The head of the Fox affiliates group is convinced that broadcast TV’s problems trace back to programming: Offer better fare and stations will thrive. But to stem the erosion of valuable properties to cable networks, the broadcast networks need more money, and retrans revenue — measured in dollars, not cents — looks to him like the best immediate source of it.
Here’s a fresh take on the troubles of the TV station business: It’s not the economy or the Internet or the collapse of the domestic auto industry. It’s the programming.
According to John Tupper, a small-market broadcaster who now chairs the Fox affiliate group, broadcasting’s only chance of recovering billions of lost revenue over the past few years and setting new highs in gross receipts will be to put on more and better programming and reverse the slide in ratings.
And the key to improved programming is retransmission consent, he says. If broadcasters are going to get the best, they are going to need retrans fees measured in dollars not in cents.
In this interview with TVNewsCheck Editor Harry A. Jessell, Tupper, owner of the Fox affiliate in Minot-Bismarck, N.D. (KNDX-KXND), makes his case for hefty retrans fees and expresses his hope that Fox will follow NBC’s lead in offering to be the affiliates’ agent in getting them.
An edited transcript:
Broadcasters have watched their revenue and profit margins plummet over the past couple of years. What’s it going to take to restore the fundamentals of the business?
It’s all about programming and ratings. The broadcasting business is currently losing some of its marquee programming. We need to stem the tide of the program migration to the cable platform to maintain the ratings and then provide a funding source to the broadcast platform so as to increase the quality and quantity of their original programming and sponsorship of marquee events like sporting events.
We’re talking about retransmission consent fees here, right?
Unless some other source of funding emerges. I don’t think that the mobile business or the Internet plays that stations are engaged in or retrains as it is now configured are going to come close to replacing the revenue lost. Even if you did, you would still need to generate a source of funding to bring back and maintain the marquee programming and actually increase the level of interest that you can create with your programming.
You said “retrans as it is now configured,” by which I suppose you mean 20 or 25 cents per sub per month. You don’t think that is sufficient.
No. According to SNL Kagan’s latest estimate, broadcastings is getting what amounts to about $800 million out of what’s predicted to be a $16 billion business this year. So, we’re talking about something that’s on the order of 5 percent of the revenue that is trying to offset a drop of 35 percent of the revenue that’s occurred over the course of the last five years.
If $800 million isn’t enough, how much should the broadcasters getting?
Probably something close to what their competition is taking in at the present time. If you do the calculation, the average cable program service is being paid program fees that are equivalent to about $5.31 per rating point delivered.
How about the broadcasters?
They’re getting somewhere between 25 and 29 cents.
Can you put that in terms of monthly per-sub fees?
The average cable program service monthly fee is about 78 cents a month. Of course, the highest priced one is ESPN, which requires you to carry it on your basic service and that you have to also have block booking of other ESPN related channels that so that the subscribers it appears are paying something like $5 a month for the suite of ESPN channels whether they want them or not.
So how much do broadcasters need? Is 78 cents enough? Or, do stations have to get ESPN kind of money.
If you were to do an equation based on rating points delivered, you would clearly see that the broadcast signals are worth significantly more than ESPN. Now, is it realistic to think that the broadcast channels are going to get more than $5 a month from subscribers? The answer is probably no.
OK, so what is a realistic number?
Each network is different and it should be based upon what it earns in audience delivery. Part of the upside-down nature of the current situation is that cable program services are being paid subscription fees without regard to their popularity as measured by their audience delivery.
If you were to come up with an analysis of what the price of TV stations should be based upon their ratings or popularity among the subscribers, you probably would end up with a number that would be in the two to three dollar range.
How do you get to squeeze those dollars out of the operators? They’re going to fight like crazy not to pay.
They’re currently fighting like crazy not to pay and they’ve quite frankly been very successful as evidenced by the numbers that we’ve just recited about what they pay per rating point for a broadcast signal. Because they’re so consolidated, they can really have control over that. The results have been what they are and that’s going to result in the demise of the local broadcast business.
One of the two major problems that local broadcasters have in negotiating for retrains is that it is a fragmented industry. It is not as consolidated as the cable or satellite business. So it is more difficult to get broadcasters to pull in the same direction.
The other problem is that you have a lot of companies that own broadcast platforms that also own cable platforms. So their boards have a conflict as to which one of these initiatives they want to support. The way that has come down so far is that everyone has leaned towards supporting the cable platform over the broadcast platform because the cable platform appears at this juncture to have a superior business model.
You make it sound hopeless.
