A new breed of TV distributors that’s wreaking havoc in the industry is now on its way to upending the retransmission-consent business model for both pay TV distributors and TV station groups.
Over-the-top subscription services such as Sony’s PlayStation Vue, Dish Network’s Sling TV and a planned offering from Hulu — known as virtual multichannel video programming distributors — aren’t just disrupting the way Americans consume content.
These new players are also forcing new business models on time-honored carriage negotiations between TV distributors that want to carry broadcast networks and those networks’ broadcast-station affiliates.
Virtual MVPDs are one of the hottest segments in distribution. As younger viewers continue to devote more time to watching content on mobile devices and online, they could become a force in the distribution sector, especially as the traditional pay TV universe declines.
Overall, pay TV subscriptions have dipped between 1.5% and 2% per year over the past two years. Although cable is expected to continue to improve its losses, ongoing subscriber losses at satellite TV and telco TV could push the annual declines higher in the future.
Those subscribers are going to have to go somewhere. And though many may cut the cord all together, opting for a broadband connection and a Netflix, Hulu Plus or Amazon Prime subscription, a good portion could go to vMVPDs.
That could create a sense of urgency for the station groups; 3 million vMVPD subscribers in 2017 could quickly escalate under the right market conditions, morphing into a serious source of revenue.
As vMVPDs are launched, they are hammering out new deals with broadcasters, but with a catch — the deals are on a national basis, unlike the market-by-market negotiations of the past.
Traditionally, broadcast networks took a laissez faire attitude toward retransmission consent. They negotiated deals with the distributors for only their owned-and-operated stations, leaving affiliate station groups to negotiate their own, separate deals.
But with vMVPDs, the strategy has been different. Networks have been striking their own, broad deals with OTT distributors, offering owned-and-operated stations in their local markets and next-day national network feeds in areas where they don’t own affiliate stations.
The idea is to bring the independent station groups on later, with those broadcasters receiving a percentage of the fee the network has negotiated. For example, if a network negotiated a fee of $3 per subscriber per month for its O&O stations and an additional $3 for its network feed, it would offer a percentage of that latter fee to station groups for its network affiliate stations. The share varies by market size, according to sources in the broadcast community.
For station groups, that could mean a substantially smaller piece of the pie. According to some cable executives, retrans fees for local stations from the likes of Sinclair Broadcast Group, Nexstar Broadcasting Group and Tribune Media could top $2 per subscriber per month. And some are holding out for more, to the chagrin of some broadcasters, who warn that if the station groups overplay their hands, they could end up with nothing.
From the station perspective, accepting the lower fee could mean they would have to squeeze even more money out of their existing retransmission- consent base — the cable, satellite and telco TV operators who are already complaining they are paying too much.
Revenue from retransmission consent, a product of the 1992 Cable Act, has been the savior of some broadcasters, taking up the slack during a depressed advertising market and in some cases representing more than 30% of a station’s total revenue.
At the same time, it has been the bane of cable, satellite and telco TV operators who have complained they are paying increasingly higher fees for content that is available over the air for free.
Regardless of the partisan claims, retransmission consent is a large part of the TV business, expected to top $7.7 billion in 2016 and growing to $11.6 billion in 2022, according to research firm SNL Kagan.
According to Kagan, more than half of that revenue is from local broadcast groups like Sinclair and Nexstar, which made up about $4.6 billion of the $7.7 billion generated in 2016. In contrast, owned and operated network stations accounted for about $2.9 billion of the estimated 2016 retrans haul.
Virtual MVPDs are new to the TV scene — Sling TV, the oldest, launched in 2015 — and still have relatively few subscribers. Sling TV leads the pack with about 900,000 customers, and the segment as a whole is expected to have between 2.5 million and 3 million subscribers by the end of 2017, according to Morgan Stanley media analyst Ben Swinburne.
Of the major vMVPDs, so far only Sony PlayStation Vue has a deal with local station groups, specifically Sinclair and Raycom Media for certain CBS affiliates. The other major vMVPDs — Sling TV, DirecTV Now and Hulu — have deals with national broadcast networks, but no station groups yet.
Not all of the national broadcasters have signed on, either. Hulu, which plans to launch its vMVPD service later this year, signed a carriage deal with CBS earlier this month, and has agreements with ABC and Fox, but not with NBC. NBC, a partner in the Hulu consortium, is expected to sign on at some point.
