Big Four eye possible windfall in near future
Fox, CBS and other broadcasters have long maintained that they deserve real money from cablers and satcasters because Big Four stations remain among the most-watched channels on the dial, no matter how many channels viewers have to choose from.
There’s a gold rush afoot that promises to reach into every corner of the television biz, from local broadcasters, cable and satellite TV operators to the Big Four networks and Hollywood’s creative community.
At a time when the nets and their local affiliate stations are facing rising costs, declining viewership and plummeting ad rates, they’re suddenly eyeing a possible $1 billion-$2 billion windfall over the next few years.
This is not due to a new business plan, or technological changes. It’s found money. For nearly 20 years, the networks and their affils have been negotiating deals with cable operators under the Federal Communications Commission rules known as “retransmission consent.” That wonkish term causes many in the TV biz to tune out on the details, but it certainly got people’s attention over the New Year’s holiday when News Corp. went to the mat in its highly publicized contract wrangling with Time Warner Cable for the retrans rights to Fox O&O stations in nine major markets.
Time Warner Cable, the nation’s second-largest cable operator, wound up agreeing to pay significantly more cash than it ever has before to carry the Fox-owned stations, and this deal has single-handedly raised the bar on negotiations for broadcasters and cable operators throughout the country. (Retrans pacts typically run three to six years, and many Big Four affil deals are up for renewal in the next two years.)
Biz research firm SNL Kagan estimates that TV stations generated $739 million from retrans fees in 2009. SNL Kagan analyst Robin Flynn had projected that retrans coin would reach about $1.39 billion by 2013, but in the wake of the Fox-Time Warner pact, Flynn has revised her projections to about $1.6 billion in 2012 and nearly $2 billion by 2013.
This influx will huge have a big ripple effect in Hollywood’s creative community, where the new money will help pay for high-priced programming and star salaries such as Simon Cowell’s $50 million payday for “American Idol.” The big money in retrans will flow primarily to Big Four affiliate stations — those with must-have sports and programming franchises. Univision also has logged big retrans deals in heavily Latino markets, thanks to its massive market share of the Spanish-lingo TV aud.
“It’s a transforming event,” News Corp. prexy and chief operating officer Chase Carey told investors during the company’s second-quarter earnings conference call on Feb. 2. “It certainly puts (Fox) in a competitive place where it has the dual revenue stream like a successful cable network.”
After a marathon 36-hour negotiation session on Dec. 31-Jan. 1, Fox and Time Warner cut a five-year deal that will generate about 80¢ per month per Time Warner subscriber for the stations by the final year of the deal. That’s in the ballpark of the carriage fees commanded by top-rated basic cablers USA Network and TNT. The deal will be worth hundreds of millions of dollars to News Corp.’s bottom line, and it sets an important industry-standard benchmark for broadcasters.
It’s no wonder TV station managers who gathered last month in Las Vegas for the annual NATPE syndie sales confab spoke of Rupert Murdoch, Carey, Fox Networks Group topper Tony Vinciquerra in reverential terms.
“There’s no question that the Fox negotiation certainly got people thinking about where the next (retrans) benchmark is,” said Paul Karpowicz, prexy of Meredith Local Media Group. Des Moines, Iowa-based Meredith owns 12 stations, most of them CBS and Fox affiliates in mid-sized markets including Atlanta, Nashville, Las Vegas and Portland, Ore.
But it took the recession and the wallop of a nearly 20% plunge in local ad sales — even steeper in some big markets like Los Angeles — last year to forced broadcasters to focus on drawing on untapped riches from their cable competitors.
“This is a long overdue development,” said Dave Lougee, prexy of Gannett Broadcasting, which owns 23 stations, most of them CBS and NBC affils. “Broadcasters are finally on track toward getting the marketplace value of their products.”
But there are strings attached to all of this new money for affils. The Big Four networks plan to lay claim to some of the wealth. Net execs note that the vast majority of the programming that makes affil stations a must-have channel for operators is provided by the network, particularly in the area of pricey sports rights.
There are other potential obstacles to broadcasters collecting the retrans cash. As station owners get more aggressive in seeking cash compensation from cablers, satellite TV operators and telco providers, the public sparring and threats of station blackouts are on the rise, which has prompted the FCC and some lawmakers to take a hard look at the 18-year-old regulatory framework of retransmission consent (see separate story).
