EvolutionArticle2011

EvolutionArticle2011

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  Ironic twists andcompetitive shifts are informing the latest cycle of negotiations between broadcast stations and multichannel distributors. W HEN WE TOAST THE COMING year at the end of December, the broadcast and cable industries will have completed their first cycle of retrans- mission consent contracts, which began in 2008. The dramatic standoffs that sometimes took place between station groups and multichannel providers, and the hundreds of millions of dollars they collectively spent lobbying to achieve better leverage in those negotia- tions, are like an episode from last season’s Survivor – a lot more gripping at the time. Everyone’s now fixated on the second round of negotiations, which are a work in progress. Yet in order to understand the new dynamics at play, it’s insightful to look back on the influences and pre- dictions that existed in 2008 and compare them with TheEvolutioBy RAOUL DE SOTA MANAGEMENT Reprinted from the November/December 2011 issue of The Financial Manager magazine
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  what came topass. And, looking forward, it’s now pos- sible to predict what will happen at the end of the sec- ond cycle, three years from now. Flashback to 2008 At the time of the first round of negotiations three years ago, the Federal Communications Commission chairman Kevin Martin was busy challenging the cable industry with his ideas about à la carte channel options and outlining an approach to ease costs on the expanded basic tier of cable service. Over at the National Cable & Telecommunications Association, president Kyle McSlarrow was telling con- gressional committees that the retransmission consent process was one big disaster waiting to happen. McSlarrow asserted that broadcasters were acting in bad faith. He pointed to published reports that TV station groups were seeking higher rates during the 2008/2009 negotiation period and threatening to remove their signals if the discussions did not go their way. McSlarrow insisted that private equity firms were waiting in the wings to swoop in and harvest the cash bonanza from higher retrans fees. Cord cutting – the abandonment of subscription television by consumers – was a fear for many of the distribution platforms in 2008 as the recession took hold. It seemed to be an unrealized worry, as over 2 million subscribers signed up for multiplatform video services during the year.The winners in this regard were onofRetrans
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  MANAGEMENT DirecTV, Verizon FiOSand AT&T. The losers were generally the cable operators and Dish Network. But while many cable companies lost subscribers, most of them still had substantially good financial out- comes due to the addition of broadband customers. Meanwhile, the National Association of Broad- caster’s president David Rehr was arguing in front of some of these same congressional committees that the retransmission consent regime was working just as it was intended to. Disagreements that resulted in station groups removing their station signals (or the other way around) were infrequent. Regardless, they did seem to capture the headlines. The importance of growing the dual revenue stream business model that retrans fees afforded stations was becoming increasingly crucial.The year 2008 was wit- ness to historic drops in well-known broadcast group stock prices. TV station advertising was entering a severe crisis period. While 2008 was somewhat sal- vaged by the political spending, that sector would dry up during the next year. As the U.S. was catapulted into recession, the industry braced for what turned out to be double-digit drops in advertising revenues in 2009. Univision announced well before the Oct. 1, 2008 deadline that it was seeking retransmission consent fees in place of must-carry status. Les Moonves, presi- dent and CEO of CBS, restated his aggressive outlook on retransmission-consent revenue for the company’s owned-and-operated stations. On the other side of the fence, ABC announced a program intended to pro- vide ABC free of fees to certain size operators. And The Walt Disney Co.’s president and CEO, Robert Iger, stated that he was less than enthusiastic about his own ABC owned-and-operated stations. Meanwhile, contracts did get negotiated; threats were exchanged and some disruption of service did occur. All in all, the negotiation process was not as dire as many had predicted. The Present Scenario If we compare the issues that were prevalent in 2008 with what’s of concern today, it’s apparent that the rhetoric between the competing lobbying arms of the respective parties seems to be maintaining the same level of tension, but the actors and scenery have changed somewhat. The à la carte concept died at the FCC when chair- man Martin departed for the Aspen Institute. The pressure of substantiating the value of any one cable network or any one broadcaster on the merits of unique viewership left with him as well. However, à la carte is still alive elsewhere. The pri- vate sector has now taken up the banner, and cable companies are now championing the idea as a way of combating high fees by certain cable networks. The implications of this debate on broadcastTV stations is most likely positive, because no matter how you slice it, local television affiliates are still commanding the larg- est total-day viewership on any distribution platform. That’s not to say that a station’s perceived value still isn’t a major point of discussion. A former chairman of a major cable network once told me that the importance of local programming, such as news and sports, was inverse- ly proportional to its distance from the target audience. This is incredibly relevant to any distributor that is try- ing to sell itself on the merits of its local content, or to a broadcaster trying to sell its unique qualities to local con- sumers. Without local content, the multichannel plat- The Satellite Extension and Localism Act of 2010 (STELA) has given birth to the first truly national footprint, in terms of a national carrier of television stations. As a result of STELA, Dish Network is the only operator in the U.S. offering local television sta- tions to “eligible subscribers” in all 210 DMAs. Who is an eligible subscriber? In a nutshell, the FCChasstatedthatasubscribermayreceivedistant signals from satellite carriers if: • The market in which the distant-signal station is located is deemed to be significantly viewed. The FCC posts a list of significantly viewed communi- ties at www.fcc.gov/mb. • The subscriber is considered to be unserved – in other words, if an over-the-air signal cannot be received by the subscriber, and the satellite company does not offer local-into-local service. The term local into local is related to the “carry one, carry all” requirement, whereby if a satel- lite operator chooses to carry a local station in a given DMA it then must carry any qualified local station in the same DMA. Given the STELA stipu- lations for Dish, only DirecTV subscribers might be considered to be unserved. • The subscriber uses the satellite service in an RV or truck as a fixed attachment. • The subscriber has been a C-band subscriber and began service before Oct. 31, 1999. •ThesubscriberlivesinMississippi,NewHampshireor Vermont. Those states have special conditions that allowfordeliveryofout-of-markettelevisionsignals. If you are a station owner and have elected for retransmission consent, then you should be able to negotiate with Dish Network in good faith for a carriage agreement. If you’re a local station owner in a small market, you have the opportunity to enter in to a win-win scenario with Dish Network since it would be in the satellite company’s interest to claim the non-cable “local provider” moniker. STELA’S STELLAR POINTS FOR STATIONS Over 2 million subscribers signed up for multiplatform video services in 2008. The winners in this regard were DirecTV, Verizon FiOS and AT&T.
