[opendtv] News: In Retrans, Stations Are Fighting for Lives

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
  • Date: Wed, 5 Nov 2008 04:41:46 -0500



In Retrans, Stations Are Fighting for Lives
By Greg Schmidt

TVNEWSDAY, Nov 4 2008, 3:34 PM ET

Fifteen years after its adoption by Congress, broadcast retransmission consent remains a highly charged topic. Why? Because, at long last, broadcasters, as Congress intended, are succeeding in getting cable operators to compensate them for carrying broadcast signals. This has prompted significant elements of the cable industry to respond by threatening to seek relief from the next FCC and the next Congress.

There was no screaming by cable, by the way, when the satellite companies started paying cash to broadcasters 10 years ago. Nor did they even whimper three years ago when the telcos entered the video market and joined the ranks of paying broadcast customers. But now cable itself is being asked to pay and faces the prospect that its unjustified competitive advantage is going away. Most cable companies, including many of the most powerful, have quietly recognized that the jig is up and have agreed to reasonable terms. A few holdouts continue to wage quixotic rear-guard actions, allegedly, of course, on behalf of the consumer, and the smaller operators are complaining that retransmission consent is going to ruin them.

Whenever a fight like this breaks out, regulators and consumers almost always react by throwing up their hands and declaring both sides to be evil and greedy. What regulators and consumers need to know is just this: broadcasters are fighting not for a few incremental dollars but for their very lives.

Without retransmission consent revenues to fuel competitive programming payments, all premier sports and entertainment programming will migrate exclusively to pay television. If you doubt that statement, think Monday Night Football. ABC literally invented Monday Night Football in 1970 and carried the show for 36 years. But for the last decade or so of its life, despite marquee ratings, MNF was a loss leader for the network, hemorrhaging as much as $150 million a year. In 2006, MNF moved to ESPN, where it became instantly and wildly profitable. And this despite the fact that ESPN paid double - double - what ABC had been paying and saw advertising revenues decline as the result of a 25 percent loss in audience in its first season.

Voodoo economics? Sort of. ESPN, unlike ABC, not only gets advertising revenues but a pay TV subsidy in the form of outsized subscriber fees that now total well in excess of $3 billion a year. That is a massive second revenue stream that ABC cannot match through advertising revenues alone.

What happened to MNF will eventually happen to all marquee programming-sports and otherwise-if the broadcast system does not get its share of the pay TV revenues. Already, numerous cable networks with infinitesimal ratings and inferior household penetration have outbid local stations and networks for first-run entertainment and sports programs and for dozens of original and off-network syndicated programs.

They can do this not because more people watch their channels, but because those that do are paying for them. Unless that same subsidy for cable networks is extended to broadcasters, neither local stations nor the broadcast networks will be able to compete for the best programming. And that means, among other things, that the 13 percent of American households who receive TV off the air, many of whom are unable to afford pay television, will be denied access to the best programming.

It might be different if this competitive advantage were fair or deserved. It was neither. It was simply a relic of a regulatory regime, the cable compulsory copyright license that failed to adapt to the underlying changes in the industry. Before the ink was even dry on the 1976 Copyright Act, which gave cable mandatory free broadcast carriage, cable morphed from being a simple repeater/extender of broadcast signals to a full-fledged competitor.

And by the time Congress dealt with the problem 16 years later, the MSOs had consolidated their market power and defeated the intent of Congress. Only the breakout of true competition in the home video market, first in the form of the satellite carriers and then the telcos, made untenable the MSO mantra that they wouldn't pay for "free" television.

All this is not to say that the system has worked optimally. No one is happy with the abruptness with which the game changed, a sizeable exogenous shock to the system which made it more difficult for cable operators to budget sensibly. All that can really be said is that broadcasters, too, would have preferred a longer phase-in period and tried to get the process started many years ago.

The satellite carriers and telcos have adapted quite nicely to making broadcast payments a significant part of their programming budgets, strong evidence that cable, too, can make the adjustment.

Cable must also shoulder much of the blame for the fact that the networks have used their station retransmission consent clout to secure the launch of and higher subscriber fees for a passel of cable networks. This development was the genius of John Malone, who insisted at the outset that cable would pay only for "added value" in the form of additional cable networks. Whether or not the resulting package deals are "tying arrangements," they are not in the interest of non-network broadcasters either.

For reasons known only to experts in institutional behavior, the networks seem incapable of making a proper internal allocation which recognizes that most, if not all, of the subscriber revenues generated by these cable network progeny actually should be credited to their broadcast network parents. And without a proper internal revenue allocation, the networks all spend far too much on their cable programming and too little on their broadcast networks.

Having spent a decade working for a modest-sized broadcast company negotiating with giant cable MSOs, giant networks and giant syndicators, I have considerable sympathy, too, for the plight of the small cable operator. But let's face it, the telco bohemoths and nationwide satellite carriers, not to mention multi-network pure play cable programmers, present a far bigger problem for small operators than broadcasters, many of whom are even smaller than they are.

I doubt very much that when this still evolving market gets to something approaching its natural equilibrium, the retransmission price disparity between the large and small operators will differ significantly from the cable network price disparity the small ops already face.

That said, broadcasters still need to be smart as well as courageous. The unavoidable reality is that the top 10 MSOs control 90 percent of the cable market. Broadcasters cannot move the needle substantially without getting reasonable compensation from those companies. It is far more important to craft a systematic plan for doing that than spending time and political capital extracting a few additional cents from those who, because of size or timing, are already paying.

Under the direction of the 1992 Cable Act's visionary godfather, Marty Franks of CBS, I was involved in the passage of the Act. In one capacity or another, I have labored in the retrans vineyard ever since. It is gratifying, as I move on to other endeavors, to see the Act's potential finally being realized. It is not a moment too soon. The result, I hope, will be a new, mutually beneficial and sustainable cable and broadcast relationship that will provide the foundation for true local partnerships going forward.

In August, 2008, Greg Schmidt became the CEO of Speech Conversion Technologies Inc. Prior to that he was EVP, digital media, LIN Television. At the time of the 1992 Cable Act, he was counsel to the CBS Affiliates Association and a number of broadcast group station owners. He can be reached at gregs@xxxxxxxxxxxxxxxxx

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