Regulation - What is it Good For?

The Fight Over Retransmission Consent

There has been a quiet legislative battle brewing in Congress all year concerning the renewing of STELAR (Satellite Television Extension and Localism Act Reauthorization). This is a bill that comes up for renewal every five years. The original bill in 1988 was intended to make sure that rural customers got access to major network television. We lived in a different world in 1988 and it was a technical challenge for satellite providers to get access to local network affiliates (ABC, CBS, FOX, NBC, and PBS) across the country and to broadcast those signals into the appropriate local markets. The original STELA legislation allowed the satellite companies to import network channels from other markets. Without the law, in 1988 numerous rural markets would have lost the ability to watch the major networks.

Of course, Congress loves to tack riders into legislation and the STELA legislation became the primary vehicle for updating the retransmission rules for all broadcasters and cable companies. The fight over the renewal of the legislation has been fierce this year since retransmission consent is the biggest issue of contention between broadcasters and cable TV providers.

Retransmission fees have exploded over the last decade. The average local network station now typically charges cable companies a fee of $3 – $4 per viewer for the right to retransmit their content on cable networks. Not too many years ago this was done for free.

It’s not hard to understand the motivation for the broadcast industry. Advertising revenues are in freefall due to cord-cutting and due to the proliferation of web advertising using Google and Facebook. Retransmission fees are a way for broadcasters to fill the coffers and replace that lost revenue. Interestingly, though, most of the retransmission revenue ends up at the big corporations that own the network channels. I’ve talked to local network station owners who say that their corporate parents suck away most of the retransmission revenues in the form of fees to continue with the network franchise. At the end of the day, most of the retransmission revenues end up with the parent companies of ABC (Disney), CBS (CBS Corporation), FOX (FOX Corporation), and NBC (Comcast).

There is no question that retransmission fees are hurting the public because they have been one of the primary drivers (along with sports programming) for ongoing substantial rate increases.  The average cable subscriber is now paying between $12 and $15 per month for the right to view network channels on their cable system. These are the fees that many cable companies have been hiding in something like a ‘broadcast fee’ to allow them to still advertise a low price for basic cable.

Like with many of the most contentious issues, the fight is largely about money. With the current number of cable customers around 85 million, retransmission fees are generating $12 to $14 billion per year. However, if you read the comments of the two sides of the issues you would think the argument was fully about protecting the consumer. Many of the arguments being made are about stopping blackouts – which occur when broadcasters and cable companies can’t agree on the fees and conditions for buying programming. If the issue was really about the consumer then Congress would be talking about capping retransmission fees or at least limiting the annual increase of the fees.

To some degree, the issue transcends cord-cutting. Anybody buying an online service that includes the major networks is also paying some version of these same fees. That’s one of the primary reasons why the prices of the only TV-equivalent services have been rising. Online services have more flexibility because they are not required to carry any specific programming. However, once a service decides to carry the four major networks, they are somewhat at the mercy of the broadcasters. As an example, I currently subscribe to Playstation Vue which carriers the same local network affiliates that I would also get from Charter. One has to imagine that the fees charged to Playstation Vue are similar to what is being charged to the local cable company.

The way to know this is a huge issue is because the industry has created organizations focused on this one issue. For example, most of the cable companies other than Comcast (who is on the opposite side for this issue) have created the American Television Alliance to lobby against certain provisions of the bill. If you look at their website it looks like it’s a consumer-friendly site, but the members are largely the big cable companies. This is a bogus lobbying organization created solely to lobby on this legislation.

The legislation was introduced in July as the Modern Television Act of 2019. The five-year clock on the last legislation expires soon, but in 2014 the legislation was passed many months after the expiration date. It doesn’t look likely for the latest legislation to pass on time.

The Industry

Providing Local Content to Rural America

This fall we can look forward to a big battle in Congress over the rules regulating cable TV. The rules that govern the rights of satellite TV providers to carry local network affiliates (ABC, CBS, NBC, and FOX) will be expiring. If Congress takes no action it’s possible that local networks could disappear from satellite cable lineups.

In 2014 Congress passed the STELAR Act (Satellite Television Extension and Localism Act Reauthorization). This legislation allowed satellite providers to deliver distant network stations into rural markets rather than having to negotiate with individual stations in every market. This has acted to hold down satellite TV costs since it makes local stations agreeable to negotiate fees with the satellite providers at reasonable fees.

This is a big contrast to the way that landline cable networks have to pay for local programming. In the 1992 Cable Act, Congress enacted the idea of retransmission consent. These rules were intended to protect local network affiliates since many cable companies at the time were electing to not add local stations channels to their line-ups. The 1992 Act made it mandatory for cable companies to carry local networks, and for the most part, they did so for free.