CBS, which has its own OTT service CBS All Access, a tough negotiator in vMVPD deals, still hasn’t reached a pact with the largest vMVPD, Sling TV.
NICHE NETS AT ISSUE
Adding to the confusion, some station groups want carriage of niche cable networks — such as Sinclair’s Tennis Channel and Tribune’s WGN America — to be included in their deals. That’s caused some bumps in more traditional negotiations: Tribune’s stations went dark to Dish Network subscribers last year, in part because Tribune insisted on including carriage of WGN America in the negotiations.
While the parties eventually worked out a deal that included carriage of the stations and the cable channel, the networks were dark to Dish’s 13.6 million customers for nearly three months between June 13 and Sept. 3. Other spats are expected as Sinclair, one of the more aggressive broadcasters on the retrans front, begins to bundle Tennis Channel, purchased in March of 2016, into future negotiations.
According to sources familiar with their thinking, broadcasters believe including the cable networks adds unnecessary friction to vMVPD negotiations. They prefer the deals to remain pure broadcast plays.
All this makes for a sticky situation for station groups, which rely on the networks for primetime content but have seen their revenue dwindle as the advertising market has declined and networks — through reverse compensation — are taking a large chunk of their retrans fees.
At least publicly, the stations have said they are trying to work out deals with new distributors as they come up.
At Tribune, that includes carriage on devices like Roku, Amazon Fire TV, Apple TV and Google’s Android TV. Three of its stations — The CW affiliate WPIX in New York and Fox affiliates KTSU in Salt Lake City and WGHP in Greensboro, N.C. — launched on those services in December. Tribune’s remaining 39 stations are expected to roll out in 2017.
“Our strategy is to get our live linear content carried on new distribution platforms in an economically sensible and sustainable way,” Tribune Media senior vice president of corporate relations Gary Weitman said in a statement. “We’re deep in discussions with all the major players and we are confident that we will make good progress on this front in 2017 … As everyone knows, solving the Rubik’s Cube of OTT requires coordination and negotiation with both OTT providers and our network partners. It’s a complicated situation, but we believe that the interests of consumers in having more ways to access the content they want will ultimately win out and that economic benefits will flow to all the parties involved.”
Sinclair and Nexstar representatives did not respond to requests for comment.
BTIG media analyst Rich Greenfield wrote in a note to clients that as more viewers leave linear TV for cheaper vMVPD services, they don’t miss local broadcast channels. If they did, a digital antenna would solve that dilemma.
But the analyst sees a fundamental change in the way vMVPD deals are being negotiated.
“We believe broadcast networks are creating a framework to bring affiliates into each vMVPD on terms set by the network, with the affiliates unable to negotiate directly with the vMVPD themselves,” Greenfield wrote in a recent note to clients. “Essentially, take it or leave it affiliate deals structured by the broadcast network” will “significantly reduce the net payments offered to affiliates.”
The broadcasters see the situation as a natural evolution. According to sources familiar with their thinking, most believe that the current structure is similar to deals struck for video-on-demand and TV Everywhere content. Local affiliates were kept out of those deals to ensure that the scope of programming was consistent.
The absence of station groups from many virtual MVPD deals is largely a matter of convenience, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said.
‘LIKE HERDING CATS’
“It’s like herding cats to get these local affiliates to agree to deals — very complex and time-consuming,” Wlodarczak said. “It is easier to sign a broad deal and to throw in the O&Os.”
The issue, Wlodarczak said, is that the cable operators will likely pass through most of these costs. “Given that the expense of pay TV is the No. 1 reason people leave, it will exacerbate the media players pay TV subscriber issues. Betting on a slightly cheaper skinny bundle is not going to solve that issue, and it will not be good for less popular networks.”
As far as increased retrans fees for pay TV, Wlodarczak said that anything can happen, but to “expect more fireworks.”
That may be an understatement, given how the last big battle between networks and affiliates was resolved. Affiliates first resisted when networks demanded back in the early 2000s that they turn over up to half of their retrans haul to them in the form of reverse compensation. That was resolved simply by the affiliates stepping up their retrans fees.
Traditional MVPDs have grown used to rising retrans costs and fickle stations who raise the ante for carriage on a whim, but the breaking point could be looming near, especially as skinny bundles and virtual MVPDs proliferate.
“They’re pushing the envelope,” said one cable executive who asked not to be named. “They’re trying to get to a certain number that is not sustainable. And kids don’t care as much about local news.”