Cable's Billion-Dollar Question Needs An Answer
As retrans payments grow, programmers and operators wonder who gets stuck with the bill
By Jon Lafayette -- Broadcasting & Cable, 9/13/2010 12:01:00 AM
It is, as everyone in the business knows, a relatively new dilemma. Not long ago, cable operators were tough, tight-fisted negotiators, vowing not to pay cash for retransmission consent as laid out in the Communications Act of 1992. But in recent years, broadcasters have been cashing in. Last week, Time Warner Cable and The Walt Disney Co. were able to come to a settlement on a new retransmission consent deal that included at least 50 cents per subscriber for ABC’s owned stations, higher fees for Disney’s cable channels and carriage of several new services.
Even though the deal appeared to be settled much more peaceably than a slew of divisive deals of late, it was clear the cable operator felt that the rules surrounding retrans gave broadcasters an unfair advantage at the bargaining table. “We still have to make the very hard decision of, do you pay what we probably would think are above-market rates in order to avoid [disrupting service to customers]?” says Steven Teplitz, senior VP of government relations at Time Warner Cable. “It’s a no-win situation. You either pay more than you should in a normal functioning marketplace, which then leads to rising rates, or the customer potentially loses programming. So, even [with] a deal, that doesn’t mean that there’s still not a problem.”
The American Cable Association expressed similar sentiments in a statement released after the Time Warner deal was announced, while the National Association of Broadcasters declared, “This is just one more successful negotiation that serves to rebuke the pay-TV campaigners who seek a solution to a non-existent problem.”
No easy answers
At this point, it looks as though cable operators can’t win a fee battle against programmers, whether those programmers are broadcasters or cable networks.
Earlier this year, both ABC and Food Network went dark in disputes with Cablevision Systems, an operator known for being both stingy and less moved by public opinion. After three weeks off the air, Cablevision settled with Scripps Networks Interactive and restored Food. And in March, the operator cut a deal with Disney to put ABC back on its systems just as the Academy Awards show was starting.
“What we had initially been concerned about, we thought you would see money moved from cable channel properties to the networks. And recent events have not really borne that fear out. You saw things like Cablevision. At the end of the day, both TV properties got the better of the MSOs,” says David Bank, who follows media stocks as managing director at RBC Capital Markets. “So all of a sudden, the thought was it’s not necessarily a zero-sum game. It’s either going to come from the MSOs or the consumer, and I think for today while there probably is some margin erosion to the cable players, there also seems to be some capacity to continue to take it out of the consumer.”
Meanwhile, cable networks are concerned about getting squeezed as cash flows to the broadcasters. Also, several independent programmers are backing the American Television Alliance, a group formed by distributors to try to change retransmission rules they contend are stacked in favor of broadcasters.
“The impact of rising retransmission consent demands, both in the form of increased fees and demands for increasing numbers of channels for their affiliates, is a decline in the carriage fees and channels that [multichannel video programming distributors] can devote to independent programmers,” said Discovery Communications in a brief filed with the FCC. “Independent programmers such as Discovery Communications that are not affiliated with must-have [broadcast] programming find it increasingly difficult to gain carriage on reasonable terms and conditions—or sometimes at all.”
Large cable programmers are packing their channels with events and original shows viewers won’t want to miss to make the channels less vulnerable to being dropped in a rate dispute. Time Warner’s networks, for example, acquired the rights to NCAA basketball March Madness (and, in alternate years, the tournament’s championship game), and TBS is launching Conan O’Brien’s new late-night snow.
“As broadcasters get additional cash from cable operators, we still think that the stronger cable networks, which will be the group we’re in, will prosper as they, on the broadcast side, bolster their economics. We think that all our networks are must-have networks with musthave programming,” said Time Warner CEO Jeff Bewkes during the company’s earnings call last month.
Scripps also addressed the situation on its earnings call. “The issue is real for the distributors in terms of extra demand for cash from broadcasters, but for us the argument is a very simple one, in that it’s just a quotient of the audience that we deliver compared with the percentage of the revenue pie that we take out,” said Scripps Networks President John Lansing. “Any network that is not necessarily delivering the audience, or the high-quality audience as we are, may face greater pressure because of the demands coming from the retrans side of the pie.”
