Articles Posted in Must-Carry/Retransmission Consent

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Today’s exploration in vocabulary:

INTRANSIGENT: characterized by refusal to compromise or to abandon an extreme position or attitude : uncompromising < intransigent in their opposition> < an intransigent attitude> (from Merriam-Webster.com).

RETRANSIGENT: characterized by an insistent belief that negotiations which inevitably result in a signed retransmission agreement with less than a 0.01% chance of viewer disruption are ‘broken’ and demand immediate intervention by Congress < he was retransigent in his refusal to negotiate terms> (from CommLawCenter.com).

In the aftermath of the CBS/Time Warner Cable retransmission deal, I noted that one legacy of that negotiation would be lessened concern by future negotiators of finding themselves in a three way negotiation, with the FCC being the third wheel in the room. Since that time, several interesting developments have emerged. First, the Media Daily News reported that a Time Warner Cable representative revealed that the FCC actively discouraged Time Warner from filing a retrans complaint against CBS, indicating that the agency did not just passively decline to intervene, but sought to avoid being drawn into the middle of the negotiation (“don’t call us, we’ll call you!). If true, that puts an exclamation point on the conclusion that the FCC is none too interested in being drawn into retrans negotiations.

MVPDs apparently heard that message as well. They redoubled their efforts on Capitol Hill to have Congress change retrans law, running an ad in Politico aimed at members of Congress and making sure that a discussion of retransmission negotiations occupied an inordinately large portion of two hearings in the House of Representatives last week regarding reauthorization of the Satellite Television Extension and Localism Act (STELA). STELA is the law that permits carriage of distant broadcast signals by Satellite TV providers until the end of 2014. A bill to extend that authority is deemed by most to be must-pass legislation, meaning that retrans reform advocates are hoping to use it as a vehicle to modify retrans laws. That is a long shot effort, but not nearly as daunting as attempting to pass a standalone retrans bill.

Still, that did not prevent Representative Eshoo, who has been sympathetic to the pleas of MVPDs in the past, from introducing draft legislation last week titled The Video CHOICE (Consumers Have Options in Choosing Entertainment) Act. As described by its sponsor, the bill, among other things:

  • “Gives the FCC explicit statutory authority to grant interim carriage of a television broadcast station during a retransmission consent negotiation impasse.”
  • “Ensures that a consumer can purchase cable television service without subscribing to the broadcast stations electing retransmission consent.”
  • “Prohibits a television broadcast station engaged in a retransmission consent negotiation from making their owned or affiliated cable programming a condition for receiving broadcast programming.”
  • “Instructs the FCC to examine whether the blocking of a television broadcast station’s owned or affiliated online content during a retransmission consent negotiation constitutes a failure to negotiate in ‘good faith.’ “

At one of last week’s hearings, Representative Eshoo appeared to concede that the bill had little chance of passage, indicating it was “a series of ideas intended to spur constructive and actionable debate on ways to improve the video marketplace for video content creators, pay-TV providers and, most importantly, consumers.”

However, the bill demonstrates why government involvement is more complicated than proponents of retrans reform might assert. For example, regarding the requirement that viewers be able to subscribe to cable without subscribing to retrans stations, if the reason for changing the law is to ensure consumers are able to get broadcast programming over their cable system during retrans negotiations, giving consumers the right to not get the broadcast programming at any time over their cable system is not very helpful. In fact, this provision seems to concede that consumers can just use an antenna for broadcast programming rather than rely on their cable system, and since that is the case, these same consumers can just use an antenna to avoid any retrans-based disruptions, obviating the need for the law in the first place.

Because that result is so obviously illogical, I have to assume that this provision is instead aimed at preventing the unfairness of consumers being charged for a broadcast channel they aren’t receiving from their cable provider during a retrans disruption. That, however, has nothing to do with the retrans negotiation itself, and the stated provision wouldn’t fix that problem. If the retrans agreement has expired and the cable system therefore isn’t carrying the broadcast channel, the cable system also isn’t paying the broadcaster for retransmission. As a result, any money paid by subscribers for broadcast content they aren’t receiving is merely an economic windfall for the cable system. If that is the bill’s concern, the solution is to require MVPDs to issue subscriber refunds instead of pocketing the cash. Interfering with negotiations intended to put an end to that inequitable subscriber scenario would actually be counterproductive, as it merely causes the inequity to be extended longer still.

The provision prohibiting bundled negotiations has an even simpler flaw–if broadcasters are prohibited from accepting carriage of their cable networks as a form of compensation for granting retrans consent, they will be forced to shift to requesting all-cash compensation. Doing that, however, would increase a cable operator’s out of pocket program costs while eliminating a currently available avenue for bringing negotiations to a successful conclusion. The result would be more drawn-out and contentious all-cash negotiations that would serve to increase subscription fees, precisely the opposite of the bill’s intent.

