Policy

Dueling for Dollars

3/02/2007 7:08 PM Eastern

Sinclair Broadcast Group employed a regimen of strategies and tactics to apply pressure in — and ultimately win — its bitter retransmission-consent fight with Mediacom Communications earlier this year.

In fact, Sinclair’s battle plan could be a playbook for broadcasters seeking the upper hand on a cable operator in today’s competitive TV marketplace.

When Hunt Valley, Md.-based Sinclair pulled more than two dozen stations in January, it was taking on a cable company with a lot to lose: Nearly half of Mediacom’s subscribers, or 700,000, were at risk.

Those subscribers were ripe for the picking by DirecTV, which began offering Mediacom customers rebates as high as $150 to switch to its direct-broadcast satellite service.

And in a major blow for Mediacom, the Federal Communications Commission rejected its call for help by refusing to order the Sinclair stations reinstated during negotiations.

Why Broadcasters Will Get Cash
Precedent. Satellite and telephone companies are already ponying up.
Alternatives available. If a cable company loses carriage of a TV station, its subscribers can switch to a satellite or telco TV service.
Powerful content. Cable operators can’t do without broadcast’s high-rated, marquee programming.
Customer satisfaction. Consumers are willing to pay for popular broadcast content, such as American Idol.
Tacit approval. The Federal Communications Commission has refused to intervene in retransmission-consent disputes.
Profit pressure. They must offset declines in local ad revenue and network compensation.
Cost pressure. They want to pay off millions they’ve invested in digital and HDTV gear.

Sinclair and Mediacom were at loggerheads over the red-hot trend in retransmission-consent talks: Broadcasters seeking cash for carriage of their signals. That demand has added a new tension and dynamic to negotiations between TV-station owners and cable companies, who are quarreling over payment for both analog and HDTV signals.

With the stakes raised, broadcasters and cable companies each have an evolved arsenal of weapons they can now wield in these disputes.

For example, broadcasters are increasingly partnering with satellite providers, now grown to some 29 million subscribers, to lure subscribers away from cable. And station owners have recently found a friend in the FCC, which said during the Mediacom-Sinclair fight that it won’t intervene in such disputes.

Cable companies also have arms at their disposal. They can hurt a TV station’s viewership, and hence its increasingly precious ad revenue, by dropping a broadcaster’s analog signal. And cable has a new card to play: The refusal to carry a broadcaster’s HDTV and digital signals.

In today’s competitive video environment — where cable operators face off not only with their satellite rivals, but telcos such as Verizon Communications and AT&T — the market has reached a tipping point, where small operators have virtually no leverage against big broadcast groups.

It’s no wonder that Mediacom CEO Rocco Commisso admitted that he “caved in,” completing a deal Feb. 2 in which his company will have to pay Sinclair cash for carriage. During the dispute, Mediacom — a Middletown, N.Y.-based operator whose systems are primarily in the Midwest and South — lost 7,000 subscribers in the fourth quarter alone, even before Sinclair pulled its stations, and it expects to report even more switchouts for January.

“We tried to put a valiant fight on,” Commisso said. “We lost the battle because the FCC was predisposed of giving the broadcasters a major win here.”

In contrast to Mediacom, there’s Comcast: A huge cable company, with a 24.2 million-home footprint, which can still emasculate a broadcaster by dropping its stations.

In a report on retransmission consent, Sanford C. Bernstein cable analyst Craig Moffett laid out a worst-case scenario. He detailed what would happen if Comcast and CBS ever got into a bare-knuckle dispute that led the operator to drop the broadcaster’s stations. CBS’s deals with major cable operators expire from 2009 to 2010.

“If Comcast were to fail to reach a settlement with CBS and 'go dark’ — something we have referred to in the past as the 'nuclear option’ for carriage negotiations due to its huge political as well as economic implications — considerable pain could be inflicted on and by both parties,” Moffett wrote.

