With retrans fees rising, does a new ad model lurk?

Comments attributed this morning to CBS Corp. boss Les Moonves underscore a conundrum of retransmission consent, the legal framework for channel-carriage deals between broadcasters and multichannel video distributors.

Retrans, if you hadn’t noticed, is big business. SNL Kagan estimates cable/telco/satellite providers will pay $5.5 billion by 2017 for the rights to retransmit TV station signals to pay-TV subscribers. Speaking today at an industry conference, Moonves said CBS expects to collect more than $1 billion from retransmission payments and reverse compensation fees (money paid to CBS by its broadcast affiliates) by 2017. Moonves, President and CEO of CBS, appeared today in NYC at the On Screen Media Summit presented by Broadcasting & Cable and Multichannel News.

According to Tweets this morning from Multichannel News writer Todd Spangler, Moonves said the hefty rights fees may actually represent a bargain to pay-TV providers, because CBS draws more viewers than even cable’s most expensive network, ESPN. By Moonves’ logic, on a pure ratings basis, CBS is among the most valuable channels a video provider can offer. If ESPN gets $5 per month/per subscriber from pay-TV companies, Moonves was quoted as saying, “shouldn’t we be getting $7 or $8 a sub?”

But ratings are only one part of the equation, and Moonves’ analysis ignores a fundamental difference between cable networks and broadcast station groups when it comes to licensing payments. That difference has to do with advertising.

ESPN, USA Network, Discovery, HGTV and hundreds of other cable networks give back 2-3 minutes per hour of time in which affiliates can sell local – or in the case of DirecTV and Dish Network – national/regional advertising messages. For the cable industry, ad inventory doled out by networks results in an annual revenue stream that approaches $5 billion. (Not all of cable’s local ad revenue reflects time sales from network ad breaks, but the vast majority does.)

CBS, at least to our knowledge, does not offer cable companies a similar opportunity to help defray licensing fees by making some of the money back from advertising on its network feed. Instead, local ad breaks go to the broadcast TV stations that are affiliated with or owned by CBS. So when Moonves boasts about CBS’s ratings being higher than ESPN’s – and its signal thereby being worth more to distributors than ESPN’s – he’s ignoring a significant quid-pro-quo of the existing relationship between ad-supported cable channels and the video distributors that pay them close to $40 billion a year in licensing fees.

(An Interesting side note: According to SNL Kagan’s estimates, by 2018 the $6 billion broadcasters will receive in retrans fees will equal roughly 23% of the total advertising revenue the broadcasters will collect.)

What’s interesting going forward is how the relationships among cable/telco/satellite distributors and broadcasters like CBS might change over time as a consequence of rising retrans costs. It’s unlikely we’ll ever see CBS share its precious local advertising inventory with pay-TV distributors, as attractive as that might be to cable and satellite companies. But the cable industry has a lever to press in the form of emerging video technologies that do offer the potential for ad-revenue alliances. Video on demand is the obvious one, considering that CBS and any other national network needs the cable industry’s machinery to make dynamic ad insertion happen within VOD streams over a national footprint. Other possibilities might include ancillary distribution channels, such as the ability to export local broadcast TV streams to iPads and other IP devices within the home. This part is pure conjecture. I have no idea what ad-related wrinkles might exist in the retrans deals currently being negotiated with CBS or any other over-the-air TV network. It’s safe to say, though, that with billions of dollars at stake, cable/telco/satellite distributors will look at creative ways to dance with broadcast networks in the way they’ve customarily danced with cable channels – by divvying up advertising inventory for the benefit of both.