Of course, the provision of the bill that has drawn the most attention is the first one, which would allow the FCC to mandate continued carriage of a broadcast station during retrans negotiations. You don’t have to be a rocket scientist to see the flaws in that idea; the big one being that retrans negotiations would never end since the MVPD has no incentive to agree to any deal as long as it can continue to retransmit the programming at the prior subscriber rate (or for that matter at any arbitrary fee that is less than what it would pay in an arm’s length negotiation). To try to solve that problem, the law would need to create some methodology for determining when FCC-imposed retransmission should end if no deal is reached. The logical point in time would be when negotiations cease. However, all such a law would accomplish is to move the time of the retrans disruption to a different date, while incentivizing broadcasters to formally declare negotiations broken off (most likely because the law incentivized MVPDs to negotiate as slowly as possible in the first place by granting forced retransmission). Such incentives merely encourage arbitrary disruptions in the negotiations, making it more difficult to promptly complete negotiations, and causing uncertainty, expense, and aggravation for everyone.

An alternative to that approach would be to limit the FCC’s authority to impose forced retransmission under such a law to a fixed period (e.g., one month), but all that would do is shift any program disruption by a month. In other words, the industry would just move from three-year retransmission agreements to two-year-and-eleven-months agreements that are followed by a one-month FCC-imposed retrans period. In either case, if a retrans disruption was going to occur because the parties couldn’t agree on price, then the disruption is going to occur no matter how the legislation is written.

The unavoidable truth is that the rare retrans disruption doesn’t occur because the parties didn’t begin negotiating early enough to get a deal done; it occurs because the parties can’t agree on price and won’t change their views on pricing until the pressures of a retrans disruption are upon them. In the end, private contractual negotiations are about agreeing on the value of an item to be conveyed, and if the parties can’t agree on that, a transaction doesn’t happen. All the king’s horses and all the king’s men can’t change that. To think otherwise is merely to be retransigent.

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When CBS and Time Warner announced Monday they had ended their month-long standoff over retransmission of CBS programming on Time Warner cable systems, the announcement brought a sigh of relief from Time Warner subscribers, particularly the NFL fans among them, and the usual press statements putting each party’s best spin on the highly confidential result. However, the real legacy of these negotiations will be to alter how retrans agreements are negotiated in the future, and the somewhat surprising result will be less, not more, retrans blackouts.

When a change in the law in 1992 gave broadcasters the right to negotiate with cable system operators wishing to resell their programming to the public, the idea was to balance the playing field between cable networks, which relied on both ad revenue and a share of cable subscriber fees, and local broadcast stations, which had only ad revenue to support their operations. Prior to that time, broadcasters had effectively subsidized competition from cable because cable system operators could resell broadcast programming without paying for the underlying content, and then use the profits to launch and invest in cable networks that competed with broadcasters for both programming and advertising. These economics are what initiated the migration of sports programming from broadcasting to cable.

In the early retrans negotiations, which I’ll refer to here as Retrans Version 1.0, cable still had local monopolies, leaving broadcasters in the awkward position of attempting to negotiate with a party whose only “competition” was the broadcaster’s free signal. If the broadcaster’s programming disappeared from the local cable system, subscribers couldn’t leave for a new provider. Their only option was to put up an antenna and continue to be a subscriber in order to receive non-broadcast content. Under those circumstances, cable operators didn’t see any reason to pay money for the right to resell broadcast programming–they were the only resellers in town. The result was very few retransmission blackouts, as broadcasters knew that dropping off of the only cable system in town would hurt the broadcaster a lot more than the cable operator.

Unable to obtain money for retrans rights, the compensation broadcasters typically received for permitting retransmission of their signal was the right to program additional channels on the cable system. This cost the cable operator little to nothing while providing it with yet more free content from the broadcaster, making it an easy “give” in retrans negotiations. Ultimately, however, it ended up providing the public with its first great benefit from retransmission negotiations–the launch of a plethora of diverse new program services that not only developed into some of today’s most popular cable networks, but provided an alternative to existing cable networks that were largely owned by the cable systems themselves.

Retrans Version 2.0 commenced after Congress passed the 1999 Satellite Home Viewer Improvement Act, which finally allowed satellite TV to carry local broadcast signals. As a TV service wanting to be competitive to cable, satellite TV operators knew they needed to provide local broadcast signals and fought hard to persuade Congress to change the law to make that a reality. However, lacking the monopoly status enjoyed by most cable systems at the time, satellite TV operators understood they couldn’t replicate the strongarm negotiating tactics that had been employed so successfully by cable operators. Instead, they agreed to pay broadcasters money for the right to retransmit broadcast content, allowing them to attract subscribers away from cable and ultimately end cable’s monopoly. For the first time, broadcasters had competing multichannel providers vying for the right to resell their content to subscribers. As satellite TV’s market share grew, cable operators needed to ensure continued access to the most popular programming on their systems to fend off that competitive threat, and grudgingly began paying for the right to resell broadcast programming as well.

