Broadcast / Cable Re-Transmission Agreements: Why Should We Care?

On the surface, there is little that appears as boring as the recent announcement that Time Warner Cable and Sinclair Broadcast Group have reached a cable re-transmission agreement. The net result of this news: nothing changes for viewers.

But, in the broadcasting world, this shows a fundamental shift in business practice and a new step in the evolution of how content is delivered to viewers. Let me back up a bit…

Broadcast television stations create local content and can have exclusive local licenses to network and syndicated content. This means that WFAA-TV, Dallas ABC, produces local news at 6pm and 10pm, they carry ABC network programming exclusively in Dallas, and they have Oprah, for instance, through exclusive syndication.

Local television stations, therefore, own or have an exclusive local license to everything that they broadcast. From their towers, broadcast stations typically send out their content over an analog and a digital signal. As a viewer, you can pick this up through an antenna for free. Sometimes. Some rural viewers do not get a quality over-the-air signal, for instance.

In the Dallas area as an example, 77.7% of the homes have either cable or satellite. So, 22.3% (529,890 households) are using this over-the-air signal while 77.7% (1,848,770 households) are tuning into the local channels through a cable or satellite system that is re-transmitting these local stations on their system. In a small number of cases, people get up and flip the A-B switch on their cable box to view via antenna, but most of the time, people use the online guide to switch to ABC.

This is cable re-transmission.

(While there are different rules for satellite companies and cable companies, for the rest of this article I am going to use the catch-all term 'cable systems' in discussion of re-transmission.)

Cable systems must get permission to re-transmit local broadcast station content. For cable systems and local broadcast stations, this negotiation is critical. Most cable system subscribers expect to be able to get their local channels through their set-top box with no additional effort on their part.

For local broadcast stations, there is a definite benefit as well. Broadcast stations have a coverage area that is strictly defined by the amount of power they put through their tower, the height of their tower, and the geography of the region. Cable re-transmission allows local stations to reach much farther away from their tower, increase their viewing area, and to reach new viewers with no additional cost. They do not have to build additional towers or increase the power of their signals. Larger coverage areas and larger potential audiences lead to higher viewership, higher Nielsen ratings, and more advertising revenue. And, at least in the beginning, local cable systems were not a serious competitor for local television advertising dollars.

The federal government, through the FCC, has been involved in this process for quite some time. Most recently with the Satellite Home Viewers Improvement Act (SHVIA), the federal government set forth some rules for the relationship between local broadcast stations and the cable and satellite systems in their local markets. Three key provisions of SHVIA and other like-minded legislation:

• Value of True Local Content - The FCC recognized the value of local content and the role local broadcast stations have in their communities by providing local content like weather, news, emergency warnings, and local sports. Therefore, cable and satellite systems can not bring in out-of-market stations and call them ‘local’ to specific markets. For example, KNBC-TV (Los Angeles NBC) could not be brought into Odessa Texas by the local cable system and called the ‘local’ affiliate for Odessa.
• Must-Carry Provisions – This means that any broadcast station in a market has the right to be carried on all cable and satellite systems in their market as the ‘local’ affiliate. For example, WFAA-TV (Dallas ABC) can assert must-carry and Time Warner is obligated to put the station on their cable systems in Dallas. Must-carry involves no financial obligations from either party.
• Re-Transmission – This means that a broadcast station, as the content owner in a local market, is not obligated to make their content available to cable systems for free. They are able to withhold their content and negotiate terms for re-transmission.

A local broadcast station could either assert their must-carry rights OR negotiate a re-transmission agreement that might include some sort of compensation or other provisions. In the past, local stations exercised their must-carry rights to force cable systems to carry their content, but provided their content for free. However, in recent years, local stations have begun to reconsider this practice.

Considering the benefits to local broadcast stations, why does providing content to cable systems pose a problem for local television stations?

• While not historically a threat, local cable systems are now one of the biggest competitors of local television stations when it comes to local commercial advertising sales.
• In addition, local cable systems now routinely charge their subscribers an additional $4.00 - $10.00 per month to access the local broadcast channels. They are charging customers for content that they are getting from local broadcast stations for free.
• Local Broadcast stations know how important and profitable it is to cable systems to provide access to the local broadcast station content to their subscribers.

