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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.