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Broadcasters Feel Squeeze — and Will Hike Fees

12/05/2011 8:01 AM Eastern

As they near the next round of retransmission-consent negotiations, broadcasters are under added
pressure to raise fees as their networks continue to up the
ante for reverse compensation, according to a report by credit
rating agency Moody’s Investors Service.

Moody’s expects retrans fees to triple to $3.6 billion by the
end of 2017, mirroring a May report by cable and broadcast research
giant SNL Kagan. As the retransmission-consent season
begins to heat up, cable, satellite and telco distributors are
bracing for what could be a contentious negotiating round.

Many retransmission deals expire at the end of December.
Both Mediacom Communications and Suddenlink Communications
have said publicly that more than 70 deals each
inside their footprints come up for renewal at the end of the
month.

The American Cable Association, a lobbying group representing small, independently owned cable operators,
has said that their members are gearing up to renew
more than 900 retransmission deals by the end of the year.

NBCU FACTOR

Networks began to test the reverse-
compensation waters a
few years ago, and now most
major broadcasters — ABC,
CBS and Fox — are receiving
some form of compensation
from their affiliates. NBC, part
of the NBCUniversal joint venture
controlled by Comcast,
has said it will request reverse
compensation from its affiliates
and is expected to reach
an overall agreement before
the end of the year. NBC, like other major broadcast networks,
has also expressed a desire to negotiate retransmissionconsent
agreements for its affiliates as well as its owned-andoperated
stations, a move distributors have opposed.

Kagan, in a November report, estimated that reversecompensation
fees would rise from $146 million in 2011 to a
hefty $1.3 billion by 2015.

That will put more pressure on station groups as they are
required to pay reverse-compensation fees to their respective
networks, wrote Moody’s vice president
and senior analyst Carl Salas.
Salas estimated station groups will
pay about half of their retransmission
compensation back to their
networks in the form of reverse
comp.

While that could be a severe
blow to broadcasters, Salas, like
other analysts, expects that broadcasters
will simply double their
fees from distributors to make up
the difference. “For now, we expect
most broadcasters will agree
to pay reverse compensation to the
networks, with the expectation that
they can off set some of these fees
with higher retransmission fees.”

Salas believes broadcasters
as a group will be able to offset reverse-compensation costs
through higher retrans fees by about 2015. But after that,
broadcasters will likely have to make a decision, Salas wrote.

“Each pure-play broadcaster
will have to decide
how much of its long-term
value comes from its own
local content, or from the
network programming it
broadcasts,” according to
Salas. “The broadcaster
must then use that determination
to decide whether to
pay reverse compensation
— risking lower profits if it
does, and loss of network affiliation if it does not. So far,
the networks have shown they have the upper hand.”

Retrans fees have become an important revenue segment
for broadcasters over the past several years. According
to Moody’s, the fees represented about 2% of revenue in 2006
and have grown to account for about 9% of revenue by 2010.
Moody’s expects broadcasters’ reliance on retrans to become
even greater as time progresses — retrans should make up 20%
of overall revenue by 2017, the ratings agency predicts.

That increased reliance was evident in 2010, when retrans
helped push overall revenue at Moody’s core pureplay
broadcasting universe into the black despite a sharp
downturn in advertising revenue. Moody’s estimated
that without retransmission consent fees, the broadcasters
would have experiences an average 8% cumulative
decline in revenue between 2006 and 2010.

BIG REVENUE LINE

Retransmission-consent fees are now the second-largest
revenue segment for broadcasters, behind advertising,
and have been the single fastest-growing segment — with
a 54% compound annual growth rate between 2006 and
2010, according to Moody’s.

As more networks begin to demand reverse compensation
from stations for their programming, the pressure on
broadcasters will only get greater.

Miller Tabak media analyst David Joyce said that reverse
compensation has added another wrinkle to retrans
negotiations.

“I do think the retrans negotiations are going to continue to
be difficult, made more complex by the TV stations not getting
100% margins on that new-found, new-fought revenue, but effectively
50%,” Joyce said. “What makes it more complex, but
could make these discussions more than just about a cash fee,
are the digital rights (for Android and iPad apps) and whatever
might evolve in the interactive-advertising realm.”

September