While you might think these competitive developments would have quickly led to a mature market for program retransmission rights with stable pricing, reaching that inevitable destination has been slowed by two factors. The first is simply that the monopoly years of cable so badly distorted market forces that the market for retransmission rights didn’t begin to develop until satellite TV became a competitive force and the retransmission contracts in place in 1999 began to expire, requiring negotiation of new retransmission deals. This occurred much later in markets where satellite-delivered “local into local” service was delayed because of capacity limitations of the satellite systems themselves. Even then, progress was slow for broadcasters, with cable operators being understandably resistant to paying for something they previously saw themselves as receiving for free. One of the best examples of this era is the cable operator who told us during negotiations that he believed paying for the right to retransmit broadcast signals was “unethical” and proceeded to carry my client’s broadcast programming illegally. The negotiation was concluded shortly after the cable operator became the first party ever to be found in violation of the FCC’s rules on good faith retrans negotiations, and the FCC ordered retransmission to cease until an agreement was in place.

Which brings us to the second factor that has delayed countless retrans negotiations and slowed the maturation of the market for broadcast retransmission rights–the possibility of government intervention. Retrans negotiations over the past decade have been conducted with a spectral third party in the room–the threat of governmental intrusion into the negotiations. While the FCC previously concluded that it has no authority to force any particular result in retrans negotiations beyond ensuring that the parties are negotiating in good faith, that has not stopped cable and satellite TV operators from regularly calling upon the FCC to intervene in negotiations. When the FCC resists, the call goes to Congress to “fix” retransmission laws or provide the FCC with authority to step in and alter the dynamics of a retrans negotiation. While such multichannel distributors certainly are hoping to place the government’s heavy thumb on their side of the scale, creating even the possibility of government intervention generates uncertainty which the cable or satellite TV operator hopes will cause the broadcaster to take the deal that’s on the table.

Uncertainty, however, is the enemy of efficient negotiations. When each party knows exactly where it stands, the parties focus on reaching an agreement and getting the deal done as quickly as possible. Where the possibility of government intervention is introduced, the parties cease focusing on each other and start playing to the FCC (or Congress). At best, that means grandstanding and delays in the negotiations while one party hopes to generate enough noise to entice the FCC to step in and get a better result than the party can negotiate on its own. At worst, it means creating high visibility blackouts in an effort to draw the FCC or Congress into launching retrans “reform”. Both approaches are the antithesis of efficient and swift negotiations, with one party quite literally putting off “getting down to business” in hopes that it is buying time for the FCC to join the fray. This approach has unfortunately made some Retrans 2.0 negotiations slow, messy, and unpleasant for all involved, including subscribers.

That is why this week’s CBS and Time Warner deal, regardless of its economic terms, is a watershed event. The negotiations started in typical Retrans 2.0 fashion, resulting in a blackout of CBS programming on Time Warner systems and the traditional public exchange of unpleasantries between the parties as government intervention was sought to protect subscribers from the loss of CBS programming. In fact, some have speculated that Time Warner dug in its heels specifically to create a high profile program disruption that might draw in Congress or the FCC. The FCC played its part in the drama, with a spokesman for the acting Chair of the FCC announcing just five days into the blackout that the agency “stand[s] ready to take appropriate action if the dispute continues.”

However, it is what happened in the nearly four weeks of CBS blackout after that comment was made that carried us from Retrans 2.0 into the world of Retrans 3.0. Specifically: the blackout occurred in the highest profile markets, but the government did not step in; the blackout was geographically widespread, but the government did not step in; the blackout involved high-profile network programming, but the government did not step in; the blackout drug on far longer than imagined, but the government did not step in; the blackout affected a major sporting event and threatened to affect upcoming NFL games, but the government did not step in. In short, it presented one of the most politically-appealing invitations for the government to second guess the path of a free market retrans negotiation, and the government declined to do so. Perhaps just as important, viewers came to realize that the sun still rose in the morning despite the CBS blackout, antenna manufacturers enjoyed a sales boost, and a retrans deal was achieved in less time than it typically takes Congress to name a post office.

Having seen the government’s lack of enthusiasm for getting involved in one of the most extreme examples of a blackout, parties to retrans negotiations will hopefully be able to retire “threatening to involve the government” as a negotiating tactic. While I have no illusions that such threats will now cease, their impact has been considerably diminished over the past month. The CBS/Time Warner dispute presented an unprecedented opportunity for broadcasters and multichannel providers to peer into the deepest recesses of their corporate closets and confirm that there is no government bogeyman residing within, waiting to pounce on unsuspecting negotiators. Freed from the need to look over their shoulder during retrans negotiations, or to play to the governmental crowd, parties can focus on getting retrans deals done quickly and efficiently, without being distracted by the uncertainties and contingency planning surrounding disruptions from outside the negotiating room.

