Nathanson: No Limit In Sight For Retrans $

If you want to get a solid grasp on what’s happening to the traditional TV business at any given moment, a good first stop would be MoffettNathanson LLC, the New York-based securities research firm.

The two principal analysts, Craig Moffett and Michael Nathanson, literally have it covered.

Nathanson keeps an eye on the big multimedia companies — 21st Century Fox, CBS and Disney — and pure-play cable programmers like AMC, Discovery, Scripps Networks, Time Warner and Viacom, while Moffett focuses on the cable and satellite operators, including Comcast, whose holdings include NBCUniversal.

Moffett launched Moffett Research in the spring of 2013. Nathanson signed on a few months later from Nomura Securities, adding his name to the letterhead and restoring two-thirds of the team that had distinguished itself for its telecom acumen at Sanford C. Bernstein & Co. Tom Wolzien, now an independent consultant and entrepreneur, was the other member of the Bernstein trio.

In this interview with TVNewsCheck Editor Harry A. Jessell, Nathanson talks about the TV advertising shortfall, the critical role of the NFL in broadcasting, why he think retrans and reverse comp will keep growing and more.

An edited transcript:

I just saw a study from Magna Global confirming what you have been saying for months: 2014 was a lousy year for TV advertising. Do you know where the dollars are going, if they’re not going into TV?

They’re going to digital. Autos spent a little less in general, but other categories like consumer products and food shifted money to digital. It’s growing quickly. It’s now grabbing some of those dollars out of TV when it used to grab them out of print.

So who are we talking about — Google, YouTube, who?

Google, YouTube, Facebook, a little Twitter — a little of everything. Facebook is moving more aggressively. They’re growing pretty quickly.  It’s surprising how weak things are. Making it worse was the ratings for cable were down tremendously in the second half of the year. One of the categories that was weak for cable was direct response. Because you don’t have as many ratings points, you use them for your make-goods and you tend to squeeze out direct response.

What about the first quarter of 2015?  Do you have any sense on that?

It feels a bit better, but we are a little surprised. The NBC Olympics did really well last year, so we thought we would see more money falling off of NBC and into other people’s pockets. I don’t really think the money has turned up as much as we thought it would this quarter.

So more missing money?

Yes. I think this is setting up for a very interesting upfront this May and June. Last year was one of the only down upfronts in history and it was probably the only down upfront in a non-recessionary time. So it’s really interesting.

You get two bad years back-to-back and you’ll know it’s structural, right?

That’s exactly right.

In a nutshell, what are the prospects for broadcasting, and I’m talking about network and local.

For the networks, live sports and events are such a big part of the fourth and first quarters that you have an underlying stability to the ad market. Second and third quarter in non-summer Olympic years there is definitely a big difference because you don’t have the same must-have events. So I think broadcast is less of a structural worry. Because a large part of their programming is built on sports through the NFL, their risk of erosion is a bit less.

On the local side, local marketers or local ad sellers have been dealing with this slow market for a long time.  It has not been robust, but there is a comfort level about the rate of growth and expectations.  I don’t see the same near-term shifts from local to local digital as you do with national. National is much more competitive in terms of the dollar share.

How would you characterize the interest of the Big Four in operating TV stations these days? ABC practically announced its interest was waning when it passed on buying WJLA in Washington.

I say all four are different. Fox and CBS I think have an interest in local stations. They have NFL rights. They’re interested in driving retransmission. Broadcast is near the core skill set for them. At Disney, there are so many different parts that are growing faster than ABC, I don’t see Disney making a play at getting larger in stations. They made their decisions recently to get larger in theme parks and in sports nets. As for NBC, I think nothing will be done until the Comcast-Time Warner deal is done, basically.

Were you surprised to see Fox and CBS declare their interest in the incentive auction?

I will tell you I was surprised, but, look, after the AWS-3 spectrum auction where the amount of money raised was more than we ever thought, they would be crazy not to suss out what a big market stick is worth. 

