Leveling Off of Retrans Fee Growth a Question Mark for Cable
Facing another year of swiftly growing retransmission consent fees paid to broadcasters, the cable industry and experts say it's unclear when, or if, that rate of increase will begin to moderate. That broadcasters have been able to keep those rates of increases this long is surprising, given declining broadcaster ratings and the proliferation of other content sources like over the top, said Duke University Shepley professor of public policy Philip Napoli.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
SNL Kagan told us it estimates retransmission fees this year will total $10.1 billion, an 8.6 percent increase over its 2017 estimate of $9.3 billion (see 1711210024). The FCC Media Bureau's latest annual cable price report said last week that in 2015, retrans fees paid by cable operators rose on average 34 percent per subscriber to $57.21 (see 1802120026).
Retrans growth should start moderating in three to five years, said National Cable Television Cooperative CEO Rich Fickle. He said small cable operators were often particularly hard hit by the last retrans agreement renewal cycle that concluded at the end of 2017, with many NCTC members paying $8 to $10 per subscriber per month in retrans costs. He said the rate of fee increases should slow as cable operators become less dependent on video programming and focus primarily on broadband. He expects to start seeing cable systems opting not to carry all the stations in a market. That "winnowing down" process should also be helped by the increasing ease of getting those signals via alternate sources such as OTT, Fickle said.
Fickle said regional sports network programming could become a bigger cost driver for cable operators starting in 2019 if Disney gets regulatory OK to buy much of 21st Century Fox, since Disney would have a number of RSNs and sizable leverage in negotiating. Consolidation could also start driving up cable network pricing beyond 2018, he said.
Napoli said retrans rate growth seems to be driven largely by the lack of MVPD negotiating power due to the political blowups when negotiations break down and cable operators' desire not to take that blame. Cox Communications said retrans and sports, including regional sports networks, "continue to be the biggest battlegrounds" in negotiations.
Retrans fee growth won't moderate soon since broadcasters with must-have programming have no economic incentives to hold down those rates, said a lawyer with cable clients. The lawyer said programmers with no must-have programming are at more risk of not being carried, citing the ongoing Starz blackout on Altice USA (see 1801020039).
In preliminary polling of American Cable Association members, very few said their retrans fees are going up this year by less than 50 percent, ACA President Matt Polka said. He said ACA members on average will see their retrans fees up 88 percent between 2017 and 2020. "Something is just drastically out of whack," he said, saying neither the FCC nor Congress is likely to act to change the balance of power in retrans talks with broadcasters. "At the FCC, it's probably the other direction," Polka said, citing the agency's relaxing of media ownership rules. NAB didn't comment. A broadcast official noted Kagan data also shows retrans costs are a small part of what cable operators pay in programming fees.
Facing sizable increases in reciprocal compensation fees to be paid to networks, plus the same decline in ad revenue hitting the media overall, local broadcasters often have to turn to rising retransmission fees as a source of revenue, said Marashlian & Donahue lawyer Nate Hardy, who has small broadcast and cable clients. He doesn't see "a breaking point" in retrans at least over the next four to five years, but added a point will come "where this is going to become untenable." He said it sometimes appears small and local cable and broadcast operators in retrans talks are particularly empathetic with the pressures on each other, but talks between local systems and national players lack that mutual understanding and end up being more difficult.
Local broadcasters' reverse compensation to networks is growing more rapidly than retrans, and most small and mid-sized broadcasters' bottom lines aren't improving because of higher retrans fees charged to cable operators, said a lawyer with broadcast clients. The lawyer said small MVPDs in particular are seeing robust retrans fee increases, but broadcasters still don't consider themselves fairly compensated for their signals given what MVPDs are paying cable networks or regional sports networks for programming that get smaller ratings. The rate of retrans fee growth already is slower than it was in years past and will moderate more over time -- in part because of the realities of what markets can bear, the lawyer said.
Fox Executive Chairman Lachlan Murdoch in an analyst call last week said that Fox after its expected sale of its cable assets to Disney sees big potential to "aggressively" increase its retrans fees due to its heavy investment in sports, particularly the NFL, and "being a more focused company" with a smaller bundle. Charter Communications Chief Financial Officer Chris Winfrey told analysts last week the company expects 2018 programming costs per customer to grow more slowly than in 2017, largely due to numerous programming renewal deals struck in the past 15 to 18 months. It said in 2017, programing costs went up 11 percent. Comcast CFO Mike Cavanagh in an analyst call said programming expenses were up 12 percent in 2017, but it also expects programming cost increases "to meaningfully moderate" compared with 2016 and 2017. Comcast's retrans revenue this year is expected to hit $1.6 billion, up $200 million year over year, he said.