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Networks Seek Their Cut Of Retrans

11/07/2009 2:00 AM Eastern

Retransmission-consent fees paid by cable operators to broadcasters continue to climb, reflected in station groups' earnings and in moves by broadcast networks to get in on that revenue stream.

Several broadcast-station groups said networks like News Corp.'s Fox, CBS and ABC have been pressuring them to pony up a portion of their own retrans dollars and, in some cases, are reaching out to individual distributors asking for separate fees.

News Corp. chief operating officer Chase Carey said during the company's third-quarter earnings call Wednesday that retransmission deals for Fox owned-and-operated and affiliated stations roll off in the next two to three years.

Retransmission cash for the O&Os — something News Corp. had passed up in prior years to secure carriage for its cable networks — is beginning to look very attractive, he said.

People familiar with the situation said News would likely seek retransmission dollars for its O&Os — about 27 stations in major markets like New York, Los Angeles, Chicago, Dallas and Boston — and would take the lead in negotiating retransmission payments for affiliated stations.

$1 PER MONTH FOR FOX?

Several reports have stated that News could seek as much as $1 per month, per subscriber for the O&Os.

During the News earnings call, chairman Rupert Murdoch joked that an analyst was being too conservative when he suggested a monthly fee of 75 cents per subscriber for the Fox network. It is unclear how big a cut of whatever fee is paid would go to News from its affiliates.

Carey would not speculate on pricing, but said it is getting tougher for broadcasters to compete economically with cable networks, which earn revenue from advertising and from affiliate fees.

Carey also said retransmission cash won't cure all the ills broadcast stations face in a difficult advertising environment.

“Retransmission in many ways is a building block,” he said. “It's very tough to compete with the cable-channel business model of dual revenue streams without one for broadcasting. … I do think there are a lot of things you need to do to continue to build this business.”

CBS, meanwhile, continues to insist retransmission fees will be a substantial, growing revenue line. Fees in 2010 should be nearly double what they were in 2009 based on contracts already in place, CBS Corp. CEO Leslie Moonves said Thursday during that company's earnings call.

CBS has already signed retransmission deals with Verizon Communications, Dish Network, Time Warner Cable and Cablevision Systems. “We see it contributing hundreds of millions of dollars,” said Moonves, adding that the TV Everywhere initiative could potentially create a third revenue stream for broadcast networks. That initiative is aimed at transferring advertising to online and mobile platforms, thus preserving the TV business model. CBS has signed deals with TWC and Comcast to be part of authenticated online services.

Moonves is pressing for non-O&O CBS stations to share their retrans dollars with the network. There's been a debate about who should get what share of fees paid by MSOs. Moonves said: “As each new affiliate agreement comes up, there will be a sharing of the retransmission fees; it's in the very early stages. There's a realization that if they're [affiliates] getting paid retransmission fees, they're getting it because of network providing NFL, 60 Minutes and [Late Show With David] Letterman. We are working with the affiliates right now and most understand the situation and they're talking to us about how we do this in the best possible way together.”

In August, Gray Television CEO Hilton Howell said that NBC Universal tried to extract retrans revenue from his stations but backed off after Gray resisted strongly. Gray owns about 10 NBC affiliated stations. He said at the time that Fox has made similar overtures: Gray has one station affiliated with Fox.

Belo Corp., which owns about 20 stations in 15 markets, said last week ABC has asked for a cut of its retransmission revenue as part of its affiliate renewal talks. Belo operates four ABC affiliates, including flagship WFAA in Dallas-Fort Worth.

Belo CEO Duvia Shive said during an earnings call Tuesday that affiliation talks were ongoing, and hinted the station group will probably end up paying the network. “We expect to complete the agreements in a way that is manageable for the company and continues the good relationship we've had,” Shive said.

Belo reported about $10.6 million in retrans revenue for the third quarter, up 26% from the same period last year.

Across the board, publicly traded station groups reporting third-quarter results have posted sizeable increases in retransmission revenue.

Leading the pack is Sinclair Broadcast Group, which reported $28 million in retrans revenue in the quarter, a 56% increase over the prior year. LIN TV, which has 27 stations in 17 markets, reported a 28% increase in retrans revenue to $10.4 million in the period.

So far, though, the station groups are keeping mum on the situation. Officials at Nexstar and Sinclair declined to comment. Gray Television officials did not return phone calls for comment.

Retransmission consent has basically been the bailiwick of television station groups, which negotiate with cable, satellite and telco distributors for carriage of their stations on local cable systems.

Those negotiations sometimes have reached a fever pitch — especially as deals tend to expire around major sporting events.

Things were quieter between broadcasters and distributors last year, as media firms waited for a new presidential administration and Federal Communications Commission. Several big deals, including CBS pacts with Time Warner Cable and Comcast, were reached nearly 12 months before they were set to expire.

The kid gloves appear to be slipping off now. But Miller Tabak media analyst David Joyce said cable operators are usually able to replenish lost profits due to retransmission payments through other services.

“Retrans does hurt the consumer in the end — clearly the broadcasters envy the cable-network business model of the dual revenue stream,” Joyce said. “Cable operators tend to not pass on more than half of the program increases directly. They make up for it in VOD, HD/DVR, premium channels.”

NO PANIC FROM CABLE

Cable operator executives on earnings calls last week didn't sound too concerned about the potential for retransmission-consent fees forcing their hand in terms of raising rates or dropping channels.

Cablevision Systems chief operating officer Tom Rutledge said on Cablevision's earnings call Tuesday that retrans expenses shouldn't lead directly to higher rates. Cablevision said late last month its video rates would be raised an average 3.7% in 2010.

“We have a large programming expense budget as part of our cable business,” Rutledge said. “While we have concerns about retransmission consent, we think we can manage our overall cost structure.”

Time Warner Cable chairman and CEO Glenn Britt, on TWC's earnings call Thursday, sounded optimistic about retransmission negotiations.

“I think a much more positive way is for retailers and distributors to partner with content people and to use technology to create new products and services to give consumers what they want,” Britt said. “There is plenty of money for everybody if we behave that way. I think we have been pretty successful in a most of these negotiations, arriving at mutually satisfactory deals without a lot of fireworks.”

RETRANS RISES
Broadcast station groups began reporting third quarter results last week, and retransmission-consent revenue there continues to grow:
($ millions)

Company Q309 Q308 % Change
SOURCE: Individual company reports
Sinclair $28 $17.9 56%
LIN TV $10.4 $8.1 28%
Belo $10.6 $8.4 26%

Claire Atkinson of Broadcasting & Cable contributed to this report.

September