It’s not. Hope exists today in those companies that are in the cable program service and also in the network television business and who have directed a lot of their energy to the cable platform. They may come to see that if they bury their broadcast platform, they are going to leave themselves exposed without any sort of a unique vehicle to differentiate themselves when the Internet takes over the delivery of video.
It sounds like you’re talking about NBC. As you know, NBC has now proposed to its affiliates that it represent them in their retrains negotiations in the belief that it could get more in fees than the stations could get acting independently. Is that what you are talking about?
Yes it is.
Do you think NBC can get a buck or two?
I think they can easily get a buck or two from any and all MVPDs and the evidence for the value of the local signals clear and unequivocal. Look at what happened in 1999 when the satellite industry got access to local television stations and were able to offer the local-into-local service. Their penetration went from 8.6 million households in the country to now approaching 30 percent. In that 10-year period, virtually the only thing that changed was their ability to deliver local signals.
If you look at what’s happened to Monday Night Football when it went from the broadcast platform to ESPN, you see that its ratings have probably dropped 40 percent. When you don’t have a local television station providing an identity and a promotion and a different feel for the community, you get a very different result in terms of audience delivery.
What about the Fox and the Fox affiliates? Have you discussed retrans representation with the network.
I’ve been discussing it with Fox for the past nine years and they did do it in fact in 1994 when they launched FX. They did that by aggregating all of the affiliates’ retransmission consent rights. In exchange for those, they got the cable companies to carry FX. The cable companies paid 25 cents for FX and the network shared seven-and-a-half cents of that with their affiliates, or five-and-a-half cents if the affiliates took an equity interest in the channel. That was later unwound in connection with a renegotiation of the NFL rights cost and the renewal of the relationship between the affiliates and the network and FX after the three-year run of the initial term didn’t happen.
What has happened in the interim is that the cable industry was successful in convincing the networks and their cable platform arms that they would be better off not sharing any portion of subscriber fees with affiliates because that money could then be retained by the cable companies’ programming budgets and pay directly to the networks cable program services.
So does Fox have any interest in doing this today?
As of April, the answer is no. We once again asked if they would have any interest in doing it and we were sort of summarily dismissed and told that they didn’t think it was going to work and didn’t have an interest in pursuing it. What’s now happening is NBC is taking a look at this, which, frankly, was a surprise to me because based upon everything else that [CEO Jeff] Zucker had been saying, it appeared he was prepared to throw the broadcast platform under the bus and put all of his eggs in the cable platform.
NBC’s move of offering to represent their affiliates in a negotiation, which would provide more retransmission consent money to affiliates than they would get on their own and provide a funding source for the network, appears to be a little schizophrenic to me. But I’m very pleased to see it because I do think it’s the way to go. There may be a recognition of the fact that on a per-rating-point basis there is far more growth potential in the broadcast platform than there is in the cable platform.
So you still have some hope that Fox could step up at some point.
Oh yes, absolutely. You know, I think that the conventional wisdom on these matters can change on a dime. With one of the networks making a move in that direction, it may cause other networks to evaluate their positions and see which way they’re going to go.
And if you could get $2, what kind of split would you be open to?
As far as I’m concerned, the overriding principle would be, can I get more through that arrangement than I can get on my own. If the balance of the money goes into a network program acquisition pool, which will result in increasing both the quality and the amount of original content on the network and, therefore, the audience and local spot rates, then I’m all for it.
So, what kind of revenue split are we talking about on $2?
I would not be adverse to a 75/25 split if it met the principles I just described.
So if you could get $2, you would let Fox keep $1.50 with the understanding that that it would go right into programming.
Yeah. I mean a $1.50 out of a 100 million households that are subscribers to cable and satellite would be a $150 million a month or $1.8 billion dollars a year. That would come close to doubling the budget for Fox programming. If you ended up with programming that was twice as good as the result of that, that would allow the local television stations to become very viable businesses again.
Maybe you could get the bowl games back.
You could get the bowl games back and you could keep from losing any others and you could probably end up with more star power in your recurring scripted programming and you would altogether have a better more profitable service.
Can the other networks afford not to go for the big retrans dollars if NBC does?
If NBC got an extra $1.8 billion then it would be in a position to outbid the other networks for any piece of programming and they would therefore attract all of the best programming, including scripted programming, reality programming and sports programming.
So the other networks would have to follow suit.
Presumably, the other networks, to stay in the network business and not be relegated to programming AM radio type programming, would have to do the same thing or find some other way to create a pool of funding that would allow them to be competitive with NBC.