Retrans' Hobson's Choice

With just a few days until its retransmission consent deal with Altice USA expires on Oct. 1, 21st Century Fox -- soon to be "new Fox" -- has already taken to the airwaves, warning the cable operator's customers that they may soon be without essential programming, including NFL games and the Major League Baseball playoffs and World Series.

Fox launched a TV ad blitz earlier this week to warn Altice customers of the danger, complete with a moaning Danny Devito, telling Altice's Optimum and Suddenlink customers that they may be without the broadcast network as well as cable channels FS1 and FS2, FX Network and NatGeo.

The ad blitz is nothing new, and neither is the danger that big sports events could be lost in the shuffle over retrans negotiations -- these deals are specifically timed for that. What may be different this time is that Fox, which sold off most of its content businesses -- including FX and NatGeo -- to Disney earlier this year, may be using the Altice fight to set the tone for future negotiations. Disney is expected to close its $71.3 billion purchase of the Fox properties in the first quarter. After that, New Fox will essentially be the broadcast network -- which has 28 owned and operated stations across the country -- Fox News Channel, the sports channels including Big Ten Network and Fox Business. With the Disney deal, Fox made a big bet that the future of TV lies in live sports and news.

In a blog post Tuesday, BTIG media analyst Richard Greenfield wrote that Fox broadcast ratings are down, like the rest of its peers, and the reliance on expensive sports programming will mean that the media giant will need to extract ever higher retrans fees.

But there is a problem: cord cutting and cord shaving has made it more difficult for distributors to pass programming cost increases on to the consumer. So if Altice still carries Fox, it will either have to eat the increase -- estimated by Greenfield to be at least $1 per month per customer for broadcast alone -- or raise prices.

Altice USA says it is still talking to Fox, and was disappointed the programmer decided to take the fight public.

“We are currently negotiating with 21st Century Fox and are disappointed that they have started threatening to black out certain channels in an effort to extract hundreds of millions of dollars in new fees from us and our customers," Altice said in a statement. "Programming costs are the greatest contributor to rising cable costs, and we urge Fox to stop its threats and instead focus on negotiating an agreement that is fair for consumers.”

To Greenfield, Fox needs these increases more than ever, because failure means that their "entire strategy is flawed as they cannot possibly generate enough advertising revenues to cover the cost of their stepped-up investment in sports/live entertainment."

Fox executive chair Lachlan Murdoch said back in February that retrans increases were necessary, and the broadcaster expected them to rise "aggressively," especially after it agreed to pay $3.3 bilion over five years for the rights to the NFL's Thursday Night Football package. Since then, Fox has spent another $1 billion over five years for rights to the WWE's SmackDown beginning in 2019. 

“We see great potential to increase our retransmission revenue quite aggressively,” Murdoch said on a February conference call to discuss fiscal second quarter results. “We think that for two reasons, one obviously is the focus and investment in sports with the new NFL Thursday night packages, but also being a more focused company with fewer channels in our bundle [we] will be able to drive our retrans for the stations quite aggressively.”

While each side could miraculously hammer out an agreement in the next few days, these negotiations almost always include at least a slight period of darkness. And we have been here before.

The last time Fox and Optimum were in a retrans scuffle was in 2010, when the New York operator was owned by Cablevision Systems. At the time, Fox was broadcasting the World Series (between the San Francisco Giants and Texas Rangers) and NFL games on its broadcast network. Cablevision even let the stations go dark during the first two games of the World Series, which would have been unheard of in the past. Cablevision held out for two weeks -- a period that was characterized by blistering name-calling and accusations on both sides. But in the end, Cablevision relented, bringing the channels back and paying what the company said at the time was an unfair price for channels its customers didn't watch.

And therein lies the rub. Retransmission consent, despite negotiations and attempts at compromise, basically comes down to an all-or-nothing decision for the cable operator. In the end, operators have to weigh the cost of losing subscribers because they lack a certain type of programming, and the price of that programming. And during major sporting events, the value of that programming only goes up.       

Retrans has been a thorn in cable's side seemingly since forever -- or at least since it became part of the 1992 Cable Act -- but operators have recently been fighting back, dropping networks in which they no longer see the value. Most recently, Dish Network let Spanish language broadcaster Univision go dark on June 30, and has said it doesn't see a need to bring it back. According to Dish, Univision's ratings are down and its has lost its cachet with viewers to competitor Telemundo, a notion Univision vehemently denies.

Fox ratings are down too, along with every other broadcaster, but  Fox still has exclusive, big-time sporting events. Altice USA may be able to weather a playoff blackout -- the American League Wildcard game, which will pit the hometown New York Yankees against the Oakland A's, is scheduled Oct. 3 and is on TBS. If the Yankees advance, the ALDS and ALCS will be on TBS as well. FS1 and Fox will carry the National League divisional playoffs, but there are no New York teams in that race. The pot gets stickier with the World Series, even if the Yankees don't make it. The Fall Classic is must viewing for die-hard fans, as Cablevison learned in 2010.

On the football side, Fox carries the New York Giants, and even though that team isn't what it used to be (they are 1-2 three weeks into the season), it still has a huge, loyal fan base in the New York area.

So I'm with Greenfield on this one, who wrote that Fox's one-two- punch of football and baseball (wrestling isn't until next year) puts the broadcaster in the driver's seat.

"[I]t is quite hard to see Altice without Fox programming given the importance of local NFL programming, not to mention the fan base of the WWE," Greenfield wrote. "While paying up for Fox content is tough to digest given the industry headwinds facing MVPDs, it does not appear Altice has any choice."