Skyrocketing Retransmission Fees

I just saw that the Sinclair Broadcast Group, one of the largest owners of local television stations now gets nearly 50% of their revenues from retransmission fees. This is an extraordinary number when considering that a decade ago that number would have been zero. What is most telling about that number is that Sinclair is growing profits while their core business is sinking. Their advertising revenues are down and the cable companies that carry their signals continue to lose customers due to cord cutting.

Retransmission fees are probably the leading factor in the escalating cost of buying cable TV. Retransmission fees are billed by local over-the-air (OTA) network stations like ABC, CBS, NBC and Fox to allow cable systems to carry their programming. FCC rules make it mandatory for cable companies to carry local OTA content. A decade ago there were almost no retransmission fees outside of a few major markets like New York City. Traditionally cable companies added local programming to their line-up without having to pay a fee – and everybody was happy because the local networks affiliates still got the eyeballs for their advertising.

But today every local network affiliate charges cable companies to carry their content. The current fees average fee per station has climbed into the range of $3 per network month, meaning that roughly $12 of every cable subscription is being sent directly to the local network affiliates – not into the pocket of the cable companies.

This is a rigged game and cable subscribers are funding huge profits for the network affiliates. The cable companies are forced to carry the content and the OTA network affiliates raise rates each year, essentially printing money. There is supposedly a negotiation process for the rates, but the OTA network affiliates have all of the power in the relationship and generally are inflexible on prices.

I suspect that the average cable subscriber has no idea that they are paying close to $12 per month to get the same content they could get for free with a TV antenna. We know from numerous surveys that cost is the leading factor that convinces households to cut the cord, and the escalating retransmission fees have been driving up cable rates by $2 to $3 per year.

We know from looking around the industry that many folks are rebelling against the high prices stemming from the retransmission fees. Over the last three years it’s estimated that there are almost 11 million new homes that are using antennas to get local content. Some of the most successful online video sources like Sling TV and Playstation Vue offer their lowest-cost packages of programming without any local programming.

Sling TV has gone so far as to offer as to offer a box it calls Air-TV that includes an antenna to get local content that is then integrated with the other Sling TV content. The CEO of Sling TV says that the company makes no money with this product, but it’s proven popular and helps to convince households to drop traditional cable by making it easy.

Most of the large cable companies have responded to the retransmission fees by creating a fee separate from the cost of the cable product. They label these fees with names such as Local Programming Fee and hope subscribers think it’s a tax. This is a deceptive billing practice because it lets cable companies advertise the price of cable without the local fees, yet every customer must pay these fees. I was looking at a customer bill from a big cable company last week that had a $40 rate for cable and an $11 cost for the local networks, meaning that the real price for the product was $51 yet they advertise the $40 rate when trying to attract customers.

Congress is the only one who can fix this issue. It is rules established by Congress that make it mandatory for cable providers to carry the network affiliates. I think almost every small cable provider I know would gladly provide free rabbit ears to customers if they could get out paying these fees.

Of course, there is another side to the issue to consider. If these fees ended today a lot of local TV stations would likely fold. This raises the question of whether these businesses should be propped up by this clear subsidy. The original concept behind the Congressional rules was not to establish a revenue for local affiliates, but rather to make sure that cable subscribers had access to local programming. But some smart industry consultants talked local stations into charging these fees and it’s now as close as you can get to a business that prints money.

The retransmission fees should probably not go to zero – but there needs to be a balance between network affiliates and cable companies. Today there is nearly zero negotiations on these fees. There are several possible fixes I can think of. One easy fix would be to allow cable companies to make these stations optional for customers. Then people who want to use an antenna could avoid the fees. This would put some balance into the negotiations since the networks would be less likely to gouge when they’d see the impact of customers dropping their programming. This is not the only possible fix – but we need to try something, because this is badly broken.

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