The New Dynamics of Retransmission Fees? . . . HD News is future Existence Insurance

Retransmission fees are forecast to rapidly grow from $1.4 billion in 2011 to an estimated $3.6 billion in 2017, with full service HD News/ENG TV stations poised to getting the lion’s share.

The FCC rules that regulate retransmission agreements were established following the passing of the Cable Act of 1992 (long name: Cable Television Consumer Protection and Competition Act). The Cable Act gave local broadcasters two options to be carried on cable TV (now MVPD Multichannel Video Program Distributor): (1) elect to negotiate with cable operators and give retransmission consent to carry signals for a negotiated fee, or (2) elect to be covered under must-carry provisions without receiving any compensation. TV broadcasters are required to choose one option in “elections” every three years. Over the last nearly twenty years, market developments have tilted bargaining power to the advantage of the major TV networks for compensation, which in 2012 will receive more than 50% of the total retransmission compensation pie through their O&O stations.

But, what will really happen to Retransmission Fees by 2017?

If the Congress passes legislation to allow the FCC DTV Spectrum Grab and Auction to go ahead based on voluntary “spectrum sell-back” by some TV broadcasters, the “selling” broadcasters will no longer be OTA and thus no longer be broadcasters entitled to retransmission fees. Of course, as a part of the “Spectrum Grab and Auction” process, the FCC will be required to materially modify its rules now based upon the Cable Act of 1992, which may (or may not) guarantee the “selling-going-out-of-OTA-business” broadcasters must-carry rights on MVPDs, at least for a limited period of time.

A Relationship between Local HD News and higher Retransmission Fees?

Can we make a credible showing that a TV station delivering “full service” HD news achieves substantially higher retransmission consent revenues than a TV station with no local news or content? The Author says yes.

Let’s look at ION Media Networks, the largest U.S. TV network in terms of TV stations owned (60) and in reach of TV households OTA (65%)

ION Media owns/operates the largest group of broadcast television stations (60) in the United States, including full power stations in all Top-20 DMAs and in 37 of the Top-50 DMAs. These stations are operated as a nationwide integrated programming network known as “ION Television”. The network’s programming lineup consists mainly of syndicated TV series, feature films and a limited amount of other entertainment and sports programming. The stations also broadcast so-called infomercials. Revenue is derived from these infomercials and from commercial advertising sales. All 60 full power TV stations each provide one HD channel as OTA primary, plus two additional simulcast channels. ION’s business model does NOT seem to include traditional newscasts or other local content delivery.

The Author lives in Los Angeles where he is served by Time Warner Cable (TWC), and ION KPXN-DTV Ch.38 is carried on the TWC HD Tier as Ch.410, with the SD/analog version on Ch.21. The two OTA simulcast sub-channels (Qubo and ION Life) are not carried on TWC, as such is not required by any FCC regulation. ION is currently not a publicly traded company, thus operational financial details are not made public such as retransmission fees collected if any. But for the last year public information was available (2007, before ION became a private entity), ION annual revenues were about $230 million. Retransmission income was not found in the 2007 SEC filing. Following the 2008/2009/2010 recession, if ION’s 2011 revenues will come in around $300 million, that will be an average of $5 million for each of 60 TV stations.

What about the Big 4 O&O Stations?
As a comparison, the 28 CBS O&O stations are expected to produce 2011 revenues exceeding $1.6 billion, or $57 million average for each station, including each station receiving an average of nearly $9 million in retransmission fees. (CBS O&Os are detailed below.) These are really the two extremes, where we can easily see the difference in revenue potential between a major TV network O&O “full service” news station and a “no-news, no-local-content, no-Big 4 affiliates” syndication-mostly station.

And the Group owned affiliated TV stations?
In between these two extremes are the major Group TV Station Owners and their major network affiliate stations with nearly all stations delivering “full service” local newscasts. One such “typical” major pure-play group owner is publicly listed Belo Corporation, with 20 full power TV stations of which 9 are in the Top-25. Belo reported revenues of nearly $700 million in 2010, averaging around $35 million per station. Belo received about $50 million in retransmission fees in 2010 or $2.5 million average per station.

Look at above chart. The BLUE column shows major pure-play Group owners with the large majority of their TV station properties in the Top-50 DMAs, with all stations being “full service” news outlets and Big 4 Network affiliates. The difference between Big 4 Network O&O stations (RED column) higher average (~$50 million) and Group station average (~$30 million) is that many of the Big 4 O&O stations are in the Top-10 DMAs (and very few are in lower than the Top-30), which increases the average revenue number significantly. The average independent TV station (ORANGE column) in the Top-50 DMAs, without news and without any Big 4 affiliation, seems to be in the average annual revenue range of $5 million.