The result has been the beginning of a change in practice. Local stations and, more importantly, large station groups like Nexstar Broadcasting and Sinclair Broadcasting Group, are beginning to re-negotiate their deals with cable and satellite systems demanding compensation for the right to re-transmit their content. They are asking the question 'Why should local broadcasters provide content to cable and satellite systems for free?'

What would happen if local broadcasters decided not to license their content to cable and satellite systems? This is an interesting question which nobody can fully answer. Cable system owners worry about three things:

1. Would subscribers pay for cable that did not include local channels?
2. If Satellite reaches an agreement with local stations, would cable subscribers convert to satellite rather than cable?
3. And, perhaps the biggest question, if cable systems pay one station in one market for local content, does this mean that every station in every market is going to want to be paid?

But, it isn't as lopsided in favor of the local broadcast television stations as it might seem. They are hesitant to pull their content from cable systems even though they feel strongly that they should be getting compensated. It looks good on paper, but it is a risk. In the short-term, viewership and ratings would go down. This would be true for no other reason than it takes people a while to figure out how to find programming in a new place. This would level off some over a period of months, but it would be a noticeable hit. This dip in ratings would negatively affect the station for a long time as it creates a history that will be used to negotiate future media schedules. But, the risk goes deeper than that...

Back to WFAA-TV, what if they withheld their content from cable only to find that viewers started going to ABC.com to watch Lost and Desperate Housewives each week or watched them through sling-casting from another ABC station in another market? Nobody has an idea what the full consequences would be. And, nobody wants to be the one left holding the bag.

For local broadcast systems, there has been a lack of solidarity on this issue. They have been competitors first and broadcasters second. I think this is changing due in large part to broadcasters like Perry Sook (photograph), Nexstar Broadcasting, that challenged the way it had always been done and led the charge even when he had to do it alone. Pulling his stations off the cable systems in several markets when his request for compensation was denied, he jump-started the conversation of how to correctly value and compensate local stations for local content. Under Sook's direction, Nexstar Broadcasting was the first broadcast group to reach a re-transmission agreement that included some form of compensation. Now, Sinclair Broadcasting has reached an agreement, also undisclosed, that includes compensation.

The battle over re-transmission is an important one for local broadcasters and content creators especially as we enter a new technical age where content can be consumed in so many new and fast-changing ways. With the introduction of video streaming, pod casting, video phones, sling-casting, and other new technologies, the battle over re-transmission will set an important precedent on the relationship between local content producers and those that amalgamate local content regardless of the technological form the distribution might take in the years to come.

--Carter Cathey
(c) 2007

What Walks Out the Door (when great senior people are let go)

Is the gold watch for thirty years of service something that is gone now forever? Are jobs now like winter hats that you wear for a few years and then trade in on a new one? Is every employee an interchangeable cog to be pulled and replaced without consequence?

As discussed in Decline of Print Media Sales late last week, 250 time staffers continue to wait for the announcement of their layoff. It was announced today that five senior staffers are already gone through early retirement, layoff, or leaving to pursue other interests.

As, Lucia Moses reports in Mediaweek:

--Fred Nelson, VP of digital media for Entertainment Weekly, whose job was eliminated when EW adopted a new management structure. He had been at Time Inc. about 10 years in various positions. His last day was Jan. 8.

--Art Berke, in mid-February after 18-plus years as head of communications for Sports Illustrated. A search for a successor is underway.

--Time magazine's Michele Stephenson, who took early retirement Jan. 5 after 19 years as director of photography and before that, serving as deputy picture editor. Picture Editor MaryAnne Golon was named to succeed her.

--Carrie Welch, vp of communications for the Time Inc. Business and Finance Network, who is leaving Jan. 19 after 25 years at Time Inc. for Lowe Worldwide as executive vp in a communications role. No word yet on a successor.

--And Fortune's executive editor Bob Safian, who left for Mansueto Venture's Fast Company, where he'll be editor and managing director.

I am reminded of an old adage that an agency president once said, “100% of my inventory goes home at 5pm.” The people were his product. He had no widget to sell. The product of his agency was the quality and experience and ability of its people.

Time Inc. may well have been overstaffed and the trimming of these jobs and the hundreds more to follow may well be prudent. It might also have made excellent sense for the board in their duty to the stockholders to maximize profitability and curry wall-street favor. It might even eventually lead to better magazines.