In such a fight, 55% of Comcast’s total footprint would be exposed to having its subscribers switch. And conversely, “in this extreme case of a national 'blackout’ on Comcast systems. … 56% of CBS’s total advertising revenue would potentially be vaporized,” according to Moffett.

“At the end of the day, these negotiations are about who can cause whom the most pain,” Moffett said in an interview. “The pain to cable operators is felt slowly, in the form of subscriber attrition to satellite. The pain to the broadcasters is felt immediately, in the form of lost advertising revenue, if they’re losing a big piece of the marketplace.”

CBS and Comcast could clash on cash for carriage. For several years now, CBS CEO Les Moonves has been beating the drum, saying he wants license fees for his stations. He’s already done cash-for-carriage deals with Verizon and nine small operators.

Other broadcasters — such as LIN TV, Nexstar Broadcasting Group and Belo — are clamoring for cash, as well.

But large cable companies such as Comcast insist that they won’t fork over cash for free, over-the-air TV.

“Comcast’s position is that our customers should not have to pay for free TV,” Comcast executive vice president David Cohen said. “And so far, we have been successful in protecting our customers across the board.”

Comcast and Charter Communications are currently negotiating new retransmission-consent deals with Sinclair. Just last week, Philadelphia-based Comcast received an extension until March 10 to continue its talks, which involve more than 30 TV stations in 23 markets, reaching 3.4 million subscribers.

Here is how broadcasters and cable operators manage to inflict pain on each other in their intensifying duel for dollars.

PAIN POINT NO. 1: TIMING

Broadcasters have been quite savvy in terms of timing when they decide to go to the mat with cable operators in retransmission-consent disputes.

In a number of instances, TV-station owners have threatened to pull — or have pulled — their signals when high-profile, live sporting events are about to be broadcast. In the case of Sinclair and Mediacom, some of the cable company’s subscribers had lost CBS affiliates, which were about to air the Super Bowl.

“What Sinclair did to Mediacom was a perfect storm, and I think they set it up, they timed it, and I think they very clearly were the wolf going after the lame and the old,” said a former cable operator. “From one perspective, it was a pretty smart strategy. I think it’s a lot harder to do that, to play that kind of game, with a Comcast or a Time Warner [Cable], or even a Cox [Communications].”

Suddenlink Communications CEO Jerry Kent had his own high-profile battle with Sinclair last year. The broadcaster initially asked for a $41 million up-front payment and a 50-cent-per-month, per-subscriber fee for each of its two stations in Charleston, W. Va. At the time, Suddenlink had just purchased the Charleston system from Charter. Sinclair saw that as an opportunity to renegotiate its retransmission agreement.

The battle lasted several weeks, with the two finally reaching an agreement Aug. 7. While terms were not disclosed, both parties have said the deal satisfied their needs.

Why Cable Companies Won't Pay Cash
Avoiding Precedent. If one TV station gets it, all TV stations will demand it as well.
Price Pressure. Rates will go up and customers would have to pay the bill. Or not.
Substitutes Exist. Other forms of compensation suffice, like buying ad time on stations.
Free Is Free. Broadcasters send their programming for free over the air and over the Internet.
Pain Is Temporary. If a signal is pulled, cable can offset the loss of video subscribers, through high-speed data, phone service and other sources of revenue.
Retaliation Is Possible. A broadcaster’s affiliated cable channels, digital networks and HDTV signals can be penalized. Or dropped, altogether.

Sinclair and Nexstar have been strategic in timing their quest for cash from cable companies.

“I don’t think the cable industry has been as smart as it could have been in terms of positioning itself for this kind of Armageddon, whereas Sinclair, I think, has been laying in the bush for some time now to try to set up this situation,” the ex-operator said. “A lot of it comes down to your rational analysis of how many markets, how many stations, how long can you go, what’s the damage to the cable operator and how important it is.”

