CBS Targets Gray For Hefty Comp Raise

CBS is upping the ante in reverse compensation negotiations, asking as much as 90 cents per month per TV household from Gray Television, according to informed sources.

CBS boss Les Moonves has boasted that the company will hit $1 billion in retrans and reverse compensation revenue by 2017 and $2 billion by 2020.

Gray, whose affiliation agreement with CBS expires by year end, looks likely to be a significant booster in getting CBS to those targets.

Officials at Gray and CBS declined to comment.

Gray has paid little or nothing in reverse compensation to CBS, according to sources, largely because its affiliation agreements reach back into a past when paying for network programming wasn’t part of the deal.

“Les is probably reminding them they’ve had a free ride for some years,” says Edward Atorino, a securities analyst with Benchmark Capital.

There’s a difference between ask and get, but if anything like the 90-cent figure sticks, it would cut deeply into Gray’s finances.

Gray is heavily dependent on its CBS affiliates, which accounted for 45% of its $346.2 million in revenue in 2013, according to the company’s annual report.

Counting all acquisitions pending at the time that report was issued a month ago, Gray operates — or soon will operate — CBS affiliates in 21 markets. Combined, they will reach some 4.2 million homes. At even 80 cents per home, Gray would owe CBS $40 million a year, the same amount that it took in from all of its retransmission consents deals in 2013.

CBS is clearly breaking new reverse comp ground with Gray.

According to a November 2013 report from Wells Fargo analyst Marci Ryvicker, CBS is on target to achieve its 2017 goal of $1 billion based on retrans of $1 and reverse comp of just 50 cents.

A number of groups will be paying close attention to how the CBS-Gray negotiations shake out. That was a popular unofficial topic at the NAB Show last week.

LIN Media and Media General, which recently announced plans to merge, will be paying particularly close attention. LIN has seven CBS affiliates and Media General has three. Contracts between the network and both those groups expire by year end.

That’s not all. Contracts encompassing 91 other CBS affiliate expire by the end of 2018, according to research from SNL Kagan.

“CBS may target Gray, but they will go after everybody else in very short order,” says a source familiar with the players.

That’s what happened three years ago when Fox pushed the boundary to 50 cents per subscriber in year four of affiliation contracts. There was a lot of hand-wringing and gnashing of teeth but, for the most part, Fox apparently got what it wanted.

“The numbers are getting big,” Atorino says. “They seem to be somewhere between 50 cents and a buck and escalating from there. CBS is in strong shape. They’re going to push the envelope on the ask.”

With the contract to air the NFL’s AFC package through 2021 and as the recent winner of the NFL Thursday Night Football contract for eight early-season games, a deal valued at $250 million according to Sports Business Daily, CBS has considerable leverage.

“CBS is behind Fox and other nets with regards to affiliation agreements,” one source notes. “They feel that as the No. 1 network, they should be getting a premium. Eighty to 90 cents per household wouldn’t surprise me. But it seems like a fairly aggressive ask.”

CBS is seeking reverse comp payments based on a television household basis, versus per pay subscriber, is standard operating procedure for the network, according to one source.

It’s also a strategy to protect the network as emerging distribution platforms, namely the Internet, alter the economics of television. If affiliates begin distributing their signals locally via the Internet, CBS would get paid just as it does for distribution over cable and satellite.

Broadcasters are just beginning to figure out how to navigate the emerging distribution platforms to their advantage, says Atorino. “For a long time, cable had the game all to themselves and they’ve taken a lot of money out of the marketplace.”

Atorino, doesn’t perceive the push for more reverse comp as a threat to the network-affiliate model, nor does he consider CBS’s ask out of line.

“This is not a big deal,” he says. “Fragmentation of viewing is creating different piles of viewers and guys with content want to get paid by the guys using their stuff.”

While CBS’s costly NFL rights contracts may increase pressure for reverse comp, they also help to undergird the network-affiliate partnership.

“The Sunday NFL agreement is through 2021,” says a source. “That contract, as with all other broadcast networks that have football, requires an over-the-air broadcast of those games. They can’t go over the top, they don’t have the rights for that. The NFL is very particular about making sure they can deliver to the greatest common denominator out there.

“The networks have to remember that there is no network without affiliates. We are the linchpin for launching shows that they, because they have own studios, can sell domestically and internationally for a boatload of money. That’s done on the backs of broadcasters.”