At the press conference in Manhattan last November that AT&T called to officially unveil its DirecTV Now streaming service, uniformed waiters stood in a straight line greeting reporters with cocktails.

Reese Witherspoon (there to tout her new Hello Sunshine company), internet celebrities and pounding EDM added to the hoopla.

“This is bigger, in my view, than the introduction of the U-Verse product 10 years ago when we entered the TV business at AT&T,” said John Stankey, CEO of AT&T’s Entertainment Group, during the presser.

The big pitch: For a limited time only — 100 channels for just $35 a month!

But as the Q&A kicked in, it became clear that the service has some gaping content holes to fill, namely the CBS O&Os and the affiliates of all the Big Four networks. In terms of broadcasting, AT&T had deals with only Fox, ABC and NBC to carry their owned stations.

Stankey said he appreciated the appeal of the missing broadcast signals and that it was only a matter of time before before they would come on board. Maybe so. But efforts to include Big Four affiliates in streaming or OTT services like DirecTV Now have become entangled in network-affiliate disagreements over control and how to divvy up the carriage fees that the streaming services will pay.

The New Multichannel Platform

DirecTV Now is one of several services that use broadband to offer multichannel streaming options that are basically alternatives to cable and satellite — generally cheaper, but without some of the bells and whistles.

OTT Platform Contenders

With DirecTV Now, AT&T is targeting the 20 million U.S. homes that don’t subscribe to cable or satellite, either because they are beyond their reach or because they don’t have the credit needed to qualify for the conventional MVPD services.

Other more established services like Sony’s PlayStation Vue and Dish’s Sling TV are going right after cable and satellite subscribers with a simple better-value pitch. On the way are similar offerings from Hulu, YouTube and possibly Apple.

“Given low barriers to entry, we see upwards of 10 total V-MVPDs [virtual-MVPDs] operating within the next two years, including many of the best capitalized and most well-known brands in the communications and internet sectors,” a report from UBS report says.

All together, they could capture 15 million homes, it says.

Most consider broadcast signals are a must for the streaming services. “It’s difficult to find a replacement for local news in video format, even on the web. It’s almost unheard of that your television programming would not include a connection to local programming,” says Gordon Borrell, CEO of Borrell Associates.

Adds TVB President Steve Lanzano: “TiVO did research in April [of 2016], and more than 75% of the respondents said they couldn’t live without ABC, CBS, NBC and Fox.”

The Broadcasting Edge

Similarly, broadcasters recognize that they have to be in the bundles if they are to maintain their advantage over basic cable.

Historically, broadcasters have been available in every TV home, thanks to their over-the-air signals that fill in where their cable and satellite distribution comes up short. That ubiquity is in marked contrast to their chief rivals, the scores of cable networks.

Broadcasting’s edge has grown in recent years as cord cutters have reduced cable and satellite’s overall universe of subscribers, and by extension, the cable networks’ subscriber counts.

“The broadcast stations have always had the best value proposition, because, to this day, they are distributed to 100% of the market. This is why the CPMs for broadcast are higher than cable,” says Jordan Wertlieb, president of Hearst Television.  

If stations are included on the streaming platforms, they“will end up having an even more disparate competitive advantage” over cable networks that are not, Wertlieb adds.

But the affiliates efforts to get carriage is being frustrated by the networks.

The networks are cutting deals with the streaming service, setting payments and other terms not only for their O&Os, but also for their affiliates. The affiliates, then, are invited to either opt-in or opt-out.

Some affiliates are balking at the arrangements. They say they want to be able to negotiate for fees from the streaming services on their own terms just as they do retransmission consent fees from cable and satellite.

Some do not believe the networks are dealing in their best interest. The networks are primarily driven, they say, by a desire to get carriage for as many of their co-owned cable networks as possible at the highest possible rates. For the network, the local affiliate is just one of many channels, albeit an important one.

Other sticking points include access to the detailed viewing data that the streaming services collect, and management of the advertising inventory. When broadcast signals are streamed, they can carry different commercial loads.

Negotiations with the networks can be “tortuous,” says Tim Hanlon, CEO of the Vertere Group, an investment advisory and strategic consulting firm. “Because of the broadcast network and affiliate relationship — the historical complexity of that — it’s proven to be the hardest link in the chain to get solved.”

“If the networks go in and attempt to negotiate for multiple channels that they have an interest in, then the question becomes: what is the proper allocation [of the carriage fees] that applies to the local television station,” says Emily Barr, president-CEO of the Graham Media Group as well as chairman of the ABC affiliate board.

“Those are questions that have yet to be completely answered, and that we’re paying very close attention to. They [the networks] would like to think that they can be our proxy,” says Barr. “We’ve had a lot of discussions with our networks about the best and most efficient way to go about doing this.”

“We are wading through the agreements that have been put in front of us by all the networks (ABC, NBC and CBS in the case of Graham),” she says. “There’s been some progress made, in the sense that there are actual agreements to consider now. [Before Christmas] there were discussions but there were no actual agreements.

“I think the networks have tried very hard…to bring the affiliates along with them. And it will be up to the individual affiliate groups to determine whether the deals feel like they’re appropriate.”

Fingers Crossed

Jeff Rosser, VP, television, Raycom Media, and head of the Fox affiliate group, said the affiliates are “excited” about the streaming services. “We want to put our programming in front of as many people as we possibly can.”

However, he says, they are not interested in any network-negotiated deals that do not “reflect the true value” of the affiliates.

ABC owner Disney does not see itself as an impediment, but as a clearinghouse for ABC affiliates seeking carriage. “The idea and interest from the network perspective is to have the local stations participate as well. We see it as an opportunity to expand the pie as it relates to ABC content, but that rests within the purview of those companies that own local station affiliations,” says Justin Connolly, EVP, affiliate sales and marketing for Disney and ESPN Media Networks.

The emergence of the streaming services is widely seen as positive for affiliates.

“At the end of the day, if national cable networks have less coverage and the broadcast stations have full coverage, the spread of that causes ad anxiety, but in a good way for broadcasters,” says Mort Marcus, co-president of Debmar-Mercury.

BIA/Kelsey economist Mark Fratrik agrees. “It’s going to have a profound impact on the finances of cable networks that aren’t part of them.”

Because of the upside, broadcast industry watchers are confident affiliates will settle their differences with the networks and, one way or another, cement deals with the streaming services so they can continue to guarantee advertisers full coverage of their markets and extend their advantage over cable.

 “Everything we’ve been hearing from those close to Hulu and Sony — and even Sling — is that broadcast is essential to these bundles,” says Marci Ryvicker, a Wells Fargo securities analyst. “We are comforted by the fact that this does seem to be a priority for all parties and we would expect resolution at some point in [2017].”

This story is updated from the a story that originally appeared last month in TVNewsCheck’s Executive Outlook, a print publication devoted to the future of broadcasting. Read the other stories in the Winter 2017 issue here. Subscribe here.