Two major TV-industry battles concluded on the same day last week. EchoStar agreed to resume delivering Lifetime Television to DBS subscribers, and station group Nexstar Broadcasting ended its bruising fight with cable operators.
But cable and broadcasting executives will spend months examining fallout from the disputes, calculating how they shift the balance of power over one of the most divisive issues in the TV business: retransmission consent. The central question: Will major cable operators start writing big checks in order to retransmit the signals of local TV stations?
In agreeing to restore Lifetime to its 12 million subscribers, EchoStar’s Dish Network cut a new retransmission-consent agreement with Lifetime corporate cousin Hearst-Argyle Television. The station group essentially affirmed that it will collect $11 million a year from a side deal in the EchoStar/Lifetime agreement that allows EchoStar to retransmit Hearst-Argyle’s stations. That’s a fat 50¢ per EchoStar subscriber.
At the same time, Nexstar CEO Perry Sook says he expects to collect around $12 million from its recent, tough round of negotiations with cable and DBS operators.
Those numbers may sound relatively small, but the ultimate stakes are huge. If TV stations dramatically strengthen their hand, cable systems could pay hundreds of millions of dollars a year. That money could substantially bolster the profit picture at broadcast groups starving for good financial news.
Cable operators have resisted paying even strong broadcast stations, arguing in part that even CSI and Lost are available free to anyone with a cheap antenna. Stations counter that they command 10 times the audience of, say, MTV, which collects 25¢-50¢ per subscriber monthly. (ABC stations want $2.)
Systems might commit to buying advertising on a station or carry a new cable network owned by the broadcaster’s parent company. But all but the smallest operators say they have not paid straight license fees.
Nexstar’s struggle ran the longest. Hoping to set a precedent, Sook in December 2004 stood up to Cox Communications and Washington Post Co.’s CableOne. In four cities where small-market broadcasters’ old retransmission-consent agreements were expiring, Sook levied a take-it-or leave-it demand: Pay 30¢ monthly per subscriber, or we’ll yank our signals.
The operators said no, and the stations went dark. Some cable subscribers went to DBS or simply connected rabbit-ear antennas, the Nexstar stations’ ratings plunged, and advertisers fled. After 10 long months and what Sook describes as several million dollars of lost revenue, Nexstar cut a deal.
None of the companies have disclosed terms, but industry executives say Cox and CableOne did not pay the straight license fees Sook was demanding, instead agreeing to buy a certain amount of advertising on his stations.
But smaller operators seem to have capitulated to Sook’s willingness to go dark. At the end of 2005, Nexstar cut a flurry of deals that it says pay license fees. DBS services already freely pay stations cash because they need the local signals to able to compete with cable.
Sook tried to allay doubts last week by summarizing the deals. Nexstar released a statement saying it expects to collect $48 million over the life of current three- to five-year agreements. The annual revenue would drop directly to the bottom line, accounting for a “low-double-digit” percentage of the company’s 2006 operating cash flow, which Bear Stearns analyst Victor Miller pegs at $78 million. Figure $12 million per year, which Miller estimates at 11.5¢ per cable and DBS subscriber in Nexstar’s markets.
“We accomplished what we set out to do,” Sook says. “I think there’s a lesson in it for other broadcasters.”
But what does the $12 million really mean for Nexstar and other companies’ negotiations? Sook says 15%-20% of that money comes from DBS companies, not cable. Also, 30% isn’t straight fees but is tied to ad time that cable systems are buying on Nexstar stations. Is that new money, or would those spots have been sold to car dealers and grocery stores? My estimate: Just $6 million actually comes from fees paid by dozens of small operators.
The details of the Hearst-Argyle story are murkier. Before dropping Lifetime on New Year’s Eve, Dish Network signed an unusual retransmission-consent deal with the stations owned by Hearst-Argyle stations, whose controlling shareholder—Hearst Corp.—also owns 50% of Lifetime. Dish agreed to pay around $11 million a year, or about 50¢ monthly for each subscriber in Hearst-Argyle’s markets.
EchoStar could get by without Lifetime, but subscribers would scream without Lost from Hearst-Argyle’s ABC stations. Since 2000, Lifetime has negotiated on Hearst-Argyle’s behalf with every major cable and DBS operator in the country but paid the broadcaster a mere 4¢ per sub.
The EchoStar retransmission-consent deal has changed. Now Hearst-Argyle says it is returning to the old structure, allowing EchoStar to pay Lifetime for its networks and Hearst-Argyle’s stations. Lifetime in turn will compensate Hearst-Argyle for the value of the retransmission-consent rights in the negotiations, around $11 million.
So, is EchoStar really still paying 50¢ per subscriber for the stations? Or did the DBS service hammer Lifetime’s rates down so far that the broadcast deal is a wash? Publicly traded Hearst-Argyle isn’t saying, but it’s a safe bet that it’s got the industry talking.
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