Broadcast stations are looking to keep more of their distribution revenue by changing the way they pay networks for programming — especially sports — to a variable payment model from a fixed reverse-compensation fee.

Cord-cutting has slowed the growth of station retransmission-consent payments, which are calculated on a per-subscriber basis. If pay TV churn accelerates, retrans payments could shrink while networks continue to get their fixed fees from stations. That would pressure profit margins for the affiliates.

Station groups want the networks to share the risk.

On Tegna’s earnings call Thursday, CEO Dave Lougee said some of its new network affiliation deals don’t have fixed fees.

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“The majority of these subscribers are now tied to a variable payment model when it comes to our reverse-compensation payments, tying payments to subscriber counts,” Lougee said. 

Lougee noted that Tegna in January renewed its affiliation agreement with NBC, which covers 20 markets and 21 million households.

Some other big broadcasters said they were keen on putting their payments to the networks on a variable basis.

On Gray Television’s call Wednesday, CEO Hilton Howell noted that “all the affiliates of the content companies — cable. satellite and virtual — pay for all channels on a per-sub basis.” Meanwhile, “broadcasters are the only people who are paying the conglomerates on a fixed-fee basis. And so I think the simple answer is that we should be paying on a per-sub basis as well.”

On Nexstar Media Group’s call Wednesday, reverse comp payments came up, but Nexstar execs said the issue wasn’t a simple one of fixed versus variable.

“I think that you have to understand that our agreements are more nuanced even than that,” Nexstar CEO Perry Sook said.

“Even where we have what you might consider to be fixed arrangements, maybe there are collars around the bandwidth of both growth and contraction, and there are all kinds of elements that go into baking the cake with each of the networks we're on,” Sook said. “I mean they are multifaceted, they are very complex, take a long time to negotiate, and money isn't always the only thing we talk about.”

Sook said he didn’t want to comment on Nexstar’s relationship with any of the networks.

“There are dynamic discussions happening in real time. And I would just say that everyone at the table is aware of what's going on in the industry and that the sands are shifting under our feet. And there is sensitivity to that all around the table,” he said.

“Having been on both sides of the table for those discussions, I think I have probably unique appreciation for the fact that they are each very different, complex,” added Nexstar president and chief operating officer Mike Biard, a former Fox distribution executive. 

“Focusing on a single aspect of those relationships, I think, misses the point,“ Biard said. “Certainly, this is the point from our perspective, which is we're going to manage the entire relationship to the net cost. And I know there's been focus on the fixed-cost aspect that some have talked about. At the right price, I would take fixed cost. It’s all about how that cost works through our business, and that's what we're focused on.”

Although network executives declined to discuss the issue, they would likely take a variable deal if the numbers were in their favor.

Gross retransmission fees were estimated to rise 3% to $14.8 billion this year by S&P Global Market Intelligence. Growth is expected to slow, with fees reaching $15.93 billion in 2027. Affiliates are estimated to keep 48% to 50% of the gross fees, with the rest going to networks.

When stations started getting cash retransmission payments from distributors, the networks argued that national programming, particularly sports, was a big part of what those distributors were paying for, and they wanted a cut of retrans cash.

Originally, the networks took a percentage of retransmission revenue, with some stations paying 50%. 

About 10 years ago, CBS started to ask affiliates to pay a fixed programming fee rather than a percentage of the retransmission payments they negotiated with distributors.

CBS argued that its costs, particularly for long-term sports rights, are fixed and that the affiliate’s payments should also be fixed, matching cost certainty with revenue predictability. (A fixed payment also insures against affiliates allocating a bigger share of retrans payments to the independent stations they own, reducing how much they have to share with the networks.)

Nearly all of CBS’s affiliate deals are for fixed fees, as are Fox’s, sources said.

Now affiliates are pushing to go back to a percentage scheme.

The parent companies of the Big Four networks also own stations and cable networks, so they have a good handle on how many subscribers their affiliates will have through the life of what are typically three-year agreements.

With that knowledge, some industry execs believe the networks would try to negotiate percentage deals that would ultimately generate the same revenue as a fixed fee arrangement.

Network executives said the payment should reflect the value the network brings to the station, but station leaders have said the presence of network programming on network-owned streaming platforms is changing that equation.

