Let’s Keep The Lid On The Retrans Volcano

Can you imagine living next to a volcano that has the potential to erupt every three years? It seems unthinkable. Yet we have settled on a process of for renegotiating retransmission consent agreement negotiations that threatens to disrupt — and potentially destroy — our businesses every several years. 

The volcanic image of retrans occurred to me as I listened to a discussion involving members of MFM’s Television Committee led by Paul Maxwell a few weeks ago. Paul, chairman and CEO of MediaBiz and an industry entrepreneur whose accomplishments include many of the cable industry’s leading publications, noted that the FCC’s recent NPRM — notice of proposed rulemaking — marked the shift from relying on capitalism to relying on the government to resolve what has become an increasingly contentious issue.

It wasn’t always this contentious, Paul reminded us. Retransmission consent surfaced as an alternative to must carry in the 1992 Cable Act, which allowed stations to select one of these two options every three years. The initial intent was for retrans to provide broadcast networks and their affiliates the chance to collect a carriage fee similar to the license fees received by cable networks. “Cable operators viewed it as a ‘heads, broadcasters win; tails, cable loses’,” Paul recalled.

Initially, cash compensation was the exception. Networks and station groups used the first wave of retrans agreements to secure carriage for new 24-hour TV networks. FX and ESPN2, among the country’s first retrans channels, were soon followed by channels such as Food Network and MSNBC, among others. Meanwhile, early attempts by broadcast networks like CBS, which had championed “must carry, must pay” legislation, to garner fees were rebuffed without harm to the cable operator. However, some cable networks were displaced to make room for the retrans channels. 

What changed? One answer would be what Paul described as the “gold rush” that came in response to seeing a growing number of lesser-viewed cable networks receive increasing amounts of cash in return for their carriage. Moreover, direct broadcast satellite and video services offered by telecom carriers, such as AT&T and Verizon, became an alternate means for viewing local stations. As the TVB recently reported, national ADS (alternative delivery system) penetration has grown to represent 30.5% of U.S. television households in November. 

More recently, stations have begun to realize the value of retransmission consent agreements involving the digital subchannels they were multicasting as part of the migration to digital broadcasting. For example, a recent research study by International Media Advisors and Bortz Media & Sports Group finds, “Stations that leverage their digital spectrum by becoming aggressive multichannel service providers are likely to enjoy the greatest long-term success. By doing so, they can enhance their local brands, offer greater flexibility to advertisers and significantly increase cash flow and asset value.”

Retrans plays a big role in achieving the success for multicasting predicted by the study. According to the analysis, “Broadcast networks are expected to negotiate much more aggressively with multichannel providers for subscription fees on behalf of their owned-and-operated outlets. We project that these retransmission-consent revenues could nearly triple on an industry level over the next five years, increasing to roughly $2.6 billion by 2014.”

“However,” the experts from IMA and Bortz cautioned, “while retransmission consent provides a growth opportunity for stations, negotiations between affiliates and networks about how to split the revenue will ultimately determine the bottom-line impact of retransmission fees on station cash flow. Those stations that are most successful will maximize their leverage on two levels — both with the networks and multichannel operators. And a key way to accomplish that is to deliver strong value in the local market that goes well beyond the transmission of network programming.”

The study also cited a number of factors responsible for the “miniscule” returns that stations have received on their initial investments in multicasting thus far. Among them were:

• Lack of audience reach and/or awareness of “secondary” channels.
• Perceived limited audience potential, and lack of ratings/measurement.
• Limited experience with selling small and/or targeted audiences.
• Uncertainty over revenue prospects.

Cooperative relationships with local cable operators are viewed as one of the best means for overcoming these challenges and cashing in on multicasting’s revenue potential. The IMA and Bortz Media experts advise that these relationships enable broadcasters to “secure the broadest level of carriage and the best channel placement possible for subchannels.”

Interestingly, viewership is one of the reasons we’re seeing cable operators balk at continued carriage of a growing number of cable and satellite networks, including retrans channels. In addition to cost concerns, Maxwell attributed this trend to the growing importance of re-allocating bandwidth to meet cable customer demand for high speed Internet and related IP services.

MFM hosted a general session panel about retransmission consent at our 2006 annual conference. It was moderated by John Higgins, a longtime financial news reporter for such industry trades as Multichannel News, one of the trades Paul Maxwell founded, and Broadcasting & Cable. John suffered a fatal heart attack not long after that conference. He continues to be sorely missed both by those who knew him personally and those who relied upon his reporting, which included a deep understanding of the business of television. 

As John observed at the time, “It” [retrans] is what it is; so the most practical solution is to figure out how to make it work for everyone.” John managed the combustible combination of a panel composed of a cable operator and a TV station group owner with the expertise few could match. The key to his session’s success was John’s Solomon-like ability to help the two sides identify the proverbial win-win that benefited their respective businesses.      

For the broadcaster, those outcomes included a metro-area stations’ ability to contract the cable system’s ad sales reps for selling ads to smaller businesses in the outlying communities. The collaboration also included favorable positioning of the station on the cable channel lineup and the potential for cash compensation, pending proof of concept. 

The multicast channel’s benefits to the cable operator included local content that would help to add value to the operator’s video services lineup, differentiating it from a satellite TV provider’s offerings. It also allowed the cable system to split ad sales revenues for popular local programming.

The ability for the two companies to find common ground represents the type of capitalism-driven solutions described by Paul Maxwell. However, in the same way that the 1992 Cable Act didn’t solve a longtime dispute, I doubt whether everyone will be happy with a regulatory solution proposed by the FCC.

As Paul noted in a recent issue of his The Morning Bridge report, “With the issue now part of the FCC’s increasingly controversial actions, what’s going to happen is up in the air. But, like a lot of issues, the outcomes in this case are driven by size and leverage. [It] seems smaller broadcasters find themselves in situations not unlike smaller cable operators … in need of some leverage help.” 

I fervently hope that we can replace that reliance on leverage with a commitment to the collaborative engagement between local broadcasters and their multichannel video distributors, and between networks and their local affiliates. It would help to quell that smoking volcano and to prevent the type of contentious battles that erupt into a lava flow that can ultimately destroy the businesses that were established on its foundation.

Mary M. Collins is president & CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week.You can read her earlier columns here.