However, over the last decade, as local stations were losing advertising revenues, they have stepped up charges to cable companies to carry their signal. The fees for access to local network affiliates in most markets has skyrocketed and contributes $10 – $12 per month towards the cost of cable TV bills in most markets (in a few a lot more).

There is a lot of pressure on Congress to look at the whole retransmission issue while they are considering the STELAR renewal for satellite companies. Congress hasn’t made any significant regulatory changes for the cable industry since the 1992 Act and the industry has changed drastically in the last few years.

Just looking back to 2014 when the STELAR act was passed, online content providers like Netflix represented only 2% of the industry. Today there is a slew of online content providers and there are now more households buying online content than subscribing to traditional cable packages. With cord-cutting, the numbers are shifting drastically, with the latest figures trending towards traditional cable losing as much as 5% of total market share this year.

We are also seeing escalating battles over carriage of content. There were 213 blackouts in the industry as of the end of July, contrasted with 165 blackouts for last year. Last month a battle between AT&T and CBS caused those channels to go dark. There has been a running battle between Dish Networks and Univision this year. It’s becoming obvious that the cable companies are no longer willing to automatically accept huge rate increases from local network affiliates.

It’s a classic battle of huge companies. Cable companies are pushing to break the required nature of retransmission consent rules that require them to carry local stations – that rule gives cable companies almost no negotiating power. Meanwhile, the big networks like ABC and CBS have been benefitting from the retransmission revenues. While these fees are theoretically paid to local stations, the parent networks sweep most of this money into their own coffers. The network owners are pushing hard to keep the retransmission consent rules intact.

Most local stations now charge between $2 and $3 monthly to cable companies for every customer that receives their signal. It’s an interesting dynamic because a majority of people could instead get this content for free through the use of rabbit ears. Additionally, most of the national content from the big networks is available online – it’s not hard to find ways to watch the shows from CBS or NBC. The big monthly retransmission fees only add local programming like news and local sports to cable subscribers.

The cord-cutting phenomenon tells us that many households are willing to walk away from local programming if it saves them money. I was in a meeting last with ten people, and not one of them watches local news and local programming. The big question facing Congress is how relevant local content is to most households. There are many people who still love local news and local sports, but that universe keeps shrinking as households are deluged with content alternatives. Expect to hear lots of rhetoric this fall as both sides rachet up arguments for Congress.


Regulation - What is it Good For? The Industry

Should the FCC Regulate OTT Video?

A funny thing happened on the way to make it easier for OTT video providers to get content. Some of the biggest potential providers of online content like Amazon, Apple, and Microsoft have told the FCC that they don’t think that online video companies ought to be regulated as cable companies.

Of course, these couple of large companies don’t represent everybody who is interested in providing online video, and so they are just another faction to deal with for the issue. For example, FilmOn X recently got a court order allowing them to buy video as a regulated video provider and in the past Aereo had asked for the same thing.

A lot of the issue boils down to companies that want to put local networks online or else deliver them in some non-traditional way as was being done by FilmOnX or Aereo. These kind of providers are seeking to get the ability to force the local network stations to negotiate local retransmission agreements with them. Under current law the stations are not required to do so and are, in fact, refusing to do so.

The FCC is in a tough spot here because they don’t have a full quiver of tools at their disposal. The FCC’s hands are very much tied by the various sets of cable laws that have been passed by Congress over the years – the rules that define who is and is not a cable company, and more importantly, the rules and obligations of being a cable company. It will be interesting to see how much the FCC thinks it can stretch those rules to fit the situation of online programming, which was never anticipated in the rules.

I can certainly understand why the large companies mentioned above don’t want to be cable companies, because there are pages and pages of rules about what that means; the FCC is unlikely to be able to grant a company just a few of those rules without also requiring ones that these companies don’t want.

For example, the current cable law defines required tiers of service. Cable companies must have at least a basic and an expanded basic tier, and those are very narrowly defined. A basic tier includes all of the ‘must-carry’ local networks and the expanded basic carries all of the things we think of as cable channels.

I think what the FCC has in mind is a set of rules that require programmers to negotiate in good faith with online companies that want to buy their content. Certainly any company that wants to put content online today is completely at the mercy of programmers saying yes or no to giving them the content they want to carry. And there is nothing from stopping the programmers from changing their mind if they see an OTT company being more successful than they like.

