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Digital Dollars: New Prize in the Retrans Battlefield

Tussles over digital rights in retrans negotiations like Time Warner Cable-CBS could lead to TV Nowhere 9/02/2013 12:01:00 AM Eastern

CBS O&O Ratings Hold Up In Blackout Markets

If the people at CBS expected a ratings buzz cut due to the Time Warner Cable shutdown of owned stations in New York, Los Angeles and Dallas, it hasn’t happened yet. Flagship WCBS New York retained its No. 2 spot in local news throughout the first three weeks of August and even showed modest ratings gains year-over-year in adults 25-54 at 5 p.m., 6 p.m. and 11 p.m., despite 1.3 million Time Warner Cable households affected in the nation’s largest DMA.

Peter Dunn, president of CBS Television Stations, said he has heard from clients and others in the industry who did not expect WCBS to hold its own while being dark for so many TWC subs. “They’re surprised ratings haven’t taken a hit, like everybody thought,” Dunn said.

Dunn credits better local product and a certifiable summer hit in Under the Dome for the strength, and he believes stability will continue into the fall as returning hit shows and football fill out the grid. “We’re starting from a good position,” he said.

Primetime at KCBS Los Angeles was up 2% from last year during the first 25 days of the blackout, while total-day ratings were off 8%. KTVT Dallas showed year-over-year gains in adults 25-54 at 5 and 6 p.m., while 6 a.m. and primetime were flat. —Michael Malone

jlafayette@nbmedia.com | @jlafayette

In the midst of a negotiation, when one party says it’s not about the
money…it’s about the money.

Why This Matters
Changes in technology can either force programmers and distributors to work more closely together, or they can potentially blow up existing relationships and business models.

About 3 million Time Warner
Cable subscribers, primarily in
New York, Los Angeles and Dallas,
have been unable to watch
CBS programming during a bitter
retransmission consent fee battle
that has stretched about four
weeks. The big rift between the
sides isn’t just about the growing
fees cable operators pay to broadcasters;
it’s increasingly about digital rights.

A vague, uncertain concept only a few years
ago—before anyone tapped virtual keys on
an iPad—digital rights now represent a gold
mine. They’re also key to the billions of dollars
generated by streaming subscription video-ondemand
as well as the foundation of TV Everywhere,
the main defense the current pay TV
ecosystem has against over-the-top invaders.

In dueling worst-case scenarios, if CBS wins
this battle, retransmission costs rise, pushing the
cost of cable upward, driving more viewers to
over-the-top entertainment options. Or Time
Warner wins significant changes in digital rights,
making other programmers
and distributors gun-shy about
rolling out the current generation
of TV Everywhere products
designed to increase the
value of a cable subscription.
In both cases, viewers are the
ones who will be caught short.

Increasing Pay Scale

Retransmission consent was introduced in
1992 to protect local broadcasters dependent
on ad revenue from competition with cable programmers,
which also receive payments from
subscribers. At first, cable operators resisted paying
cash to the broadcasters. But as competition
from overbuilders, satellite providers and telcos
grew, the dam broke and retrans payments
became a gusher, estimated by SNL Kagan to
reach $4.9 billion by 2017.

While most retrans deals are negotiated quietly,
more stations have been blacked out this
year than ever before. According to the American
Television Alliance, viewers of four different
providers have lost 75 separate stations in 52
different markets—an all-time high. And though
struggles are increasingly typical, the Time Warner
Cable-CBS battle “will be remembered
as an important one because it’s one of the
longer-lasting ones involving stations in major
markets,” said SNL Kagan analyst Robin Flynn.
“It’s one of the first ones where digital rights has been raised as the major sticking point.”

Time Warner Cable will pay more for retransmission
when it again starts carrying CBS
stations. But exactly what will that cash buy?
When CBS Corp. CEO Leslie Moonves responded
in a publicly disclosed letter to proposals
to end the blackout from Glenn Britt, his
counterpart at Time Warner Cable, he said that
“perhaps the most egregious portion of your
letter was at the very top, where you ‘agree
to resume carriage with the new economics’
while ‘employing all the other terms and conditions
of our recently expired contracts.’”

Moonves said those terms and conditions, or
rights, were set back in 2008, when Netflix was
mailing DVDs and Amazon was known for selling
books. Both companies now spend billions
to stream broadband video to subscribers.

“What you are asking for, pure and simple,
is either to gain the right to deliver content
free that others are paying for, or to inhibit
CBS from licensing content to existing online
competitors and new companies that are now
emerging,” Moonves noted in his response.

In a online video answering questions about
the dispute, Melinda Witmer, Time Warner Cable
executive VP and chief video and content
officer, said: “What’s also at stake is making sure
that we can continue to innovate for our consumers.
Just like we did a few years ago introducing
the opportunity to watch programming
on iPads and other mobile devices in the home
and PCs, we want to continue to innovate. And
for a programmer they don’t necessarily want
for us to be able to do that. It may be important
to them that they be able to restrict more what
consumers can do with the hope that they may
be able to impose future costs on consumers in
exchange for that flexibility.”

Cable operators are interested in serving
customers—particularly younger customers—
who are doing more than simply viewing, said
Matt Polka, president of the American Cable
Association, which represents cable operators
that are much smaller than Time Warner Cable
but face similar issues. “The whole issue
of digital rights is very important.”

Distribution executives at other programmers
say that until Time Warner Cable blacked
out CBS, a template had largely emerged for the
kinds of digital rights traditional distributors get
when they sign new carriage agreements. Those
rights include the ability to stream the channel
live to pay-TV customers across all the different
platforms, subject to the underlying rights,
which are quickly being cleared.

