Michael Grotticelli /
07.07.2011 08:00 AM
Reverse compensation could strain network-affiliate relations

Over the years the once close relationship between broadcast networks and their local market affiliates has continued to strain, due to a number of issues like ad revenue, program exclusivity and alternative distribution platforms. Retransmission fees, something broadcasters have been fighting to get for several years as a way to save their businesses, could be the straw that broke the camel’s back.

These fees, paid to local television stations by cable and satellite operators, accounted for $1.14 billion in revenue last year, and that revenue will grow to $3.6 billion annually by 2017, according to SNL Kagan, an industry research company.

Of course, the fees are ultimately paid by television viewers in the form of higher bills for cable and satellite services, but the networks now want a cut, in the form of a new fee being called “reverse compensation.”

Fox has been aggressive about collecting the new fee on its affiliates. KSFX, a Fox television station in the Ozarks, recently told its viewers that the Fox network was going away in the fall. The station refused to pay the new fee imposed by network. Fox’s prime time schedule will go to a competing station.

The networks told the New York Times they need the new fees from stations to keep supplying prime-time programs and sustain profitability for their parent companies, imitating the cable channel model of a dual revenue stream of advertising and subscriber fees.

“We think that being a Fox affiliate is worth something,” Michael C. Hopkins, president of affiliate sales for Fox, told the newspaper. So far, Fox has taken the most aggressive stance of all the networks and has severed its ties with three Nexstar-owned stations this year.

Perry A. Sook, the chairman and chief executive of Nexstar Broadcasting, told the New York Times that Fox’s proposal was unprecedented in its size and scope. “Given the limited amount of regularly scheduled programming Fox provides to local stations compared to ABC, CBS and NBC, we just cannot make their numbers work.”

The networks believe they should have a “fair share” of the retransmission money, Leslie Moonves, the CBS chief executive, said at a media conference in New York last month. “If a station is looking at what’s really bringing in the money, it’s the NFL, it’s ‘American Idol,’ it’s ‘CSI,’ it’s the prime-time strength. It’s not the local news or ‘Regis and Kelly’ at 9 a.m. that’s bringing in the big bucks.”

Previously, local stations traded advertising time to the networks in exchange for prime-time programming. That’s no longer enough. NBC is floating a plan that would split retransmission fees down the middle with its affiliate stations.

NBC said in a statement that the arrangement would be a win for both the network and the stations because both “need to develop additional revenue streams to offset the high cost of producing local and national programming and news.”

Fox is more aggressive. Though the terms are not public, the network is said to expect about 25 cents a month per viewer who receives the station via a cable or satellite company, escalating after the first year, sources told the Times.

In a letter to stations last winter, Fox said if this arrangement did not work for some stations, the network would “pursue different distribution channels. We don’t want that to sound like a threat, but it is a fact.”

ABC, a unit of the Walt Disney Company, has a combination of Fox’s plan and NBC’s proposed plan. It’s either a flat fee or a share of a station’s retransmission fees; whichever is greater.

“ABC has successfully completed negotiations with more than 60 percent of our affiliate coverage for the network,” a spokesman told the newspaper.

Most stations have agreed to the new terms, but others have balked. Against this background, the FCC is considering changes in the retransmission negotiation process, since some cable companies argue it currently favors the stations and causes occasional blackouts for customers.



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