Ops, Broadcasters Give Peace A Chance

1/09/2009 7:00 PM Eastern

Just a few years ago, CBS Corp. CEO Les Moonves told an audience at an industry conference that within five years, cable operators should expect to pay cash to carry the network.

At the same conference — the Deutsche Bank Media & Telecom conference in New York — Time Warner Cable CEO Glenn Britt balked. He said his company would resist broadcasters that asked for cash for retransmission consent. “We’ll have tough negotiations,” Britt said at the time.

Today, TWC is one of the first major cable operators to agree to a retransmission-consent agreement with CBS since it was spun out as a separate company. The pact, finished well before its previous deal expired, extends to 2013 and likely involves some form of cash payment from the cable operator.

Retrans Revenue
SNL Kagan estimates that retransmission consent revenue for broadcast television networks will skyrocket in the next four years, and cable operators will foot the bulk of that bill.
(in millions)
2008 2010 2012
Cable $160.7 $411.9 $668.2
DBS $287.2 $390.4 $462.2
Telco $39.6 $127.7 $201.4
Total $487.5 $930 $1,331.8

Time Warner Cable’s apparent change of heart points to a larger trend in retransmission-consent negotiations toward the tail end of 2008, when many bruising battles were predicted as the contracts expired. At least for now, the vitriol is gone, a trend expected to continue at least through the spring.

In addition to the Time Warner-CBS deal, Univision Communications struck a long-anticipated deal for carriage of its owned-and-operated TV stations and affiliates with cable giant Comcast, outlets reaching 20 million subscribers. This negotiating cycle marked the first time that the Spanish-language broadcaster had opted for retransmission-consent for its stations, which by nature includes payment, rather than “must-carry,” which simply requires carriage under the law.

Cable operators and broadcasters have been at loggerheads regarding retransmission consent since a law was passed as part of the 1992 Telecommunications Act, and they have the battle scars to prove it. Past retrans battles have been marred by several rounds of public name-calling, followed by aggressive ad campaigns in local markets by the broadcasters to move cable customers to competitor services.

So what’s so different now? For starters, both sides, in an effort to avoid confusion for consumers surrounding the upcoming digital transition of broadcast signals, had proposed a “quiet period” for retrans negotiations prior to the Feb. 17 transition deadline. While no formal agreement was reached, it appears that broadcasters and cable operators decided to keep the vitriol in these negotiations to a minimum for the time being.

Both sides are also wary of attracting too much attention from a new presidential administration that has sent some signals of its desire to further scrutinize the media industry. “If you have a lot of public squabbles, you look like an industry that is in need of regulation,” said Collins Stewart media analyst Tom Eagan.

Moreover, some smaller cable operators said they were forced to strike retransmission-consent deals and ante up cash to TV stations because they couldn’t risk losing carriage of the local broadcasters carried by satellite-TV rivals DirecTV and Dish Network.

But both broadcasters and MSOs appear to agree that retransmission-consent deals have value and seem to have come to the conclusion that a protracted battle — where a channel is dropped and subscribers and viewers are lost on both sides — is a recipe for mutually assured financial destruction.

And it also appears that both sides are rediscovering the concept of compromise — finding a way to get broadcasters the cash they crave in a way that lessens the blow for the cable operator.

That seems most apparent in the CBS deal. The cable operator paid a higher license fee for Showtime, and as part of the overall deal got continued carriage of the broadcaster’s stations, according to an executive familiar with the situation. It was in CBS’s best interest to shore up distribution for Showtime, which is losing theatrical-output deals with its three major first-run movie suppliers (“Viacom’s $100 Million Game-Changer,” May 5, 2008, page 2).

And by increasing the fee for the premium channel Showtime, Time Warner Cable can more easily pass on the additional cost to the customer. While neither side officially announced terms of the deal, Moonves said at the Citigroup Media and Telecommunications conference in Phoenix last week that Showtime’s increased popularity with shows like Weeds, Californication, The Tudors and Dexter have arguably made it the new quality premium channel.

“What just happened with Time Warner shows that they’re certainly not afraid in giving us increases in what we’re getting paid,” Moonves said.

That could bode well for other MSOs. “Time Warner was significant in the size and the power of it and I think it opens the door for a lot more of these deals,” Moonves said at the Citigroup Conference. “It set a template and people now know we are going to get paid for our content.”

Despite the protestations of MSOs, broadcasters are at least getting some cash for retransmission consent. The six major station groups (Sinclair Broadcasting, Belo, Hearst-Argyle, Nexstar, LIN TV and Gray Television) reported a combined 30% rise in retrans compensation in the first nine months of the year.

