proposal

Retransmission consent fees: Broadcasters want more from everyone

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Three words strung together--retransmission consent fees--elicit wildly dissimilar responses from what are, essentially, not wildly dissimilar audiences. No matter the reaction, the TV viewer, usually without an opinion, is the one most directly affected when television broadcasters extract those fees from pay TV providers.

For broadcasters, the fees they garner from pay TV service providers to carry their over-the-air channels sometimes mean the difference between a profit and a loss. While they don't publicize exactly how much they're charging pay TV providers, most broadcasters list the results from their fees in their earnings results and almost all have recorded increases that in some instances meant the difference between a profit and a loss.

For large cable operators, the fees are nuisances that are eventually passed along to consumers in the form of rate hikes.

And for small cable operators, they're more than nuisances: They're dams in the flow of revenue and services.

"Retrans fees serve the interest of broadcasters and nobody else," Steve Friedman, COO of small cable operator Wave Broadband and chairman of the American Cable Association (ACA) says. "There's no reason you can't have some sort of regulation."

Despite pleas from cable operators like Cablevision Systems (NYSE: CVC), which went out of its way to seek FCC support during a particularly nasty spat with News Corp. (Nasdaq: NWSA) that ended Fox Networks channels blackout, the feds aren't jumping into the battle with both feet.

Exploring new measures

Julius Genachowski, FCC

"It's time to take a fresh look and explore whether there are measures we can take to allow the market-based processes ... to operate more smoothly" - FCC Chairman Julius Genachowski (Image source: FCC)

"It's a really important issue," says Zac Katz, legal advisor for wireline communications, international and Internet issues in FCC Chairman Julius Genachowski's office said during a panel at the recent ACA Summit. It will, however, take some time for the FCC to resolve issues to make sure anything it does is "consistent with our statutory limits," he said.

The Commission issued a Notice of Proposed Rulemaking but admitted at the time that it "doesn't have the authority to require broadcast television stations to provide their signals to pay TV providers or require binding arbitration."

Still, Genachowski has said, action is needed: "It's time to take a fresh look and explore whether there are measures we can take to allow the market-based processes ... to operate more smoothly and service consumers and the marketplace," he said, warning that a lack of federal intervention is no reason for anyone "to drag their feet on reaching retransmission consent agreements."

Meanwhile, the clock ticks. Cablevision is still smarting after its battle with Fox--which was, incidentally, its second retrans fight in 2010 following one where Walt Disney Co. (NYSE: DIS) briefly blacked out its ABC signal.

Cablevision lost 8,400 basic cable subscribers in the first quarter of 2011 and "some of that was attributable to how we came into the year after the dispute that we had with News Corp.," said COO Tom Rutledge.

Another large MSO, Charter Communications (Nasdaq: CHTR), took steps to at least sway public opinion by posting a "surcharge" on bills to reflect the cost of retransmitting local and network TV signals.

Retrans fees have helped bolster broadcaster earnings during down advertising periods and are helping keep things afloat in a tough economy even as advertising returns.

...retransmission fees, (Michael Berg) writes, were established because cable and other pay TV providers were profiting from picking the signals free off the air and rebroadcasting them to a paying audience.

"These deals are critical to driving Fox's financial success," News Corp. COO Chase Carey said during an earnings conference call. And as for Cablevision's complaints that Fox charged unfair fees, he said: "We could have asked for a lot more."

The right to charge

Broadcasters frankly see retrans fees as a government-given right. Washington, D.C. communications attorney Michael Berg used TVNewsCheck as a forum to explain the industry's position on retransmission fees which, he wrote, were established because cable and other pay TV providers were profiting from picking the signals free off the air and rebroadcasting them to a paying audience.

"Retrans was created to eliminate that subsidy," Berg wrote.

Berg sees retrans as a two-way street with "small and independent TV stations ... typically forced by MVPDs (multichannel video programming distributors) to accept less favorable terms than network-affiliated, larger and longer-established stations."

That, perhaps, is the crux of this issue: the smaller markets where networks themselves have started to wring more retrans cash from their local affiliate stations.

