The vast majority of the public has never heard of retransmission fees, and yet it is those fees along with reverse compensation that is responsible for a lot of the rate increases in cable bills in recent years. These two fees are associated with what cable companies pay to carry the major networks – ABC, CBS, NBC and Fox.
For most of the history of cable TV in this country local cable systems were able to get access to local channels for free. The consensus in the industry was that local networks benefited as much as cable companies when their signal was on carried a cable system. The quality was often better on cable and cable systems often brought the local networks into homes that didn’t watch them before. And since network stations always made their money from advertising, it was argued that, if anything, putting stations onto cable systems increased the local station’s reach and gave the station more viewers.
The FCC made it mandatory for cable networks to carry local networks starting with the Cable Television Consumer Protection and Competition Act of 1992. Local network stations have the right under those rules to be carried or not carried using either must-carry rules or retransmission consent rules. A few local networks stations in major metropolitan areas negotiated small fees to carry their signal starting in the mid 1990s. But the phenomenon only became widespread in the last 10 – 15 years and today almost every local network station chooses retransmission consent rules that allow them to charge cable systems for carrying their content.
This has turned into big business. I just saw an article last week where CBS expects to take in more than $1 billion this year between retransmission consent fees and reverse compensation fees (explained below).
Retransmission fees are not cheap for cable companies and many of my clients around the country tell me that the cost for each local network station is nearing an average of $2 per month for each subscriber. For the four major networks that’s $8 per customer per month. That is a really large cost to a cable operator, especially considering that a decade ago this was free to them. A lot of the cable companies have been loath to add all of these costs into the base cable bill and instead have been hiding some of these fees in charges called something like ‘local channel fees’ or some similarly non-descriptive name.
Small cable companies obviously dislike these fees and many of them assume that their local station owners are getting rich from the fees. But that’s where reverse compensation comes into play. Reverse compensation are the fees that the major networks charge to local affiliate stations to remain affiliated with them. It’s no coincidence that the amount of reverse compensation fees demanded each year by the big networks has been rising at the same rate as retransmission fees. It turns out that the local stations are paying most or all of their local retransmission fees back to the networks. And it means that the local affiliate stations have no alternative to raising the retransmission fees in order to pay the networks.
There is no real way for a cable subscriber to opt out of getting the local networks. A customer is free to use an antenna and receive local channels over the air, but unfortunately this does not get them out of paying the cable company for these networks if they buy any cable product. The FCC rules require the major networks to be included in the basic tier (the first and smallest tier of programming) and customers don’t have an option to opt out of the basic tier if they want to buy a higher tier.
There have been several attempts in the industry to avoid the local retransmission fees. Aereo tried a different to beam local stations to customers using an antenna that was ‘owned’ by the customer. But the courts ultimately decided that this violated the cable TV laws and Aereo went bankrupt. But now, finally there is an alternative, which is to get programming from the Internet and not the cable company. But that means if a customer wants to avoid these fees they must cut the cord and get these channels with rabbit ears.
There doesn’t seem to be any end in sight to significant annual increases in retransmission fees. The major networks are coming to rely more on these fees as they see advertising revenues peaking, with the expectation that advertising will decline in the battle with online advertising. I doubt that very many people understand that they are already spending $100 per year for networks that they could receive for free with a set of rabbit ears. But since there is no easy way around these fees other than to cut the cord, I’m not sure it would matter much even if they did understand.
The retransmission fee demanded by WHDH NBC in Boston must be particularly high. We discovered when vacationing on the Cape that NBC is currently blacked out on DirecTV as the two renegotiate… so no Olympics! The stakes are high for DirecTV, which runs the risk of losing customers – for those who have the option of OTA or cable. In our case, the rural location has no other TV choice and streaming fails, stutters or displays at too low of a quality due to the 3/1 DSL. So there’s simply no other option.
There is no ceiling on the fees and they are expected to climb every year. I have no doubt that the fees in major cities are the highest.
By the way, you can get some, but not all of the Olympic coverage on Sling TV assuming that the Internet connection at the Cape is fast enough to stream video. You can sign up for one month at a time.
If retransmission fees were illegal and only must-carry were allowed, then every station would demand must-carry, right? Because more eyeballs are better than fewer eyeballs, and there’s no cost to the local station of being carried on cable. Right? I’ve always wondered why, then, it seems that the broadcast stations/networks have all the leverage in the negotiation. Have any cable operators ever played real hardball in negotiations, refused to pay, been willing to (temporarily?) lose a local network station, maybe found a more flexible local station (on the same network) from another market? I believe I’ve heard of hardball negotiations for some cable-only channels, leading to cable customers temporarily losing access to a cable-only channel, but I don’t recall hearing of something similar for local network affiliates. And what if the cableco will settle for just the national network stream, without the local programming; does that run into the same retransmission fee demand?
Yes, there have been cases where cable networks have refused to sign a contract. But in the long run they eventually lose. IT turns out that customers really want to see local programming like news and other content and cable operators give in to that demand. It also would be rare for a network affiliate from elsewhere to agree to such an arrangement. They all stick together on these kinds of issues.
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