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  form becomes acommodity. In today’s environment of multi-screen options and disruptive technologies, it’s very important not to be commoditized. The FCC continues to play a pivotal role in depriv- ing station executives a good night’s rest. There is an ongoing full-court press to change the negotiation pro- cess. What is most often argued is that what is being asked for in terms of fees by station owners is not tied to current economic reality. What’s more, if the broad- casters don’t get what they want, they resort to actions that are not in the public good, such as dropping access to stations. FCC’s current chairman, Julius Genachowski, appears to be acting cautiously on this issue.The FCC comment period regarding potential changes to the retransmission consent negotiation framework has passed, and a ruling could be in place soon. Odds are that the status quo will remain in place. The fact remains that there is a fairness doctrine that is contained within the 1992 Cable Act allowing broad- casters to negotiate for fees. And, to date, no broadcaster has been found to have acted in bad faith. One substantial event has occurred since the last cycle of negotiations. The acquisition of NBC/Uni- versal by Comcast Corp. has layers of complexity relat- ed to it. For example, we now have the largest cable company in the country proclaiming with glee how positive retransmission consent revenue is going to be for its organization. More ironically, McSlarrow – the former NCTA president and now the president of NBC/Universal – has become a big retransmission consent advocate. This also puts Michael Powell – who is a past FCC chairman and the current NCTA president – in a somewhat strained position; how can he fight retrans- mission consent as an uneconomic regime for cable when his largest cable member is stating otherwise? This ironic rearranging of the deck chairs has given station groups a unique and potentially strong leverage position as they attempt to shape the debate in their favor in Washington, D.C. All of the above being said, the public handwring- ing that occurred during the last negotiation cycle still continues. That’s largely because the economic valua- tion of a station’s signal distributed via satellite, telco and cable is continuing to evolve and is not close to reaching any mature stasis. The handwringing is all about math. When a station goesfromgettinglittletonothingforitscarriagetosome- thing more, the percentage increases are always large. Figuring Out the Future According to MediaCensus MediaBiz figures, the top five cable operators in the U.S. lost over 4 mil- lion subscribers from the second quarter of 2008 to the second quarter of 2011. During the same time period, the two satellite providers added over 2.5 mil- lion subscribers, and AT&T and Verizon teamed up to add over 5 million video subscribers. Bottom line, it is clear that basic subscriber growth over the past three years suggests market share shifts rather than precipitous “cord cutting” trends to date. And I don’t foresee large decreases in multichannel subscribers as a whole. Successful multichannel distribution companies will start to talk and act more like large broadband compa- nies. Glenn Britt, CEO of Time Warner Cable, gave credence to that at the Sanford C. Bernstein investor conference. According to press reports, he explained: “We’ve become less of a TV company than we were previously. We should have more broadband in homes that choose to buy satellite for video.” Local broadcast TV stations are still the most watched video product on a market-by-market basis, and that’s likely to continue. But the video distribution industry will see seismic shifts in the ease of delivery of television product over the next three years. The FCC auction of broadcast spectrum is problem- atic. The underlying issue with this auction process is that it has been characterized as a sale of unused spec- trum. Station groups will have to weigh carefully the advantage of putting more spectrum to work (i.e. get- ting distribution and monetizing that spectrum) versus enjoying some short-term financial windfall from an auction. The Satellite Television Extension and Local- ism Act of 2010 (STELA) has proven to open some opportunities for Dish Network. (See sidebar, page 28.) But while STELA requires Dish to offer local stations in all U.S. markets, and thus gives stations some lever- age, it is not a dramatic game-changer for the overall retransmission consent negotiating process. The next three years will see more market shifting of basic-tier subscribers and ever greater availability of vid- eo programming on over-the-top devices. Anticipating the future is tough, but do your company a favor and avoid negotiating yourself into limitations on the deliv- ery of your television station signals and embrace the multi-screen opportunities for widest distribution. Raoul De Sota is senior vice president of strategic development at Cable Audit Associates, which provides auditing, assurance and revenue systems management services. He can be contacted at (720) 407-7546 or [email protected]. Successful multichannel distribution companies will start to talk and act more like large broadband companies. The economic valuation of a station’s signal distributed via satellite, telco and cable is continuing to evolve and is not close to reaching any mature stasis.