Sizing things up
The pressure is, of course, greatest on the smaller independent programmers. “We all know how this works. Those that have the most leverage suffer least, and maybe even benefit. Those that have the least leverage suffer most,” says Chad Gutstein, executive VP of Ovation.
The issue has come up in Ovation’s discussions with distributors. “We’ve heard that the increasing costs of retransmission consent are going to force some difficult choices that are going to have difficult consequences on companies like Ovation,” Gutstein says. Those consequences could include reduced fees, reduced distribution or roadblocks toward increased distribution.
“The majority of the rise in programming fees placed on the cable operators from the broadcasters will funnel down to higher overall monthly subscriber rates or may lead to dropping some of the fringe cable nets from the lower digital tiers,” says Justin Nielson, an analyst at SNL Kagan.
Amid a series of finger-pointing statements from both sides, Hallmark Channel, an independent programmer, has been taken off AT&T’s U-verse service because of a fee dispute.
“Whether you’re on the broadcast/programmer side or the cable side, those without the most leverage will get nailed,” adds Michelle Ow, Nielson’s colleague at Kagan. “I think how aggressive cable companies have been on retrans legislation is indicative of how they are going to do all that they can, so they don’t get to the point where it does become a runaway cost and they move toward a la carte.”
So, how did cable operators lose their mojo in negotiations with broadcasters? According to a filing with the FCC by the American Television Alliance— backed by Time Warner Cable, Verizon, Cablevision, Charter Communications, DirecTV, Dish Network, Mediacom, Bright House Networks, Insight Communications and Suddenlink Communications— retransmission consent and must-carry were created because cable operators had monopoly power in their markets and could prevent over-the-air broadcasters from serving the public interest in their communities.
“While Congress stacked the deck in broadcasters’ favor in order to counterbalance the perceived threat posed by the cable industry, it did so to achieve the public interest goals of localism and a diversity of viewpoints, not to generate windfall profi ts for broadcast licensees,” the filing reads.
But when retrans went into effect in 1992, the distribution landscape changed, with satellite and telcos grabbing bigger shares of the pay TV market. That enabled broadcasters to play one off the other. If the cable operator wouldn’t pay, the broadcaster could urge viewers to switch to satellite or telco, hurting the cable operator’s business. While the broadcaster was off, the cable operator would feel pressure from the government to restore service. And once the broadcaster agreed to a fee it liked, it could use that to negotiate the next time a retransmission agreement neared expiration.
“Broadcasters with an increased number of distribution options are engaging in brinksmanship, thus driving up programming costs for MVPDs and harming consumers with higher cable rates and the constant threat of blackouts,” the filing said.
In addition to distributors, several independent programmers have signed on with the alliance, including Discovery, Ovation, C-SPAN, The Africa Channel, Retirement Living, Outdoor Channel and Si TV.
The prospect of spiraling programming costs is one reason some operators are looking at new ways of bundling channels. Multichannel distributors are wary of any signs that customers want to cut the cord and get the programming they want via broadband. Earlier this month, for example, Apple unveiled a new TV service that allows viewers to rent shows from Disney and News Corp. for 99 cents.
Time Warner Cable CEO Glenn Britt has said he’s discussed the notion of creating smaller bundles of channels for consumers looking for a less expensive cable television option. Programmers, naturally, are opposed to the idea—or at least they believe each of their channels should be included in whatever size bundle the operator proposes to provide to subscribers.
Time Warner Cable’s Teplitz says smaller bundles and retrans are separate issues: “To the extent that the rates keep going up because of retrans, it does feed into that desire for smaller packages, but they’re not linked in a way that one is going to solve the problem for the other.”
Each of the options being tossed back and forth may turn out to be part—or all of—the answer to the retrans dilemma. But no matter what shakes out, one thing is for certain: The bill is coming due, and soon.
E-mail comments to email@example.com and follow him on Twitter: @jlafayette
Another reason for a-la-carte pricing. I am paying for 200 channels of which I watch 12-15 with any regularity.
Hogrod - 9/13/2010 10:58:48 AM EDT
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