Just when network and local broadcasters are getting comfortable
with the notion that hefty retransmission fees are a solid second
revenue stream, new technology comes along to undercut their
BTIG analyst Rich Greenfield points out that
is the first of what is likely to be next-generation Internet
Protocol options that, if widely adopted, could eventually render
retrans fees obsolete. That's not a farfetched notion -- and that
has the biggest cable, satellite and telephone program distributors
In short, why would broadcasters be foolish enough to assume
that consumers' use of wireless technology will stagnate through
the next cycle of retrans negotiations? They won't.
For its part, Bamboom provides consumers IP access to
over-the-air broadcast television channels while sidestepping
copyright infringement and other legal issues faced by other
over-the-top broadcast TV services such as Filmon.com. IVI.com and
Zediva, according to Greenfield.
Bamboom customers use their own proprietary micro antenna to
receive and code broadcast content for IP delivery without having
to rely on any middleman provider. Consumers are legally allowed to
access and control single copies of over-the-air programming. Until
now, consumers buying digital TV antennas for their TVs, adding
stand-alone DVRs (such as a TiVo) and Slingbox to make content
portable, still need to work through an enabling broadband
Consumers have access to broadcast network content through
Bamboom even if their multichannel service provider (cable,
satellite or telephone video platforms) stopped paying retrans fees
for the content and could no longer carry the broadcast network
programs. With Netflix (NFLX) and YouTube offering more catalog
on-demand movies and television shows, consumers will have
increasingly less incentive to pay for the video services of
Video content cloud services being developed by Apple (
), Amazon (
), Google (GOOG) and others will surely render similarly
alternative low-cost direct-to-consumer content access options.
) is testing a new TV service at MIT that will be
delivered over its own Internet Protocol
infrastructure to computers and video game consoles to protect its
However effective Bamboom proves to be, it is an example of how
digital connected technology will continue to disrupt the existing
television ecosystem by giving consumers liberating choices (call
it constructive innovation). Broadcasters prefer to label such tech
options as "destructive innovation," because they can render their
new revenue assumptions unsustainable.
But betting against advancing technology is a dangerous game --
and that's exactly what broadcasters are doing. They are assuming
that connected digital technology will remain static and a limited
threat to their new revenue source. The advent of Bamboom
demonstrates this is not the case. Consider the following facts,
according to JP Morgan's new
TV Fact Book:
Local TV stations are becoming extremely reliant on the
direct payments from multichannel program distributors that are
expected to grow 15% annually over six years and could total
more than $3.6 billion in 2017. By then, retrans fees could
account for nearly 15% of total TV station revenues, compared
with 2% today.
Even for the broadcast network station owners, retrans is a
very big deal. CBS (
) expects its TV station group to garner $250 million in fees
by 2012, compared with less than $25 million in 2007, JP Morgan
analyst Michael Meltz reports. SNL Kagan estimates 70% of
retrans revenues are concentrated in the top 25 largest TV
markets with stations owned by the national TV networks.
At the same time, CBS is charging its local TV station
affiliates reverse compensation that it expects to collectively
generate more than $200 million within a few years. The most
profitable of the four broadcast networks is making ends meet
by sucking revenues out of affiliates' TV stations, whose
financial future dangles precariously on CBS' unpredictable
ability to attract sufficient viewers and advertisers.
Like CBS, Fox also charges its TV affiliates per household
program license fees and ABC expects a cut of affiliates'
retrans fee revenues. NBC (which is owned and controlled by
Comcast, the largest cable operator) is set to negotiate with
multichannel program distributors on behalf of its affiliates.
Essentially, the broadcast networks are double-dipping: getting
their retrains fees from multichannel program distributors and
taking a share of fees paid to their affiliates.
Broadcast networks and their corporate parents say it is
justified. Retrans fees typically comprise more than 20% of
local stations' profits, providing critical support to local TV
stations maintaining better than 25% earnings margins even as
the most successful of the broadcast networks -- CBS -- musters
only about a 10% profit margin. The broadcast networks take all
the risk by financing the production and acquisition of
programs while struggling with tech-driven shifts in ROI.
For now, retrans is in a vicious cycle. Cable operators and
other multichannel program distributors are passing on these
increased content access costs to consumers, who generally have
little choice but to subscribe to their services if they want
access to the networks' live sports, live programs such as
"American Idol" and pay network programming (HBO/Showtime).
Greenfield says broadcasters are using their "big
of live event programming and live sports to command upwards of 60
cents to 70 cents monthly per subscriber today, and are banking on
that rising to a retrans fee of $4 monthly per subscriber over the
next six years, according to SNL Kagan. That would be a $4 billion
business built on 100 million multichannel homes in the U.S. that
barely existed three years ago, Greenfield points out.
But it also could be a new business quickly marginalized by
emerging competing technology that would be financially disastrous
for broadcasters that think retrans is here to stay.
Outside of the Big Four networks, the top 10 station owners such
as Tribune, Hearst, Belo and Sinclair only account only for about
35% of all revenues and have none of the same cost-offsetting
options. Meltz observes that while most local TV broadcasters are
in a better financial position than they were several years ago --
due to retrans fees, political advertising and a slowly improving
economy -- all of the industry's basic metrics are wildly variable.
He points out that the broadcast networks ratings continue to
decline or flat line, and ad revenue growth is back in the single
digits -- and it is not likely to get better.
Because retrans fees have become a critical element in
determining whether broadcaster TV owners survive the digital
diffusion of viewers and advertising dollars, they should be
ardently developing other ancillary revenue streams, such as
leasing digital spectrum to businesses for non-broadcast uses and
partnering with community agencies and companies to provide unique
interactive hyperlocal services.
The sustainability (or not) of retrans fees also will determine
whether the Big Four broadcast networks and their corporate parents
remain in the TV station ownership business. They do not need to.
TV stations have long since ceased as a required distribution
vehicle for the networks, which are now fixed on how to prevent
what's left of their proprietary program proposition from slipping
down the digital rabbit hole.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Why Are So Many Going Nuts About Netflix?