Will Stations’ Retrans Bubble Burst?

Ten years from now, the TV penetration of MVPDs could dwindle to the 20% range if current consumer trends continue, pointing to a shifting retransmission consent revenue scenario for broadcasters. That was one of many predictions expressed during a session at TVNewsCheck’s TV2020 conference that examined the extremely positive future prospects related to retrans fees as well as the stress points for MVPDs and broadcasters alike.

The session’s moderator, Mark Fratrik, SVP and chief economist of BIA Advisory Services, noted that in some mid-size and small markets, retrans fees currently exceed 50% of stations’ gross revenues.

BIA expects gross retrans fees to total $9.4 billion this year, rising to $10.3 billion next year. For the next several years, retrans is likely to rise by 8% overall, and net retransmission consent (subtracting fees paid to the networks) will grow at about 7%, Fratrik said.

While there are a dwindling number of subscribers to big MVPD packages, the fees broadcasters get from over-the-top (OTT) platforms is a mitigating factor, he added.

That scenario could change considerably. Marcos Torres, senior managing director of RBC Capital Markets, predicted that the MVPDs will largely be internet providers a decade from now.

And Robert Gessner, president of the Ohio cable system company MCTV and chairman of the American Cable Association, opined that “in 10 years, TV penetration will be in the 20% range, maybe even lower. It depends on how willing older people are to adopt smart TV’s and streaming.”

It no longer makes sense to try to stem the loss of cable TV customers, said Gessner, although his company works hard to serve them. He explained that his company’s content costs have risen over 11% in the last 11 years, from about $22 to $70 per month between 2007 and 2018 — causing the fees consumers pay for basic cable to increase from about $45 to $100 per month.

“My gross margin has decreased from 55% to 29%. That puts me in the unenviable position of a rapidly shrinking margin on a rapidly shrinking customer base. Why would I chase those customers?” Gessner said.

A chief problem for the MVPDs has been the way large cable network groups force the operators to carry big bundles of their channels in order for the systems to carry the most popular networks, swelling the size of cable program bundles.

The network groups also raise their rates by the same 12%-15% every year, Gessner said, adding: “I won’t say it’s collusion, but there’s conscious parallelism among the eight largest content companies.”

“Conscious parallelism” was a milder term than what Michael Ruggiero, chairman of ATV Broadcast, used to describe the broadcast networks’ reverse compensation strategies during the same session.

When reverse compensation was first bandied about, “it’s almost like the movie The Godfather, when all the four families got together. [The networks] got together and said: ‘Hey, we can make money off our affiliates. And this is how we’re going to do it. And they’re the ones that are going to get all the grief from the cable operators. And they’re the ones that are going to lose their service if they don’t come to agreement,” Ruggiero said.

Yet another view on retrans fees came from RBC’s Torres. “Retrans is a huge component of M&A. We’re at a point in the TV industry where we’ve never seen this amount of inventory in the marketplace,” he said.

Torres said that the increased interest by private equity firms in reentering the broadcast investment space has been driven by the lucrative aspects of retrans revenues.

He noted that there are two types of station expansion trends today: large groups like Sinclair Broadcast Group, Tegna and Nexstar Media Group are seeking wide national scale, and others, like Cordillera Communications, are seeking deeper dominance within individual markets.

“I believe that retransmission revenue will grow,” Torres said. “The TV groups are getting bigger and bigger — both in market scale and in national scale — at a very rapid pace.

“I think that this will eventually come to a head, and there may be some need for governmental involvement. A TV station group could own so many TV stations that it shuts off a large part of the country in a retrans negotiation with a national MVPD,” he added.

Read all of TVNewsCheck’s TV2020 coverage here.