But, I can’t help but wonder what walked out the door with Carrie Welch, VP Communications, after 25 years of service. What knowledge is she taking with her that they will not even miss until silence follows a question she would once have answered? What insights left the building with Michele Stephenson after 19 years as Director of Photography for Time Magazine? What did she know after two decades of selecting photographs for the pages of Time Magazine that wasn’t written in the Monster.com job description?

Perhaps the more profound question is whether or not anybody cares? Is a 25-year veteran easily and instantly replaceable by a 25-year-old college graduate? Can we just move everybody up a chair and a title without impact? And, with the revolving door of celebrity CEOs and the average tenure of a CMO at 22 months, is there anybody that really knows the impact to the magazines?

I am reminded of a story about a woman that was laid off by a Fortune 100 company after a decade of service. Her specialty was that she knew more about the physical configuration of their stores than anybody else. She knew the depth of the shelves, the height of the racks, the clearance of the ceilings, etc. And, since there were dozens of store designs, across dozens of states, this was quite a challenge.

She was well-compensated and managed the group that produced in-store signage and coordinated and negotiated with external print vendors. She was laid off along with dozens of other employees in a cost-reducing move. Some time later, there was a print job that was produced to incorrect specs. Nobody caught the fact that it wouldn’t fit inside the stores because everybody relied on her for such details and she was no longer there. That one mistake with reprinting, reshipping, reinstalling, etc. cost more than ten times her annual salary.

It would be an excellent moral of the story to say that the company discovered their mistake in letting this valuable resource go and hired her back. Perhaps even saying that they hired her back to HELP in their efforts to reduce costs. It would be nice to envision Richard Gere climbing her balcony, a la Pretty Woman, and begging her to return.

As you might have guessed, this was not the case. In fact, the company had already recognized the benefit on wall-street for the layoffs and they just couldn’t seem to find anyone to blame for the mistake. After all, it wasn’t anybody’s fault. Nobody could be expected to know the dimensions of all the different store designs, could they?

In this movie, the Pretty Woman took her severance package, spent some time emotionally recovering from getting canned in her forties for the first time, then got her next job making more money and moved on with her career.

As our peers at Time Inc. might tell us, perhaps in today’s corporate environment, if you want a gold watch, you should go ahead and buy it for yourself.

--Carter Cathey
© 2007

Decline of Print Media Sales

Mediaweek Online just reported that Time Inc. is about to lay off as many as 250 people. The formal announcement is expected one day next week.

This continues a trend of compression in the world of print that has no end in sight. With the explosion of "new media" and the expectations of today's media consumer for instant information, magazine circulations and their advertising revenues have been declining. (There is an excellent report on The State of The News Media that is full of excellent detail on the trends in print media.) The magazines that are surviving are niche magazines, category-leader magazines, and magazines that have fully embraced and been fully embraced online.

Even news magazines now routinely break their stories on their website first rather than waiting for the distribution of their print editions. The staff at most magazines know that the core product moving forward is going to be the distribution of content online branded under the print edition's masthead.

As all media continues to converge, we shall see some media outlets flourish and others flounder. As a media seller, I think it would be a difficult time to be selling print. Selling Newsweek or People Magazine in New York is probably still quite lucrative. However, most magazines are facing more of a challenge.

For example, type Kitchen Remodel Magazine into Google and you get scores of options. The top several spots are for the major print magazines for the Kitchen Remodel industry:
--Remodelling Magazine
--Kitchen and Bath Design News Magazine
--Kitchen and Bath Business Magazine

Further down the list are a few other print magazines in this category:
--Home Remodeling Cape Cod and The Islands
--This Old House

All of these magazines are going after the same potential advertisers: manufacturers of flooring, faucets, counter tops, sinks, showers, tile, hardware, lighting, etc. These same potential advertisers are being courted by a dozen broadcast and cable outlets like HGTV Network and DIY Network. These are also the same potential sponsors for several major trade shows.

Budgets are stretching thinner and thinner and the second- or third-tier print remodelling magazine is not as easy to sell as it was ten years ago. These magazines get even harder to sell when the magazines are reduced in size and quality, key strategic leadership leaves, sales teams are smaller with larger territories, budgets are slashed, and the editorial offices have more empty desks than occupied ones.

Good luck to those managers that are leaving Time's magazines and the 250 other employees walking around with targets on their backs for the next week. I hope your severance packages allow you enough time to find work somewhere outside of print.

--Carter Cathey
(c) 2007