Uncovering The Truth About Retrans Value

SNL Kagan has supplied some ammo for stations to take into their next retrans negotiations with cable and satellite operators. It’s a report showing growth of the cash flow margins of cable networks, and it’s the retrans equivalent of the Predator drone.

What it shows is just how fat cable networks have become. According to its research, more than 30 networks have margins of 50% or more topped by Nickelodeon, with a 64.6% margin and the Food Network at 60.5%.

Next in line: NBCU’s CNBC World and CNBC at 59.9% each; Viacom’s VH1 Classic at 59.3%; Discovery Communications’ TLC at 58.7%; The Disney Channel at 57.7%; Scripps’ HGTV at 57.1%; the Discovery Channel at 57%; and AMC Network’s AMC at 55.4%.

The average margin of all cable networks in 2010 was 41%, which SNL researchers found “amazing, given the fact that there are a number of networks with negative cash flow margins and emerging networks with low margins in the mix.

“In addition, sports networks typically have lower cash flow margins than general entertainment and other genres,” the reports says. “ESPN, for instance, which makes up almost 15% of industry revenue, has a cash flow margin of just 25.3%.”

And the gilded gated community of cable’s super rich is expanding. By 2015, the number of 50%-margin-plus networks will nearly double to 58, the report says. And there will be another 61 with margins between 40% and 50% and 32 in the 30%-40% range.

So, when your local cable operator gags on your asking $1 per sub per month (which is the least you should be getting) and says he can’t afford anything close to that, show him the SNL Kagan report and point out that it isn’t your neighborhood broadcasters who are getting rich off of his subscribers, but those remote cable networks that, by the way, only have a fraction of the audience that you have.

The reason that the cable networks can post such margins despite their paltry ratings is because cable and satellite operators mindlessly pay them programming fees that have no relation to the audiences they are delivering.

Tell the operators that instead of balking at your demands they should consider cutting back on the fees to Discovery and AMC and HGTV until their margins drop out of the stratosphere and down with your average TV station.

Station margins, you should stress, ain’t what they used to be. According to John Sanders at Bond & Pecaro, my infallible source in these matters, Big Four network affiliates are still doing well, but only the best in the biggest market can manage a 50% cash-flow margin anymore.

Margins for affiliates in the top 20 markets averaged 42% in 2010 and they get smaller along with the market size. They shrink to 37% in DMAs 21-50, to 35% in DMAs 51-80, to 35% in DMAs 81-100 and to 34% in DMAs 101 and smaller.

And the trend is downward. Each of the 2010 averages is off three, four or five points from where they were in pre-recession 2006. (Over the same period, the average cash flow margin of cable networks grew at a compound annual rate of 3.5%).

Without the boost from political advertising, most pure-play publicly traded TV groups are reporting 2011 margins in the 30%-35% range, Sanders also notes.

Keep in mind the stations we are talking about here are full power with Big Four affiliations and regular newscasts. The averages are not being dragged down by second- and third-tier players like the cable averages are.

FCC officials should also take a look at the SNL Kagan report.

Claiming that broadcasters’ retrans demands are putting upward pressure on subscriber rates, cable operators are trying to hobble broadcasters’ ability to negotiate for fees by convincing the FCC to allow them to import affiliates from adjacent markets and to bar stations from combining locally through shared services agreements and other partnerships.

But the report shows who the real culprits behind rising cable bills are. To support their extraordinary margins, the networks will receive $26.8 billion in programming fees this year. The broadcasters, according to an earlier SNL Kagan report, will be getting only 5% as much — $1.47 billion.

In a way, I can’t blame the operators for trying to target broadcasters at the FCC. Unable to say no to cable networks, it’s about all they can do to curtail programming costs. The FCC doesn’t have any authority to regulate what the cable networks charge.

In the meantime, broadcasters ought to arm themselves with a copy of the SNL Kagan report, The Economics of Basic Cable Networks, and be ready to fire away at the next retrans negotiating session.

Harry A. Jessell is editor of TVNewsCheck. He can be reached at 973-701-1067 or [email protected]. You can read his other columns here.