March 26, 2010
Why We Should Care About Retrans: Conclusion

This is the fourth installment in a series on TV retransmission fees. Previous installments focused on introducing the series, PR and television audiences, and regulation. In brief Disney, WABC's parent company demanded a per-subscriber retransmission fee from New York area cable provider, Cablevision. Cablevision thought the fee was too much. A messy public battle ensued and WABC disappeared from Cablevision at midnight on Sunday, March 7, night before the Oscars. If you want to learn more about retrans in general, check out this great article from Broadcasting & Cable.

The latest public battles over retransmission consent are a clear indication that television business models are becoming increasingly unstable. Retrans has always been an easy way for national networks to get things they want--like carriage for their cable stations, but until recently, retransmission fees were not part of national networks' business models for owned and operated (O&O) local stations. So, what's changed? Business models are up in the air because of digital distribution, network culture, and new players--like Google--entering the TV market. This is scary and some bad things could happen:

  1. Hulu, cord cutters, and piracy will ruin the TV industry.

  2. The economy and declining ad revenues will ruin the TV industry.

  3. The ratings industry's failure to measure digital audiences will ruin the TV industry.

This is all to say that networks know they're leaving money on the digital table, as it were. While they're scrambling to adapt their business models, it's easy to grab some low hanging fruit and collect a few extra million in retransmission fees.

According a report from SNL Kagan, if ABC got the $1 per subscriber it was allegedly demanding from Cablevision, ABC would earn an extra $3 million a month for a signal it was already providing. If stations across the industry demanded retrans fees from cable operators, it would amount to $400 a month, or $4.8 billion annually. Further, networks may be engaged in a game of retrans copycat. Once CBS negotiated for retrans fees, the other networks followed suit.

This strategy may boost the bottom line in the short term, but banking on retrans isn't a sustainable model in the long term because retrans doesn't provide that much revenue for networks; the FCC may get rid of retrans consent altogether; and battles over retrans are already really tiresome.

The good news is that the standoff between the cable operators and networks can be solved even without a revision of must-carry and retrans consent regulations. TV businesses models are in trouble beyond carriage negotiations anyway, so both cable operators and networks have some serious things to consider. Here are some ways cable operators (and satellite and telecom TV services) and networks can maintain their value in the changing marketplace. We'll start with cable.

Cable operators need to stop being dumb pipes. It's great to be a dumb pipe if you have a monopoly, but it's bad to be a dumb pipe in a commoditized market. Cable companies don't have monopolies any more, so they need to stop acting like monopolists. In many major markets, cable providers face competition from satellite providers, telecom providers, and even other cable providers. MSOs need to figure out a value proposition that differentiates them and gives them leverage when negotiating carriage deals. For negotiations to be fair networks need to benefit from carriage on each provider. Customers also have to want to subscribe to one cable provider over another. Today most people stick with one provider because switching is a pain--that's not a way to breed loyal customers. Ultimately, cable providers need to become valuable to both consumers and networks.

Cable operators need to differentiate themselves to consumers. There are a couple ways to do this:

  • Focus on customer service.
    When you don't have monopoly power, you can't afford to treat customers badly or they'll go somewhere else. I bet there are a lot of people who would pay an extra dollar or two a month to get meaningful customer service and support. Good customer service also means making fees more transparent.

  • Make TV easier and more fun to watch.
    Most people have trouble navigating clunky cable interfaces to find the shows they want to watch. The cable operator that can figure out an simple, clean interface will be miles ahead of the competition.

Cable operators also need to differentiate themselves to networks to make better carriage deals. There are a few ways to do this too.

  • The gold is in the data.
    Cable operators are sitting on one of the richest data sets out there. The digital data from set-top boxes can tell what, when, and how people are watching with way more precision than Nielsen ratings. Cable companies need to figure out how to make this data useful to advertisers and networks. Or someone else will.

  • Make advanced advertising and interactive TV happen. Now.
    Cable companies need to get their act together on advanced advertising and interactive TV solutions. Networks are eager to play in this space, but cable operators have been slow to make it a reality. If cable operators came to carriage negotiations with a fantastic new ad serving solution, networks wouldn't be so quick to pull their signals.

  • Make customers happy.
    Seriously, if customers are loyal to their cable companies, networks have less bargaining power in carriage negotiations.

Business models need some help on the network side too. The windfall from retrans fees will not make up for all the opportunities they're missing in the digital space. Here are suggestions for the networks side:
  • Treat the online space as a testing ground for radical new ideas.
    Network execs keep reminding us that traditional TV is the core business and that online TV only yields "digital pennies" "digital dimes". If you want those dimes to grow, you have to invest them wisely. To figure out what's a good investment, networks should use online TV to try new models. Create a bunch of different value propositions and see what consumers like. The great thing about the Internet is that you can experiment and get near-real time results. If something doesn't work, you can get rid of it. Google has become the leader in search because they experiment with their algorithm hundreds of times a day to figure out how to make it work better. Try everything. Want to know if subscriptions, downloads, micropayments, ad swapping, or streaming video will make more money? Throw it at the wall and see what sticks. When a revenue model does work, it can be applied to regular TV because everything's digital now.

  • Fix licensing agreements.
    We hear the complaint all the time that licensing agreements prevent TV networks from innovating on the distribution front. There may be no way to change what's been done, but new licensing deals should be made to allow for experimentation. Sweeten the deal for content producers by giving them a cut of what works-- because eventually something will work.

  • Invest in real, meaningful research.
    You need a bunch of smart people thinking about these issues and they need to have the freedom to challenge the status quo.

Both sides need to realize another important lesson: don't bring consumers into your mess. Seriously. As I've said before, people have no sympathy for networks or cable companies. Consumers will just end up hating both sides if we keep getting dragged into retrans battles. Taking a signal off the air just makes people want to cut the cord, and that's not good for either cable companies or networks.

This series ended up being about a lot more than retrans, but this situation gave us a way to explore the changing business of television. I'm not sure what's going to happen, but I know it's a very exciting time to be thinking about TV, writing about TV, with any luck, working in TV. As always, I'd love to hear what you have to say either in the comments or @shelila.