Sinclair officials maintain that its recent negotiations with Mediacom were simply business as usual.

“Mediacom always thought we were trying to do this to somehow set an example,” said Sinclair general counsel Barry Faber. “We had plenty of deals in place already where we’re receiving compensation and so we didn’t view this as anything particularly groundbreaking.”

PAIN POINT NO. 2: CARRIAGE

Broadcasters need more than just cash from cable operators. They need cable systems to carry their digital networks and HDTV signals. And broadcasters also need carriage for the cable networks they or their parent companies own.

Thus, playing hardball with a cable operator on retransmission consent, and insisting on cash, could backfire for a broadcaster such as CBS, which owns Showtime and the college-sports network CSTV, and has said it wants to launch entertainment-oriented digital networks.

“Moonves has got at least two cable networks and I sure wouldn’t want to be running Showtime if [cable] operators decide to take out retransmission consent on Showtime,” the veteran cable operator said. “Showtime is heavily dependent upon cable operators not just for carriage, but for marketing, positioning and pricing, and I just think that puts them at tremendous exposure.”

Many other broadcasters also need cable carriage for their affiliated networks. Tribune Co. has traded retransmission consent for its TV stations for carriage of its Superstation WGN. E.W. Scripps has linked carriage of its stations to distribution for its Scripps Networks stable of channels, such as Food Network. And Hearst-Argyle Television gets revenue from Lifetime Entertainment Services in exchange for securing carriage for its networks, such as Lifetime Movie Network.

Cox has tussled with broadcasters over their HDTV signals, and the issue of paying for them. For example, Cox was in retransmission-consent talks late last week inolving the analog and HDTV signals of Belo’s WWL-TV in New Orleans.

But for some broadcasters, getting additional channels, such as digital multicasts, launched on cable just isn’t a priority.

“For us, cash is king,” Nexstar chief operating officer Duane Lammers said. “There’s no sense in us surrendering all the retransmission-consent cash to get carriage of a second channel that nobody may ever watch.”

Signal Compensation
Television stations have seen a falloff in the payments they receive as affiliates of the Big Four broadcast networks (ABC, CBS, Fox and NBC). At the same time, cable and satellite distributors are beginning to pay stations for permission to retransmit their signals.
Network Compensation (in millions):
2003 2004 2005 2006 2007E
Sinclair $15.9 $14.3 $13.3 N/A N/A
Nexstar $8.3 $8.5 $6.6 $4.2 N/A
Hearst-Argyle $32.2 $29.0 $19.1 $9.8 $9
LIN TV $12.7 $12.4 $10.5 $2.4* $3-4
Post-Newsweek $18.3 $17.7 $13.8 $13.2 N/A
* For the nine months ended Sept. 30
Source: Company reports
Retransmillion Consent Revenue (in millions):
2003 2004 2005 2006 2007E
Sinclair $2.6 $3.5 $19.2 $25.4 $48
Nexstar N/A N/A $2.9 $13.7 N/A
Hearst-Argyle $1.9 $1.8 $6.8 $17.9 $18-20
Figures include both cash and advertising revenue.
Source: Company reports

PAIN POINT NO. 3: COMPETITION

Emboldened broadcasters argue that the advent of video competition from telephone and satellite companies has given cable systems little choice but to pay cash. That’s because cable-TV subscribers now can switch providers if they lose a favorite TV station in their market due to a retransmission-consent dispute.

“We have the advantage today that we didn’t have 15 years ago as an industry, of having competition in these markets,” said LIN TV president Vincent Sadusky, who closed a retransmission-consent deal with Cox last week.

In addition, DirecTV and its satellite rival, EchoStar Communications’ Dish Network, are paying per-subscriber license fees to carry local TV signals. So are Verizon and, reportedly, AT&T, creating what broadcasters claim is clear precedent for cable.