Distributors also get time-shifting rights to
four or five rolling episodes of most shows in
order to create a video-on-demand package.

A distribution exec at one programmer said
selling SVOD windows reduces the amount he
needs to charge cable operators. “I thought the
industry had made some good strides, thinking
from the consumer perspective,” the distributor
said. “You’ve got to extend the value equation
for the people who write a monthly check.”

Defining a Fair Share

0901_coverstoryChart.jpgBut Time Warner Cable appears to be seeking
more. “That’s not good enough for them,”
says one senior distribution exec. Time Warner
Cable might want all of a season’s episodes
available to subscribers on its VOD systems. In
addition, they want to get the entire library of those shows’ episodes that CBS sells to Netflix,
according to the distribution executive.

“Distributors would like to have everything
behind the pay wall,” said the distributor,
referring to authentication, which allows
only paid subscribers to view online content.
And one big difference between broadcast
networks and cable networks is that very little
cable content is available via free streaming,
the way you can find broadcast shows on
CBS.com, NBC.com or ABC.com.

Time Warner Cable also seems to want to
put restrictions on CBS in terms of pricing of
shows to third parties. One deal that seems
to chafe distributors is the arrangement CBS
made with Amazon to stream new episodes
of the summer hit Under the Dome four days
after they appear on broadcast.

“I’ll bet Time Warner is sitting there saying,
‘You can’t do that,’” said one distribution
exec. “And [Moonves] is saying, ‘I couldn’t
have produced the show unless I had a check
from Amazon. Are you going to step up and
pay me $750,000 to make the show?’”

It is unclear what type of products, if any,
Time Warner Cable would put together with
whatever extra digital rights it obtains in the
negotiations. “I’m not sure how this makes
life better for the Time Warner customer,” the
distribution exec said.

Value Judgments

But how much are digital rights worth to
the cable operator when viewers don’t need to
subscribe to watch broadcasters’ content? “The
broadcaster comes to us with significantly increasing
demands based on the value of their
content. But when the content is free online or
available for a very nominal amount, it raises
the question of value,” says ACA’s Polka. “I’ve
watched Under the Dome on Amazon. I love
the Amazon platform. But at the same time, it
definitely raises that issue for our members.”

Other programmers say CBS can’t back
down on controlling its digital rights. “I just
don’t think CBS can afford to give up free
digital rights. That’s just an IP killer,” said another
distribution executive. “I think they’ll
end up taking a little bit less on retrans and
hold onto the ability to monetize the backend.
I would hold onto my back-end and take
a little bit less on retrans.”

Analysts says CBS, the top-rated broadcast
net, is seeking a raise in retrans payments
from Time Warner Cable from about 75 cents
per sub per month to about $2 at the end of the multi-year deal. Even with operators such
as Time Warner Cable putting up more resistance,
as Flynn starts to update her retransmission
revenue projections, she expects them
to be higher than the current set of numbers.

While rising fees are good for broadcasters
in the short term, they could damage the business.
“Obviously, MSOs are seeing their video
margins drop,” Flynn said. “How long are they
going to do that before they raise fees more?
And then potential cord-cutting increases
more, and then retrans fees don’t grow as much [because the number of subscribers falls]?”

Analyst Brian Wieser of Pivotal Research said
broadcasters are counting on ever-rising retrans
fees. CBS takes in about $1 billion in retrans
revenue and reverse compensation payments
from the retrans money taken in by its affiliated
stations. Nearly all of that drops to the bottom
line, which is very significant for a company that
generates total cash flow of $2 billion-$3 billion.


Everything That Rises Must Convert

But Wieser believes there is risk that rising retrans
revenue can’t go on forever, even if there
are no signs of action being taken right now.
He’s also of a mind that the entire CBS-Time
Warner Cable dispute is all about the money.

“That still strikes me as a smoke screen,”
Wieser said. “This is about, can they get the
like-to-like linear live broadcast from a buck to
two bucks over some period of time and make
sure they get the appropriate jump for Showtime.
The digital rights thing, I don’t know. Maybe
it’s a bigger issue than I’m giving it credit for.”

Polka thinks change is inevitable as well. “The
worst-case scenario is the further perpetuation
of a failed regulatory regime where these kinds
of major disputes become increasingly more
common,” he said. “Deals will get done, but just
because a deal gets done doesn’t mean that’s the
best thing for consumers, particularly when the
whole system is built on a rotting set of regulations
that are not helping consumers but rather
hurting them. If the best result is an increasingly
bad result for consumers, then consumers don’t
have a lot to look forward to.”

CBS O&O Ratings Hold Up In Blackout Markets

If the people at CBS expected a ratings buzz cut due to the Time Warner Cable shutdown of owned stations in New York, Los Angeles and Dallas, it hasn’t happened yet. Flagship WCBS New York retained its No. 2 spot in local news throughout the first three weeks of August and even showed modest ratings gains year-over-year in adults 25-54 at 5 p.m., 6 p.m. and 11 p.m., despite 1.3 million Time Warner Cable households affected in the nation’s largest DMA.

Peter Dunn, president of CBS Television Stations, said he has heard from clients and others in the industry who did not expect WCBS to hold its own while being dark for so many TWC subs. “They’re surprised ratings haven’t taken a hit, like everybody thought,” Dunn said.

Dunn credits better local product and a certifiable summer hit in Under the Dome for the strength, and he believes stability will continue into the fall as returning hit shows and football fill out the grid. “We’re starting from a good position,” he said.

Primetime at KCBS Los Angeles was up 2% from last year during the first 25 days of the blackout, while total-day ratings were off 8%. KTVT Dallas showed year-over-year gains in adults 25-54 at 5 and 6 p.m., while 6 a.m. and primetime were flat. —Michael Malone

March