Market Insight

Carriage and retransmission disputes characterise early 2017 in US pay TV

January 05, 2017  | Subscribers Only


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At the turn of the year – as in previous New Year periods – another round of heated negotiations was taking place between programmers and pay TV providers in the US.

  • AT&T-owned DTH operator DirecTV and broadcaster Hearst failed to reach a retransmission agreement, resulting 33 Hearst TV stations in 26 designated market areas (DMAs) across 39 states being removed from DirecTV’s line-up
  • In a dispute affecting 17.1 million pay TV subscribers, cable operator Charter and broadcaster NBCU extended carriage negotiations for broadcast channels NBC and Telemundo and a suite of cable channels (including USA, Syfy, CNBC, Oxygen, MSNBC, Bravo and E) beyond their 31 December deadline
  • DirecTV/AT&T U-verse and broadcasting group Cox Media reached an agreement for 15 stations in 10 DMAs, a day after an impasse resulted in a blackout
  • Cable One and Northwest Broadcasting failed to reach a retransmission agreement, resulting in four Northwest TV stations in Mississippi being removed from Cable One’s line-up
  • Cable One and Hearst extended negotiations for TV stations in 16 Cable One DMAs beyond their 31 December deadline
  • DTH operator Dish Network dropped local NBCU affiliate, KSL TV, from its Salt Lake City line-ups.

Carriage and retransmission contracts typically expire at the end of the calendar year, and a flurry of renewal negotiations usually take place in the build-up to the New Year to get agreements in place in time for January. Without an agreement, impasses can result in channels being removed from pay TV provider line-ups and programmers facing the possibility of their channels permanently removed, which would result in a loss of carriage and retransmission revenues. Also feeling the effects of these disputes are of course pay TV subscribers, the consumer victims of blackouts and/or fee increases.

At the time of writing, the two most significant impasses were between DirecTV and Hearst and Charter and NBCU. It is no surprise that the operators involved are among the US’s largest pay TV providers, with both seeking to leverage their huge subscriber bases to limit fee increases.

 

Our analysis

Year-end retransmission-fee feuds are nothing new, and aside from the one cable-network carriage dispute, it is not surprising that the majority of this winter’s disputes have revolved around carriage of local broadcast stations. As their share of primetime viewers continues to be eroded by cable networks, local stations’ perceived value has been diminishing, while their demand for a second revenue stream has been increasing.

Charter and NBCU’s extension is a good-faith move that will provide both parties the time they require to come to an amicable agreement. For its part, Charter, following the completion of its $60 billion acquisition of Time Warner Cable in May 2016, now has a much larger subscriber base to leverage, which will drive down carriage-fee increases. NBCU, meanwhile, will endeavour to maximise increases, and IHS Markit expects the broadcaster to increase market-wide carriage fees for USA Network and CNBC to $0.95 and $0.43 per average subscriber per month, respectively, in 2017.

Pay TV operators are faced with inevitable increases in both cable carriage fees and local station retransmission fees. IHS Markit’s analysis of programming cost expenses reveals that the two largest cable operators paid 10% more in Q3 2016 compared with a year earlier. Increases in programming costs are allowing content owners to maintain video margins as the number of pay TV households decline.

In response to these cost increases, operators have been raising the price of subscriptions. IHS Markit estimates that pay TV ARPU for 2016 was $92.69, and we forecast that it will rise to $95.42 in 2017, an increase of 2.7%. With these rises in ARPU failing to fully compensate for increases in programming costs, operators are left with a profit shortfall.

In response, operators are coming up with creative ways to remedy the situation. The majority are now instituting some form of broadband bandwidth cap, and associated unlimited-bandwidth fee. For instance, Comcast instituted a 1,024 GB monthly allowance for the vast majority of its home broadband customers in November 2016. This allowance is sufficient for most households, but those that regularly consume more data will have to pay a surcharge of $50 a month for unlimited data, to avoid significant overage fees.

As previously highlighted by IHS Markit, price increases are driving US pay TV customers away from video products. In Q3 2016, cord-cutting was less pronounced than in some other recent quarters, but it still amounted to the loss of 331,200 pay TV subscribers. These subscribers, the minority of which will be subject to upcharges for unlimited data, are effectively lost to the pay TV industry, forcing operators to pass price increases on to fewer and fewer customers.

Low-price bundles and online competition are the inevitable result of the vicious circle that has been perpetuating. And if the cycle of carriage-fee increases and price increases continues unchecked, we expect the US pay TV universe to shrink significantly in the coming years.

Geography
USA
Research by Market
Media & Advertising
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