Broadcast television is fighting for its life, and one massive battle taking place now could define how the war may be won. The carriage agreements between Time Warner Cable (TWC) and News Corp. for Fox-owned stations, cable networks and regional sports networks expire Dec. 31. The executives working on those agreements—otherwise known as retransmission deals—are expected to remain at the negotiating table into the wee hours of the holiday season.
Many industry insiders say you can't overestimate the stakes. While many carriage agreements typically expire at the end of any given year, the terms and pricing on the Fox-TWC deal are of utmost importance to just about everybody and every company in the business of television. As one network executive told B&C, “Whatever they agree to with Fox, they have to agree to with all four networks.” Says another exec: “It sets where the conversation starts for everyone else.”
The deal is playing out on one of the biggest fronts in what insiders describe as TV's “holy war.” It has precedent-setting power over the many showdowns that are already underway or are scheduled to take place over the next two to three years across the broadcasting and cable industries.
The timing is crucial. With the station business struggling and the broadcast networks looking for a new and sustainable business model, networks, affiliates and cable operators are engaged in redefining revenue streams and the business as we know it.
And the money at stake is significant. In the broadcast networks' newly inspired push to get cash for their signals, if affilliates of the Big Four were to average $1 a subscriber, it would bring in $400 million per month, or $4.8 billion a year, according to UBS analyst Mike Morris. Last-place NBC is projected to lose more than $500 million in 2009, according to a report in the Los Angeles Times, so while the network's new owners may have something to say about NBC taking big coin from cable operators, such a figure shows the difference the revenue stream could make.
On Everyone's Mind
In the last week and a half, News Corp.'s Chase Carey and TWC's Glenn Britt, along with CBS' Leslie Moonves, Comcast's Brian Roberts, Disney's Bob Iger and NBCU's Jeff Zucker, have made public statements about the significance of retrans. It was a hot topic on virtually every broadcast company's third-quarter earnings call, and widely discussed at last week's UBS Media Conference. The FCC and NCTA have even been involved in a retrans-related flap this month. They are all girding for this war, and will all be paying attention to the Fox-TWC deal.
Stakeholders in retrans battles will hold their positions with religious-like zeal, as they endure uncomfortable shifts in the ways things have been done. Much as with longtime political skirmishes, adversaries are becoming allies and allies adversaries, depending on the deal. As LIN TV Corp. President-CEO Vincent Sadusky put it on his Q3 earnings call: “We've all heard this funny term 'frienemies.' In the media business and in the interactive business, a lot of us compete with each other and a lot of us partner with each other, and that's just the way it is.”
In 2009, broadcast stations will have reaped an estimated $739 million in retrans cash from cable, satellite and telco operators ($315 million of that from cable), representing 4.2% of their total revenue, according to SNL Kagan figures. SNL Kagan expects that number to grow in 2010 to $933 million, or 5.1% of revenue, with the cable portion growing to $424 million.
Broadcasters are hoping that when TV's various nations emerge from the fighting, they will finally have the long-sought dual revenue streams that cable networks with ad-revenue and carriage-fee cash enjoy.
Although SNL Kagan expects retrans cash to rise to 8%-9% of broadcast revenue by 2015, that alone would not necessarily constitute dual revenue. However, with the growth of other distribution streams such as digital, online and mobile sources, things could look up for the business, says Justin Nielson, an analyst with SNL Kagan covering broadcast. “There is a transformation in the broadcast business,” Nielson says. “It's happening.”
What Exactly Is Retrans Cash?
Since the 1992 Cable Act, which established standards for broadcast signal carriage on cable systems, broadcasters have had the legal right to two choices: the mandatory must-carry option or negotiate in “good faith” a retransmission consent deal.
Nexstar Broadcasting is widely credited with becoming the first major broadcaster to secure cash as part of its retrans deals, about five years ago. Other station groups followed, and retrans cash for broadcasters has grown steadily since. Retrans deals generally incorporate a combination of ad and promotional value.
Traditionally, a network's owned-and-operated stations did not go after cash as part of their retrans deals. Instead, they extracted value for their O&Os primarily by securing carriage or increased carriage fees for their co-owned cable networks. Now, however, the networks are getting into lock-step in pursuit of cash in their O&O retrans deals, as the market for new cable networks is saturated and the Holy Grail of TV has become actual dollars.
CBS was the first network to start pursuing cash for its O&Os in 2006 after its split with Viacom. Since then, Moonves has been reportedly requesting 50 cents-plus per sub. In three deals earlier this year—with TWC, DISH and Cablevision—multiple sources say CBS received, on average, something in the neighborhood of their ask.
The content carriage agreement between TWC and CBS, announced in January, was for CBS O&Os and Showtime Networks, and sources say it indeed involved cash. Prior to this deal, TWC's carriage deals for CBS stations and Showtime were negotiated separately, with Showtime's previous deal involving cash and the stations' previous deal not comprising cash.
