The Bruising Retrans Battle

BROADCASTERS AND THEIR DISTRIBUTORS ARE WAGING WAR MORE FIERCELY THAN EVER, AND BLACKOUTS ARE LIKELY TO RISE FOLLOWING A COVID SLOWDOWN. BY KRISHNA JAYAKAR

CLOSE TO 16 MILLION HOUSEHOLDS WERE impacted nationwide when AT&T’s DirecTV and U-Verse services dropped the signals of 64 TEGNA television stations on Dec. 2, 2020. For 18 days the blackout continued, igniting a social media firestorm and flooding complaint hotlines. More recently, in October 2021, a TEGNA dispute with the satellite provider Dish resulted in close to 3 million Dish subscribers losing access to local broadcasters in 53 markets. The reason for the blackouts? Breakdowns in retransmission consent negotiations between the companies. The TEGNA disputes are among the latest in a series of retransmission-related blackouts in recent years. In early 2020, a dispute between ViacomCBS and Comcast affected almost 12 million subscribers in 15 markets. Another one, in 2019, between Nexstar Media and Comcast affected 11 million. Despite the negative publicity and the severe consumer backlash, both TV stations and multichannel video program distributors (MVPDs) are willing to risk blackouts as part of their negotiation strategy. While they’ve been going on for a long time, blackouts seem to occur more frequently and last longer with each passing year. To examine the trends, I compiled data from Kagan from 2011 to 2020, on 413 publicly reported retransmission agreements involving network-affiliated full-power commercial TV stations.

Of these, 161 carriage negotiations (39%) ended in deadlock, blacking out more than 1,400 TV stations. The percentage of negotiations that triggered a blackout increased over that time, from 21% to 50%. (See chart, page 16.) Blackouts also lasted longer. If the typical blackout was 37.4 days in 2011, it rose to 99.4 in 2018 and an unprecedented 170.8 days in 2019.

The blackouts settled down to 37.2 days in 2020, but that was an anomaly. Under the shadow of the pandemic, only 10 retransmission deals were finalized. Though five involved a blackout (50%), these were settled relatively quickly. The long-term trend indicates that 2020 was only a temporary plague-year truce.

In 2021, as this article goes to print, the trade press is abuzz about an impending blackout that threatens to be the largest ever, involving the Dish network and 108 of Sinclair Broadcast Group’s TV stations. A blackout reportedly was averted in recent months as the two parties agreed to short-term extensions while they continued to negotiate.

There’s an obvious reason why retransmission consent is such a contentious issue: money.

BROADCASTER VANTAGE POINT

In 2020, U.S. television stations made a record-setting $13 billion from retransmission revenues, up 9% from the previous

THE PLAYERS IN RETRANSMISSION CONSENT ARE COMING TO THE ARENA INCREASINGLY BULKED UP AND READY TO DO BATTLE.

year, according to Kagan. Retransmission revenues now account for fully 36% of TV station revenues. Considering that retransmission consent comprised less than 4% of TV station revenues in 2009, this is a phenomenal growth rate.

Average monthly per-subscriber rates, which were around 25 cents when retransmission consent was first introduced, have increased to $2.71 for each station.

Largely due to retrans revenue growth and to a smaller extent, digital/online revenues, television stations have managed to eke out a 5.6% annual growth in total revenues over the last decade, according to Kagan.

In sharp contrast, broadcasters’ advertising revenues on their traditional outlets have faced significant challenges. That revenue stream has been buoyed by the biennial blockbuster political sector, and a phenomenal growth in spending tied to online sports betting, in the many markets where it’s legal. But non-political advertising dwindled during 2020 as the pandemic kicked in. And before that, over the last several years, growth in some core (non-political) advertising categories has been anemic.

Another factor for stations involves their affiliation agreements with the national broadcast networks. In the distant past, the industry practice was for the networks to compensate their local affiliates for carrying their programming. The networks recovered these costs by embedding national advertising in their feed.

