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No Cash, No Carry - Broadcasting & Cable

No Cash, No Carry

Digital broadcasting reignites the fight over whether cable operators should pay to carry TV stations
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The hot consumer-electronics product in Abilene, Texas, is not a TiVo, a Blackberry or even an iPod. It's a set of “rabbit ears,” the old-fashioned TV antennas that most viewers haven't used in years. But suddenly they're essential for Cox cable subscribers who want to watch the local NBC station, KRBC.

“We've been selling 40% more than normal,” says Thurman Richardson, manager of a local Radio Shack store. “People keep coming in.”

Richardson is profiting in part from Nexstar Broadcasting's fight with the local cable operator, Cox Communications. Tired of cable systems' refusing to pay cash for carrying its stations, Nexstar is demanding that they start paying 30¢ per subscriber monthly for the right to retransmit the signals.

Raising the stakes on Dec. 31, it pulled stations off Cox cable systems in Abilene and San Angelo, Texas, and The Washington Post Co.'s systems in Texarkana, Texas, and Joplin, Mo. Nexstar took an additional station off a Cox Louisiana system last Wednesday. As a result, more than 120,000 cable subscribers have lost their Nexstar NBC and CBS stations so far.

“We have to do this,” says Nexstar COO Duane Lammers about the fight with Cox. “This is about the survival of local television.” Unlike cable operators, over the past few years, DBS companies have paid 15¢-20¢ per subscriber monthly for local broadcast signals.

The scuffle is playing out across the country between local broadcasters, which want cash from cable systems carrying their signals, and cable operators, which don't want to pay. At the heart of the fight is a 1992 law that gives stations the right to attempt to negotiate payment or simply demand guaranteed carriage for free. Now, with technology advances promising new high-definition TV and digital channels, broadcasters think they have new leverage to get some cash for their content.

In Baltimore, Pittsburgh and 13 other cities, cable subscribers couldn't watch the Super Bowl in HD without using an antenna because of a fight between Sinclair Broadcasting, which owns the local Fox affiliate, and cable operators. The broadcaster, known for being outspoken, wants cable operators to pay 50¢ per subscriber monthly to carry its stations' HD signals.

Broadcasters are also looking for new payments for digital channels they plan to create as they make the transition from analog signals. Their hopes could be dashed, however, by an expected ruling this week that would hand cable tremendous leverage in carriage of digital broadcast programming. Broadcasters are hoping to delay the vote until after Chairman Michael Powell—who favors cable in this dispute—actually departs in March.

Many broadcasters cheer Nexstar executives on, but most see the odds as too long to join them. “We realize we're not in a strong position to negotiate,” says Young Broadcasting CFO James Morgan. Besides Nexstar and Sinclair, cable operators say Emmis and Media General demand cash for their digital stations.

But one major broadcaster may be reconsidering. Fox TV Stations Chairman Lachlan Murdoch wants his stations to start demanding cash instead of settling for carriage of Fox cable networks.

FEAR OF PAYING CASH

Any money that broadcasters could secure would be pure profit. But cable operators fear that starting to pay cash to a few stations would open the floodgates, ultimately leaving them paying billions of dollars for the programming they already carry.

Right now, cable systems generally secure the signals of strong stations of, say, Fox or CBS parent Viacom by agreeing to launch cable networks. For broadcasters that don't own cable networks, cable systems agree to buy ad time on their stations. (“They're now top-10 advertisers in every market,” says Young's Morgan.)

But major operators have refused to simply pay for carriage. They complain that they will be faced with trying to recover those costs from their subscribers, whose rates already go up regularly, and will get blasted every time they raise rates.

Cable operators, known for raising rates excessively, now conveniently claim to be defending consumers. “It's really not us they're trying to extract money from,” says Cox Communications COO Pat Esser. “It's our customers.”

In the current fights, big cable operators may have an advantage. Cable systems in bigger markets have more leverage because broadcasters have more money at stake.

Small operators often are barely competitive with satellite TV and could be ruined if their local stations walked away from the negotiating table and were carried solely on EchoStar and DirecTV. “Rural operators feel broadcasters are putting the screws to them,” says one FCC staffer. “They have no negotiating power because the channels are must-have.”