Time Warner Cable spokesperson Maureen Huff shot down the notion, however, that the O&Os got a per-sub fee in the 50-to-60-cent range: “Any assertion that Time Warner Cable paid CBS 50 to 60 cents per subscriber for retransmission consent is untrue,” Huff said. “We would never have entered into a new retransmission consent agreement with CBS almost two years before the old agreement expired if the new deal wasn't extremely favorable to us—particularly given that the old agreement did not include any cash payments.”
The cash in that deal is up to CBS to allocate to CBS or Showtime, say sources, who also maintain this deal “broke the seal” by marking the first time a TWC deal to carry an O&O involved cash. CBS declined to comment for this story.
The TWC-Fox pact marks News Corp.'s first big push toward cash for its O&Os, and the company's executives are pursuing more per sub than any broadcaster has gotten for retrans: $1, according to a report in The Wall Street Journal. In a very boisterous way, News Corp. has joined CBS in leading the fight for retrans cash.
Since the Dec. 3 announcement that Comcast would take a 51% stake in NBC Universal, Roberts and Zucker have made comments in support of the idea of cash for O&Os. During Disney's fiscal-quarter call, Iger said the company is intent on getting paid “fair market value” for its stations and network, and reiterated that thought last week at the UBS conference.
While broadcast networks get serious about going after retrans cash for their owned stations, they also want to share in their affiliates' retrans payouts. Meanwhile, cable operators are resisting the seemingly all-at-once call for cash and grappling with how to maintain their margins in the face of it.
When asked if the American Cable Association had any problem with networks negotiating for their affiliates, ACA President Matt Polka said: “Particularly that stations have talked about real money for retrans to the tune of $5 or $6 a month per sub on the wholesale level when you add up all the stations in a market. Yes, that is a concern as we see the networks trying to hone in on the marketplace as well.”
The fronts indeed are many. But the vast majority fall into one of two categories: Broadcasting vs. Cable and Broadcast Networks vs. Broadcast Affiliates.
Broadcasting vs. Cable
In the decades-long history of broadcasting and cable, cable companies paying broadcasters cash for their signals is a new phenomenon. Broadcasters often wax about cable being “built on the back of broadcast,” and they have a point in referring to the early cable systems. No rules governed cable's use of broadcasters' signals until the Cable Act of '92. Broadcasters argue that due to this legacy, they have been in a drawn-out game of catch-up with cable network carriage fees.
Broadcasters call the current value landscape for broadcast and cable networks distorted; they contrast a network like ESPN that gets $4 carriage fees with many network affils that get 25 cents, while broadcasters out-rate their cable counterparts by multiples.
Cable executives have long resisted paying cash for broadcast signals. Among cable's arguments: Broadcasters have their spectrum for free. Plus, broadcast network programming is available for free. Why should cable pay for something that's free? But as cable's satellite and telco competitors rose up, they paid broadcasters, paving the way for broadcasters to pursue cash from cable, especially when it came time to make deals for new high-definition signals.
The leverage in retrans negotiations today varies by market and companies involved. There are cable operators of various sizes and strengths, just as there are among broadcasters. But in general, broadcasters have leverage as the exclusive providers of content that has the power to motivate consumers to make decisions about their TV service.
Broadcast affiliates have in large part presented a unified front in fighting for cash, and the additional force of the network O&Os pushing in that direction bodes well for broadcasters getting more, as SNL Kagan projects.
Cable companies have taken issue with how broadcasters are using their leverage. TWC added its support last week to Mediacom's request of the FCC to look into whether Sinclair is violating the “good faith” bargaining rules by negotiating retrans consent for both its owned stations and ones it has local marketing agreements with in the same markets. Comcast and the NCTA have already filed in support.
TWC last week announced a one-year extension of its carriage agreement with Sinclair, which has several Fox affiliates in TWC markets, and a four-year carriage deal with Local TV, which comprises primarily Fox affiliates. The cable operator claimed in its filing to the FCC that Fox “brazenly sought to hijack the retransmission consent process” by inserting itself into its affiliates' retrans negotiations and that Sinclair “ceded its authority” over retrans consent negotiations to Fox. TWC's filing said Fox is now seeking to extract “unprecedented compensation” for retrans rights held by its owned stations and those of its affils, and that Fox's push “consists of upending the retransmission consent framework established by Congress.”
Fox issued a statement Dec. 10 in response to TWC's filing, calling the action “an extension of [TWC's] desperate campaign to mask its impressive profits and instead malign its program suppliers' efforts to receive fair compensation,” and “an attempt to undermine and interfere with Fox's existing contractual relationship with its affiliate stations as well as artificially influence the negotiation process.” Sinclair did not respond to requests for comment.
Meanwhile, cablers are weighing how much of the cost they can pass to customers and/or recoup by way of tougher negotiations with other programming providers.