Blackouts are caused by one or both parties to a retrans negotiation misgauging their negotiating power relative to the other party. While that will inevitably still happen from time to time for the same reasons it happens in any business negotiation, the legacy of Retrans 3.0 is that it should no longer happen because one party thinks that if it delays enough, or causes enough of a public stir over a retrans dispute, the FCC will come to its rescue. The result will be better for all, including subscribers.

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In a decision that disappointed but didn’t entirely surprise broadcasters, the U.S. Court of Appeals for the Second Circuit today declined to rehear in banc its earlier decision rejecting a request by broadcasters to terminate with extreme prejudice Aereo’s broadcast subscription service in New York. Today’s announcement was not a decision on the merits, but merely the result of a poll taken among the Second Circuit judges in which less than a majority indicated an interest in hearing the case in banc. Barring an effort by broadcasters to seek Supreme Court review (and Fox, at least, has indicated that option is not off the table), the matter will return to the trial court for a full trial on whether Aereo is infringing on broadcast copyrights.

Once again, Second Circuit Judge Denny Chin, who had been the district judge in the earlier Cablevision case on which Aereo has built its business, dissented from today’s decision. His dissent is respectful but spirited, and so thoroughly dismantles the court’s earlier decision in favor of Aereo that a reader new to the dispute could be forgiven for being mystified as to how the other two judges on the original panel could have reached a contrary conclusion.

As interesting as the legal dispute itself is (at least to lawyers), the end result may well be governed more by technology than by law. If you have spent much time in the communications world, you have heard the old saw that “the law struggles to keep up with technology.” In the case of Aereo, however, it has been quite the opposite, with technology struggling to keep up with the law.

After the Second Circuit’s decision in Cablevision created, as Judge Chin’s dissent today puts it, “‘guideposts’ on how to avoid compliance with our copyright laws,” Aereo and others apparently raced to develop technology that could neatly fit through the legal loophole Cablevision ostensibly created. Judge Chin is obviously not a fan of such reverse engineering, noting today that “[i]n my view, however, the system is a sham, as it was designed solely to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law purportedly created by Cablevision.”

So far, the Aereo legal proceedings have presumed that Aereo was successful in its engineering efforts, and that its “one tiny antenna per subscriber” approach allows it to technologically clear the legal hurdles of the Copyright Act. Those familiar with the intricacies of radiofrequency engineering, however, have been quick to point out that the biggest obstacle to the Aereo system isn’t the laws of copyright, but the laws of physics.

One of the immutable laws of RF antenna design is that the size of the receiving antenna must correlate to the wavelengths it is meant to receive. As a result, high frequency devices (which means short wavelengths) can get by with smaller antennas, whereas the comparatively massive wavelengths of TV signals require much larger receiving antennas. That is why, during the golden age of over-the-air TV reception, and during the silver age of over-the-air HDTV reception, the promises of smaller and smaller antennas that would work “just as good” as hulking rooftop antennas never came to fruition.

Aereo’s claim of reliable reception with dime-size TV antennas (particularly in New York, the world capital of urban multipath interference) therefore seemed more akin to alchemy than to advanced RF antenna design. However, with the exception of patent lawyers and a fair number of communications lawyers, engineering expertise is not a common skill in the legal trade. As a result, the debate over Aereo has focused on that which lawyers know–the law–rather than on that which determines whether Aereo even fits within the legal loophole it claims to exploit–incredible advancements in TV antenna design.

Communications lawyers are perhaps more sensitized than most to the law/engineering dichotomy, as communications is one of the few fields where engineering solutions to legal problems are often an elegant alternative to brute force legal tactics. Because of this, one of the most interesting commentaries on the Aereo dispute I have come across is a piece by Deborah McAdams titled Aereo’s Unlikely Proposition.

It is a very intriguing article (and well worth a read) in which a number of engineers discuss why the “fits exactly into the shape of the loophole” system described by Aereo can’t exist in the real world. In other words, that Aereo isn’t an example of the law falling behind technology, but of technology being unable to produce an antenna capable of outrunning the law. If true, then the success of Aereo’s legal battle hangs not on whether it has a groundbreaking legal theory, but on whether the claimed antenna technology emerged from Aereo’s engineering department, or from its marketing department.

In either case, Aereo’s claims for its technology would be better assessed in an RF testing lab than in a courtroom. Extended debate over the legality of Aereo’s claimed technology is pointful only once it has been confirmed that Aereo has indeed created a revolutionary antenna technology that functions as described. If not, then the legal wranglings over a theoretical retransmission system are much ado about nothing.

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We now know what the per-subscriber fee for cable systems lacking retransmission agreements with local broadcast stations is, and it isn’t “free”.

