America's television revenue rumble

The battle over retransmission fees is increasingly central to television revenues in the US – and CBS and Time Warner are more than willing to fight for their slice.

In what is further evidence of the financial importance of retransmission fees to television broadcasters, US network CBS is locked in a battle with cable provider Time Warner around what each party deems a fair price to transmit CBS’s free-to-air signal across Time Warner’s cable network.

Fox has battled with the likes of Time Warner and Cablevision previously, but the current impasse with CBS and Time Warner marks the first time these two companies have come to blows. This has resulted in CBS initiating a blackout of its owned channels across Time Warner cable services in a selection of key markets. It has also taken the unprecedented action of blocking access for Time Warner internet bundle subscribers to video on demand programming on CBS.com.

Retransmission is a relatively new, but increasingly important piece of the revenue pie when it comes to broadcasters. Of late, it has become especially important to free to air broadcasters, who have successfully argued that their networks provide a key component of any subscription TV suite and therefore they should be compensated in the same way the cable only channels (such as ESPN, The History Channel etc) are.

Networks such as Fox and CBS feel that they are at a competitive disadvantage being part of a cable transmission that solely relies on a single revenue stream – advertising. Cable specific networks have the luxury of two streams of revenue – both advertising and transmission fees. A station like ESPN can command upwards of $5 per month for every subscriber. Based on 50 million households accessing ESPN, this would give ESPN an additional $3 billion per year to spend on programming, rights and talent.

In Australia the concept of retransmission is barely discussed. Free TV Australia has pursued some lobbying efforts around the idea of increasing the current retransmission fees – around 36 cents per month – yet nothing has eventuated. With retransmission in Australia the role of Fox is reversed; whilst in the US it has been aggressive in its pursuit of higher transmission fees and the argument of it being a fair trade, in Australia it doesn’t appear to share the same thinking.

The CBS and Time Warner stoush has come about due to CBS wanting to increase its retransmission fee from $1 to $2 per month across Time Warner’s 25 million subscribers. A $1 rise may seem insignificant, but across 25 million homes it’s an additional $300 million in high margin revenue every year. Time Warner has so far responded saying they are happy to consider the fees, but only on the proviso that CBS becomes an optional non-bundled channel across Time Warner cable, giving customers the option to pay for CBS access.

That’s $300 million CBS can use to secure crucial sporting rights in an increasingly competitive live sports landscape in the US. CBS already has various rights around NCAA Football, NCAA Basketball, Golf and most importantly, NFL Football. In 2011 CBS agreed to a new deal with the NFL for seasons 2013 through 2022 at a cost of over $1 billion per annum. Its NCAA college basketball deal is reported to be worth $700 million per annum.

In what makes the debate more complicated, Time Warner itself is seeking in some markets to move beyond being a cable supplier and into becoming more of a broadcaster itself – particularly within sports. For example, in Los Angeles, Time Warner broadcasts the Los Angeles Lakers in the NBA and the Los Angeles Dodgers in the MLB (Major League Baseball).

So far there’s no resolution and CBS signals remain blacked out on Time Warner services for the time being. Reports suggest the effect of the blackout has been mild so far due to the US still experiencing warm weather and “viewers being outside in the sun” Another key factor is the absence of NFL Football – easily the biggest game in town across the entire United States. NFL returns Thursday September 5, and as Cablevision experienced in 2010 in its blackout battle with Fox, customers will revolt if they are denied access to their sports (in 2010 it was the World Series that pushed the issue to a resolution). Given the popularity of NFL and CBS’s rights access, it is highly likely CBS will get their $2 monthly fee per household eventually – the question is how long consumers will be willing to stomach the inevitable increase in cable fees as the costs are passed on.

Ben Shepherd is a media and technology consultant. He can be found on LinkedIn and on Twitter.