Analysts say as nets spend more, reverse comp under pressure

New York -- A panel of top analysts said that retransmission consent revenue is becoming more important than ever, as major broadcast networks aim to spend heavily on pricey programming like sports, and could force even greater disparity as those networks look to extract a greater chunk of the pie through reverse compensation.

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At the TVB Forward conference here Thursday (Sept. 27), panel moderator, S&P Global Market Intelligence senior director, research Robin Flynn said CBS has already thrown down the gauntlet, saying it is seeking $3 per month per subscriber in retrans revenue and $2 per month per subscriber for reverse compensation from station affiliates.

JP Morgan media analyst Alexia Quadrani said that while she sees the overall retrans pie growing, the cut going to local broadcasters could shrink.

Quadrani said smaller station groups will probably feel the most pressure -- she estimated that while station affiliates normally split 50% of their retrans revenue with their respective networks, for smaller stations the amount going to the network in some cases approaches 75%.

“The networks are going to have to obtain more live content, because that is what everyone is watching and that has the highest price tag,” Quadrani said. “They’re [networks] going to have to pay for that somewhere and so I think overtime we will see more pressure on reverse comp.”

MoffettNathanson media analyst Michael Nathanson agreed, adding that the uncertainty is heightened after 21st Century Fox agreed to sell most of its cable and production assets to The Walt Disney Co. for $71.3 billion. After that deal closes, expected in the first quarter next year, “New” Fox will consist of the broadcast networks, 28 owned-and-operated TV station, cable channels Fox News Channel, Fox Business, and sports channels FS1, FS2 and Big Ten Network. With that new focus on live news and sports, Fox has already spent big, plunking down $3.3 billion over five years to the National Football League for Thursday Night Football, and another $1 billion over five years for WWE programming, beginning in 2019.

“Fox Broadcasting is going to have more sports than probably ESPN,” Nathanson said. “I wonder do they come out, not with a $3 and $2 number, but with a $4 and $3 (retrans and reverse comp split)? ...That to me is a big possible change.”

Fox executive chair Lachlan Murdoch has said publicly that he expects the company to “aggressively” raise retrans fees.

While in the past most of that revenu has come from traditional MVPDs like cable and satellite operators, the panel said virtual MVPDs and over-the-top players are increasingly adding to the retrans pot. That should help growth the overall pie overtime.

Nexstar Media Group EVP and chief financial officer Tom Carter said for the most part, vMVPDs have rolled out in larger markets, meaning the bulk of the retrans stream from that segment hasn’t hit his company just yet. Nexstar is the second largest station group in the country with 170 stations, but they are mainly in secondary markets.

But Carter said the advent of OTT and vMVPDs have helped slow the declines in retrans revenue from more traditional operators as they have lost customers to cord-cutting.

“We’ve seen a moderation in the decline of subscribers as OTT rolls out in these markets and you recapture some of these people,” Carter said. “Everybody want to pay less and only what you use, and that is a platform that is available from OTT that historically has not been.”

On the advertising side stations are more optimistic, adding that core advertising revenue is expected to be better than Q2, and political advertising will continue to be strong.

Both Carter and TEGNA chief financial officer Victoria Harker said they were encouraged by the trends in core advertising, but not particularly enthusiastic -- Carter said the segment feels better, but that may not be evident in Q3 or Q4 results yet. Political, however, he said is “overwhelming.”

“Politicians are price insensitive -- they want their ad on and they want their ad on shelf space that is premium, so they pay for that. That does crowd out traditional advertisers,” Carter said.

While legalized sports betting is expected to present a lift to advertising, the station group execs said it will take some time to make an impact.

Harker said sports betting will likely be approved on a state-by-state basis and could take between two and four years to take hold. Carter, who is based in Texas, also didn’t anticipate that state approving sports gambling anytime soon. But he noted that the world’s largest casino is located in Oklahoma, just a few miles outside of Dallas, and will likely advertise heavily in the Dallas market.

“It’s going to be catch-as-catch-can,” Carter said.

Photo of Wall Street panel at TVB Forward 2018 conference courtesy of TVB. Pictured from left: Marci Ryvicker, Alexia Quadrani, Michael Nathanson, Robin Flynn, Victoria Harker, Tom Carter.

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