Section 76.64 of the FCC’s Rules requires cable systems to have a written retransmission agreement in place before retransmitting the signal of a station that elected retransmission consent status. Because the law is clear on this point (for a differing view, see Aereo), there have been few cases where the FCC has had to address complaints of illegal retransmission.

In the first of these cases, the FCC found the cable system violated its obligation to negotiate in good faith with the broadcaster and ordered retransmission to cease until an agreement was in place. Two later cases for a pair of 34-day violations against one cable system operator resulted in base fine calculations of $255,000 each, but the FCC reduced the fines to $15,000 each based upon the cable system operator’s inability to pay.

Today, the FCC upped the ante, proposing a fine of $2.25 million for TV Max, Inc. and related parties for retransmitting six local TV stations to 245 multiple dwelling unit buildings in Houston without a retransmission agreement. Despite having previously had retransmission agreements with all of the stations, the cable system operator claimed it now qualified for an exemption from the retransmission agreement requirement because it had installed a master antenna on each of the buildings, allowing residents to obtain the broadcast signals for free over-the-air. Each of the six stations filed a complaint with the FCC, noting that the respective retransmission agreements with the cable system operator had expired or been terminated for non-payment, but that retransmission was continuing.

On December 20, 2012, following an investigation, the FCC’s Media Bureau issued a letter to TV Max stating its “initial finding that TV Max had willfully and repeatedly violated, and continued to violate, the Commission’s retransmission consent rules, and stating that it planned to recommend that the Commission issue a Notice of Apparent Liability for Forfeiture for these violations.” The Media Bureau later followed up with a March 28, 2013 letter to all of the parties asking for the status of carriage and whether retransmission agreements were now in place. While the stations all responded that they were still being carried without their consent, TV Max indicated it had not retransmitted the stations over its fiber since June 7, 2012.

That led to today’s Notice of Apparent Liability for Forfeiture and Order. In its decision, the FCC found that some of the cable system operator’s statements to the FCC were “lacking in candor”. Specifically, the FCC concluded that the cable system had continued to retransmit the stations over its fiber and had not installed master antennas on all of its buildings by the time it claimed to have ceased fiber retransmission:

Based upon the evidence before us, and in view of the applicable law and Commission precedent, we conclude that TV Max has willfully and repeatedly violated Section 325 of the Act and Section 76.64 of the Commission’s rules, and persists in its violation of these provisions, by retransmitting the Stations’ signals without the express authority of the originating stations. As discussed below, the violations are based on (1) TV Max’s admitted carriage of the Stations from the time their retransmission consent agreements expired through at least July 25, 2012 without the Stations’ consent and without a master antenna television (MATV) system in place in all the buildings it serves; and (2) TV Max’s ongoing carriage of the Stations without their consent since July 26, 2012 because it was not exclusively using its MATV facilities to retransmit the broadcast signals to its subscribers.

While the precise length of time any particular station was carried without a retransmission agreement varied, the FCC noted in its decision that Section 503 of the Communications Act limits its ability to issue fines for cable violations occurring more than one year ago. As a result, the FCC based its proposed fine on 365 days worth of violations involving six stations. While the decision is a bit fuzzy on the precise math behind the final number (particularly given that the maximum fine is much higher than the fine proposed), a little reverse engineering provides some real-world context for a $2.25 million fine.

The FCC notes that the system has about 10,000 subscribers, that six stations were carried without a retransmission agreement, and that the fine reflected one year’s worth of violations. That works out to a monthly retransmission “fee” of $3.13 per subscriber for each station (apparently the federal government has less negotiating leverage than ESPN). Still, that is more than the cable system operator would have paid under an arms-length negotiated broadcast retransmission agreement. Unfortunately for the affected stations, however, payment of the fine goes to the U.S. Government rather than to the television stations.

On the other hand, retransmitting programs without consent is also a copyright violation, meaning that stations pursuing copyright claims against the cable system operator could add significantly to the operator’s financial pain. Such are the risks of reinterpreting the breadth of the Communications Act’s retransmission consent requirements (see Aereo?).

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Recently, TVNewsCheck.com ran a short item noting that a large broadcast group (not a network owned and operated group) and a large multichannel video distributor (MVPD) successfully concluded carriage negotiations. There was no interruption of service. Given the successful outcome, I was surprised to see that someone posted a comment regarding the piece saying the deal illustrates why the FCC should tighten its broadcast ownership rules. No matter how many times I read comments of this sort, I am perplexed that people actually believe it’s a good thing for the government to mandate that broadcasters be the underdogs in all major negotiations that impact the quality and availability of broadcasters’ programming. If anything, government policy should encourage broadcasters to grow to a scale that is meaningful in today’s complex television marketplace. Not one of the other major distributors makes its programming available for free.

