As Retrans Revenue Slides, Broadcast Stations are Finding New Ways to Grow

The distributor payments known as retransmission retrans revenue may be nearing their peak They are based on persubscriber rates and as cable and satellite operations face customer losses it impacts broadcasters39 revenues The station groups are also squeezed by their affiliation agreements with broadcast networks which have forced them to turn over a cut of that retrans revenue in recent years characterized in industry parlance as reverse retrans compensationMany analysts believe that the growth in both retrans fees paid by multichannel video program distributors MVPDs to broadcasters and reverse retrans compensation paid by broadcasters to the networks will reach a mature equilibrium of about 1 over the next few years and certainly by 2028That39s a dramatic reduction when compared to years past Consider some info on the multichannel distributors from SampampP Global gross retransmission fees paid to the broadcasters grew at a compound annual growth rate CAGR of 40 between 2009 and 2016The stock market rewarded broadcasting companies for their retrans revenue during that same period An index of the stocks of TEGNA Inc Gray Television Nexstar Media Group and Sinclair Broadcast Group tracked by Bond ampamp Pecaro increased at a nearly 27 CAGR from 20092016 compared to a CAGR of a little more than 10 for the SampampP over the same periodIn the following years a downward trend began In 20162021 the SampampP averaged a nearly 15 returns versus approximately 8 for the broadcast indexWhile indications were that trouble was brewing the stations became more dependent on MVPD revenue to fuel their growth Data from the Security and Exchange Commission SEC based on yearend 10K filings helps explain this In 2015 retransmission revenues represented between 25 and 32 of total broadcast revenues for three of the largest TV station groups TEGNA Inc Gray Television and Nexstar Media Group IncSinclair did not begin separately identifying distribution revenues in its annual 10K filings until 2018 And by 2021 the four broadcasters were reporting that retrans revenue made up between 43 and 54 of total broadcast revenue This reflects to a degree the impact of retransmission revenues from virtual MVPDs vMVPDs streaming platforms like YouTube TV Hulu and Sling that gained momentum as consumers cut the cord with traditional cable and satellite services in recent yearsAccording to SampampP Global revenues from vMVPDs grew at a CAGR of 77 between 2017 and 2021 albeit from a relatively low starting point of 163 millionTotal gross retrans revenue growth is now in the low single digits due to two factors First the aggressive rate increases that local broadcasters were able to demand from MVPDs and vMVPDs began to slow at the end of the last decade Secondly the eight largest pay television platforms in the United States lost over 15 million subscribers in the first quarter of 2022 representing a 31 plunge when compared with the same period in 2021 That39s according to a May 2022 Next TVcom article citing Championship Research data that included both vMVPD and traditional MVPD informationMaking matters even less rosy for the stations the Big 4 television networks ABC CBS FOX and NBC have been increasing the percentage of reverse retrans they require from their affiliated stations SampampP Global estimates that beginning in 2020 approximately 50 of retrans revenues revert back to the networksFor local television stations that aren39t owned and operated by the Big 4 the percent of fees paid to the networks can be even higher approaching 60 to 70 of gross retrans For smaller local broadcast companies or those without a significant number of stations with a specific network the total network affiliation fees can be even more burdensome In rare instances they exceed the total retrans revenues received by a station from the MVPDs and vMVPDsSome networks have moved to charging a fixed fee as opposed to a percentage of retrans revenues That can have other dire consequences The network affiliation agreements tend to be for threeyear terms so if local MVPD subscribers decline rapidly during that period the local broadcaster can be stuck paying out more than they receiveThere are however signs that the leverage that the networks have over station groups is shifting The news that NBC may cut its 10 PM primetime program and that could eliminate one component of value from the networkaffiliate transaction Similarly the networks are moving some of their stronger programs from broadcast to streaming programs For example Fox moved Arrested Development to Netflix ABC moved Dancing With the Stars to Disney and NBC is offering nextday streaming for many of its programs on Peacock This qualitative change could also shift leverage to the affiliatesMoreover against this challenging backdrop the local broadcasting industry has developed new ways to monetize its broadcasting assets Growth in political advertising has been rising over each election cycle consistently proving to be nearly recessionproof And stations in markets with highly contested races have seen windfalls in election years with some more than doubling the prior year39s revenueEven stations in states that have historically been stalwart Democrat or Republican areas and thus ignored by many candidates have seen political revenue related to highly charged referendum issues on the ballots resulting in millions in additional advertising expenditures from political action committees PACs and outside interest groupsAt the same time broadcast companies have been diversifying their revenue streams For example there39s Gray39s Circle Media joint venture and acquisition of Third Rail Studios and the Assembly Yards studio complex This opens a range of rental income from studio and streaming production companies like Apple and Netflix It is also a real estate play as part of the property is being developed for mixeduseSinclair has made forays into sports programming with acquisitions of the Tennis Channel and FOX Regional Sports Networks and it also signed a sportsbetting deal with Bally These moves show that diversification does not come without risk Sinclair assumed billions in debt in connection with the sports network acquisition just before the devastating impact of the COVID pandemic and is now reportedly seeking to restructure its ownership and debtMeanwhile Nexstar recently acquired interests in The Food Network The Hill and The CW Network Additionally despite a flurry of deals with streaming companies traditional broadcasters are still the dominant holders of NFL rights which anchor them to both audiences and the MVPDsAs a result television stocks have generally held up better in 2022 than the SampampP index which is down approximately 22 through the end of September 2022 while Nexstar and TEGNA are actually up about 11 for the yearThe next revenue boom for local broadcasters may already be on the horizon with the rollout of ATSC 30 often referred to as NextGen TV which is only in the early stages of the life cycle This new technology may open up an unprecedented revenue generation stream supported by powerful data distribution capabilities and realtime twoway targeted advertisingThese features provide local broadcasters with a powerful tool to compete for digital advertising dollars and may be in the nascent situation that retrans revenue was two decades agoThis column was written by Matthew Lochte He is a principal at Bond ampamp Pecaro Inc which provides financial strategic and valuation services to media companies To reach him please contact infomediavillagecomClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillagecomMyersBizNet

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