of its life, despite marquee ratings, MNF was a loss leader, hemorrhaging as much as $150 million a year. In 2006, MNF moved to ESPN, where it became instantly and wildly profitable. And this despite the fact that ESPN paid double what ABC had been paying and saw advertising revenue decline as the result of a 25% loss in audience in its first season.

Voodoo economics? Sort of — ESPN, unlike ABC, not only gets ad revenue, but a pay TV subsidy in the form of outsized subscriber fees well in excess of $3 billion a year. That is a massive second revenue stream that ABC cannot match through ad revenue alone.

What happened to Monday Night Football will eventually happen to all marquee programming — sports and otherwise — if broadcast does not get its share of the pay TV revenue. Unless the same subsidy for cable networks is extended to broadcasters, neither local stations nor the networks will be able to compete for the best programming. And that means, among other things, that the 13% of American households who get only the network stations, many of whom are unable to afford pay TV, will be denied the best programming.

It might be different if this competitive advantage were fair or deserved. It was neither. It was simply a relic of a regulatory regime — the cable-compulsory copyright license — that failed to adapt to the underlying changes in the industry. Only the breakout of true competition in the home video market rectified the situation.

All this is not to say that the system has worked optimally. No one is happy with the abruptness with which the game changed, a sizeable exogenous shock to the system which made it more difficult for cable operators to budget sensibly. And local broadcasters are as unhappy as cable operators that the broadcast networks have used their station retransmission consent clout to secure the launch of and higher subscriber fees for a passel of cable networks. While its genesis lies with cable, the result is that the networks all spend too much on their cable programming and too little on their broadcast networks.

Having spent a decade working for a modest-sized broadcast company negotiating with giant cable MSOs, giant networks and giant syndicators, I have considerable sympathy for the plight of the small cable operator. But let's face it, the telco behemoths and nationwide satellite carriers — not to mention multi-network pure-play cable programmers — present a far bigger problem for them than broadcasters, many of whom are even smaller. I doubt very much that when this still-evolving market gets to something approaching its natural equilibrium, the retransmission price disparity between large and small operators will differ significantly from the cable network price disparity the small operators already face.

In one capacity or another, I have labored in the retrans vineyard since the act was passed. It is gratifying, as I move on to other endeavors, to see the Act's potential finally being realized, though it is not a moment too soon. The result, I hope, will be a new, mutually beneficial and sustainable cable -broadcast relationship that will provide the foundation for a true partnership going forward.

September