HD News = Higher Ratings = Higher Retransmission Fees
The amount of retransmission compensation follows the overall ratings and DMA ranking, with Big 4 Network O&Os leading with average retrans fees of about $8 million per station (16% of total average revenues), followed by the Group owned Big 4 affiliated stations with an average of $2.5 million (8% of total revenues), while retrans fees for Group owned stations without newscasts and without Big 4 affiliation seemingly fall far behind with insignificant retrains fees in comparison to “full service” HD news stations in the same DMAs. The actual numbers for such “no-news” stations are much more difficult to ascertain as detailed financial data is often not published, such as is the case with privately held ION Media. The Author speculates that a number of such stations elect must-carry rather than retransmission consent, as the station may not carry much weight in negotiating for retrans fees.

CBS O&Os expect receiving $250 million in 2012. . . just in Retransmission Fees

If the industry forecasts are right, the straight line growth year-on-year on the above graph forecasts total retransmission fees of $1.8 billion for 2012.

CBS announced earlier this year that their TV Station Group expects to receive at least $250 million in 2012 in retransmission fees from cable, satellite and telco TV service providers (MVPDs). CBS’ TV Station Group comprises 28 O&O TV stations, making the average of fees received about $9 million per TV station (forecast for 2012). This looks very good. Let’s look at more CBS detail:

CBS Television Stations include sixteen (16) that are part of the CBS Television Network, eight (8) affiliates of The CW Network, three (3) independent stations and one (1) MyNetworkTV affiliate. Major market “full service news stations” are WCBS-TV (New York), KCBS-TV and KCAL-TV (Los Angeles), WBBM-TV (Chicago), KYW-TV and WPSG-TV (Philadelphia), KTVT-TV and KTXA-TV (Dallas-Ft. Worth), KPIX-TV and KBCW-TV (San Francisco), WBZ-TV and WSBK-TV (Boston), WUPA-TV (Atlanta), WWJ-TV and WKBD-TV (Detroit), KSTW-TV (Seattle), WTOG-TV (Tampa-St. Petersburg), WCCO-TV (Minneapolis, and Minnesota satellite stations KCCO-TV and KCCW-TV), KCNC-TV (Denver), WFOR-TV and WBFS-TV (Miami), KOVR-TV and KMAX-TV (Sacramento), KDKA-TV and WPCW-TV (Pittsburgh) and WJZ-TV (Baltimore).

The Author has no reliable data as to the breakdown of fees to be received by each TV station, as retransmission agreements are generally confidential. But one can assume that the New York City flagship station WCBS receives by far the largest amount of retransmission compensation. The New York DMA counts some 7.5 million TV households of which more than 6 million are cable, satellite or telco TV subscribers. At an average monthly MVPD (Multichannel Video Program Distributor) subscription price of $90 ($1,080 per year), the total annual MVPD TV subscription take in the NY DMA is over $6 billion (of course excluding broadband and IP telephone revenues). At $0.60 retransmission fee per month per (full paying) subscriber, WCBS may take in an annual whopping $40+ million in 2012 just in retransmission fees. This one WCBS flagship station may be responsible for more than 16% of the total $250 million retransmission revenues expected by CBS in 2012. In Pittsburgh (DMA #24), the smallest market for a CBS O&O “full service news station” (KDKA), with about 1.2 million TV households of which about 1 million are MVPD subscribers, the same computation produces annual 2012 retransmission fees of about $7 million.

The 100 or so Big 4 O&O TV Stations receive about 50% of all Retransmission Fees

We have looked at CBS, which has been very vocal about the need to substantially increase retransmission fees. So has FOX. The total number of the O&Os operated by the Big 4 TV networks is about 100 TV stations. ABC, FOX and NBC will each approach the 2012 $250 million to be achieved by CBS, thus the Big 4 will together receive an estimated $900 million or 50% of the total forecast $1.8 billion in retransmission fees to be paid by the MVPDs in 2012.

Industry experts estimate that as much as 70% of the total pie will go to TV stations located in the Top-30 DMAs, mostly to “full service” HD news stations, leaving only about $500 million to be shared by many hundreds of TV stations around the country. PBS stations do not generally ask for retransmission compensation, as they are non-profit, funded by government appropriations and private grants and donations.