Last year, Kagan Research estimated that TV stations generated $230 million in revenue from retransmission consent. By 2010, Kagan is projecting $1 billion in retransmission-consent revenue: $498 million from DBS, $389 million from cable and $118 million from the telcos.

The two major satellite providers actively market in cities where cable companies have dropped TV stations, often offering rebates in order to lure cable subscribers.

“We will certainly help any broadcaster who is in a retransmission situation where they might lose a distributor,” EchoStar CEO Charlie Ergen said during a conference call last week. “If a cable operator wants to not pay [for retransmission consent], then it’s an opportunity for the satellite industry.”

Cable companies argue that it’s not a financial hardship for satellite providers to pay for retransmission consent, because companies such as DirecTV and EchoStar are able to sell the local TV signals on a separate broadcast tier, passing those costs directly to subscribers who specifically want the stations.

Cable operators, by law, can’t do that.

“The argument about DBS [paying cash] is a fallacy because DBS has the right to tier their broadcast services,” said Matt Polka, president of the American Cable Association, a lobbying group for independent cable operators. “Give us the right to carry broadcast signals on a tier, we’ll do it gladly. If Verizon wants to pay [for retransmission consent], that’s up to them … They’re trying to get a foothold.”

PAIN POINT NO. 4: NEW REVENUE STREAMS

Broadcasters are under pressure to find new revenue streams, and that’s why they are eager to monetize retransmission consent. TV-station ad revenue is slumping, expected to dip 1% to 3% this year, according to the Television Bureau of Advertising.

And during the past several years, the “Big Four” networks have renegotiated affiliate deals to eventually eliminate once-lucrative network compensation fees paid to stations to carry programming from ABC, CBS, Fox and NBC.

Perhaps not coincidentally, those fees began to decline precipitously in 2005, right around the time that retransmission-consent revenue began to rise. For example, in 2005, network compensation at Hearst-Argyle fell 35.9% from $28.8 million to $19.1 million and dipped another 48.7% in 2006 to $9.8 million.

At Nexstar, network compensation dipped 22.4% in 2005, to $6.6 million, and fell 36.4% to $4.2 million in 2006. At Sinclair, the drop-off was less dramatic — 7% in 2005, from $14.3 million to $13.3 million (the company has not yet released 2006 network compensation) — but the station owner expects more dramatic declines in the coming years.

In its 2005 annual report, Sinclair even went as far as to say that retransmission-consent fees have “replaced the steady decline in revenues from television network compensation.”

So far, aggressive stances on retransmission consent have paid off in spades for a handful of pioneering broadcasters. Sinclair has seen such revenue rise nearly 10 times since 2003 — from $2.6 million to $25.4 million in 2006. That success caused Sinclair to predict in late February that retransmission revenue would nearly double in 2007 to $48 million.

Nexstar’s retransmission revenue rose nearly five times in 2006 to $13.7 million ($8.7 million in cash and $5 million in advertising revenue) from $2.9 million in 2005.

At Hearst-Argyle, retransmission-consent revenue rose nearly 10 times from $1.9 million in 2003 to $17.9 million in 2006. But with about 95% of its deals done, the rise will not be so dramatic this year — just 1%, to between $18 million and $20 million, according to Hearst-Argyle’s financial statements.

In the past, cable operators have effectively paid TV stations for their signals. It’s just that this compensation didn’t come in the form of per-subscriber cash payments. Rather, cable companies would buy ad time on local TV stations, or agree to launch cable networks affiliated with the broadcaster or its parent.

But that’s not enough for some station owners. Sinclair wants financial “consideration” for retransmission consent itself, Faber said. So if a cable company, in lieu of paying cash, just wants to buy $100 worth of advertising for $100, “that to me would not be receiving consideration,” Faber said.

PAIN POINT NO. 5: AD REVENUE

When a broadcaster pulls its signal from a cable system, it risks diminishing its station’s viewership, thus losing advertising. That’s why the station groups most aggressive in seeking cash have picked their battles carefully — targeting operators with the greatest exposure to their broadcast stations and the smallest impact on their own ad revenue.

