Retransmission Consent

Transcription

1 Retransmission Consent In a world of uncertainty, it seems as if annual cable rate increases have become as certain as taxes. Have you ever wondered why these rates continue to increase? Well just imagine that you have driven the same car for over 20 years without any routine maintenance or ever made any updates. Now apply that same thought to the cable industry that has seen drastic changes in programming with hundreds of new networks, changes and updates in technology and increased competition. What if the rules governing the cable industry hadn t had any maintenance or updates just like that old car? Unfortunately this what if situation is a reality in the cable industry that is still forced to operate under rules created in 1992 that have seen little to no updates, so just like that 20 year old car, the system is broke and in need of some fixing. When Congress created retransmission consent in 1992, there was good reason to worry about the future of broadcast television. Cable providers in most communities didn t have any competition in the areas they served. As more and more consumers began to opt for a cable connection from the cable company and give up rabbit ears, broadcasters became more reliant on the cable operator to distribute their programming. At this point, Congress viewed the cable operator as a threat to the survival of overthe-air broadcasting. These concerns lead to the creation of the 1992 Cable Act, which established new rules governing the carriage of broadcast station on cable systems. The Act gives broadcasters two options for securing carriage. The first option is for the broadcaster to elect must carry status, which entitles the broadcaster to automatic carriage without compensation. The second option is to elect retransmission consent status, which allows the broadcaster to bargain with a video distributor for carriage. The two options provide tremendous benefit to broadcasters by ensuring that all broadcasters would obtain carriage one way or another. As the industry has changed and more competition among cable, satellite and telephone companies has flourished, little has changed in the way broadcasters do business. They continue to retain all the government protections originally granted to them under the 1992 Cable Act. Broadcasters continue to retain their monopoly status in the local market because the FCC rules prohibit cable and satellite providers from obtaining programming from an alternative source. As a result, broadcasters have grown bolder in their demands asking for increased financial compensation. If the cable or satellite operator does not comply with the demands of the broadcaster, the broadcasters can withhold its signal, causing what is referred to as a blackout. Existing retransmission consent rules So what are the rules that govern how a cable and satellite operator must deal with a local broadcast station? According to the FCC, the Communications Act requires that a television station give its consent to a cable system to carry its broadcast signal. Television stations and cable systems negotiate for this retransmission consent and money and other compensation is exchanged between the parties in these private negotiations. If the parties do not produce an agreement prior to the expiration of the existing agreement, they may decide to extend the existing agreement if both parties agree, which

2 means the cable system could continue to carry the station during the negotiations. If an agreement is not reach and an extension is not granted, the cable system must stop offering the station to customers. These retransmission consent rules don t affect all negotiation. They apply only to local broadcast stations which are defined as a station equipped to broadcast television programs. Unlike cable networks such as ESPN, TNT and CNN that provide their signal via satellite transmission, local broadcast station use over-the-air spectrum provided by the federal government to broadcast their signal. The distribution of their signal over-the-air is free and capable of being received by customers in their DMA (Designated Marketing Area) with the use of a digital antenna. This same signal that they deliver overthe-air for free, is what local broadcast stations are asking for compensation from cable systems in the form of retransmission consent. Local broadcast stations make a bulk of their revenue from advertising. As technology has changed causing advertising to spend their budgets in different ways, the revenue from traditional commercial advertising has declined for local broadcast stations. This decrease in advertising has caused the stations to seek new sources of revenue. Barely a decade ago was any revenue for a local broadcast station derived from retransmission consent fees. In 2008, retransmission consent fees made up less than 5% of revenue for many broadcast station. Last year, that percentage had increased to 15% and estimates today by research group SNL Kagan estimate the following broadcast media owner groups getting over 20% of their revenue from retransmission consent include Sinclair (24%), CBS (23%), FOX (22%), Nexstar (20%), Allbritton (20%) and LIN (20%). This transition in revenue source equates to large amounts of money, with $500 million in retransmission consent revenue paid in 2008 to an estimated 7.6 Billion by Retransmission Consent Revenue 8,000,000,000 7,000,000,000 6,000,000,000 5,000,000,000 4,000,000,000 3,000,000,000 2,000,000,000 1,000,000, Rates *Source: SNL Kagan

3 To help better verify this objective data, here are comments made in various news articles from senior management at several large broadcasting groups: CBS CEO Les Moonves: The Sky really should be the limit when it comes to retransmission consent fees, stated in his Q earnings call that our fast-growing, non-advertising revenue sources were up significantly with double-digit increases in retrans, reveres comp and streaming. As for the future, Moonves claimed that we remain on target to hit our goal of $1 billion in retrans and reverse comp by 2017, if not before. News Corp: The benefits of growing subscriber revenue were also apparent at the Fox broadcast network and the company s owned-and-operated television stations, where retransmission fees nearly doubled against the same quarter a year earlier. Brian Stelter, New York Times, August 6, 2013 Disney: Disney has said it expects to boost revenue from so-called retransmission fees to $400 million to $500 million annually by 2015 from virtually nothing several years ago. Associated Press, August 7, 2013 Nextstar: Retransmission consent revenue jumped 65.5% from %15.3 million to $24.9 million in this year s Q1. TV News Check, August 7, 2013 LIN TV: The Television Station acquisitions we made in 2012 and healthy increase in retransmission fees and the continued growth and contributions of our digital businesses were key drivers that help to offset the lack of political advertising revenue and a sluggish economy. Vincent L Sadusky, President and CEO, Earnings Call, June 30, 2013 So is the local broadcast station getting rich from all this retransmission consent revenue? Not exactly, there are multiple players involved in the retransmission consent process. It begins with cable system paying the local broadcast station or media ownership group that owns or manages the local station. In some cases, the local station is considered an owned and operated station that is owned by the broadcast network.) Each station carrying programming from a broadcast network (ABC, NBC, CBS, FOX, etc.) must have permission to offer that content. This process of having the local station pay for programming is called reverse retrans. It is generally seen as a way for the networks to share in the affiliate revenue, although it is not necessarily tied directly to retrans and can be a flat fee demanded by the broadcast network. So just as retransmission consent fees have increased for cable systems, reverse retrans has continued to grow with broadcast networks claiming they deserve more for their programming. Retransmission Consent Payment Cycle Example