Fighting for Retransmission Dollars: HD News & Live HD ENG build audience and market leadership

We establish above that the local TV station consistently leading in the local DMA audience race is in the best position to negotiate for the most in retransmission compensation, whether directly with local MVPDs or through its Group Station Owner negotiating with national or regional MVPDs. The three (3) primary areas where TV stations may increase audience share are:

  • Deliver network programming with higher audience appeal, which is NOT under the control of the TV station or the Group Station Owner (but is a function of network affiliation)
  • Deliver syndication programming with higher audience appeal, which is often controlled by its Group Station Owner making package syndication deals covering all of its TV station properties
  • Deliver local news, weather, sports and traffic with higher audience appeal, which is materially a function of local TV station control and operations

Delivering highly attractive local content, in the form of news, weather, sports and traffic, is the only primary activity available to (and fully controlled by) the local TV station which may substantially improve audience share. And the HD News set and live HD ENG capabilities make up the foundation for a successful local news operation. The local station executive team will no doubt score high marks at the Group Station Owner’s HQ when achieving a substantial and lasting rating boost through a clever implementation (or expansion) of HD news, enabling the Group Station Owner to demand higher retransmission fees.

HD News & Live HD ENG promote network and syndication shows . . . and feed the website !

Local TV stations’ promotional efforts of its network, syndication, local program and website content are greatly aided by successful HD News activities, with an opportunity to create a positive circle of audience awareness and support.

Can you imagine a local TV station’s website without local news, weather and traffic? The local competitive advantage is obvious, as, without news, weather and traffic, the website becomes just a TV program guide but only for its own channel. And the future revenue growth potential of a successful local TV station website is an important consideration in the longer term, together with the stronger retransmission compensation position of a full service TV station. HD News and live HD ENG is really a competitive and financial necessity.

(HD) News REVIVAL at TV Stations: HD Studio Cameras and HD News Camcorders are now highly cost effective

After the difficult years of 2009 and 2010, TV broadcasters are bullish on local news again, fueled by (a) the realization that a TV station without significant local content may not be relevant in a few years as most prime time and syndie shows may be available directly to homes through the OTT/ internet, and (b) the potential local revenue gains establishing or expanding local news shows a very attractive ROI now that the cost of HD news facilities have dropped substantially, in terms of both equipment acquisition and operations. From major markets like New York to smaller markets like Boise, TV stations are expanding local news efforts. Nearly all major market news stations have already converted to local HD studio and most of those have transitioned to live HD ENG. But, overall, below the Top-25 markets, there are hundreds of news stations in process of transitioning or planning to go HD in 2012.

JVC is the 2010/2011 market leader in HD ENG camcorders and HD studio cameras in terms of quantities of products delivered to a record number of TV stations across the U.S. JVC has concentrated its ProHD professional camera line to be cost effective yet entirely professional, in one family of products suitable for HD studio, HD ENG/EFP and HD Hyperlocal. In addition, its compressed streaming output, widely available file-based work flow and instant editing capabilities have propelled ProHD to be the most implemented HD News and HD ENG format among Group Station Owners over the past several years.

Fast Forward to 2017:
New dynamics for Retransmission Fees?

The Author does not claim to be a Soothsayer, but the handwriting seems to be on the wall for a number of issues relating to the future of television. Let’s analyze some of the major issues, going fast forward towards 2017:

How many TV Stations on the air (OTA) in 2015?
The FFC “DTV Spectrum Grab and Auction” of taking 120 MHz from the TV broadcasters in the 600 MHz band is scheduled for transition in 2015, IF Congress goes along passing the appropriate legislation in 2011/2012. It is likely that many non-news TV stations may voluntarily turn in their 6 MHz DTV channels to the FCC for promised compensation and that the remaining TV stations keeping their spectrum will be repacked to accommodate perhaps less than 1,000 TV stations to remain on the air after 2015. (Currently, there about 1,780 full power TV stations OTA across the U.S.) To be a relevant “real OTA” TV station after 2015, the station really needs to deliver substantial local content including HD news, weather, sports and traffic to the local audience.

TV Everywhere rules in 2015
TV Everywhere (at any time) will be largely developed by 2015, expecting to provide live and time shifted access to all prime time and syndication TV programming over the internet/OTT, where the TV Networks may no longer rely on local affiliate TV stations to exclusively deliver network programming. New business models must be developed for the local TV stations which MUST include local content in the form of HD news, weather, sports and traffic, and perhaps mobile television through Mobile DTV and/or through 4G smartphone/ tablet streaming arrangements with wireless providers, and not to forget the increasingly important TV station website.

