Market Insight

Latest retransmission fee feud highlights the problem with programming costs

September 04, 2014  | Subscribers Only

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DIRECTV customers have been unable to receive 53 Raycom stations since 1 September in the fall out from the latest US retransmission fee battle. The standoff, involving  Big Four broadcast affiliations across 37 markets (covering nearly 13% of US TV households), comes at a critical time: the eve of the start of the NFL season and a few weeks before TV shows start their fall premiers.

Three months of negotiations  have yet to result in an agreement, with both parties putting blame on the other. DIRECTV states that Raycom is seeking to more that double its fees , while Raycom claims it has reached agreements with every distributor in their markets but DIRECTV. This isn’t the first time Raycom has taken stations off the air during failed negotiations. In 2013, Raycom blacked out all of its 53 stations to DISH subscribers for eight days until they finally came to an agreement. 

Our analysis

Retransmission fee battles are nothing new, and the impasse between Raycom and DIRECTV is just the latest in a long line of such disputes. Both parties are looking to set precedents in a multi-year agreement, making an accord problematic. Raycom wants to increase rates so that it can become more in line with its perceived value, and because it sees DIRECTV and fellow pay TV operators bowing to increases in affiliate fees for cable networks. For DIRECTV the fight is more a matter of cost control.

For Raycom, the move from predominantly broadcast viewing to cable by the majority of Americans, has been a significant pain to its advertising business. While not being the first to field, or the largest local station owner, its 53 stations hold a significant amount of influence. The company is seeking  significant increases in carriage fees to offset or negate worsening performance in its advertising business, and to a large degree IHS believes they have been successful.

On the other hand, DIRECTV spends more on license fees than do most other pay TV operators in the USA. Its exclusive deal with the NFL for Sunday Ticket and a likely renewal coming up at a much higher rate, and other sports rights costs are pushing the company's margins down past the point of comfort. In addition to the spat with Raycom the company is also at odds with Time Warner Cable over its Los Angeles area sports nets, the negotiations becoming so contentious that they are likely to face arbitration. Additionally, DIRECTV still refuses to carry the Pac-12 networks for the third straight year citing unreasonable fees, as it tries keep programming costs under control.

Both companies make valid arguments, but what it really comes down to is whether or not the American public still feels that broadcast television is of the same value as it was 20 or more years ago. It is true that many first-run series debut on broadcast TV, but the same is also now true for cable. With the highest ARPU in the business, DIRECTV is likely loath to push off the increases in retransmission fees on its subscribers who already shoulder the burden of significant sports costs.

Increases in programming costs which are passed down to subscribers are at the heart of what IHS believes to be the most fundamental problem to ever face the US TV business: the fact that newly forming households are unlikely to take a video subscription. Disputes like this one are an unfortunate sign of the times, and as long as they are necessary, it is likely that the trend of cord nevers will continue on its current trajectory.

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