CBS just announced that they are making over $1 billion per year in retransmission fees. These fees are a big culprit in the continually steep price increases for cable TV.
Retransmission fees are the fees that the major over-the-air networks (ABC, CBS, NBC and FOX) charge to cable companies for the right to air their content. These fees have been allowed in FCC rules for decades, but it’s been in the last ten years or so that the networks woke and up started charging cable companies to carry their content.
There are two slightly different ways that these fees work. The majority of the CBS stations around the country are owned by somebody else and are referred to as affiliate stations. CBS charges these affiliates a fee each year – which the industry calls reverse compensation – to give each station the right to carry the CBS programming. CBS and the other major networks increase these reverse compensation fees every year, and each affiliate station has little choice but to then pass those costs on as increased retransmission fees to cable operators.
CBS also directly owns 14 TV stations in major cities as well as two smaller stations. In these stations CBS directly charges the retransmission fees to the cable companies.
I call these fees runaway in the blog title because there doesn’t appear to be any end in sight for the size of these fees. At the end of 2015 CBS had estimated that these fees would grow to $2 billion by 2020. But they just now upped their estimate to $2.5 billion. To hit those targets from today’s $1 billion revenue figure means we’ll be seeing big increases in cable rates. And if CBS is raising the fees this much you can expect the same thing from the other major networks. This is verified by estimates from SNL Kagan who now estimates total retransmission fees in 2020 of $10.6 billion.
To put that number into perspective, there will roughly be around 90 million cable households by 2020. That means by then that the average retransmission cost per household will be $10 per month. But that average hides the real story. A lot of satellite subscriptions don’t include network channels, or if they carry some they come from one of the major markets like New York City or Chicago. I’ve always figured that the satellite guys are getting a greatly reduced price for those channels, which would benefit both them and the big station that sells bulk subscriptions. There are also many places in the country where the cable systems don’t carry all four networks, or they again carry some remote station at a reduced cost. When you consider all of that I’m guessing that the real cost per household for urban cable systems will be around $15 per household per month.
For years now the major networks have been saying that they deserve to get as much revenue as the most expensive cable networks – and that means ESPN. ESPN now costs over $6 per household per month. If the four major networks climb that high that will be $25 per household per month just for the four major networks. The irony is that most households can receive these networks for free with “rabbit ear” antennas.
But the FCC cable rules require that cable systems carry all local networks that can be received by people with rabbit ears. And that means that cable customers cannot opt out of receiving or paying for these channels in a cable subscription. The only way for a household to avoid these fees is to drop traditional cable packages completely.
A number of cable companies have begun to isolate the retransmission fees on customer bills and call it something like “local network charge.” But I don’t think the cable companies have done a very good job of explaining the retransmission fees to customers.
There are more households every year thinking about dropping cable, and for many of them the primary issue is price. As cable subscription prices keep climbing much faster than inflation my guess is that the cord cutting phenomenon is going to accelerate. There are OTT services now like Sling TV that will sell customers a high quality set of rabbit ears that can be easily incorporated with their content. There are a lot of households that will be happy to avoid paying for local networks if somebody can make it easy for them to do so.
Over the Top or ‘Parasitic” services are interesting. I think the whole landscape of media distribution will evolve into a direct ala carte subscription to the specific channels a person wants to watch. As soon as Gigabit internet is available to all pops in land line, wireless and mobile delivery then there will be a great ‘flattening’ of the method of distribution of content. Everything will be a direct app connection from the producer to the consumer. I think there will be great opportunity for a ‘affiliate’ sales model that compensates a consumer for sharing a link to the app for that channel and earning a small % of the subscription fee each month and a ‘reseller’ model that affords the bulk purchase of subscription credits at a wholesale discount for the better funded marketers.
Also with the convergence of affordable media production hardware with the home studio small team production of entertainment content there will emerge an entertainment hub system for marketing your channel app and an app that organizes and aggregates all the apps into a guide for selection of the app content stream for simple selection and viewing.
That sounds like a place we all hope this eventually moves to. But it’s going to take a long time to wrest away the market power of the current content providers. As long as they are providing the content that people want to see they are going to be the ones dictating how it gets distributed and how much it costs. I would include Netflix, Amazon and other OTT content creators into the same basket as the traditional content creators like NBC and CBS. These companies all have a major incentive to control the compensation for their content and the market power to do it their way.
I think we end up at your vision when there is mountains of good content being produced outside of these traditional big companies. Until then, I think we are still in the mode where ‘content is king’ and the content providers get to set the rules.
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