So I would think that even Amazon, Apple, and Microsoft would like the ability to force the programmers to negotiate with them, but they obviously don’t want other FCC rules that they think will come along with that ability. Of course, these are very large companies with deep pockets and one has to imagine that they get a fairly decent hearing when they talk to programmers. The FCC’s real concern is not these giant companies, but companies smaller than them who don’t have any ability to force the programmers to even talk to them. I think the FCC believes that if online content is to be successful that there ought to be widespread competition and innovation online, not just content provided by a few giant tech companies along with other huge companies like Verizon.

Today the programmers have most of the power in the industry. They are making a huge amount of money from the mega-subscription models where all of their content is forced upon US cable companies. And they have no reason to become more reasonable because most of them are seeing gigantic growth in selling content overseas, so they have no real reason to upset the cart in the US market.

If online content is to become a vibrant alternative and not just be expensive packages foisted on the public by a small group of huge corporations, then something has to change. I just don’t know how much the FCC can do realistically considering how they are hamstrung by the current cable laws.

What Customers Want

One Way to Cut Cable Bills

I just read that retransmission fees may climb to $6 per network in the next few years. At a recent industry summit Randy Bongarten, the CEO of Bonten Media Group and the owner of a number of broadcast stations, said that he predicted cable systems would soon be paying as much as $6 for each of the major broadcast networks – ABC, NBC, CBS, and FOX.

For those not familiar with the cable industry, every cable company must pay a retransmission consent fee to each of these major networks to compensate them for carrying their programming. This is a relatively new phenomenon in the industry and following is a brief history:

  • In 1972 the FCC said that cable systems must carry stations that are within 60 miles of their service area.
  • In 1992 the FCC ruled that station owners could negotiate compensation for carriage of their signals.
  • Not much was done with this until the early 2000s when small payments for network content were negotiated in a few major metropolitan markets.
  • But within a decade every cable system was paying for local content and the networks increased rates aggressively with each new two-year contract. Most network stations today charge between $2 and $4 per customer to cable companies for carrying their content.

And now the networks want to keep increasing the payments for local content to $6 per customer per month. That means that soon $24 out of every cable TV bill in the country will be sent back to the four primary networks. With roughly 100 million cable subscribers that is nearly $29 billion per year and $288 per household.

This situation is made worse by the fact that cable companies have little recourse but to carry this content. Customers would drop cable if they refused to carry the local stations. But cable companys’ hands are also tied because in order to carry advanced programming such as expanded basic or digital tiers they are required to carry the basic tiers – that tier that must be given to every customer. The other problem faced by cable companies is that there is little real negotiation on the retransmission rates – it’s generally a take-it-or-leave price demanded by the network affiliates.

The FCC could return some fairness to the process and also give a break to consumers with one simple change in the rules. The FCC could let customers opt out of buying the basic channels from the cable company. Anybody who lives in a metro area can already get all of these networks for free with a pair of rabbit ears. If customers had the option of opting out of these channels from cable, then they could cut their cable bill significantly while still being able to watch the channels for free from rabbit ears. It’s relatively easy to install rabbit ears to work alongside your cable system.

Of course, the cable companies have to ask for this kind of change and so far none of them have gone this far. And this is because, as much as they hate passing on the big fees from programmers, the big cable companies are also complicit in the process. When their programming costs go up $3 in a year they will raise rates $4, and so their profits keep climbing every year along with the programmers.

But we are finally starting to see cracks in the system. Most cord cutters are doing so to save money and I am positive that if people had the ability to opt out of paying for the local networks from the cable company that many of them would. Today if such programming costs $4 per network, then a customer could instantly cut their bill $16 per month or $192 per year.

So perhaps what we need is for individuals to start asking the FCC to allow them to opt out of paying for local channels that they could otherwise get with a cheap pair of rabbit ears. The cable companies might eventually come around to wanting this if cord cutting grows to be too significant, but right now they have no interest in looking out for the benefit of their customers.

I know many smaller cable operators who would love to have this option. They feel the local networks are holding them hostage by demanding bigger payment for local content every year. If a cable company was willing to work with their own customers to bypass the local stations this might bring some balance back to this process and turn it into the negotiation that the FCC originally envisioned in 1992. I know smaller companies who would gladly provide every customers with rabbit ears and help them integrate them into their TVs if that was allowed. But today a cable company could find themselves in hot water if they actively helped customers bypass the local networks.

The runaway greed of the networks and station owners is ruining the cable market. Cable rates continue to skyrocket much faster than the cost of inflation. Households really love their TV, but more and more households are finding cable to be unaffordable.

I hope the FCC wakes up to this and perhaps this blog can be the first tiny step towards planting this idea in people’s heads. Nobody really wants to pay $24 per month just to get ABC, CBS, NBC, and FOX. So let’s start asking the FCC to let us opt out of those payments.

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