In a provocative note to investors, three analysts at LightShed Partners take up the question of retransmission fees, which have become one of the largest revenue sources for local TV station groups, and conclude that it “[f]eels like management and investor expectations for revenue growth are inflated, with serious headwinds growing.”
The post by Richard Greenfield, Brandon Ross And Mark Kelley noted they were prompted to take up the issue after hearing Dish Network chairman Charlie Ergen argue that RSNs are on the way out and that retrans fees are on the way down.
““The fact that the local networks now are going the path of regional sports where the cost gets so high that… any rational company will make more money by not having the service…broadcasters themselves are cutting back on the content, and so they’re not producing the high-value drama shows and stuff are going somewhere else to OTT,” Ergen complained in the Q4 conference call with investors. [Edits to the transcript here were made by the Lightshed analysts.] “Customers are following them there…our customers are going to find alternatives to the [broadcast] networks. And even the mainstay of professional football, which is probably the one mainstay they [broadcasters] have, is readily available to a number of sources today. So the next step in retrans is down, not up… I said it about regional sports, I’m saying it now. That’s where that’s going. And it’s a shame because the local broadcasters are caught in a vice between the network and the distributors. So we have some empathy for their plight, but we cannot be their bank unless we get a return. And right now, we don’t get a return.”
The LightShed partners analysts noted that “broadcast TV station groups have been incredibly savvy over the past decade leveraging an antiquated regulatory system that dates back to the 1992 Cable Act to drive retransmission consent fees....Given the inability of government officials to update the television regulatory landscape, annual retrans fees now exceed the $12 billion (tax) we forecasted back in 2013.”
Looking forward, they note that cord cutting, the shift of sports rights to streaming, the growing investments in streaming content and other factors are however making the local stations less valuable to operators.
“All major new general entertainment programming has shifted to streaming platforms vs. broadcast TV, with more and more sports content shifting from broadcast to streaming (most notably Thursday Night Football, which was the #2 series on broadcast before moving to Amazon Prime)....Time spent watching broadcast TV is falling rapidly, yet the annual cost of retrans continues to rise,” they wrote.
“We could not help but think broadcast TV stations are headed for massive disruption,” they conclude.
On major factor is that "cord-cutting is hovering today around 7% and all signs point to a meaningful acceleration over the next couple of years,” they wrote, adding that the “price/value of multichannel video bundle is worsening. Cost of the bundle to the consumer continues to rise, even as there is less and less quality programming, as legacy media companies now launch all their new shows direct-to-streaming.”
They also argued that “as the Regional Sports business model literally melts down in 2023,...diehard sports fans are getting new ways to access local sports without a multichannel bundle. Just this past week, MSG+ was announced at a $30/month price point to access Knicks/Rangers/Islanders/Devils/Sabers content, no bundle required.”
They also suggest that the bargaining position of stations with vMVPDs is deteriorating, citing the recent retrans spat with FuboTV.
“Earlier this year, the CBS Affiliate Board rejected CBS’ retransmission consent agreement for vMVPDs,” they argued. “In turn, Fubo lost access to CBS affiliates across the country. However, CBS (owned by Paramount), was able to replace the local affiliate feed with the national feed of CBS. Importantly, that national feed includes CBS primetime programming, national morning shows, national news, late-night national talk-shows, and, maybe most importantly, Sunday afternoon local/regional NFL games.”
Local station groups like Nexstar have argued that their local news programming still gives them tremendous leverage.
“We hope NXST [Nexstar] management does not actually believe that as retrans would be a tiny fraction of what it is today without the power/leverage of NFL games on Sunday,” Richard Greenfield, Brandon Ross and Mark Kelley at LightShed wrote.
In addition, viewers, they argue, viewers have other choices for local news, both from digital media and other local stations.
