Currency

Switching to Cable Isn't Good Business for Broadcasters Yet

1/04/2013 09:15:41 AM

They say the grass is always greener, but there isn’t necessarily more money to be made by broadcasters if they switched their networks to cable channels.

With Web-streaming upstart Aereo’s tiny rented antennas threatening to disrupt the retransmission consent system that’s been boosting the broadcasters’ bottom lines, senior analyst Todd Juenger of Sanford C. Bernstein & Co. thought it might be a good time to take another look at the financial virtues of converting from over-the-air to a pay-TV model.

At first blush, there’s some merit to the idea. A network like CBS or Fox might get additional affiliate fees of $2.4 billion annually and would break even programming the dayparts local stations now handle, Juenger estimates. That would more than offset the 5% drop in ad revenues ($200 million) that would be caused by a 10% drop in distribution, plus $1 billion in lost retransmission and reverse compensation payments and the $600 million in profits from owned and operated stations. The broadcasters presumably would also be getting the proceeds from auctioning off their local stations’ spectrum.

But Juenger says there’s a wildcard that disrupts the equation in the value of having affiliates, with their local news, local news personalities and community presence. That translates into higher ratings and ad rates for the
national networks.

How much value is unknown, but Juenger suspects the number is very big. “Big enough to turn the economics negative. Without the local connection, and its powerful news lead-in/lead-out, we believe the broadcast networks would become indistinguishable over time from the large general entertainment cable networks
(USA, TNT, TBS). The broadcast ratings advantage would erode, as well as the CPM premium,” he says.

That leads to his conclusion that “in a world as it exists today, we suspect the broadcast model is safe.”

Somewhere, Les Moonves is breathing a sigh of relief.

However, in a world where Aereo and other over-the-top streamers can offer broadcast programming and steal away pay-tv subscribers,  the math would be different, Juenger says.

“Not only would the broadcast networks lose the retrans/reverse comp from Aereo subscribers, they would also be losing affiliate fees for all the cable networks they also own,” he says. “Faced with that prospect, we believe the
broadcast networks would be better off converting to cable, preserving their bundled economics, and working as hard as possible to minimize the negative impact of losing the local presence.”

Ultimately that could prove beneficial for pay-TV distributors, who would benefit from increased local advertising in the absence of local affiliates. “We believe this would be more valuable to cable distributors than satellite, because the cable companies can sell truly ‘local’ advertising, delivered in specific markets where they operate,” Juenger says, “whereas ‘local’ advertising on the satellite services is actually delivered nationally, across only the subscribers to that service.”

Meanwhile the switch might not be all that good as far as the national interest goes.  “While advertisers may profess not to care very much about those 10% of households who receive their TV via antenna, politicians do. Not to mention the public policy benefits of having multiple, independent local news sources. And universal access to a TV signal was once seen as a vital cornerstone of national security,” Juenger adds.

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