A clash between broadcast TV affiliates and networks over carriage fees from streaming services has escalated in recent weeks, and hundreds of millions of dollars are at stake, according to some observers.
The issue has reached the boiling point at a time when most station groups reported declines in advertising during the second quarter. And it centers on a critical question: Which group should negotiate carriage deals with streaming platforms (vMVPDs) — affiliates or networks?
Both constituencies have held a series of discussions with lawmakers in Congress and the FCC to press their cases. And as the debate has escalated, it has raised some other questions, such as: Why is this snowballing now? Exactly how much is at stake? And how is it likely to get resolved?
Right now, the vast majority of streaming carriage deals involve direct negotiations between the networks and vMVPDs. (There are a few cases when the streamers have chosen to negotiate with the stations, for reasons that remain murky to the sources contacted for this story.) Affiliate sources explain that the networks then pass along a cut of the vMVPD revenue, but there isn’t any transparency about the revenue the networks garner from the streamers nor what percentage they choose to pass along.
The negotiation process is the exact opposite of what occurs with MVPDs. The stations have the legal authority to strike deals with traditional distributors, and they then pass along “reverse compensation” revenue to the networks.
Recently an advocacy group representing more than 600 stations, the Coalition for Local News, sprang up to highlight the stations’ concerns with the FCC and Congress.
It was quickly followed by the formation of the Preserve Viewer Choice Coalition, which advocates for the networks’ views. It is made up of the Big 4 networks — ABC, CBS, NBC and Fox — along with Univision, Telemundo, Warner Bros. Discovery and Roku.
The affiliate groups’ name emphasizes the stations’ desire to properly fund journalism. And the network group’s name indicates its members focus on the amount of programing consumers receive at an affordable price. But while both of those names might be appropriate, they mask the most pressing matter for both groups: getting a fair share of the huge pot of cash that’s at stake.
“Streaming services have grown at a remarkable rate the past few years, while cable and satellite has declined. As a result, regulations need to be modernized to account for the rapidly changing marketplace,” says Michael O’Brien, SVP, chief distribution officer of The E.W. Scripps Co. “That’s what is driving our sense of urgency: with each passing day the current asymmetrical regulatory landscape becomes less and less effective at promoting localism and the value of local news.”
Numbers help explain the situation further. If you roll up both MVPD and vMVPD estimates into one set of figures, some year-over-year growth is expected in the future, according to BIA Advisory Services. It estimates that carriage fees will grow from nearly $14 billion in 2023 to north of $15.5 billion in 2027. Those numbers add together both network and station compensation, including both the affiliates and O&Os.
A different view is offered by S&P Global Market Intelligence, which has crunched estimates that focus specifically on affiliate revenue from vMVPD platforms (excluding the O&Os). “For 2022, we estimated that the affiliates received $487 million in virtual service fees,” says Justin Nielson, a principal analyst at research firm’s Kagan media research unit. In 2021, the estimate was $454 million, and in 2020, it was $335 million. “It has jumped up quite a bit, but it’s leveled out over the last year,” Nielson adds.
Those figures are small in comparison with what affiliates receive from traditional MVPDs — which Kagan estimates were $8.64 billion last year. That said, the vMVPD numbers are expected to become more meaningful. And traditional MVPD subscriptions are dropping — if not like a stone, at least like a pebble. MoffettNathanson puts the annual traditional pay TV decline at 11.4% as of first quarter 2023.
“In many respects, we have a maturing market,” explains John Sanders, a principal of the media consultancy Bond & Pecaro. “Linear traditional subscribers are declining and virtual subscribers are growing at a much lower rate [than they once did]. The overall pie is shrinking.” Paraphrasing one of his professors, Sanders adds, “When the tide is falling and all boats are under pressure, there is a strong impetus to reach out and grab the nearest necktie.”
A key point of contention relates to the proportion of vMVPD revenue that the networks are passing to the stations. Kagan estimates that networks are giving them an average 40% of the carriage fees received from the streamers. But the story is different for the O&Os: they get an average 50% share, according to Kagan.
The estimates are “based on an average from public filings which include the gross and net retrans margins,” Nielson says.
Some affiliate representatives think the average 40% affiliate figure is high. One observer contacted for this story thought 20% might be more like it. “That’s part of the issue. We don’t know. There’s so much confidentiality in these agreements, there’s no way to find out,” O’Brien explains.
Needless to say, the networks’ own strong views on the vMVPD revenue matter are colored by other challenges — some of which also impact stations. Among them is the ongoing writers and actors strikes, which are depleting the original production pipeline. That, in turn, has contributed to a lackluster upfront. Making matters more problematic, Nielsen (the research firm) recently reported that traditional TV usage fell below 50% for the first time ever in July.
At the same time, the pressure’s on for large media companies to make their streaming services profitable. “Hulu has barely grown over the past three years,” notes MoffettNathanson in a report published in May. (Hulu is owned by The Walt Disney Co. and NBCUniversal.)
Can anyone really expect that the FCC, led by Chairwoman Jessica Rosenworcel, to do anything? So far, the FCC has refused to settle the matter by lighting a fire under a review process that began in 2014 but has been dormant. Rosenworcel has said that the FCC doesn’t have the legal authority to regulate streaming services.
The National Association of Broadcasters is caught in the middle, as it represents the interests of all broadcasters in Washington. And that might make it seem like the perfect organization to broker some kind of resolution between the two factions. Aren’t there some points of contention that could be resolved?
NAB President-CEO Curtis LeGeyt did not comment for this story, and if he has any interest in becoming the broadcasters’ version of a Madeleine Albright or Henry Kissinger to settle the matter, he’s not saying.
A spokesman for the NAB offered the following comment: “NAB continues to advocate for the FCC to refresh the record in the vMVPD proceeding. We always strive for advocacy that maintains unity for the good of the broadcast industry and the tens of millions of Americans who rely on our service every day.”
Rick Ducey, managing director of BIA, notes that many people believe that there’s no basis in statutory law for the FCC to regulate internet-based services. “Unless Congress does something to change that, I’m not sure the FCC is a great forum.”
The two sides are making their case known to the commission as well as Congress. The networks have hired a lobbyist to drive home their points, while O’Brien explains that the affiliates’ coalition “is focused on grassroots advocacy, rather than traditional lobbying. However, the coalition’s members have their own efforts to advocate before all relevant facets of government for the need to modernize the FCC’s rules to sustain the economic model needed to support local news.”
The FCC has heard from two House leaders — House Energy & Commerce Committee Chair Cathy McMorris Rodgers (R-Wash.) and Communications Subcommittee Chair Bob Latta (R-Ohio). They recently fired off a letter to Rosenworcel telling her to steer clear of regulating the vMVPDs. Meanwhile, Senate Commerce Committee Chair Maria Cantwell (D-Wash.) has asked the chairwoman to consider it.
If the FCC refuses to budge, it’s possible that the arguments could play out in court. “But it could get long, drawn out, expensive and speculative in terms of what happens,” Ducey says.
If Congress plays a hand in regulating carriage fees for vMVPDs, it might become an uphill battle, one observer predicts. Regardless, “our intention is to put a spotlight on the issue and grow support from communities and the people who represent those communities,” Scripps’ O’Brien says. “Ultimately, what the FCC does will be out of our control. But we want to make sure that there is a large voice on the issue.”
16 May 2024
23 May 2024
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