On the other end of the cable spectrum, the boom times in retrans is coming as Comcast Corp., the largest domestic cable operator, is poised to take control of NBC Universal. That has NBC affiliates concerned that the enlarged company would have enough clout to dictate terms for non-NBC O&O affils.
It’s expected that a range of affiliate-centric protections will be included in any mandates that the feds put on the deal as a condition of granting regulatory approval for the $30 billion transaction between Comcast and General Electric.
Michael Fiorile, chairman of the NBC affiliates board and CEO of Columbus, Ohio-based Dispatch Broadcast Group, told a House subcommittee at the Feb. 4 hearing on the Comcast-NBC U deal that affils will insist that the new NBC U “keep negotiations on affiliation and retransmission consent deals separate between NBC and Comcast.”
Fiorile said NBC affiliate station owners had been meeting with Comcast execs to hammer out a written agreement of commitments that would secure their support for the merger.
But Comcast CEO Brian Roberts acknowledged in a hearing before a Senate subcommittee, also on Feb. 4, that the company’s position as both a cable operator and a broadcaster might allow Comcast to play a “constructive” role in the process.. “By being a cable company and a broadcaster we think we can play a unique role in trying to find constructive models to help the broadcasting business grow in the future,” he said.
Surprisingly, there has been little squawking from affiliate station owners about the networks’ intent to snag some of that retrans cash. After a brutal decade of grappling with new technologies, new competitors and an erosion of broadcasting’s old ad-supported business models, there’s an understanding that the Big Four networks need to do something dramatic to shore up their futures.
“This will help the networks afford high-quality programming,” says Rich Greenfield, managing director of Pali Research and a Wall Street analyst who has closely followed retrans developments. “It’s great for networks and producers. Anybody who’s a big producer of programming should benefit from this. Just when you thought everything was going to reality (on the nets), here comes this incremental revenue stream.”
But the devil is in the details. Station owners say there’s no clear plan from any of the Big Four on how revenue-sharing will be structured. Affiliate and network reps are in the early stages of discussing the issues and gathering feedback from various constituencies.
Nets and affiliates have worked out similar deals to help pay for big-ticket items, such as NFL packages and CBS’ rights to the NCAA basketball tourney. But the retrans handoff would be on a much larger scale. And it marks a 180-degree turn from the original Big Three business model in which networks paid affiliates “comp” money for carrying their shows. (ABC, CBS and NBC have phased out most affiliate comp payments, which once ran as high as about $200 million per net, during the past decade.)
“Rather than the networks trying to do an outright grab on retrans money, we’d all be better served if we could figure out a way to approach this issue together,” Meredith’s Karpowicz says. “If they can help me get a larger retrans fee, then I’m very comfortable sharing some of that with them. It would be nice if we’re working together rather than them having expectations about ‘You guys are going to do this and we’re going to take it.’?”
There’s been some talk of each network serving as the negotiating entity on behalf of affils that elect to hand the task over to their larger partners. But net execs say privately that such an effort would be unwieldy and labor-intensive, and might not yield that much more than a strong affil station could command on its own. Gannett, for example, estimates it will bring in more than $60 million in fees for its 23 stations this year, up from $19 million in 2008.
Fox has language in its existing affiliation contracts with stations giving the network the right to share in retrans coin. ABC is understood to be in the midst of renewing a number of affiliation agreements with key station groups, and undoubtedly retrans and revenue sharing are the primary topics of conversation in those talks.
CBS has in recent weeks has closed at least one new affiliation agreement with a station owner that calls for the payment of a pre-set annual fee to the network. Diana Wilkin, prez of CBS’ affiliate relations department, characterized the agreement as involving a “cash value exchange” but would not elaborate or specify the station group.
Insiders note that the nets will likely be cautious about entering into a deal that specified the handover of a set percentage of retrans coin, because some stations still may wind up with compensation other than cash, such as carriage of digital channels.
CBS’ approach has been to tailor its new deals around “what we determine the value of the affiliation to be to that particularly station or group, which is an individual conversation,” Wilkin says. “There’s not a one-size-fits-all” template, she added.