Industry insiders say the landscape of programming costs is in a period of reformation, with broadcast signals increasingly going for more and the cable channels that are not at the top of the ratings chart suffering a squeeze on carriage rates. “We're all in the business of attracting eyeballs,” says one broadcast network executive. “Slowly but surely, we're all going to see money follow.”
Some weaker cable channels may wind up snuffed out in the process. News Corp.'s Carey hinted Dec. 7 at the UBS conference that his firm, and rival media companies, may be looking to shed minor cable channels or at least put much less effort behind them. “Many content guys have multiple channels,” Carey said at UBS. “They largely have to exist under their own weight and have value.”
Networks vs. Affiliates
The message was delivered loud and clear during recent earnings calls and executive speaking engagements: Networks are after a share of their affiliates' retrans cash.
The operating assumption is that this payment will be negotiated as part of affiliate contracts, which is how Fox already appears to be handling it, according to documents TWC submitted in its filing about Mediacom and Sinclair. The filing says Fox is “threatening to exercise veto power over any station's negotiation of a retransmission deal that does not extract a satisfactory kickback to the network,” and that should an affil's retrans deal not be satisfactory to Fox, the network “will use contractual mechanisms” to preclude it.
Affiliate contracts, like carriage agreements, run for varying lengths, so this is expected to be a rolling process—and a rocky one.
The networks and their affiliates have had many contentious moments, and this process stands to be among the roughest. Affiliate reactions to the notion of sharing their retrans cash have varied, but among those at the most resistant end are Nexstar boss Perry Sook—who says he will fight as hard to keep retrans cash as he did to get it—and Gray TV President Bob Prather.
“It's outrageous that the network wants a piece of ours,” Prather told B&C. “They can get their own if they want it.” He argues that “90% of what cable subscribers want is local news.”
The networks counter that their programming gives stations their most valuable exclusive asset in a market, and thus their most important bargaining tool with cable operators. Network executives point out that if there are five or six local news products in a market, the loss of one on a cable system is not enough to motivate a consumer to switch video providers. If viewers can't get the Super Bowl or American Idol, it's a different case.
For the most part, station owners interviewed for this story agreed that they are willing to share in upside resulting from support of the networks in their retrans negotiations. “Hopefully they'll look at us as partners. [They've] looked at us as second-class citizens the last few years,” Prather says. “For a long time, the affiliates had the upper hand and got compensation. It seems like [the networks are] saying it's get-even time.”
The networks apparently see potential to help their affiliates drive harder bargains with cable operators. Last week at UBS, Carey said that affils “are selling it cheap.”
Network executives like to say that they are keeping in their back pocket the improbable idea (at least in the short term) of bypassing affiliates by making carriage deals directly with cable companies for network programming. One network exec ticked off a number of options a network could choose from to fill out programming, including a syndicated programming package or even merging networks.
But David Barrett, president-CEO of Hearst Television, downplayed the possibility of that happening on then-Hearst-Argyle's earnings call for fourth quarter 2008. “I guess I have been around a long time and this is not a new thought, although it's getting a little more attention right now than it has over the past few years,” Barrett said. “I believe on the near horizon—and call that five to six, seven, eight years—I don't think there is a likelihood that the networks can successfully migrate their product to cable without taking a larger reduction in ad fees than the [increase in] carriage fees that they [could] get from the cable operators. Their ability to generate a $3 billion ad base will be considerably diminished if they were dealing with the smaller audiences that they would inevitably deal with on the cable flat platform. And the fee revenues that they may expect to generate from cable, satellite and telco providers would not be able to offset that.”
Why Fox Vs. TWC Matters
Fox, the top-rated network, and Time Warner Cable, the second-largest cable operator, are two of the biggest players in the industry, not to mention in the retrans war. What happens in this battle will set deal benchmarks as well as the tone for these types of negotiations.
Fox could not have picked a better deal to kick off its crusade for cash for its O&Os. With football playoffs and the return of 24 and American Idol coming in January, the network is in a position of strength. From that perch, Fox is expected to build from the deals CBS has won.
Once the deal is made, Fox can use it as a starting point in discussions with other operators as well as affiliates. Other network O&O deals, too, will be expected to follow suit.
Any trickle-down effect will take time. Whatever Fox gets from TWC will no doubt come with a fight. And both sides are ramping up the war of words.
TWC launched a consumer campaign last month dubbed “Roll Over or Get Tough,” drawing its customers into the programming agreement discussion. It did not call out Fox explicitly, but its timeliness was hardly coincidental. Last week, the operator launched a second phase of the campaign.
Carey once again indicated last week that Fox will play tough. When asked if News Corp. would resort to yanking signals, Carey responded: “[Viewers are] not buying it to get pretty set-top boxes. They're buying it for content on the screen, and they'll be pretty upset if they don't have it.”
So the battle is on. And everyone in the business will be watching.
With additional reporting by John Eggerton, Michael Malone and Claire Atkinson