That cozy system began to change in the early 2000s. After years of decline, station revenue from network compensation died out in 2012. Instead, the networks began to demand that the stations compensate them out of growing retransmission revenues. Practically unknown before 2005, these so-called reverse compensation deals have become standard industry practice in the network-affiliate relationship.

Another worrisome trend for television stations is the networks’ new practice, dubbed affiliate bypass, of licensing their content directly to MVPDs, which cuts out stations altogether. Between reverse compensation and affiliate bypass, TV stations are experiencing a threat to retransmission revenues, their best chance of revenue growth.

TIGHT MVPD SQUEEZE

While retrans revenues were a godsend to TV stations, they put MVPDs in a tight bind. Traditional multichannel subscriptions fell by a whopping 8.3%, to 73 million in 2020, and that decreased revenue for the operators as well. Tempted by streaming video subscription services and the free social media content available online, only 56.5% of U.S. households now subscribe to legacy multichannel cable systems, according to Kagan. Remaining subscribers often go to lower tiers of service, in what has been dubbed “cord shaving.”

Aware that consumers have choices and are increasingly price sensitive, MVPDs

70 50 60 40 50 30 40 20 30 10 20 0 10 0

21% 27% 53%

53%

18% 50%

60% 44% 61% 44%

55%

50% 44% 44% PERCENTAGE OF BLACKOUTS

21% 2011

27%

2012 2013 18% 2014

PERCENTAGE OF BLACKOUTS

2015 2016 2017 2018 2019 2020

2011

Note: Percentage of retransmission negotiations that triggered a blackout, by year.

2012 2013 2014 2015 2016 2017 2018

20202019 SOURCE: Kagan

Note: Percentage of retransmission negotiations that triggered a blackout, by year.

SOURCE: Kagan

170.8

AVERAGE BLACKOUT DAYS

170.8

AVERAGE BLACKOUT DAYS

99.4

37.4 30.5 26.6 40.5

22.7 52.7

34.3 99.4

37.2

37.4 2011 2012 2013

30.5 26.6 40.5 2014 2015

52.7 2016

34.3 2017 2018

Note: 22.7 Average duration of blackouts, by year. 2019

37.2 2020

2011 2012 2013 2014 2015 2016 2017 2018

SOURCE: Kagan 2019 2020

HOW RETRANS BEGAN

FOR YEARS, RETRANSMISSION CONSENT WAS ONLY AN OBSCURE PROVISION in the Cable Television Consumer Protection and Competition Act of 1992. So-called must carry rules required cable systems with more than 12 channels to allocate up to a third of their capacity to local commercial TV stations. That came in addition to other provisions for public and lowpower stations.

Led by the efforts of Nexstar Media, TV stations began demanding retransmission consent payments from the MVPDs. Initially, the distributors refused to pay. After all, why would they pay for content that they had previously received for free?

However, they began to relent in the mid-2000s when broadcasters — especially those offering professional and college sports coverage — exerted their leverage. From that trickle in the mid2000s, retransmission revenues have now grown to $13 billion, according to Kagan.

Note: Average duration of blackouts, by year. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

$4.92 $6.52 $8.10 $9.52 $11.06 $11.96 $13.02 $1.80 $2.44

SOURCE: Kagan

RETRANSMISSION REVENUES (IN BILLIONS) 2011 2012 $3.66 2013 2014 2015 2016 2017 2018 2019 2020 Note: For U.S. TV stations SOURCE: Kagan

$4.92 $6.52 $8.10 $9.52 $11.06 $11.96 $13.02 $1.80 $2.44

RETRANSMISSION REVENUES (IN BILLIONS) $3.66 Note: For U.S. TV stations SOURCE: Kagan

RETRANSMISSION REVENUES (IN BILLIONS)

$8.10

$1.80 $2.44 $3.66 $4.92 $6.52 $9.52 $11.06 $11.96 $13.02

2011 2012 2013 2014 2015 2016 2017

Note: For U.S. TV stations 2018 2019 2020

SOURCE: Kagan

have reluctantly passed along retransmission fee increases to consumers, accelerating subscription losses. To avoid annoying customers further, these price increases are often hidden as confusing and misleadingly labeled “fees,” notes Consumer Reports.

