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.

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.