Cable, stations brace for New Year's rights battles

Some 3 million Cablevision subscribers missed the opening moments of the 2010 Oscarcast when WABC battled with the cable op over retrans consent. Viewers in many smaller TV markets probably shouldn’t count on watching too much TV on New Year’s Eve. Blackouts are likely on the horizon in many cities as local TV station owners and cable operators go toe to toe over the increasingly pricey proposition of retransmission consent.

Over the past few years, broadcasters’ demands for higher carriage fees have frequently been met with threats from cable, satellite and telco TV operators to drop the channels. Often both sides have taken the fight to the public, buying dueling ads in local newspapers and angering viewers, who have found themselves caught in the middle of all the saber-rattling and about to lose their favorite show or event.

For instance, in 2010, about 3 million Cablevision subscribers in the New York area almost didn’t get the Oscarcast when the cable operator’s carriage battle with WABC-TV New York overheated. A deal was reached only after the first few minutes of the telecast had been blacked out.

Many retrans pacts were drawn up as three-year contracts, with many of those on a cycle that expires Dec. 31 or Jan. 1.

“I’d say 85% of (broadcasters’) deals are on the original three-year cycle, and this is one of those years,” says Mike Ruggiero, who heads consulting firm ATV Broadcast, which has 160 broadcast TV stations as clients. “We’re getting a lot of deals done, and the rates are going up considerably because programming costs have gone up. So it’s anxious times.”

Specifics of retrans expirations are confidential, but disclosure filings show evidence of a bulge at the end of 2011. For instance, group broadcaster LIN TV, which negotiates with 113 multichannel TV platforms of all sizes, said in its 10K filing that it’s likely a jump will ocur this year as a result of “retransmission consent agreements reached with cable operators during the second half of 2008.”

SNL Kagan estimates that in 2008, retrans fees amounted to $500 million and will climb to $3.9 billion by 2015. If the forecast holds, retrans will be jumping from 2.4% of basic-cable network carriage fees in 2008 to a significant 10.8% of those fees in 2015.

Most of the larger station groups with outlets in major markets have already been through their retrans wrangling during the past two years. On Dec. 31, 2009, Fox and Time Warner Cable execs engaged in a marathon negotiating session that went well into New Year’s Day. That deal helped set the template and pricing scale for agreements between Big Four affiliate stations and local distribs.

“Affiliated TV stations’ owners have been able to secure significant increases in the latest rounds of negotiations, a lot of which are going on now,” says Robin Flynn, senior analyst with SNL Kagan.

Matthew Polka, president of the American Cable Assn., a trade group for smaller operators, sees tension rising in markets that don’t generate as much media attention as the threat of blackouts hitting major cities like Gotham, L.A. and Chicago.

“Many broadcasters haven’t even responded to requests from our members for negotiations, and we expect in the last week of December we’ll see take-it-or-leave-it deals that say you either sign this or lose the station by Dec. 31,” says Polka. “So we’re facing … a lot of potential (station) drops.”

Station owners also face increased pressure to secure top fees for their retrans rights because their Big Four network partners now demand that affiliate stations fork over a portion of their retrans windfall to help them pay for pricey franchises like the NFL, “American Idol” and high-end scripted series. For instance, NBC is trying to hammer out a reverse-compensation plan with its 200-plus station affiliates after lagging behind ABC, CBS and Fox in collecting such fees.

Because of the growing level of saber-rattling, the FCC has taken steps toward a possible revision of its retransmission consent rule, including steps that would make it harder for station owners to pull their signals if contract talks hit an impasse.

In the good old days before 1994, cable subscribers in major markets could rely on their providers to retransmit the content of all major broadcasters in their area with no threat of blackout dates or higher fees related to the cost of licensing the signal.

That’s because cable operators were required to transmit broadcasters’ signals under the old must-carry rules. But everything changed after the passage of the Cable Television Protection and Competition Act, which gave stations the chance to opt out of free must-carry, and instead — under the provisions of retransmission consent — demand payment from cable systems for the carriage of their signals.