In this environment, the MVPDs allege that the broadcasters’ demands for year-over-year retransmission-fee increases are unreasonable and contrary to the latter’s public interest obligations. They point out that total retransmission consent payments have increased annually even when the subscriber base has shrunk because per-subscriber rate increases have outpaced the subscription declines.

MVPDs also point out that these fee increases come at a time when they are under pressure to increase their infrastructure investments, to satisfy greater consumer expectations for connectivity and speed. NCTA, the internet and television association, reports that its members have collectively spent $290 billion on infrastructure over the last two decades.

But though they are unified in opposition to the television stations, MVPDs are hardly a homogeneous group: wired cable and broadband providers are long-established and stable incumbents in many markets, while satellite distributors are still struggling to find a footing.

The MVPD sector also includes small single-market cable systems, as well as large groups with national footprints. Comcast and AT&T are large and well-financed behemoths, with a history of aggressive competitiveness. In many cases, they butt heads with each other as much as they do with content providers.

A fourth type of player adds another pressure point: streaming video platforms. Both TV stations and networks license their content to online platforms – many of which can be accessed over the top (OTT), on TV sets.

THE MERGER FACTOR

Another trend that makes the retrans fight increasingly contentious is industry consolidation. Five companies own 33.5% of all full-power U.S. TV stations according to S&P Capital IQ data in March 2021. Among them are Nexstar (161 stations, 9.7%), Gray Television (128, 7.7%), Sinclair (112, 6.7%), E.W. Scripps (93, 5.6%) and TEGNA (63, 3.8%).

The cable television market may be even more concentrated: a single company, Comcast, has a 25.8% share, and along with Charter (21.3%), controls almost half the multichannel video subscription market. On the network side as well, megamergers such as the 2019 CBS-Viacom deal and the NBC-Universal merger a decade earlier have created content production powerhouses, even as Netflix and other streaming platforms pump money into original programming.

The players in retransmission consent are coming to the arena increasingly bulked up and ready to do battle. Consider that a retrans deal in 2011 involved 6.5 TV stations on average and spanned 4.3 markets. In 2020, it was 20.9 stations and 15.3 markets, according to my analysis of Kagan data. (Last year’s numbers are slightly down from 2019 due to the slowdown in retransmission negotiations during the pandemic.)

The scale acquired through mergers and acquisitions allows both station groups and MVPDs to drive harder bargains. The outcome: more frequent and longer blackouts.

Given all these dynamics, what does the future hold for retransmission consent? Clearly it will continue to be a contentious issue. However, blackouts of popular television shows and sporting events are highly resented by audiences and have generated huge public relations backlashes for all the parties involved. No one wants a blackout, and yet no one is willing to back down to avoid one.

RULE MAKERS WEIGH IN

Legislators and regulators have gotten into the act. Since 2000, the Federal Communications Commission (FCC) has had rules to ensure that both television stations and MVPDs negotiated in “good faith” on retransmission. However, these provisions were rarely enforced, partly because bad faith is hard to determine. But in recent years the FCC has moved more aggressively. For the first time, in December 2019, the FCC imposed (and later upheld on appeal) a $9.5 million fine on several stations in the Sinclair group for bad faith in retrans negotiations.

Also in 2019, Congress passed the Television Viewer Protection Act, which (among other things) allowed smaller MVPDs – often at a disadvantage when negotiating with station groups – to coordinate their actions through MVPD buying groups.

There is also a proposal currently in Congress, called the Modern Television Act of 2021, which would allow retransmission of a broadcasters’ signal for up to 60 days without an agreement while the parties negotiate. It would also require mandatory arbitration under FCC oversight if negotiations fail. But given the political gridlock in Congress, not much action can be expected in the current legislative session.

There’s little doubt that viewers will continually face more blackouts, and the retrans war will wage on for some time to come.

Krishna Jayakar is a professor and head of the Department of Telecommunications, Bellisario College of Communications, at Penn State University. He can be reached at kpj1@psu.edu.