Cable networks throughout the industry are bracing for the ripple effect on their carriage fees wrought by the broadcast networks' new push for cash compensation in retransmission consent deals.
“The world we are coming into is going to be much more difficult,” one senior cable network affiliate executive tells B&C. “Broadcasters and sports providers have put pressure on the system lately. They've made it so much more contentious.”
News Corp.'s landmark New Year's retransmission consent deal with Time Warner Cable, which reportedly will escalate over several years to pay a 75-cent per-subscriber cash fee to carry Fox O&Os, is expected to ignite major shifts in how multichannel video providers dole out their programming budgets. Operators will start paying more for higher-rated content and less for smaller-draw programming.
CBS already has cash from cable operators, but the fee precedent set by the Fox-TWC pact is expected to hike what broadcasters across the board are able to get out of cable operators to the tune of billions. If affiliates of the Big Four were to average $1 a subscriber, it would bring in $4.8 billion a year, according to UBS analyst Mike Morris.
Some costs will be passed to consumers. There will also be a squeeze on smaller networks that vie for the same budgets. “Dollars will continue to follow audience, and so because [broadcast networks] have such a significant audience advantage over niche cable, they're better positioned to take the lion's share of the incremental subscription dollars,” Morris says.
Niche players are considered particularly vulnerable to cable operators that will then hold the line on—or roll back—their carriage fees to pay for the increased carriage costs associated with the bigger-draw programmers. The small guys may also face the tougher question of whether distributors will decide they simply don't need them at all.
“It is a very challenging situation right now,” says Derek Chang, DirecTV's executive VP of content, strategy and development. “DirecTV and other distributors are engaged in fierce competition, and there are limitations on what we can do on rates with customers. We're also getting a lot of pressure from programmers to increase rates at extraordinary levels.” Most cable channels get between 1 cent and $1 per subscriber, though there are exceptions such as ESPN, which earns as much as $4.
What counts as an extraordinary rate increase lies in the eye of the beholder. There is no set formula for who gets what in the subscription world. Fees are all over the map, based on historical relationships, the size of the cable group, promotional efforts, ratings, type of programming, broadband video contributions and other factors.
Cable companies, satellite operators and now telecom providers each have their own set of ideas about what channels are worth. The general rule of thumb is that prices shouldn't be going up more than the consumer price index (CPI), which rose 0.4% in November and 1.8% over the last 12 months, according to the Labor Department. That view has been challenged by many content providers arguing that their investment in shows is rising faster than the CPI level.
So how will Chang deal with former DirecTV CEO Chase Carey, now on the other side of the table as News Corp. deputy chairman-president-COO, when it comes time to negotiate retrans fee hikes? Chang's response: “Never heard of him.”