If independent (non-O&O) broadcasters aren’t permitted to achieve a scale large enough to negotiate effectively with upstream programmers and downstream distributors, you won’t have to wait long see high cost, high quality, high value programming available for free to those who choose to opt out of the pay TV ecosystem. It’s much better to have two, three or four strong competitors in each market, owned by companies that can compete for rational economics in the upstream and downstream markets, than to have eight or more weak competitors, few of which can afford to invest in truly local service or negotiate at arms-length with program suppliers and distributors.

For those who have not been paying attention, the television market has changed profoundly in the past 20 years. The big programmers and the big MVPDs have gotten a whole lot bigger. The largest non-O&O broadcast groups have grown too, but not nearly as much. Fox, Disney/ABC, NBCU and the other programmers are vastly bigger companies with incomparable market power vis-a-vis even the largest broadcast groups. The same is true of the large MVPDs, which together serve the great majority of television households.

There’s nothing inherently bad about big content aggregators and big MVPD distributors. And anyway, they are a fact of life. Despite their size, each is trying to deliver a competitive service and deliver good returns for shareholders. That’s what they are supposed to do, and in general (with a few exceptions) they serve the country well. But again, they are much, much larger than even the largest broadcast groups. If you believe that having a viable and competitive free television option is a good thing, that’s a problem.

So in response to the suggestion that the FCC further limit the scale of broadcasters, I reply: why does the government make it so damn hard for the only television service that is available for free to bargain and compete with vastly larger enterprises that are comparatively unregulated?

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If all goes well, next week I’ll fulfill one of my secret ambitions: to discuss how retransmission consent is affecting the business of television distribution. I’ve participated in many panel discussions on retransmission consent policy (because I work in Washington, and policy is what we talk about here).

On Tuesday I’ll be in New York at the SNL Kagan TV and Radio Finance Summit where I’ll finally have a chance to talk about the business, financial and investment aspects of retransmission consent (because that’s what they talk about in New York). To me, those are the far more intriguing topics, because if you don’t totally understand the market, you can’t credibly defend your policy positions.

SNL has assembled an all-star panel, including senior execs from Fisher Communications, SJL Broadcast Management Corporation, Communications Corporation of America, Moodys, and the resident FCC Media Bureau Chief, Bill Lake. SNL’s Robin Flynn (who always comes armed with thoughtful and well-presented data) will moderate. So Robin, here are some of the questions I’d like to hear debated by my fellow panelists, and I may have an opinion of my own here and there.

  • Why are retransmission fees still so low relative to viewing and why aren’t they rising faster? What should the government do to help bring sports programming back to broadcast television?
  • According to SNL research, some groups get much higher retransmission rates than others. Does this reflect real differences or reporting anomalies? Will this differential continue? How will it affect the market?
  • What are the biggest negotiation and deal mistakes groups make?
  • Is there any way to protect against the unexpected, like Aereo and Ad Hopper?
  • Is Aereo really a “retrans killer”? What happens to different market segments if it is? Could some broadcasters be better off if Aereo prevailed?
  • Has retransmission consent fundamentally changed the network-affiliate model, or simply adjusted the dollar flow?
  • Is cord-cutting equally bad for all programmers?
  • Apart from retransmission consent, is there a growth case for broadcast groups?
  • Do rising retrans fees really make the pie bigger (and drive up consumer costs), or do they just move the slices around? Which networks will benefit most long term?
  • And most important: What happens to the price of a Happy Meal when corn futures triple (and what does this tell us about retransmission consent?)
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As those who follow our interactive calendar are aware, I spoke last week as a representative of broadcasters on a retransmission panel at the American Cable Association Annual Summit. The ACA’s membership is predominantly smaller cable system operators, and because of that, the ACA has been very vocal in Washington regarding its displeasure with the current state of retransmission law.

While broadcasters are understandably tired of being paid less per viewer than cable networks, smaller cable operators feel they are being squeezed in the middle–forced to pay more to retransmit broadcast programming, but unable to free up money for those additional payments by paying cable networks less than the amount to which those networks have become accustomed. While the economics of supply and demand should eventually bring programming fees in line with the attractiveness of that programming to viewers, this process will take some time. In the meantime, as I heard from operator after operator during the panel, they are looking for a much faster solution, and that solution is for the government to step in and by some method guarantee cable operators low-cost access to broadcast signals.

A discussion of the dynamics of retransmission negotiations and policy could easily fill a book, but for the limited purposes of this post, I just want to focus on a particular refrain I heard from cable operators, which is that losing a broadcast network signal for even a short time is devastating to their business, leaving them in a tenuous bargaining position during retransmission negotiations.

The reason this came to mind today is a pair of decisions just released by the FCC which illustrate the temptation for a small cable operator to engage in a little “self-help” to overcome what it perceives as an unfair negotiation. These decisions also illustrate why other cable operators should ensure they never succumb to that temptation. In these decisions (here and here), the FCC issued two Notices of Apparent Liability to the same cable operator for continuing to carry the signals of two broadcasters after the old retransmission agreements with those stations expired and before new retransmission agreements were executed.

