In the midst of a negotiation, when one party says it’s not about the money…it’s about the money.
Why This Matters
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
But 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.
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.”