The dramatic shifts in the structure of the network-affiliate relationship are a far cry from how the Big Four first approached retrans when it became law after the 1992 regulatory overhaul of the cable biz. Back then, three of the Big Four focused on horse-trading retrans rights for their O&Os with operators for carriage of their new cable channels — think Fox’s FX, NBC’s MSNBC, ABC’s ESPN Classic, and more recently, the dawn of the Fox Business Network. In May 2000, Disney and Time Warner Cable waged a public war over retrans rights that led to ABC O&O stations being yanked from the cabler for two days, but Disney’s focus at that time was not on getting cash but leveraging retrans for expanded carriage of its Mouse-owned cable channels including SoapNet and Toon Disney.
Because the O&O groups, traditionally the strongest stations in the largest markets, weren’t pushing for cash paydays from the biggest operators, it was nearly impossible for other station owners to demand such fees. More often, cable operators would commit to buying a certain amount of advertising time from the local station. More recently, cablers have agreed to carry a broadcaster’s digital channels in addition to the main signal, or make some of a station’s local programming available on a VOD platform, in an effort to sweeten retrans deals.
But after a brutal few years of declining local ad sales, Fox, CBS and other strong broadcast groups began declaring their intent to hold the line for cash commensurate with the fees drawn by top cable channels. According to SNL Kagan research, the ad market for local TV stations fell to less than $19 billion last year, compared to nearly $25 billion in 2006. By 2013, Kagan’s Flynn predicts it will reach just under $22 billion.
Carey has said he believes Fox stations are worth more than even the roughly $4 per sub that cable operators pay for ESPN. At the height of the Fox-Time Warner scuffle in December, Disney took the unusual step of offering a lengthy statement of support for Fox’s position. The Mouse is facing a Sept. 1 contract expiration deadline on its mammoth O&O retrans and cable carriage pact with Time Warner.
Satellite providers DirecTV and Dish Network have been paying stations cash for the past 11 years (since satcasters have been legally allowed to retransmit stations on a local-market basis), which has also helped put pressure on cable operators to cough up coin. In the wake of the Fox-Time Warner deal, DirecTV and Dish are sure to face higher fee demands down the road. Time Warner Cable and others have sounded the alarm that they have no choice but to pass on at least some portion of their higher programming costs to consumers.
“Just like people pay more for gas when the price of a barrel of oil rises, the price we charge is directly affected by what we pay for programming,” says Time Warner Cable spokeswoman Maureen Huff. “That is why we are trying so hard to control these increasing programming costs.”
But at the same time, industry insiders say the largest cable operators have been resigned to that fact that a big hike retrans fees was inevitable, and they’ve been prepping for this higher cost structure in their budgeting and long-term business planning.
Pali Research’s Greenfield warns that broadcasters cannot count on retrans as being the panacea for all of local TV’s woes, especially as networks are set to grab so much of the revenue. The biggest issue facing local stations, in Greenfield’s view, is how to transform their local news production — traditionally the single-biggest driver of profits — for a younger generation of viewers who are absorbing news and info from a myriad of instantaneous sources these days. They don’t wait to get headlines from the 4 o’clock report as their parents once did.
Retrans coin “helps mitigate the immediate pressure on the broadcast business,” Greenfield says. “But it helps the network business more than it helps the local TV stations … And if they’re not going to get most of the additional dollars from retrans, what are they going to do?”
In the short term, broadcasters say they’re happy for the breathing room offered by the promise of a secondary revenue stream. Advertising sales, even in a depressed market, will still dwarf retrans revenues, but it still provides a cushion that stations desperately need right now.
Meredith’s Karpowicz notes that 2009 “was a very difficult year. That line item of retrans really saved a lot of people this year.”
Gannett’s Lougee says the retrans conversations of the next few years are an important milestone for TV’s old guard — which is a big part of the reason why affiliates are amenable to sharing the wealth with their network partners at a transformative moment for the broadcasting biz.
“The good part about all of this is that it becomes a tipping point for broadcast networks,” Lougee says. “It now feels like we’re beginning to be on a positive trend that can reverse that negative trend for the (network) business model. We’ll all benefit together. It’s important that affiliates help them on that path.”