While this second revenue stream will keep rising, probably at a slower rate, there is at least one development that could cause trouble — the decline in subscriptions to traditional multichannel bundles will challenge the gross retrans revenue stations collect.
Retransmission consent, part of the Cable Act of 1992, has now been on the books for 25 years. Yet, it did not become a major source of revenue for the broadcast industry until many years after its passage. In the past 10 plus years, stations have seen their retrans revenues grow from roughly $.30 per MVPD subscriber in 2005 to an average of $1.68 in 2017.
Kagan, a media research group within S&P Global Market Intelligence, projects that monthly fee to continue increasing for the next six years. However, Justin Nielson, a senior research analyst at Kagan covering the broadcast sector, warns the decline in subscriptions to traditional multichannel bundles will challenge the gross retrans revenue stations collect. That challenge will also extend to broadcast networks that collect subscriber-based “reverse retrans” fees from their local affiliates.
Nielsen provided a detailed description of these challenges in an article he wrote for Media Financial Management Association’s member magazine, The Financial Manager. As he points out, retrans has become a very important means of balancing a station’s year-to-year revenues. For example, while there was an estimated 67.6% drop in political advertising from $2.65 billion in 2016 to $860.2 million in 2017, the contribution of $9.42 billion in retrans fees helped overall TV station revenue to remain relatively flat, at $30.77 billion in 2017 vs. $30.84 billion in 2016.
The growing importance of retrans compensation was also evident in the latest round of station group earnings calls. As TVNewsCheck reported earlier this week, Sinclair Broadcast Group President-CEO Christopher Ripley indicated retransmission consent and other distribution revenues can account for 45%-50% of company’s revenue in the off-years for political advertising.
Expect A Slower Growth Rate
According to Kagan’s analysis, gross retransmission fee revenue in 2017 was up 24.3% from an estimated $7.99 billion in gross retrans revenue in 2016 and represented 26% of total TV station revenue. It was also 12 times greater than the $762.4 million recorded back in 2009 when payments averaged $0.19 per sub per month.
This annual growth rate is expected to slow down. Kagan’s Justin Nielsen reports the firm’s most recent projections call for total station gross retrans revenue and carriage fees from VSPs (virtual service providers) to rise 8.9% in 2018 to $10.23 billion, an average $1.84 per sub per month. The company anticipates gross retrans revenue will reach $12.82 billion by 2023, an average $2.28 per sub per month.
“Those gross figures relate to revenue flowing to both stations and TV networks,” Nielsen explains. “But if you back out the networks’ retrans revenue [reverse compensation], it’s clear that station retrans growth will be much slower — up only 6.1%, from $4.74 billion in 2017 to $5.03 billion in 2018.” Compare that to a nearly 12% increase in reverse compensation revenues for the networks. Those revenues are expected to climb from $4.65 billion in 2017 to $5.20 billion in 2018.
Over the course of the firm’s projection period (which runs through 2023), net retrans and VSP carriage fee revenue is expected to climb to $6.22 billion. At the same time, reverse retrans back to the networks is forecast to reach $6.60 billion.
The M&A Factor
Three of the country’s largest TV station groups, Nexstar, Sinclair and Gray Television, anticipate higher growth rates than the research firm’s projections for the industry. As Kagan’s Nielson observes: “All three broadcasters have been ahead of the curve in terms of high retrans growth rates.”
Nielsen attributes the ability of larger station groups to negotiate higher fees to M&A activity that has given them greater bargaining power with cable MSOs and other MVPDs. He also points out that the creation of major TV station affiliate group owners has helped broadcast networks invest more in programming and retain valuable sports rights through the reverse retrans payments they now receive.
Looking ahead, he expects recent deregulatory moves at the FCC to strengthen the bargaining position for TV station groups. They include the reinstatement of the UHF discount and actions taken last November to lift restrictions on duopolies. The agency’s review of the 39% national TV household ownership cap could also have a favorable impact.
OTT And VSD Growth
While cord cutting represents a threat to stations’ retrans growth, Kagan’s Justin Nielsen believes OTT and VSP platforms “will give stations an alternative delivery option, and stations will receive a share of advertising and subscription revenue from these new online video streaming services.”
However, he warns, broadcast networks, which have the digital rights to the most-watched primetime and sports programming, “will have more leverage in affiliation agreements with stations as OTT and VSP alternative delivery options become a larger slice of the retrans revenue pie.”
In Nielsen’s view, the leverage inherent in networks’ ownership of digital content rights is a big reason affiliate station groups are focusing on creating their own original programming. He explains that this is content, particularly local news, which cannot be easily replicated by the networks.
Future Retrans Negotiations
Another challenge for local broadcasters will be their future retrans negotiations, which Nielsen expects to remain contentious this year and beyond. In addition to looking to “attain higher sub fees in a declining multichannel sub environment,” stations will be seeking carriage of their “UHD” broadcast signals using the new ATSC 3.0 standard.
This development warrants those concerned keeping a close eye on petitions asking the FCC to rethink the voluntary rollout of 3.0. In a filing with the FCC, trade group NCTA warned that allowing broadcasters to bundle carriage agreements for both their current ATSC 1.0 signals and the new ATSC 3.0 “compels premature carriage of the latter with the result being higher costs for MVPDs and customers.”
Justin Nielsen’s article also contains a summary of the “history of war and peace” involving broadcaster negotiations with cable MSOs and DBS operators. If you would like to read the full piece, the March-April edition of The Financial Manager is available for viewing on the MFM website for another week or so. Thereafter, it will be housed in the “TFM Archives” section, where it will continue to be available to members of MFM and BCCA.
The Trade Association Perspective
Broadcaster and MVPD negotiations are likely to be among the topics discussed in a keynote session at the upcoming Media Finance Focus 2018 conference. NAB President-CEO Gordon Smith and NCTA EVP James Assey will be on a panel moderated by Axios media reporter Sara Fischer. Additional panelists include David Chavern, president-CEO of the News Media Alliance, and longtime video game developer Guha Bala, president of Velan Ventures, who will provide the perspective of the entertainment software community.
Several breakout sessions will also touch upon the topic, including a presentation on how broadcasters could streamline remittance data through standardization, and a session concerning the role of automated data harvesting in the accurate tracking of usage and payment for consumed media.
In addition, a keynote from Deloitte Consulting’s Todd Beilis will discuss how traditional media organizations can adapt their business models to fit digital trends such as direct-to-consumer content delivery.
Discussion concerning the next gen ATSC 3.0 standard and tax issues involving the broadcast incentive auction also number among the more than 70 professional educational sessions slated for the event.
A copy of the agenda may be found on the conference website; I encourage you to look it over. As we are seeing with the impact of cord-cutting on a station’s retrans revenue, the best way to keep your business strategies ahead of the curve is by having a good sense of what lies around the bend.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.