Fiber-to-the-Home (FTTH) trumps Cable TV by 2017?
The many hundreds of TV channels delivered all the time to Cable TV subscribers through HFC (Hybrid Fiber Coax) delivery systems is a waste of bandwidth, as each subscribing TV household generally and largely limits their regular TV watching within the household to twenty (20) “favorite” channels or less. The 20-channel mix may vary from month to month or from quarter to quarter, but there is no need to present all 500+ channels to each of the STBs in the home, all the time. Telco IPTV does the same, however, both Cable TV and Telco IPTV is now starting to use an emerging technology called SDV (Switched Digital Video) applied to conserve bandwidth from the neighborhood distribution hub to the subscriber home by only delivering that one channel (or those several channels) being watched at any given time. This frees up a large amount of “last mile(s) bandwidth” and makes it possible to supply many more subscribers from each neighborhood distribution hub and/or apply the bandwidth saving to other broadband services.

The STB communicates with the hub, delivering only the TV channel called for by the STB which is controlled by the viewer. This is similar to OTT, where a discreet stream of (requested) compressed video is delivered from the nearest OTT provider hub (being local, regional, or national) with the appropriate unique IP address for the OTT device located in the (requesting) home. The OTT device may be an IP STB, a ROKU box, a HULU/VUDU/Netflix IP capable Blu-ray player, a PC or Mac, or an Internet-capable HDTV set. A majority of TV viewers may in 2017 watch more TV at any one time through OTT/FTTH delivery than through “traditional” MVPD delivery, which may include prime time (first-run) TV shows delivered directly OTT, perhaps bypassing the local affiliate TV stations as the “middlemen”, or at the minimum making affiliate TV stations non-exclusive outlets.

Reverse Affiliate Fees and share of Retransmission Fees
Back in “the good old days”, the TV networks were making handsome payments to their affiliates for carrying the network programming. In recent years, the TV networks have turned the tables by demanding and receiving “reverse affiliate fees” from the stations, and recently demanded a share of the retransmission fees paid by the MVPDs to the local affiliate stations. This continuous pressure exerted by the TV networks to extract ever higher payments from the local TV stations is unsustainable in the longer term, and may be the preamble to the TV networks seeking alternate “OTT channels” of delivery of their prime time programming to the TV homes, at first allowing dual delivery through the “old” affiliates and the “new” OTT channel, but eventually cutting out the “old” and exclusively deliver through a new technology/revenue model. By 2017, it is probable that such a new technology/revenue model will have emerged, where local affiliates no longer can rely on being (exclusive) local outlets for the TV networks.

Future Existence Insurance:
Local HD News, Live HD ENG and Streaming Website

Strong market, technology and regulatory forces will cause material changes to the various TV industry business models over the next five years. A large shift in the way TV is received by the viewers, by a significant decline in “traditional” MVPD delivery to a majority of consumers viewing TV delivered OTT, may actually reduce the total Retransmission Fee pie, as program compensation to the TV networks takes a different form and “middleman” compensation to the local affiliate station may be made redundant. (Discussed above)

“All politics is local”, again quoting the late Tip O’Neill (D-Mass), former speaker of the House, as the Author states that “Most news, weather and traffic of interest is local”. National and international news are provided by the major TV networks as well as by CNN and other cable news organizations, seeking “bundling” with local news to reach maximum audience. The local viewers are first and foremost interested in local news, weather and traffic, thus a local TV station news leader has the foundation for a successful future existence and is best positioned to negotiate profitable relationships as new technology/revenue models and opportunities emerge, whether with TV networks, MVPDs, wireless broadband providers or ISPs.

HD News optimizes short, medium and long term revenues . . . preserves future options

The shorter term opportunities lie in the traditional TV station business model where increased ratings produce increased ad revenues and retransmission fees.

The medium term opportunities, made possible through “full service” local HD news leadership, include maintaining relevancy as an OTA TV station in turn preserving the OTA tool necessary to build out the Mobile DTV and to lead local content streaming OTT, in concert with website success.

The specific long term opportunities are difficult to predict at this time, but it is certain that a local OTA TV station with “full service” HD news, Mobile DTV, local content streaming OTT, and an interactive website has indeed preserved a maximum of future options, compared with a TV station without news and local content.

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