Free TV could be fading to black
As ad dollars shrink, broadcast networks look at shift to cable
Thursday, December 31, 2009 3:10 AM
By Tim Feran
THE COLUMBUS DISPATCH
Fierce negotiations between Time Warner Cable and Fox owner News Corp., along with the recent purchase of NBC Universal by Comcast Corp., are underscoring changes in television. And the notion of free, over-the-air broadcasting might be unraveling.
That could mean higher cable- or satellite-TV bills.
Although the story is current, its roots go back more than 60 years, when TV stations began airing news, sports and entertainment free and made their money by showing commercials.
All went well for decades, until cable TV and the Web began fracturing the audience for free TV and siphoning away its ad dollars. The current recession has squeezed advertising further, forcing broadcasters to accelerate their push for new revenue to pay for programming.
And pay they must, because "Good programming is expensive," said Rupert Murdoch, whose News Corp. owns Fox, at a shareholders meeting in the fall. "It can no longer be supported solely by advertising revenues."
To make more money, the Fox owner is telling Time Warner Cable to hand over higher fees to Fox's affiliate stations, or else on Friday the broadcaster will pull some of its channels, including FX, Fuel and Speed.
The future of free TV also could be fundamentally altered as the biggest pay-TV provider, Comcast Corp., prepares to take control of NBC. Comcast has not signaled an intent to end NBC's free broadcasts. But Jeff Zucker, who runs NBC and its sister cable channels such as CNBC and Bravo, told investors this month that "The cable model is just superior to the broadcast model."
The traditional broadcast model works like this: CBS, NBC, ABC and Fox distribute shows through a network of local stations. The networks own a few stations in big markets, but most stations are "affiliates" owned by separate companies.
In Columbus, for example, the parent of The Dispatch owns CBS affiliate WBNS-TV (Channel 10). NBC affiliate WCMH-TV (Channel 4) is owned by Media General. ABC affiliate WSYX-TV (Channel 6) and Fox affiliate WTTE-TV (Channel 28) are both owned or operated by Sinclair Broadcast Group.
Traditionally, the networks paid affiliates to broadcast their shows, although those fees have dwindled in recent years. What hasn't changed is where the affiliates get almost all their money: from advertising.
Basic-cable channels such as ESPN or Bravo, on the other hand, have a dual stream of income: advertising dollars and fees paid by cable subscribers.
The cable model has been increasingly lucrative. In 1998, cable channels attracted 24 percent of total TV ad spending, according to the Television Bureau of Advertising. By 2008, that had risen to 39 percent. On the subscriber front, cable channels get 26 cents per subscriber on average from cable carriers, according to research firm SNL Kagan.
News Corp. illustrates the divergence between broadcast and cable profits.
News Corp.'s Fox broadcast network, which airs hit shows such as American Idol and 24, reported a 54 percent drop in operating income in the quarter that ended in September. In contrast, its cable channels' operating income rose 41 percent.
Although networks get some revenue from ads or shows shown online, it's not a significant sum. So the networks and local stations want to charge pay-TV companies a monthly fee per subscriber to carry their programming.
And, since 1994, the Federal Communications Commission has allowed networks and their affiliates to do that.
However, talks about those fees haven't always gone smoothly. The current stand-off between Time Warner Cable and News Corp. is only the latest heated negotiation.
In 2008, for example, Time Warner pulled the signal of central Ohio CW affiliate WWHO-TV (Channel 53) for nearly a month after negotiations broke down between the cable carrier and WWHO owner LIN TV Corp.
"We'd like to think this round (of negotiations over retransmission fees) with Fox would be the last," said Judy Barbao, Time Warner Cable's Columbus spokeswoman. "But until there's a fix to the business model, broadcasters are going to look for ways to make up for money they've lost in advertising."
The American Cable Association says its members -- mainly small cable-TV providers -- have seen their costs for carrying local TV stations more than triple in three years. The group's head, Matt Polka, said those fees have been recouped from consumers' wallets in the form of higher cable bills.
Over time, the networks might be able to get even more money by abandoning the affiliate structure. Here's why:
If a network operated purely as a cable channel and cut out the affiliates, the network could get the fees for the entire pay-TV audience.
Such a move would devastate affiliates, which would find themselves in the costly position of having to buy or produce all their programming, not just local news.
There is so much money at stake that Fitch Ratings analyst Jamie Rizzo predicts that at least one of the four broadcast networks might consider becoming a cable channel as early as 2011.
Observers say the leading candidate to do so might be NBC, although Comcast Executive Vice President David L. Cohen told the FCC this month that the company "remains committed to continuing to provide free over-the-air television."
Thus, the threat of NBC switching entirely to cable and abandoning its affiliates seems to have lessened, said Michael J. Fiorile, president and chief operating officer of The Dispatch Printing Company and -- through the company's ownership of an NBC affiliate in Indianapolis -- chairman of the NBC Television Affiliates Board.
"We're kind of optimistic at this point, based on what we've heard and seen from Comcast," Fiorile said.
Even if a shift did occur, it probably would take years, as the networks untangle complicated affiliate contracts. And, although CBS Corp. chief Leslie Moonves this year called the idea "a very interesting proposition," he cautioned that it "would really change the universe that we're in."
But even if affiliates can breathe easier, viewers probably will continue to feel a squeeze as a result of negotiations between behemoths such as News Corp. and Time Warner Cable.
"The issues don't change," Barbao said. "Broadcasters are looking at ways to solve their business model. Locally, here, we have a great relationship with the network affiliates. But the negotiation is bigger than us and them.
"Disputes like this are becoming way too frequent. If it's not us, it's Comcast. If not them, it's some other provider. Something has to give."