4 When a customer pays their cable bill, the myth that cable operators are getting rich is just that, a myth. Payments for retransmission consent fees and licensee fees paid to cable operators for their networks such as ESPN, USA, etc., in 2014, account for approximately 70% of each dollar spent on cable programming. With payments for retransmission consent, HTC pays directly to the media group owning or managing the local broadcast station such as Raycom, Sinclair or Media General. Although these media groups reap a large profit, they too must pay a fee to the major broadcast network in which they are affiliated. In recent years, those payments, referred to as reverse retrans, have been 45% to 55% of the retrans revenue collected from cable and satellite operators. Industry Consolidation In the last few years, there has been an unprecedented amount of consolidation. Many of the largest groups have doubled the amount of stations they own. There are typically rules that govern how many stations once company can own in a given market, but many of these companies have used various tactics such as creating secondary subsidiaries to skirt the rules. Part of this consolidation trend is because it allows companies better utilize their resources and maximize profits, which often means job cuts and new sources become a little less local. A potentially larger benefit is that these media groups understand the retransmission consent rules currently in place allow them extreme leverage to demand higher rates for their programming. These media groups are counting on consolidation to provide more leverage to increase rates that increase their profits and cover the cost of their acquisitions that can be substantial such as the 2013 Sinclair purchase of Allbritton Stations for $985 million. Station Consolidation Graphic Stations before Stations after 2012

5 Blackouts Blackouts are typical is sports programming, but media groups are now using this tactic to pressure cable operators to pay the huge increase in retransmission consent fees. It s nothing to be proud of, but broadcasters leave customers in the dark without access to their programming when they deploy this tactic. In just the last five years, broadcaster blackouts have seen an astronomical increase from 51 in 2011 to 127 in Frequent Asked Questions What is Retransmission Consent? Retransmission Consent is an option granted to local, full power broadcast stations to elect to negotiate with a cable system for carriage of their broadcast signals. Every three years, local broadcast stations have to provide cable operators with their election status. This election status can either be must-carry or retransmission consent status. If a station elects must-carry status, the local cable operator is required to carry that station, but the station does not have any option to request compensation for that station. If they elect retransmission consent status, they can then propose that the local cable operator pay cash or some other form of consideration to carry their station. The local cable operator can decide to accept the proposal, opt to not carry the station, or provide a counter-proposal. Why is Retransmission Consent a concern? Under Retransmission Consent, many local broadcasters have asked for fee increases above 300%. If cable companies do not agree to these fees, broadcasters can threaten to take away their programming from the cable system. What are cable companies doing to prevent these unreasonable rate increases? Cable companies, along with other video distributors, are all impacted by these fee increases and demands from the broadcast stations. Congress and the FCC are both being asked to step in and explore changing the outdated regulations that govern the carriage of these local broadcast stations to better reflect today s competitive market and protect customers from blackouts when agreements cannot be reached. Why can t the cable system seek carriage from another broadcast station? Unfortunately, the FCC rules allow the local station what is called network exclusivity within their home market. For example, the local NBC, ABC, or CBS affiliates within the Myrtle Beach / Florence market have network exclusivity, so HTC cannot seek carriage of another station for better rates outside of the Myrtle Beach / Florence market. The only time a local cable operator can carry an out-of-market station is if that station is considered significantly viewed. The list of significantly viewed stations by market is determined by the FCC based on viewership of the over-the-air signals. How does Retransmission Consent affect the customer? The price that cable companies charge customers for cable service is directly affected by what is paid to programmers, including local broadcast stations. Higher programming fees result in higher cable prices. HTC, along with other cable companies, is working hard to control these increases in programming cost and will continue to fight large programming increases to the extent possible.

6 If cable companies pay for cable networks like USA and FX, shouldn t they also pay for broadcast networks? Cable companies pay cable networks such as USA and FX for permission to carry their channels, but these networks are much different than broadcast networks. Cable networks have to pay substantial fees monthly to have their signals broadcast on satellites. Local broadcast stations are given free airwaves from the government to broadcast their signals. Local broadcast stations offer their signals free over-the-air to anyone with a digital antenna. Why should the cable company have to pay to offer the same signal that is provided free overthe-air? Cable networks provide additional benefits to cable operators such as the ability to insert advertising as an opportunity to offset some of the cost of the network. Local broadcast stations do not offer the same advertising time. Cable operators have more negotiating power with cable networks because they can choose like networks to carry if a cable network is demanding an unfair rate. There is not an alternative for the local broadcast stations.