When broadcasters won the right to charge for their signals in 1992, some of the major broadcast networks initially bragged that they would withhold their O&O stations unless cable paid as much as $1 per subscriber monthly. One by one, they folded their hands. ABC was first to drop its cash demand, settling instead for cable carriage of its then-new sports network ESPN2. Then NBC and Fox struck similar deals. CBS waited too long and got nothing. The new rule seemed to be: No cash, no carriage.

After a few years, negotiations got brutal, particularly a 1996 fight between Disney/ABC and Time Warner, which helped prompt Congress to require that broadcasters negotiate deals “in good faith,” meaning that stations could not refuse to negotiate and must provide reasons for turning down an operator's offers. The good-faith requirements were extended to cable and satellite operators last year.

TAKE IT OR LEAVE IT

Compared with other negotiations in the past few years, the Nexstar dispute is unusually fierce. There were practically no conversations between Nexstar and the cable companies leading up to a Dec. 31 deadline when the company dropped a last-minute demand: Pay 30¢ or go dark. “It came in as a take-it-or-leave-it,” says one Cox executive.

In all four markets, Nexstar runs commercials on its own stations and in local newspapers urging cable subscribers to switch to satellite TV. Cox and Cable One are blasting back with charges that Nexstar simply wants to increase their bills. In Joplin, Mo., Cable One isn't waiting for its subscribers to go to Radio Shack for antennas; the cable system has given away a few thousand pairs of rabbit ears to its customers.

Eager to exploit the dispute, DBS companies EchoStar and DirecTV are running their own ads and special promotions to steal customers. The companies claim their sales in Nexstar markets are picking up.

Says Nexstar's Lammers, “We know that thousands of people have cancelled their cable, thousands more are going to cancel their cable.” He could not, though, verify the number.

But the victory may be hollow: Nexstar is already losing precious advertising dollars. Even with a herd of rabbit ears, the broadcaster has likely lost many of the 60% of locals who were getting their broadcast stations via cable (sometimes far more clearly than with an antenna).

STRUGGLE TO KEEP ADVERTISERS

Advertisers say Nexstar stations immediately began offering 30% additional “bonus” spots to every order. That hasn't kept all the customers happy. Gary Grubb, who buys advertising for Abilene's largest car dealer, Lawrence Hall Chevrolet, has shifted about half his TV spending to other stations.

“I have reduced my budget with KRBC,” he says, “but I haven't completely excluded it. Our trade area covers a 45- to 50-mile area,” he adds. “There a lot of people who would receive KRBC anyway, via the old-fashioned way.”

Lammers insists that “our losses so far are far below what we thought.” He notes that there are plenty of non-cable homes in these markets and not every cable operator in a particular market is in the fight: “In Joplin, Mo., it affects just one out of eight homes.”

Cox and Nexstar finally met last Monday, but it didn't go very well. Two executives from Cox's Texas region and a lawyer from Cox's Atlanta base traveled to the broadcaster's suburban-Dallas headquarters.

During the meeting, Lammers waved a penny in the air, then laid it on a desk. To even start, the Cox executives had to acknowledge that Nexstar's stations were at least worth a penny. He told them, “If you agree to the concept, we'll give you the stations back right away. We know we'll get somewhere between 1¢ and 30.” He got to keep his penny.

A Cox spokesman characterized the meeting as “unproductive. We are hopeful that this is just the start of the dialogue.”

One big hurdle for broadcasters comes this week, when the FCC decides whether TV stations can demand that cable operators “must carry” each of the six or so digital channels that stations could offer. The conversion to digital broadcasting gives stations space in their slice of the spectrum to create new channels. NBC stations, for example, are launching local digital Weather Plus channels. In a digital world, the National Association of Broadcasters wants an operator to carry not just a station's primary video but whatever “multicast” channel it puts on. Cable operators don't want to be forced to surrender more real estate. Powell agrees with cable and is expected this week to push a rule declaring that broadcasters get only one slot unless they can negotiate a better deal.

The fight is so divisive that even executives inside the Cox family disagree. Cox Broadcasting President Andy Fisher visited Washington two weeks ago to ask FCC officials to delay a vote his cable cousin, Cox Communications President Jim Robbins, supports. In an FCC filing, the National Association of Broadcasters insists that Fisher was lobbying on its behalf “and not as a representative of Cox Television.”

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