In Sinclair’s recent spat with Mediacom, more than half of the cable company’s footprint was in the broadcaster’s markets, while Mediacom only represented about 3% of Sinclair’s nationwide audience.

“It’s a small-to-medium sized operator’s nightmare,” Kent said.

It’s a far different scenario when a huge operator is involved. For example, Comcast’s talks with Sinclair involve just 15% of Comcast’s customers. But those cable markets represent more than one-third of Sinclair’s total annual ad revenue.

“If a cable operator the size of Comcast takes out a broadcaster, they’re going to suffer some very, very serious economic harm,” the former cable operator said. “I just don’t believe, based on my experience, that a broadcaster can basically exit a market for any significant period of time. … Even a crazy broadcaster has to think long and hard about that.”

But there would likely be major negative repercussions, as well, for even large cable operators who lost carriage of a major TV station in a big market. When Time Warner Cable pulled the signal of ABC owned-and-operated stations in 2000, it sparked a public furor and received a reprimand from federal regulators.

PAIN POINT NO. 6: SUBSCRIBERS

During retransmission-consent disputes broadcasters, often teaming up with satellite providers, turn up their marketing machines to try to convince cable subscribers to switch service. The toll from Mediacom’s dispute with Sinclair: 7,000 subscribers in the fourth quarter, and that number’s expected to rise.

In 2005, Cable One and Cox Communications were both embroiled in a nearly year-long retransmission-consent squabble with Nexstar, which pulled its TV stations from both. Once again, the dispute centered on a demand for cash payments.

Cable One lost video customers as a result of that fight, but officials there said that cable companies are now somewhat buffered from video-subscriber losses. That’s because unlike local broadcasters, cable sells telephone and high-speed Internet access, as well as TV. That helps offset the lost video customers.

“The biggest lesson we learned is that we’d do it again [fight Nexstar],” Cable One vice president Tom Basinger said. “Yes, we lost video subscribers, but at the same time we lost video subscribers, we gained high-speed data subscribers.”

Different station groups have “different levels of resolve,” and forms of leverage, in seeking cash payments, according to Sadusky. Those with low-rated, weak-signalled stations may settle for trading “in-kind” services, like future carriage of digital channels, he said.

But broadcasters with more leverage — such as LIN TV and Hearst, which have the top-rated stations in their markets — “are definitely looking to pursue cash as part of our new retransmission deals,” according to Sadusky.

“It’s very hard to be competitive if you don’t have some of the top-ranked stations in the market,” he said.

Cable systems have the upper hand in retransmission-consent talks with TV-station owners who don’t have strong ratings, since their deletion from local cable lineups wouldn’t prompt big complaints from customers.

The stations that Sinclair owns in Comcast markets include just a handful of Big Four networks, primarily Fox outlets. The rest are affiliates of the sparsely watched The CW and MyNetworkTV.

PAIN POINT NO. 7: CONSOLIDATION

One reason the balance of power has shifted from the cable operators to the broadcasters in many small- and medium-sized markets is primarily because of changes in the FCC broadcast-ownership rules, according to Kent.

Unlike in the past, station groups are now allowed to own or control two and sometimes three network affiliates in a single market, either through duopolies or through Local Marketing Agreements. Under an LMA, the station group may not own the station outright but manages it, handling its retransmission-consent deals. That’s how Nexstar has succesfully consolidated its power in several markets.

Such consolidation, Kent said, has given broadcasters enormous negotiating power — a cable operator may be able to weather one network affiliate going dark in its market, but losing two or even three such stations could be a crushing blow.

“I would say we’re only seeing the tip of the iceberg,” Kent said. “I would further venture that broadcasters are looking at what happened with Mediacom and are probably rubbing their hands together saying let’s do the same thing. It certainly is a point where it has emboldened the broadcasters.”

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