CBS, News Corp. Grab For Station Retransmission Dollars Could Get Ugly

Improved earnings at broadcast network media owners such as News Corp. and CBS cannot be sustained without seizing a larger chunk of the retransmission fees cable and other distributors are paying their affiliated TV stations.

Unfortunately, local TV stations need that expanding new income because they have their own financial issues. They are struggling to develop online and other digital revenues to supplant declining advertising dollars particularly during nonelection years. Like their newspaper brethren, their local stronghold faces stiff competition from new Web competitors including bloggers, hyper local news sites such as Yelp and classified ad services such as Craigslist.

Even stations' own broadcast networks have siphoned away some of their TV advertising while compromising their monopoly on prime time programming by streaming it online complete with commercials for anytime on demand viewing. And let's not forget the damage done by fiddling with the all-important late local news lead-in fiasco caused by the short-lived movement of Jay Leno and the Tonight Show to prime time.

Now that stations have enjoyed some recent success in negotiating license fees from cable, satellite and telecom operators for the retransmission of their programming, the Big 4 broadcast networks (CBS, FOX, ABC and NBC) want a bigger piece of that as well in an effort to offset their own broadcast TV woes. There already has been loud resistance from cable and satellite distributors.

The irony, of course, is that each of these broadcast networks is owned by a media conglomerate that have other assets including reliably profitable rival cable networks that generate dual advertising and subscription revenues. News, Walt Disney Co., NBC Universal and CBS also negotiate handsome retransmission frees from distributors for their cable and their broadcast networks. Their film studios, radio and billboard, publishing and theme park businesses all tend to be cyclical and subject to economic trends.

These media conglomerates already benefit from the fact that cable networks receive some 96 percent of subscription fees paid by distributors (or an estimated $27 billion in annual affiliate fees) even though they generate less than 60 percent of total TV ratings.

That translates into about $2.3 billion in cable network affiliate fees per month today compared with less than $100 million in retransmission payments paid to local TV station affiliates and less than $30 million in retransmission payments paid monthly to the major broadcast networks and their owned TV stations, according to Morgan Stanley analyst Benjamin Swinburne.

CBS (which owns BNET) is the smallest, most traditional advertising-dependent of the media companies. It is most vulnerable to local media struggles, the devastation of auto advertising, the shift to online media platforms and cyclical election spending. CBS could siphon as much as $300 million in after tax cash flow from retransmission fees paid to its affiliated stations by 2012, Swinburne estimates. Some large network affiliated TV station groups already exceed that level of annual retransmission payments.

That would represent about a 12 percent upside to most earnings estimates for CBS, which would go a long way to offset the 15 percent drop in advertising revenues its experienced in 2009. Taking as much as half of its affiliates' annual retransmission fees will help to balance out erratic swings in ad revenues which (base case) could grow 9 percent in 2010 on political and Super Bowl spending, and decline again by at least 1 percent in 2011, Swinburne said in a new report. Steady growth of CBS' Showtime premium cable network and its TV studio also should help to offset lost local ad revenues which are not expected to return to their peak levels.

News likewise reached hard-fought agreements with cable operators for retransmission revenues for its owned TV stations and will seek an escalating portion of such fees pay to its affiliates. This could collectively render about $300 million in retransmission revenues by 2013 when News completes renegotiation of its affiliate pacts, Swinburne said. The most contentious negotiations between networks and distributors have become fodder for regulatory reviews.
The unknown in such assumptions is whether or not consumers ultimately can afford to shell out more money to essentially keep the broadcast TV model afloat.

Bernstein Research analyst Michael Nathanson recently did the math. If each of the four network demands and secures a $1 per subscriber retransmission fee from distributors, it would translate into a monthly increase of $12 (given most cable, satellite and telecom operators' 65 percent gross margins), or $13 billion in additional annual cost to consumers.

Given that 40 percent of US households have a mean income of $20,587, and the recession along with about 18 percent real unemployment have arrested consumer spending, the brawl over retransmission fees promises to be bruising.