But there is a risk involved for broadcasters: Once a fee is demanded, the cable operator has the right to negotiate payment terms, and even to drop carriage of the station altogether if an agreement can’t be reached.

Retrans fees have been steadily rising, with compromises generally tending to favor TV stations. This has meant a significant transfer of wealth from the multichannel platforms (cable and satellite) to broadcasters. Broadcast chieftains like CBS’ Leslie Moonves and News Corp.’s Chase Carey have boasted that the new revenue is a major boost to their companies’ bottom lines.

Until 2005, subscription TV giants insisted they wouldn’t pay any cash retransmission fees to local TV stations, though they offered non-cash inducements such as good channel positions, guaranteed levels of advertising buys promoting cable, and carriage of sibling channels.

Then stations began pressing for cash — initially 10¢-15¢ per cable subscriber per month. In the 2006-09 period, retrans rates moved to around 25¢.

With the Fox-Time Warner Cable deal, 50¢ a sub became a common benchmark for large-market affiliate stations. Fox’s pact with TW Cable called for its fees to rise to more than $1 over the five-year term. That’s comparable to what multichannel platforms pay for some popular basic cable networks, but broadcasters like to point out it’s far short of high-flier ESPN, which SNL Kagan estimates will average $5 in cable affiliate fees for the combo of flagship ESPN channel and ESPN HD.

The retrans landscape is a patchwork of deals and prices. TV stations groups typically negotiate a hundred or more retrans agreements, though only a dozen are significant, with giants like Comcast or DirecTV. Also, rates within multiyear deals typically rise in increments, so the full weight of any increase tends to be in outlying years.

Though three years is a popular term of contract length, some agreements are shorter; others are longer, such as the 10-year pact reached by CBS-owned stations and Comcast in August 2010.

In another wrinkle, the biggest media companies tend to own basic cable networks along with their TV stations, which can be bundled in one amorphous carriage-fee deal. Comcast’s ownership of NBC is a case in point.

Where are prices going to settle for TV stations? “We believe that the revenue stream will grow, literally, at double digit (percentage) rates until we’re in the $2-per-sub range, which could take six years, or perhaps less than that,” says broadcaster Perry Sook, prexy of Texas-based Nexstar Broadcasting Group, a pioneer in extracting cash for extending retrans rights. Broadcasters like to point out that broadcast TV stations account for 35%-40% of viewing of ad-supported TV channels in cable households, but they get only a 5% slice of the broadcast/basic cable network affiliation fee pie.

In statements that gave multichannel TV platforms a severe case of sticker shock, News Corp.’s Carey said that he feels Fox Broadcasting stations are worth a $5 retrans fee, and CBS’ Moonves said “the sky is the limit” at an investors’ conference in June. For their part, multichannel TV operators say their overall channel carriage costs are rising at a hefty 5%-9% rate per year, and they are simply trying to keep them from spiraling higher. Nielsen counts 103.6 million U.S. households subscribing to cable or satellite TV, each of which wants Big Four network affiliates plus additional local channels with desirable programs.

One cable exec says that payouts to affiliates of the big four networks have become a $4- $5-per subscriber monthly expense since 2005, before which the exec maintains there were no such payouts. Multichannel TV platforms, cable networks and others are lobbying the FCC to overhaul the retrans rule via advocacy group American Television Alliance.

If current trends prevail, one analyst says that multichannel TV platforms might start offering smaller, cheaper basic cable channel packages, killing off smaller basic cable networks. “We think that consumers will ultimately demand reduced cable TV price packages for basic,” said Erik Brannon, analyst at IHS Screen Digest. “One result could be that cable operators keep the big, popular channels like TNT and ESPN while letting the smaller channels drop by the wayside. So we feel there may be a contraction in the number of smaller basic channel networks.”

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