Consolidation, ad shrinkage fuel fights that have become an annual rite

Blackouts, like the dropping of the crystal ball in Times Square, rang in another new year in the TV industry.

The year 2018 ended with a handful of high profile retransmission-consent disputes, as the fear that the increased fees could spike even higher weighed heavily on pay TV operators. Those anxieties are stoked by growing broadcast consolidation, the expected closing of the Disney-Fox deal in the first quarter and a shrinking advertising market.

The end of the year is traditionally ripe for retransmission consent disputes as broadcasters leverage compelling content — mainly major sporting events — to extract more value from pay TV providers. For operators, it has become an annual rite of passage, with service disruptions becoming more commonplace, as has the call for greater regulatory reform.

Last year was a bit lighter than 2017 on the retrans front. The American Television Alliance, a lobbying group for satellite, cable and telco TV distributors, estimated that there were 140 broadcast blackouts in 2018 compared to a record 213 disruptions in 2017. But it was still more than in 2016, when 104 TV stations went dark.

Storm Clouds Looming

Most observers believe that 2019 and beyond could be worse, especially with the close of The Walt Disney Co.’s $71.3 billion purchase of certain 21st Century Fox programming assets. The “new” Fox that will emerge after that deal will be focused on live news and sports, and retrans increases are expected to at least partially fund the stepped-up content purchases many believe it will need to fuel growth.

Fox, which has 28 owned-and-operated TV stations across the country, is also expected to add to that stable as properties become available.

Consolidation has been a big focus for broadcasters — Nexstar Media Group agreed to purchase Tribune Media last month in a deal valued at $6.4 billion, and Gray Television just closed its $3.6 billion purchase of Raycom Media Jan 2. In announcing the Tribune deal, Nexstar said it expected to increase its retrans haul by $75 million just by moving the acquired stations to its rate card.

Nexstar and Tribune were the most aggressive on the retrans front as the year closed, with Nexstar pulling its signal in 16 mostly small-operator markets. Tribune grabbed the dubious honor of having the largest year-end dispute, pulling 33 stations in 24 markets from Charter Communications.

Tribune has estimated that about 6 million Charter customers are affected, and the blackout comes just days before the National Football League Playoffs were about to kick off with the Jan. 5 Wild Card games.

Charter insists Tribune is asking for an exorbitant rate increase — more than double what it currently pays. “That is more than we pay any other broadcaster. They’re not being reasonable,” Charter said of Tribune in a statement. Tribune disagreed.

Not every negotiation led to a blackout. Verizon Communications managed to reach a long-term carriage deal with Disney prior to Dec. 31 for its ABC stations, ESPN, Freeform and Disney Channel. In addition, Verizon agreed to carry Disney’s ACC Network when it launches on Aug. 22.

Tegna hammered out two deals — a multi-year agreement with Verizon on Jan. 3 for stations in Washington, D.C., Norfolk, Va. and Buffalo, N.Y., after a brief two-day blackout, and one with Mediacom Communications for 10 stations in seven states four days before its Dec. 31 deadline.

Nexstar and Tribune could get even more aggressive. Evercore ISI media analyst Vijay Jayant said in a research note that stations reaching between 55% and 60% of Nexstar’s viewers are up for renewal in late 2019, and he expected the stations to get rate increases of at least 30%.

The American Cable Association was trying to make the blackouts an issue in the Federal Communications Commission’s Nexstar-Tribune merger review. It flagged as deceptive Nexstar’s claim that a cable operator had “dropped” a signal when it knew that it is the broadcaster’s call to keep signals on a system during impasses that extend beyond the end of a contract.

Nexstar-Tribune Gets Flagged

“Nexstar’s willingness to mislead customers is troubling conduct for an entity that seeks FCC approval to purchase Tribune Media’s 42 TV stations,” ACA president and CEO Matt Polka said. “This transaction would make Nexstar the largest TV station owner in the country with 216 stations in 118 markets. It would put Nexstar in position to black out at least more than half of the country.”

But retrans impasses/blackouts are unlikely to become a factor in the FCC’s review of deals.

Agency rules require bargaining in good faith, but under FCC chairman Ajit Pai’s predecessor, Democrat Tom Wheeler, it chose not to consider blackouts when asked by the ACA and others to do so, and despite Wheeler telling Congress that consumers should not be held hostage to business disputes.

It is unlikely Pai will go where Wheeler didn’t, though there is precedent for the FCC flexing its regulatory muscle in retransmission fights.

A decade ago, then-FCC chairman Julius Genachowski was active on that front, calling for a public resolution of consumer unfriendly blackouts. And Pai stepped in last October during an impasse between Lilly Broadcasting and Dish Network, restoring signals to stations in hurricane-ravaged Puerto Rico and the U.S. Virgin Islands after expressing concerns about the impact of their dispute.

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