News

What to Watch for at Carriage Election Time

9/26/2011 12:01 AM Eastern

If the leaves are beginning to change
colors and the mailboxes of cable and satellite providers
nationwide are overflowing with certified letters, it
means that it is once again carriage election
time. Every three years, by Oct. 1, broadcasters
are required to send letters to the cable
and satellite operators in their markets stating
whether they are electing must-carry or
retransmission-consent status for the next
three-year cycle. The election letters being
sent out by Oct. 1 will govern carriage for the
period from Jan. 1, 2012, to Dec. 31, 2014.

To make it as confusing as possible, the
law states that broadcasters who fail to
send an election letter to a cable system default
to must-carry status, while those that
fail to send an election letter to a satellite-
TV provider default to retransmission-consent
status. In order to avoid being subjected to one of
these default options, local TV stations will be dutifully
sending out their election letters. This sometimes
causes confusion for cable and satellite providers, who
scratch their heads trying to figure out why they are
getting a letter electing retransmission consent from
a station with which they already have a multiyear retransmission
deal.

While it will usually be pretty obvious what steps the
cable or satellite operator needs to take in response to
an election letter (depending on the station’s current
carriage status), the Federal Communications Commission’s
rules add some additional obligations. For
example, upon receiving a must-carry election from a
TV station, satellite operators are required to respond
in writing within 30 days indicating that they will carry
the station or, if not, provide the reason for declining
the carriage request. This applies even if the station is
already carried.

MUST-CARRY WILL WANE

Something that all providers should expect in the coming
election cycle is an increase in the number of stations
electing retransmission consent, rather than
must-carry. The reasons for this are far more complex
than merely a desire to grow retransmission revenue.
To explain the actual pressures at work, however, a little
background is needed.

The most important development in the early years
of television was the growth of national broadcast networks.
These networks allowed TV stations to effectively
share program production costs with hundreds of other
stations, making high quality programming available
to local stations and their viewers, whether located
in New York or in the most rural of communities. Conversely,
the availability of local TV stations to serve as
a network’s affiliates reduced the network’s costs, since
it didn’t need to build and operate stations nationwide
in order to reach a nationwide audience. Of course, FCC
restrictions on how many stations any company could
own also ensured that networks had to rely on independently
operated affiliates to distribute network programming.
It was a model that cable networks would
later adopt, merely substituting local cable systems for
local TV stations.

Because the competition among networks to secure
one of the limited number of TV stations then operating
was intense, the networks agreed to pay local TV
stations to be their affiliate. This model worked well
for many years, providing local TV stations with both
good programming and a revenue stream
not reliant upon local ad sales. However,
as the number of TV stations grew, and as
other program distribution technologies
came on the scene, local TV stations lost
their unique position in the network program
distribution chain. The result was
that broadcast networks ceased paying affiliate compensation (arguing that the programming
itself was quite a benefit), and
now the networks routinely demand that
affiliates pay the network for their programming.
Because of this, local TV stations
have not only lost what was once a
significant source of revenue, but have seen
their programming costs increase substantially in the
process.

Like any other distributor whose supplier has increased
its prices, network affiliates are passing on
those cost increases to their buyers, which in this case
are cable and satellite providers. Complicating the situation
is the fact that the networks, having now seen
the revenue potential of retransmission rights, are
adjusting affiliation contracts to ensure a significant
share of that revenue will go to the network, either by
increasing the fixed compensation an affiliate must
pay the network, or by demanding a substantial cut of
those retrans revenues.

In the first situation, a station that fails to generate
substantial retrans revenues will have trouble meeting
its fixed-payment obligations to its network. In the
second situation, a network that is dissatisfi ed because
its affiliate has underperformed in retrans negotiations
may merely decide to move the affiliation to a different
local station (which has become much easier with the
advent of broadcast multicasting).

The change in affiliation allows the network to step
away from the original affiliate’s retrans agreements
and immediately get a clean slate for negotiating a
more attractive retrans deal with the cable and satellite
providers in the market. Affiliates are acutely
aware of this fact.

NETS PRESSURING STATIONS

As CBS CEO Les Moonves recently said of the subject
of affiliate compensation and retrans payments, “If
someone is a good negotiator or a bad negotiator, that
shouldn’t affect what we get paid.” Local broadcasters
are feeling the heat from their networks and understand
that generating ample retransmission revenues
will become an increasingly essential part of holding
on to the network programming that both the station
and its retransmission partners want. As election letters
accumulate in the mailboxes of cable and satellite
providers across the country, these developments ensure
that, more than ever, these letters will be electing
retransmission consent.


Scott R. Flick is a partner in the Washington, D.C., law
firm Pillsbury Winthrop Shaw Pittman, representing
media companies and networks before federal regulatory
agencies and the courts.
September