By buying time on station subchannels rather than splitting ad revenue with an affiliation deal, multicast networks remain in charge of selling inventory and the stations collect a monthly fee with a minimum of effort and outlay. However, the upcoming spectrum auction could make subchannel space to rent a scarcer commodity. This is part 3 of a three-part special report. Read parts 1 and 2 here.
Pay-For-Play Is Growing Diginet Strategy
Diginets that buy their way onto TV stations by leasing subchannels are nothing new. Home shopping, foreign-language and niche programming channels and others have been purchasing time for years. But as subchannel space tightens, more networks are taking the pay-as-you-go approach.
And it’s not just small networks anymore. Sony’s getTV, which launched in February on 23 Univision-owned stations, is paying for carriage. The classic programming network is now cleared in 48% of TV homes. (See the TVNewsCheck Top 25 Diginets ranking here.)
“The license fee structure provides benefits for both the station group as well as the affiliated digital network,” says Superna Kalle, general manager of getTV.
“With this structure, the station group owners can devote their time to managing and selling inventory for their primary channel, while receiving a fee from the digital network. The digital network is solely in charge of selling inventory and managing the operation of the diginet, making it a turnkey operation for station owners.”
In general, the deals are easy for stations to manage, says Michael Kokernak, CEO of Across Platforms, which publishes the Subchannel Report newsletter and tracks the multicasting market.
“The appeal of subchannel leases is that it is a simple real estate transaction. As long as the tenant keeps paying the bills, it is a turnkey operation for the station owner.”
With the exception of getTV, most of the high-profile digital networks like Me-TV, This TV, Bounce and Antenna have opted to partner with affiliates, sharing the advertising inventory.
But Kokernak has identified about two dozen networks that pay for at least part of their broadcast distribution.
“The channel says to the station: ‘I’ll pay you a set fee and you let us sell the advertising,’ ” says Bill Hague, SVP of Frank N. Magid Associates. “But there are a lot of shades of gray in how these deals are structured.”
According to Kokernak, networks are typically paying between 20 cents and 50 cents per cable subscriber per year to rent a TV channel fulltime. However, he notes, the rate can exceed 50 cents in markets like New York and Seattle where the supply of channels is currently tight.
In some cases, upstart networks turn to leasing broadcast channels because they were unable to secure sufficient cable carriage, says Jeffery Liberman, COO of Entravision.
“For us, it’s mostly cable networks that would also like over-the-air distribution,” Liberman adds, citing deals with Unimas and Home Shopping Network as examples.
“This has been a good business for our company,” says Howard Mintz, the in-house counsel for station group Mako Communications, which owns 43 stations in 26 markets, including KKJM-LD Dallas and KUVM-LD Houston, and leases channels to the likes of Mexicanal, LATV and HSN.
Titan Broadcast Management, Sinclair and Entravision have been particularly active in leasing channels.
One upside for networks that lease is that they sometimes also get local cable carriage and occasionally satellite carriage.
A downside is that the deals are usually short-term, meaning a diginet can lose distribution if its broadcast partner is not interested in renewing.
“You can get bumped off, depending on the terms of your lease,” says the head of one diginet requesting anonymity. “We have some deals where, if a station gets a more lucrative deal, they’ll bump us off. We understand. But, fortunately, the stations [generally] like us because they know we’re sticking around.”
Another potential downside is the FCC’s upcoming spectrum auction, which could get underway as early as 2015.
Some major-market stations are likely to be sold back to the government, reducing the supply of subchannels for diginets of all kinds.
“With the spectrum auction, my guess is you’ll see subchannels tightening up,” says one station group executive. “In a market like Los Angeles, if five or six channels go away, and they each have five or six streams, it’s going to get tight.”
This is part 3 of TVNewsCheck’s three-part annual Multicasting Special Report. You can read the other stories here.