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Time for Cable and Satellite Carriage Elections, and the Stakes Have Never Been Higher

October 1, 2011 marks the triennial deadline for full power television stations (and a few lucky qualifying LPTV stations) to send their written must-carry or retransmission consent elections to each of the cable and satellite providers serving their market. The elections made by this October 1st will govern a station’s carriage rights for the three-year period from January 1, 2012 to December 31, 2014, and the impact of these elections will be far more significant for individual TV stations than any made before.

To understand why, keep in mind that in the early days of must-carry/retransmission consent elections, the lack of local competition among cable providers allowed them to take a “my way or the highway” attitude toward television broadcasters. As cable subscribership soared, and local cable providers faced little or no competition for subscribers, broadcasters had little choice but to make their programming available for retransmission. Because cable providers were in a position to refuse to pay cash for retransmission rights, the largest broadcasters were limited to negotiating for non-monetary compensation (e.g., obtaining carriage for an affiliated program service, which led to the launch of Fox News, among others). Smaller broadcasters typically did worse, as they had a weaker negotiating position and little need for non-monetary compensation like guaranteed carriage of a non-existent second channel. These were the days before digital multicasting made such additional local channels at least plausible.

Faced with these challenges, many stations just elected must-carry, which guaranteed cable carriage while avoiding the need to engage in prolonged negotiations likely to result in little gain. That all changed with the arrival of satellite television providers, who provided competition to cable, and more importantly, needed local TV signals to take market share from cable providers. Both of these developments were critical to creating a free market for the retransmission of broadcast programming. First, because they lacked cable’s monopoly position, satellite providers were willing to pay cash to obtain the broadcast programming that would allow them to compete for subscribers. Second, as subscribers left cable for satellite, cable providers suddenly had to compete for subscribers, and couldn’t do it without ensuring continued access to local broadcast signals.

While cable providers resisted paying cash for broadcast programming, the competitive pressure from satellite eventually caused the dam to burst, resulting in a welcome flow of revenue to TV stations that had increasingly found themselves outbid by cable networks for sports and other attractive programming. The result has been a sea change, as many stations abandon the safety of a must-carry election for the risks and rewards of electing retransmission consent. Concurrently, the amounts being paid by cable and satellite providers to retransmit local broadcast signals have grown significantly over the past few years, as those signals’ value, which had been artificially suppressed for decades, begins to rise to its natural value in an open market. While that market will mature and valuations will stabilize sooner than many think, we have not yet reached that point. That is the principal reason why current retransmission negotiations can be a challenging affair for both parties.

For the broadcaster, deciding to elect retransmission consent must be part of a far broader retransmission strategy to be effective. Retransmission agreements have grown quite complex, and despite what many think, it’s about a lot more than just getting the highest per-subscriber rate written into the agreement. All too often, broadcasters who have attempted to negotiate the rate themselves (which is quite frankly a mistake since individual broadcasters will rarely have adequate information on current market pricing to be effective) run it by the lawyer only at the very end of the process to “spot any big problems.” They are then aghast to learn the details of the retransmission agreement they were about to sign which, quite frequently, would place them in violation of their network affiliation contract. On more than one occasion, I have seen a cable/satellite provider take back their original proposed agreement and send the broadcaster a more “broadcaster friendly” version upon learning that the broadcaster had retained counsel for the negotiations.

You can’t blame the cable and satellite providers for attempting to get the best terms they can from a broadcaster, but the numerous ways in which a proposed retransmission agreement can seek to take back with one hand what the other hand has given (that “per-subscriber” rate) often generates distrust between the parties while contributing to the complexity of the negotiations. Adding to these challenges is the need to navigate the FCC’s good faith rules on how retransmission negotiations must be conducted (which cable and satellite providers have asked the FCC to expand), and the simple fact that broadcast stations are dealing with cable/satellite negotiators who handle these deals all day long, every day of the year.

So why subject yourself to it? Well, up till now, the obvious answer has been because stations need the second revenue source to compete in a world where everyone else has multiple revenue streams. That revenue becomes even more important in a recession, where people want to make sure that they not only aren’t leaving any money on the table, but often check to see if the table is bolted to the floor on their way out.

For many stations, however, the stakes are about to get a lot higher. Until recently, retransmission revenue was an “all upside, no downside” proposition. Now that the amounts being paid are enough to attract the attention of the broadcast networks, and as network affiliation contracts expire and are renegotiated, it is becoming standard practice for the networks to demand large fixed reverse compensation payments from affiliates that are premised on estimates of future retransmission revenues and/or a direct (and substantial) percentage of a station’s retransmission revenues.

The result is that a station which fails to make the best possible retransmission deal can find that it is unable to meet its reverse compensation obligations (if it is a fixed fee arrangement), or that its network is unhappy with the retransmission revenues the station is bringing in (if it is a “percentage of retransmission revenues” arrangement). In the first scenario, a station may find that the fixed fee payment is draining its resources because the fixed fee was premised on higher retransmission revenues than the station has been able to negotiate. In the second scenario, if a network is disappointed with its share of retransmission revenues because the affiliate has underperformed in its retransmission negotiations, the network may merely move the affiliation to a competing station (perhaps as a multicast stream), which allows it to step away from the original affiliate’s “less than optimal” retransmission agreements, and immediately get a clean slate to negotiate a new deal with cable and satellite providers in the market. The number of recent network affiliation changes makes this second scenario particularly worrisome for underperforming stations.

So get those certified letters in the mail now, and if you haven’t already been strategizing with counsel regarding your election and how to proceed after that, don’t delay any further. This time around, your network affiliation may be riding on it.