If Fox and CBS sell the duopolies and others like Ion just get out of the business all together, won’t that give the remaining stations a boost? I mean it would reduce the supply of inventory in the marketplace, right?

I was thinking the same thing.  The ad dollars would get better for the survivors and programming costs would go down, too, right? It would be interesting to see who actually gets out of the business.

You did a note on the aging broadcast audience. From broadcasters, I still hear, yeah, sure, young people aren’t watching, but they will come around once they get older and settle down.  Do you believe that?

No, I don’t believe that.

Why not?

I used to work in the magazine business at Time Inc. We had the same discussion in the 1990s.  Oh, when people slow down and come home on Friday nights and the younger audience gets older, they will want to read these magazines. And I remember saying it’s not true.  Every generation consumes media differently. Look at the millennial audience in terms of how much TV they consume and how they consume. They may watch broadcast content, but it may be on a VOD or on a DVR. It may not be a live feed coming from a broadcast space.

In its earnings call in January, Meredith said that it was giving up about 50% of its retrans money to the networks in the form of reverse comp. I think that’s where a lot of other broadcasters are. Do you think that percentage goes up significantly over the next several years?

A few years ago we would have thought this was a 50-50 rev share business. But given the combination of slowing advertising growth and rising programming costs, I think the networks will push for an even greater share. Is 70/30 a crazy ask? I don’t know, but I do think you are going to see two of the four networks, CBS and Fox, being pretty aggressive in looking to get their fair share.

Well, you sort of stirred them up at the TVB a few years ago when you were suggesting that maybe the networks should get a big hunk of the retransmission dollars. Do you still feel that way?

If programming costs are rising — let’s say 5% a year — and advertising is not growing and the margins on the networks are small — some of them are barely profitable — then the management teams have to be more aggressive on driving retransmission fees. They need to show Wall Street that they can grow their network P&Ls.

Are TV stations approaching the limit on how much they can get in retransmission consent fees either because the MVPDs dig in or because the government takes some kind of action to prevent blackouts? Are we hitting a limit?

No. You still have many years ahead of you before you have to worry. We just take a look at CBS. It drives 10% of national viewers and they’re getting just 3% of the affiliate fee pie at this point in time. 

You can say that the affiliates and the networks deserve parity, getting a share of programming fees commensurate to their share of viewership, but that’s easy to say and hard to do. Don’t the cable and satellite operators say “no more” at some point short of that?

Not as long as you’re bringing people the NFL as three of the four networks are now doing.

Fox, ABC and NBC are now into the TV Everywhere business with cable operators. Is that making much of an impact? Does anybody really want to watch long-form linear TV on their smart phones?

I think people will and would. But the roll-out of these products has not really caught much people’s attention. It’s been really disappointing. I think people will want to watch some of these shows on devices. They need to make it simpler for people to understand how to watch the shows on devices.

The broadcasters knocked out Aereo in court. If Aereo had won, do you think that would have grown into a substantial business?

No. We were never that worried about Aereo. If it had been embedded in the boxes of Dish and Direct TV and Comcast and Time-Warner Cable, it might have worried me because it would have meant that cable could go dark on retransmission and not feel the pain.

We hear a lot about cord cutters, cord shavers, cord nevers.  What’s the outlook for the cable and satellite business

Craig [Moffett] covers that world. But what we saw happen in the most recent quarter was interesting. The overall number of cable or pay TV customers stayed relatively flat, but the penetration of pay TV fell because we saw a real step up in the number of new homes created in America.

So you basically have this interesting dilemma: pay TV is holding its customer base, but it was clear that it didn’t grab its fair share of new homes created. So over the long term, the number of people who pay for TV as a percentage of the American population is declining.

So it’s the cord nevers that may be the problem as opposed to the cutters and the shavers?

That’s right. It’s that millennial problem and, going back to the research, what millennials want is more choice and lower prices.