SNL Kagan estimates that retransmission fees from all sources will grow from an estimated $487.5 million in 2008 to $1.33 billion by 2012. And according to Kagan, cable operators will continue to pay the bulk of those fees. Kagan estimates that cable operators shelled out $160.7 million to broadcasters in 2008 and will dole out $668.2 million by 2012, roughly 33% and 50% of the total amount of retrans compensation generated.

That compensation can take many forms — cash, advertising or other in-kind services. Operators rarely admit to paying cash for station signals — and broadcasters keep claiming they’re getting it. “Cable operators are obviously paying something to broadcasters,” said Pali Research analyst Richard Greenfield. “That being said, I don’t think it is a break-the-bank issue.”

Miller Tabak media analyst David Joyce said that cash for retrans can be passed off to an extent to cable customers through higher rates. “With programming cost increases in the 7% to 10% range, retrans payments get buried in all of that. The cable operators eat some of that, they pass some of its through … but there are also other areas of their business that help make up for that margin hit,” Joyce said, referring to high-margin businesses like high-speed Internet service and telephony.

And though MSOs and broadcasters have been on their best behavior recently, when current contract extensions expire, possibly after the Super Bowl and after Feb. 17, some industry officials warn that retransmission-consent battles could still flare up. “Over the next year, you will see retrans become a bigger and bigger issue,” Greenfield said.

Greenfield added that several deals have yet to play out: CBS is still negotiating with Cablevision Systems; Spanish language broadcaster Univision is in talks with several MSOs, to name a few. “There are a lot of battles to come,” Greenfield said.

Still, deals that were expected to explode were settled amicably. Wall Street analysts had predicted that Univision, which had never sought compensation from distributors for its TV stations, would wind up in disputes with cable operators, especially after the Spanish-language broadcaster said last year that it would seek hefty license fees of about $1.

But last week Univision unveiled its agreement with Comcast, and said it has other retransmission-consent deals done or in the works. “Univision has had very productive negotiations in the last few months and we are extremely satisfied with the outcome to date,” said Tonia O’Connor, Univision’s executive vice president of distribution sales and marketing. “We have signed or are close to signing a number of multiyear contracts with distributors across the country that are mutually beneficial and that will ensure our viewers continue to have access to our quality news, sports and entertainment programming.”

Some operators said that ultimately Univision had substantially lowered its license-fee asking price, from $1 to more in the 50-cent range. The Spanish-language broadcaster declined to give details.

The American Cable Association, a lobbying group for independent cable-system operators, said its members saw quickly that public fights would not work. Many members went from paying zero license fees to anteing up payments in the 25 cent to 60 cent range for stations.

“Our members basically said: 'It hurts us more to have the station off because of competition,’ ” said ACA president Matt Polka. “They were stuck between a rock and a hard place, and if they wanted to survive, at least for today, and continue to provide our customers with the other advanced services, they had to swallow these deals, even though we know it’s going to impact rates.”

Even though cable operators believe retransmission-consent is a broken system that will result in rate hikes for consumers, these operators couldn’t risk dropping stations and “having fires raging everywhere,” risking the ire of the public and politicians, according to a Washington, D.C.-based lawyer who specializes in retransmisson-consent deals but asked not to be identified.

“How long can you have those fires burn before you get burned?” he asked.

The National Association of Broadcasters claimed that the relative quiet of the retransmission-consent period was proof that the system works.

“Most of the deals got done, just as we always expected,” NAB executive vice president Dennis Wharton said. “Despite the back and forth rhetoric from our distribution partners, the fact is that cable, DBS and telcos badly need broadcast programming to remain competitive.

“It also must be difficult for cable giants like Time Warner to complain about modestly compensating broadcasters for highly rated programming while shelling out a double-digit increase for less-watched cable networks.”

The satellite providers and telcos have been paying stations for years to carry their signals, also setting a powerful precedent for cable companies to fork over cash license fees, the Washington lawyer said.

There were scattered station drops New Year’s Day stemming from retransmission-consent disputes. Sunflower Broadband lost carriage of two Hearst-Argyle Television stations in Kansas City, Mo.: KMBC-TV, the ABC affiliate, and KCWE, The CW’s affiliate. And the nation’s two satellite providers, DirecTV and Dish Network, dropped stations New Year’s Eve in separate retransmission-consent spats. DirecTV took KJZZ-TV in Salt Lake City, Utah, the station that offers Utah Jazz basketball games, off its lineup.

One of the longest running disputes is Dish Network’s continuing retransmission-consent fight with Fisher Communications, a standoff in which the satellite provider dropped nine Pacific Northwest Fisher stations Dec. 18.

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