The affected broadcasters filed complaints with the FCC, and the cable operator responded that it “does not refute that it retransmitted [the stations] without express, written consent. Rather, [the cable operator] argues that it faced a ‘dramatic increase’ in requested retransmission consent fees, and states that it receives the signal by antenna rather than satellite or the Internet. [The cable operator] claims that [the broadcaster] is ‘using [the Commission] as a tool to negotiate a dramatic increase in rates’ and it requests that the Commission require the fair negotiation of a reasonable rate.”

After a telephone conference with FCC staff, the parties reached agreement on a new retransmission agreement for each of the stations involved, and the agreements were executed on February 3, 2012. However, the really interesting part of these decisions relates not to how the FCC proceeding arose, but to how the FCC chose to assess proposed forfeitures against the cable operator in the twin Notices of Apparent Liability. The FCC noted that the base forfeiture for carriage of a broadcast station without a retransmission agreement in place is $7,500. Since the cable operator had carried the stations without a retransmission agreement for 34 days, the FCC determined that the base forfeiture for each of the violations was $7,500 x 34, or $255,000. That would make the total base forfeiture for illegally carrying both stations during that time $510,000.

Fortunately for the cable operator, the FCC reviewed the operator’s financial data and concluded that a half-million dollar fine “would place the company in extreme financial hardship.” The FCC therefore exercised its discretion to reduce the proposed forfeitures to $15,000 each, for a total of $30,000. These decisions certainly demonstrate that no matter how frustrated a cable operator is with retransmission costs, the self-help approach is not a wise path to take.

In fact, the proposed FCC fines are only the beginning of a cable operator’s potential liability for illegal retransmission. Not addressed by the FCC in its decisions is the fact that retransmission of a broadcast station without an agreement is a violation of not just the FCC’s Rules and the Communications Act of 1934, but also of copyright laws. If the illegally-carried broadcast stations chose to pursue it, they could seek copyright damages against the cable operator, and the proposed FCC fines pale in comparison to the potential copyright damages for illegal retransmission. The Copyright Act authorizes the award of up to $150,000 in statutory damages for each infringement, with each program retransmitted being considered a separate infringement. So, for example, if we assume that each station in these decisions aired 24 programs a day for 34 days, the potential copyright damages for such illegal carriage would be $122,400,000 per station. The potential damages for illegally carrying both stations would therefore be close to a quarter-Billion dollars! While it is very unlikely that a court would impose the maximum damages allowed under the Copyright Act, no cable operator would want to run the risk of being ordered to pay even a tiny fraction of that amount for illegal retransmission.

In short, though cable operators certainly may not like paying retransmission fees for broadcast programming, these decisions make clear that the price of not having a retransmission agreement in place can be far higher.

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Spoiler alert: Tomorrow I’ll be participating in a webinar (with Tom Larsen of Mediacom and Sarah Barry and Robin Flynn of SNL Kagan) to discuss and debate whether the FCC will adopt new retransmission consent rules and whether rules are needed at all. If you want to be surprised at my comments, don’t read this post!

The debate so far has been characterized by a lot of rhetoric. True facts, when they are presented, usually lack context. For example, it is true that broadcast signal carriage rates are rising fast. But the multichannel pay providers attribute those rising rates to “greed”. It’s a safe bet that the real reasons for rising retransmission fees are more complex than that. There are plenty of greedy people in all sectors of for-profit commerce, but few have the ability to raise rates at will. Market forces have a way of curbing irrational demands.

What we have is a debate about whether the government should adopt new regulations governing private transactions that take place in the very complicated television distribution marketplace. Lost in the debate is any meaningful description of what that marketplace looks like today and how it came to this point. Tomorrow I’ll describe the marketplace and explain why it is permitting retransmission rates to rise. I doubt I’ll change anyone’s mind about whether retransmission rates should rise. But I hope an explanation of the market forces that are causing them to rise will nudge the debate in a more constructive direction.

And now for the spoilers. Is retransmission consent reform needed? As an advocate for broadcasters, I surely think not. But my many years of experience in both broadcast and multichannel pay television (I haven’t always been a lawyer) tell me the same thing. Rising rates reflect market forces adjusting compensation to better reflect relative value. Rates won’t rise at the current pace forever, and if they manage to exceed the underlying value of broadcast carriage rights, the market will drive those rates back down. Consumers aren’t hurt by rising retransmission rates. They are hurt when prices they pay for services are greater than the underlying value of the service. I can make a persuasive case that rising retransmission consent rates will, given time, result in lower cable and satellite bills.

