New Deals Spark Retrans Debate

Feb 6, 2006  •  Post A Comment

The owner of small-market television stations is at the forefront of the television industry’s next big battle.

Nexstar Broadcast Group, the Irving, Texas-based company that owns, operates or provides services to 47 television stations in 27 small and midsize markets, has reached multiyear retransmission agreements with about 150 cable operations, many of which are paying Nexstar cash in exchange for carrying the company’s broadcast signals, Nexstar executives said last week.

The deals, which cover around 4 million cable subscribers in Nexstar’s 27 markets, will generate approximately $48 million in additional revenue over the course of the three- to five-year contracts.

Nexstar’s success at extracting cash from so many cable companies could set the stage for a huge battle between other broadcasters and the cable industry over an issue both sides have been debating since the early 1990s.

The biggest tussle could come toward the end of the decade, when CBS Corp.’s current carriage agreements with multiple system operators begin to expire. CBS Corp. CEO Leslie Moonves has vowed that new carriage agreements with the cable industry will include compensation, arguing that there is no reason cable networks such as USA or TNT should be paid and CBS shouldn’t.

It promises to be quite a fight: Executives from many cable companies, including the two largest-Comcast Corp. and Time Warner Cable-say they’ll never pay cash to carry a broadcast signal.

For Nexstar, the agreements culminate a three-year quest by CEO Perry Sook to seek compensation from cable operators. The deals also vindicate Mr. Sook’s decision last year to take on two of the country’s top 10 MSOs-Cox Communications and Washington Post Co.’s CableOne. After both companies refused to pay retransmission consent fees, Nexstar blocked them from receiving the broadcaster’s television signals in four markets for nearly a year until they agreed in late 2005 to ink deals with Nexstar.

Wall Street estimates indicate that Nexstar is receiving a monthly per-sub fee of around 11.5 cents, a figure Nexstar officials don’t dispute. Most of the deals the cable companies have with Nexstar feature an escalator that increases the per-sub fee each year by a certain percentage. Nexstar officials also say that the lion’s share of the deals involve cash payments, while less than one-third involve some kind of advertising sales component.

The debate over cable operators compensating broadcasters to carry their signals has lasted more than a decade. However, the issue appears to be shaping up into a battle royal as local television stations grapple with a changing landscape.

Value Creation Opportunity

Indeed, the motivation behind getting cash for retransmission consent is more than a matter of principle. Due to declining viewership, a sharp reduction in compensation from broadcast networks and an uneven advertising market, many local television stations are scrambling to search for new revenue streams that will make them less subject to the changing winds of the ad business.

“This is one of the most significant value creation opportunities for pure-play [station groups],” Mr. Sook said during a conference call discussing his company’s strategy. He added later, “It’s important to establish every cable company, overbuilder and wireless company pay us cash for the right to redistribute our signal.”

Getting compensated for retransmission consent is part of an overall strategy at Nexstar to diversify its revenue base away from being solely an advertising revenue model, Mr. Sook said, adding that he hopes in three years to have 70 percent of the company’s revenue coming from advertising, 15 percent from distribution and 15 percent from new media.

That was welcome news to Bear Stearns broadcast analyst Victor Miller. “We have been waiting for the local television station business to stop being 100 percent an ad-driven business for some time,” he said during the same conference call. “Retrans is a very important development.”

The idea of television station groups receiving retransmission consent is not new.

Satellite operators for years have been paying retransmission fees to companies such as Hearst-Argyle Television and Sinclair Broadcast Group. Mr. Miller said the trend is “finally developing” on the cable side. He estimated that if CBS were able to secure retransmission consent compensation, the company could realize up to $150 million per year.

With many of Nexstar’s markets having higher satellite penetration rates than the national average, the threat of subscribers switching to satellite to get their local channels led many cable operators to agree to Nexstar’s terms.

But it wasn’t until Cox and CableOne were each unable to reach a deal with Nexstar that the industry saw Mr. Sook’s resolve: He denied both MSOs permission to carry Nexstar’s signals in Joplin, Mo., and the Texas cities of Texarkana, Abilene and San Angelo. The move affected 75,000 cable customers in those markets.

Mr. Sook acknowledged that Nexstar’s move cost the company a “several-million-dollar hit to our ad revenue across those four markets,” but he said last month that only 10 cable systems, representing around 20,000 subscribers, remain without Nexstar’s broadcast signals.