Runaway Retransmission Fees

rabbit earsCBS 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.

Retransmission Fees

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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.