Broadcasters Ride Retrans Bonanza

In an otherwise sketchy financial landscape, revenue from retransmission rights is helping broadcasters make it to the promised land of 2008, with its elections and Olympics.
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WASHINGTON
In an otherwise sketchy financial landscape, revenue from retransmission rights is helping broadcasters make it to the promised land of 2008, with its elections and Olympics.

The retrans fees (from cable and satellite operators for the right to re-sell the local channels to viewers) have exploded from next to nothing a few years ago to tens of millions of dollars annually for some large station groups—still a lot less than they make in ad revenue, but enough to offset the lack of political ads and make the difference between profit and loss, in some cases.

Broadcasters are excited about tapping the retrans well even more in the upcoming rounds of negotiations with multichannel providers—especially with the added value of HD.

The numbers are striking: Hearst-Argyle television reported $5.6 million in retrans revenue in the quarter that ended Sept. 30, an 18 percent increase from the previous year. (Retrans fees are seen as essentially pure profit, so they were a major piece of H-A’s $9.7 million total profit for the quarter.) Nexstar, which operates or services 49 stations, hopes to have 30 percent of its business from new media, including retrans agreements, within five years.

THE GOLDEN GOOSE

For about 15 years, broadcasters have had the legal framework to seek cash payments for cable carriage of their channels, but only in the last few years have they explored that option.

Barry Faber, vice president and general counsel of Sinclair Broadcast Group, said the landscape started to change when satellite companies began offering local channels. The DBS companies broke the cablers’ local multichannel monopolies, paid for the channels, and watched their subscriber rates skyrocket.

When cable retrans contracts (typically three-year deals) came up for renewal, broadcasters found they could demand cash for carriage.

As the nation’s largest owner of independent stations, Sinclair was in a strong negotiating position. Its tactics included signing month-by-month extensions to retrans contracts, allowing it to renegotiate later when it could get greater payments.

Faber said the widely reported showdown last winter with Mediacom, the nation’s eighth largest cable operator, and the capitulation by Mediacom, on the eve of the Super Bowl, showed that the MSO was finally recognizing the value of the broadcast assets.

FUNDAMENTAL CHANGE

To the small and medium-sized cable operators, it’s the broadcasters who are the monopolists; cablers are prohibited from trying to seek network signals from neighboring markets.

To cable, the retrans trend flies in the face of broadcasters’ ever-pious recitation of their localism mission. Thomas Larsen, vice president for legal affairs at Mediacom, based in Middletown, N.Y., asks: If broadcasters are so concerned about the public receiving their signals, then why are they willing to drop the signals for cable in a dispute over cash?

“We’ve gone from a time and a place in America when broadcast stations were truly free television to a period now [with] broadcast stations more like cable networks and charging customers to see their product despite the fact that it’s available free over the air,” he said.

Lin TV also had a dust-up with MetroCast, a small cabler in New England and Pennsylvania. Greg Schmidt, executive vice president for digital media for Lin TV, describes resolving the conflict as “a reality moment, when the cable operator had to recognize that their business had fundamentally changed.”

Schmidt attributes broadcasters’ ascendant position not just to satellite but also the impending competition from Verizon’s FiOS, AT&T’s U-verse, and other multichannel technologies.

In Schmidt’s view, the new world is a correction of the old regime, where broadcaster’s signals were in effect subsidizing their competitors—the low-rated channels continuously birthed by giant cable programmers like Viacom, Turner and Disney—who received compensation for their product.

“This was a downward, vicious cycle that was killing broadcasting,” said Schmidt.

Such fees more accurately reflect the value of the programming, say broadcasters. Maybe so, say cablers, but someone has to pay the new fees, namely the cable viewers.

$130 FOR BASIC CABLE?

Faber said Sinclair is seeing its fees creeping above 50 cents (per month per subscriber). Univision has publicly announced it’s gunning for a $1 fee.

“Maybe the broadcasters don’t care because consumers will blame the cable operators,” said Matt Polka, president of the American Cable Association, which represents smaller companies. “I have always maintained that broadcasters and the broadcasting industry itself will do itself in on retransmission consent because of their incredible greed.”

The FCC has the authority to enforce good-faith negotiations between parties, but has been hesitant to intervene. Larsen said the “good-faith” provision just doesn’t work.

“The FCC under Kevin Martin has given broadcasters essentially carte blanche to charge whatever they want and not give consumers choice,” said Larsen. “That’s ironic, because Martin has been an outspoken advocate of greater consumer choice throughout his entire chairmanship.”