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Defining When Cash Is Cash — and Isn't

3/16/2007 8:03 PM Eastern

The battle of semantics this month surrounding the retransmission-consent deal between Comcast and Sinclair Broadcast Group begs the question: In these deals, just what is meant by “cash?”

Comcast was first to announce its retransmission-consent deal with Sinclair on March 9, stressing in interviews that it had adhered to its policy of not paying cash to broadcasters for retransmission.

But the company selected its words carefully. Comcast executive vice president David Cohen said that the multiple-system operator's policy is to not pay cash for retransmission consent that would be passed on to consumers — a point that was quickly attacked in a Sinclair press release, which claimed that Comcast's contention that the deal is merely an exchange of equivalent value is a “mischaracterization.”

Defining cash

The argument is not new. For as long as broadcasters have been seeking retransmission consent, they have claimed to have received cash for carriage from cable operators, direct-broadcast satellite service providers and now telephone companies. For the most part, it has mainly been the cable operators that have denied they are paying cash for retransmission consent.

Webster's defines cash as “ready money; money or its equivalent (as a check) paid for goods or services at the time of purchase or delivery.”

At Comcast, cash for retransmission consent means just that — the operator pays cash strictly for the right to carry the signals of a broadcaster and receives nothing else in return. At Sinclair, the definition is the same. Again, Comcast says it does not pay cash for retransmission. Sinclair said it does not consider money paid for advertising spots to be cash for retransmission consent.

So, by its accounting, Sinclair is getting “cash.” Shortly after Comcast made its announcement, Sinclair went as far as to revise its 2007 retransmission-revenue forecast from $48 million to $53 million to drive home its point. Sinclair said that part of the reason for the revision was due to the recent signing of the Comcast deal. Sinclair's general counsel, Barry Faber, would not break out how much of that $53 million is advertising revenue and how much is retrans cash.

In its 2006 10-K annual report, filed March 9, Sinclair reported $25.4 million in retransmission-consent revenue for the year, $20.5 million in cash and $4.9 million in local and regional advertising. So it appears that Sinclair draws a distinct line between cash compensation and advertising sales.

So who's right? Maybe both.

“I think they might both be finding a way to both be telling the story accurately, in the nuance of what they're saying,” said one cable executive who asked not to be named. “You have to read between the lines.”

In an interview shortly after the deal was announced, Cohen explained the different definitions possibly could come about because Sinclair may value its advertising at a lower rate than Comcast.

“When we get a $100 ad from him [Sinclair] we value it at $100,” Cohen said. “He may say, 'It's not worth $100 to me because we don't sell all of our advertising anyway. And so it may be worth only $30 to me.' At the end of the day, the value that we have received back is comparable. When I say it's comparable, I'm not playing games by saying that I'm inflating the value of what we're getting back in order to make that statement.”

Sanford Bernstein cable and satellite analyst Craig Moffett was equally puzzled, adding that it all comes down to the value assigned by each company.

“Value is in the eye of the beholder,” Moffett said. “From the perspective of Comcast, the $100 of advertising is $100 of advertising. It's irrelevant whether Sinclair would have otherwise sold it or not. From the perspective of Sinclair, the economics are completely different. If they would have sold it [the advertising] anyway, the incremental value is essentially zero. If they otherwise wouldn't have sold it, the incremental contribution is 100%. Only Sinclair really knows.”

While cable operators may be paying what they believe to be a fair price for advertising spots, one cable operator who asked not to be named said the money spent on advertising as part of a retrans deal is often money the operator would not have spent in the first place.

Thick nuances

“I think cable operators are in fact having real hard-dollar value extracted from them in return for retransmission consent,” said the cable executive who asked not to be named. “However, they are getting other value-added services in return for that, as opposed to just paying cash,” which can translate to marketing services or something as simple as getting the operator's logo on a news crawl.

The nuances start to become thicker, however, in examining what those services are and how both sides value them.

“Let me tell you what cash is not — if somebody said to me 'I'll give you $1 million, but you have to give me commercial inventory on your stations worth $1 million,'” Faber said. “I didn't get any cash for my retrans [in that scenario]. And I don't do deals like that.”

Faber said for larger cable operators, sometimes the company will agree to include advertising, but only equal to what the operator has historically spent with the broadcaster. For example, if a cable operator typically spends $1 million on advertising with a station group and does a $10 million retrans deal, Sinclair may say $1 million of that deal is for advertising, to appease any operator concerns.

“What happens sometimes with cable guys is, there is certainly a lot of desire not to have documentation that says they're paying us cash for retrans,” Faber said.

True value

So, if a cable operator wants the deal to state that a $10 million retrans deal consists of $1 million in advertising and $9 million of video-on-demand rights, he has no problem with that.

Faber said that video-on-demand rights — mainly for local news broadcasts — have little value to his stations, but may have greater value for the cable operator. Whether the cable operator wants to say that the bulk of the cash paid for retrans was actually for VOD rights doesn't matter to him. But there is little question about its true value, he added.

“Let's say I had elected must-carry,” Faber said. “If I called them up and said 'How would you like to buy my VOD rights for $9 million?' I'm very confident that nobody is going to pay me that for it. But if that's how they want to memorialize it in an agreement because, for whatever reason, the optics of it work for them, I'm OK with that. To me money is money and I don't really care how the agreement allocates it. In my view it's for retrans.”

But that doesn't mean that VOD has no value to Comcast. The Philadelphia-based operator is one of the biggest purveyors of on-demand programming — most of it free to subscribers. Comcast sees on-demand content as a key tool for keeping its subscribers from defecting to satellite or other competitors. So even if a small group of subscribers stays with Comcast — paying an average of $100 per month — in part because they are able to watch the 6:30 p.m. local news at 8 p.m. on demand, then that VOD deal has a real value.

Could cable operators be paying $100 for $30 worth of advertising? The answer may truly be in the eye of the beholder.