"We expect to see a portion of (affiliates') retransmission fees," Disney President-CEO Robert Iger said during a Goldman Sachs conference in September. "We've struck some deals with affiliates to gain access for fees and are in negotiation with others. Retrans payments are real and will grow and there is no incremental cost to get them."

Fox, too, is in the game of asking even its own affiliates to cough up more bucks from their retrans take and is not above dropping affiliates who balk at the idea. Fox added and dropped affiliates in Evansville, Ind. and Boise, Idaho, in what many observers perceived to be a warning shot to other affiliates to toe the retrans kickback line.

Caught in the middle

Certainly, the American Television Alliance (ATVA) a coalition of consumer, cable, satellite, telephone and independent programmers saw things that way, calling the moves "bullying" and "the latest example of why the retransmission consent system must be reformed."

A Fox executive, speaking to broadcast trade newsletter TVNewsCheck, disagreed.

"It was not to send a message" to other affiliates, said the executive, who spoke on the condition of remaining anonymous. "If we can't come to an agreement with someone, we have to look at something else. ... We needed to look at where we could affiliate and that's what we did."

One would think that this might put local cable operators and local broadcasters on the same page. It doesn't. Smaller operators serving smaller markets say they're being hit with bigger fees, both real money and on a percentage basis, than their MSO counterparts, said Colleen Abdoulah, chairwoman-CEO of WOW! Internet, Cable and Phone and the ACA's vice chairwoman, speaking to reporters during an ACA Summit luncheon.

There's no way to prove this point to federal regulators, she said, because the agreements with the networks and local affiliates include nondisclosure clauses about how much money is involved.

"You can't talk about the dollars. We can talk about percentage increase," she said.

"Our biggest expense in all of it is the programming... The programming of cable takes all the fun out of it." - Alex Desberg, Doylestown Telephone Co.

This means that there's no way to legally prove that local operators are being strong-armed for more money than their national counterparts.

Alex Desberg, marketing and sales director of Doylestown, Ohio Telephone Co., which is going into the local video delivery space despite the plethora of issues around it these days, said that paying for programming is the biggest drawback.

"Our biggest expense in all of it is the programming," said Desberg. "The programming of cable takes all the fun out of it."

Retransmission, or at least the fees, isn't restricted to over-the-air TV, although that's typically where the problems start. The networks have increasingly added bundles of cable channels into the negotiations. Disney controls ABC and ESPN--quite possibly the most expensive cable channel--and some smaller ones. News Corp. has a variety of Fox cable networks, including F/X. Viacom (NYSE: VIA), with its stable of cable channels like MTV, Showtime and broadcaster CBS--while legally separate--are still tenuously connected via parent company National Amusements. And then there's NBCUniversal which, to muddy things even further, is owned by Comcast which in the future could turn out to be a retrans negotiator on both sides of the table.

It's not necessarily something that the MSO has been talking about since it acquired the property. Before the acquisition, Comcast Chairman-CEO Brian Roberts suggested that his company "by being a cable operator and a broadcaster (could) foster ideas that will not have the consumer caught in the middle."

The first earnings call after the acquisition, though, had Steve Burke, now CEO of NBCUniversal, taking a somewhat different tack that didn't sound nearly so appeasing--or appealing--to those who will have to negotiate to carry NBCU's bloc of broadcast and cable channels.

"There are a variety of ways you can make money; advertising or investing in a cable channel that would allow you to get increased advertising or increased affiliate fees," he said.

Channel bundles--take them or leave them

Like Disney, NBCU bundles its channels from broadcast to cable and creates a fees schedule that often gives service providers more channels than they want and prices higher than they want to pay, which, in turn, is creating a more rancorous negotiating arena.

"There do seem to be more stalemates (that are) more amplified between the differences that seem to exist," said Matthew Hussey, telecommunications legislative assistant to Maine Sen. Olympia Snowe, speaking at the ACA Summit. "Congress and the FCC have to work together with the industry."

The realistic chances of that happening, said ACA President-CEO Matt Polka, are minimal.

"I don't expect Congress to be active in retransmission this year," he said.

As for next year after what Polka has already predicted will be another round of ugly retrans fights?

"Congress has gotten involved before," he says. "I can see that happening again."