CBS: If It Bends, It's Money

"I don't think there would be any need for an increase in the...charge to (cable) subscribers if stations were paid for the retransmission of (a broadcaster's) signal."

"(The amount of revenue generated by retransmission consent) certainly will not be $3 billion."

-- Lawrence Tisch, former CEO of CBS in testimony to a US House of Representatives Subcommittee on June 28, 1991 during hearings which led to the 1992 Cable Act.

The retransmission consent regime was enshrined in the 1992 Cable Act. The catalyst for the Act was an effort to constrain price increases that consumers were then paying for cable services. Concurrently, there were many in Congress who wanted to ensure a durable broadcasting industry, and retransmission consent / must-carry rules were incorporated to satisfy this goal. As a result of these rules, the industry now earns billions of dollars in annual revenue from prices passed along to consumers through fees they pay distributors. We see short-term gains, and increased risk of longer-term regulatory change when broadcasters pursue aggressive actions such as blackouts or negotiations through the press.

Broadcasters' abilities to negotiate for revenue from retransmission consent of broadcast signals were entrenched through rules embodied in the 1992 Cable Act and those within the 1976 Copyright Act. Despite some apparent expectations to the contrary at the time, broadcasters will generate $3 billion in retransmission consent fees during 2013, according to SNL Kagan. This complements the $16 billion in ad revenue we anticipate. By 2017, Kagan expects $5 billion in retransmission fees, by which time we expect $18 billion in ad revenue. For CBS, we expect that by 2017 the network will generate $1 billion in revenue from direct sources and from that which is remitted by their affiliates, up from around $500mm in 2013.

These fees have risen as a result of the negotiations undertaken between distributors and broadcasters over the years. Distributors risk disproportionate injury from blackouts given the competitive environment for video services. Agreeing to pay fees merely results in them passing costs along to consumers as each of their competitors does, so settlements favoring broadcasters are inevitable. The only meaningful cost to distributors who agree to broadcasters' demands is a modest degree of cord-cutting from consumers who find any MVPD's video services will be too expensive relative to that consumer's video consumption needs.

However, blackouts have become an increasingly common feature of these negotiations (including 31 we can identify in 2012 and 7 in 2013 so far through June of this year), and the dispute embodied in negotiations between Time Warner Cable and CBS further promotes to consumers that billions of dollars are involved. The outcome will be understood through the lens of media companies generating more revenue and consumers paying more for services; politicians are very aware of this trend. At the same time, we think the perceived value broadcasters bring to communities, while arguably superior to many alternatives, diminishes with each passing year given the range of alternatives which satisfy the objectives that free broadcasting was intended to accomplish. And yet, broadcasters are increasingly exercising the advantages that were incorporated into law more than 20 years ago. Broadcasters can argue that they only seek to secure a fair market value for their signals, but we view this as partially disingenuous given that they do not pay fair market value for their broadcast spectrum. Because of this factor, politicians have some interest in involving themselves - and rules which can seem perverse or unfair - into the process.

Towards that end, we would think that overtly public disputes and negotiating through the press (no less through advertising those negotiations) would best be kept behind closed doors. We see an increasing risk to the probability that broadcasters will be able to continue pursuing those gains. These are also the reasons we have argued that broadcasters mostly harm themselves in pursuing Aereo in the press (rather than simply through the courts) as aggressively as they have. If networks continue to push too hard, and promote their efforts in this regard as well, the industry's underlying rules may eventually fall apart.

The dynamic reminds us of adages about comedy in a Woody Allen's film from around the time of the Cable Act called "Crimes and Misdemeanors". The director's stand-in, played by Alan Alda, stated: "if it bends, it's funny. If it breaks it's not funny". Pushing boundaries are key to stand-out humor, but pushing boundaries of a law's intentions only help if they don't force an unhelpful change to a law as circumstances evolve. Later in the same movie, Alda notes that "tragedy plus time = comedy". Broadcasters should hope that their increasingly aggressive efforts do not become a future source of industry jokes.

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are impacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications.

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