Will the FCC adopt new rules curbing the flexibility of broadcasters in retransmission consent negotiations? The buzz in Washington is that it won’t. I don’t think the FCC would impose new rules even if it had the legal authority to do so. Many at the FCC understand the complexities of the television distribution market, and they understand that meddling in one small part of that market will inevitably have unintended consequences, harming consumers and competition in ways that would outweigh any hoped for benefits from new regulations.

If you’re interested in knowing more on this topic but can’t join the webinar tomorrow, please drop me an email and I’ll send a copy of my slides.

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This October has more than its share of filing deadlines for broadcasters to worry about. Of course, it is the end of the quarter, so broadcasters should be prepared for their routine quarterly filings. Additionally, certain states will have EEO and noncommercial ownership filing obligations. This year is also a radio license renewal year and a triennial must-carry/retransmission consent election year for television stations. All in all, there are a number of deadlines to keep track of, so read on.

October 1 (weekend)

  • Must-Carry/Retransmission Consent Elections: Deadline for commercial full power television stations to notify by certified mail all cable and satellite providers in their markets of their election between must-carry and retransmission consent for the next three-year period. More information on this election can be found here. Noncommercial stations must make requests for carriage, as they do not have retransmission consent rights.
  • EEO Public File Reports: Deadline for radio and television station employment units with five or more employees in the following states to prepare and place in their public inspection file, and on their website if they have one, their annual EEO Public File Report: Alaska, Florida, Hawaii, Iowa, Missouri, Oregon, and Washington, as well as American Samoa, Guam, Mariana Islands, Puerto Rico, Saipan, and the Virgin Islands.
  • FCC Form 323-E: Deadline for the following noncommercial stations to electronically file their biennial ownership report on FCC Form 323-E: Radio stations licensed to communities in Alaska, Florida, Hawaii, Oregon, and Washington, as well as American Samoa, Guam, Mariana Islands, Puerto Rico, Saipan, and the Virgin Islands, and television stations licensed to communities in Iowa and Missouri.
  • Pre-filing Renewal Announcements: Date on which radio stations licensed to communities in Alabama and Georgia must begin airing their pre-filing license renewal announcements. The remaining announcements must air on October 16, November 1 and November 16.
  • License Renewal Filing: Deadline for radio stations licensed to communities in Florida, Puerto Rico, and the Virgin Islands to electronically file their license renewal applications. These stations must also commence their post-filing renewal announcements to air on October 1 and 16, November 1 and 16, and December 1 and 16.

October 10 (holiday)

  • Quarterly Issues/Programs Lists: Deadline for all radio, full power television and Class A television stations to place their Quarterly Issues/Programs List in their public inspection file.
  • Children’s Television: Deadline for all commercial full power and Class A television stations to electronically file FCC Form 398, the Children’s Television Programming Report, with the FCC and place a copy in their public inspection file. These stations must also prepare and place in their public inspection files their documentation of compliance with the commercial limits in programming for children 12 and under.

October 23 (weekend)

  • License Renewal Documentation: Date on which radio stations licensed to communities in North and South Carolina must place in their public inspection file documentation of having given the required public notice of their August 1st license renewal filing.
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October 1, 2011 marks the triennial deadline for full power television stations (and a few lucky qualifying LPTV stations) to send their written must-carry or retransmission consent elections to each of the cable and satellite providers serving their market. The elections made by this October 1st will govern a station’s carriage rights for the three-year period from January 1, 2012 to December 31, 2014, and the impact of these elections will be far more significant for individual TV stations than any made before.

To understand why, keep in mind that in the early days of must-carry/retransmission consent elections, the lack of local competition among cable providers allowed them to take a “my way or the highway” attitude toward television broadcasters. As cable subscribership soared, and local cable providers faced little or no competition for subscribers, broadcasters had little choice but to make their programming available for retransmission. Because cable providers were in a position to refuse to pay cash for retransmission rights, the largest broadcasters were limited to negotiating for non-monetary compensation (e.g., obtaining carriage for an affiliated program service, which led to the launch of Fox News, among others). Smaller broadcasters typically did worse, as they had a weaker negotiating position and little need for non-monetary compensation like guaranteed carriage of a non-existent second channel. These were the days before digital multicasting made such additional local channels at least plausible.

Faced with these challenges, many stations just elected must-carry, which guaranteed cable carriage while avoiding the need to engage in prolonged negotiations likely to result in little gain. That all changed with the arrival of satellite television providers, who provided competition to cable, and more importantly, needed local TV signals to take market share from cable providers. Both of these developments were critical to creating a free market for the retransmission of broadcast programming. First, because they lacked cable’s monopoly position, satellite providers were willing to pay cash to obtain the broadcast programming that would allow them to compete for subscribers. Second, as subscribers left cable for satellite, cable providers suddenly had to compete for subscribers, and couldn’t do it without ensuring continued access to local broadcast signals.

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