Policy

RBOCs Will Pay B’cast

2/07/2005 9:25 AM Eastern

New York -- Regional phone companies planning video services will be forced to pay cash to carry local broadcast-TV stations -- which will initially put them at a competitive disadvantage to cable, but will ultimately cause problems for MSOs, a Wall Street analyst said Monday.

With little negotiating leverage, the telcos “are likely to face significant pressure to agree to cash-for-carriage deals” with TV stations, according to a report by Sanford Bernstein & Co. analyst Craig Moffett.

“Starting from a base of zero video customers, the RBOCs seem ripe for the picking,” Moffett wrote.

As a result, the margins the phone companies achieve with their fiber-optic networks will be eroded, Moffett wrote.

“Cash for local retrans would exacerbate what we expect to be a 15% programming-cost disadvantage for the RBOCs in video, further lowering RBOC margins and limiting their video-pricing flexibility,” Moffett said. “Only Verizon [Communications Inc.] is expected to have significant cost savings associated with its fiber deployment to make the economics reasonably justifiable.”

The need to ante up cash for carriage will particularly affect SBC Communications Inc. and BellSouth Corp., because their fiber-to-the-curb strategies rely heavily on video revenue and because there are more independent network affiliates in their markets than in Verizon’s, according to Moffett.

But that bad news for telcos is no reason for cable operators to start celebrating.

That’s because if broadcasters are able to establish a cash-for-carriage precedent with the RBOCs, then “their leverage with cable operators will be improved,” according to Moffett. In some cases, direct-broadcast satellite providers already pay to carry local TV stations.

“Over the longer term, a cash-for-carriage precedent could mean higher programming costs for all players, including the MSOs, ultimately resulting in higher consumer prices,” he wrote.

Moffett said it’s unclear if the major media conglomerates will insist on cash for carriage this fall, since historically, they’ve granted retransmission consent for their stations in exchange for “carriage of weaker cable networks that might otherwise not receive carriage.” But he expects the independent broadcasters to demand cash.

“What ever the intentions of the conglomerates, however, the influence of the independents will be inescapable,” Moffett wrote. “There are only four markets -- New York, Los Angeles, Chicago and Philadelphia -- that are served by O&O affiliates of all four major broadcast networks.

“Of the remaining 204 media markets in the U.S., 11 have two O&Os and two independents, 17 have one O&O [and three independents], and the remainder are entirely served by independent affiliates.”

In his report, Moffett referenced Nexstar Broadcasting Group Inc.’s ongoing retransmission-consent disputes with both Cox Communications Inc. and Cable One Inc.

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