“What we have said consistently is we pay [networks] for programming and exclusivity of that programming,” Nexstar’s Sook said. “And to the extent the program is becoming less exclusive, it is less valuable to us, and we potentially will pay you less over time.”

It’s worth noting, though, that affiliates get carriage fees when their signals and local programming are carried by streaming services like Paramount Plus (CBS).

Once upon a time, the networks compensated their affiliates millions of dollars for carrying national programming and advertising in their markets. Now the stations pay the networks. That’s why the stations’ current payments are called reverse compensation. And that was a long time ago.

With media companies prioritizing streaming, the pressure to raise programming fees on affiliates appears to be easing, according to Sinclair Broadcast Group president and CEO Chris Ripley.

Sinclair this week announced it renewed its stations’ affiliation agreement with The Walt Disney Co.’s ABC network. 

On the company’s third-quarter earnings call with analysts and investors Wednesday morning, Sinclair CEO Chris Ripley said “there has been a shift in terms of negotiating position” as networks have moved some of their best content to streaming. 

Disney, for example, has moved Dancing With The Stars from ABC to Disney Plus.

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“Given the magnitude of the dollars that we already pay in terms of reverse retrans, we saw a significant reduction in the growth rates for reverse retrans to be more reflective of the value we bring, the value they bring, and what the current subscriber environment is,” Ripley said. “We were very pleased with the outcome at ABC.”

Cable operators and other distributors pay retransmission consent fees to stations in order to carry the broadcasters’ programming. Networks take a chunk of those payments in programming fees, or reverse retrans, to help pay for sports rights and to produce other shows.

Sinclair said it was expecting no increase in its net retrans revenue in 2023, but sees it growing into the low- to mid-single-digit range after that, thanks to the new agreement with ABC and deals to be negotiated with the other networks.

In the negotiations, some of the exclusivity provisions in the agreements were also changed, Ripley said.

But Ripley also said that during the negotiation with ABC he felt Disney’s commitment to the network was strengthening.

“They put more NFL product on ABC after the last NFL deal and they have secured most of their other major sports properties,” he said, adding that “as far as we know, there are no plans to reduce primetime programming as has been rumored on other networks. We thought the negotiation reflected the synergistic relations we have with them, but also reflected the market dynamics and the gives and takes between the two parties.” ■

CBS chief operating officer Joseph Ianniello said the broadcaster expects $2.5 billion in retransmission consent and reverse compensation revenue by 2020, a $500 million increase from its previous forecasts.

Ianniello, speaking at CBS’ Investor Day in New York, added that the broadcaster believes it can generate $800 million in additional revenue over the next five years from its Showtime OTT and CBS All Access over the top services.

Ianniello said the retrans increase is a direct result of CBS’ ability to receive fair compensation for its broadcast content and for out of home rights. He added that the figure includes less than $3 per month per subscriber in retrans revenue, less than $2 per month per subscriber from reverse compensation from affiliates.

Ianniello added that the $800 million in expected OTT revenue will be split evenly between its Showtime OTT service and CBS All Access. For Showtime to achieve $400 million in revenue, it would need to add about 4 million incremental subscribers over the five-year period, which he said is achievable, given the 90 million U.S. homes that don’t subscribe to the premium channel. Reaching that revenue level would require the channel capture about 5% of that universe. He added that Showtime’s linear service already has about 20% penetration.

For CBS All Access, Ianniello said the network receives about $5 per month in revenue per subscriber from the monthly fee for the service and another $3.50 per month per subscriber in advertising revenue. Reaching the $400 million revenue goal would mean attracting another 4 million customers, which Ianniello again said was easily achievable.

The two revenue sources are part of CBS’ Four Pillars of Growth for the next five years – the other two are international syndication and revenue from skinny bundle providers. Ianniello said the network could attract $800 million from international in the period and another $450 million from skinny bundle providers.

In a question and answer session with analysts after the presentations, CBS CEO Les Moonves addressed speculation that the broadcaster was interested in buying rival premium network Starz by saying that he looks at every deal.

“I think the answer is we look at everything,” Moonves said. “Every name of every company that is for sale, we’ve looked at it.  But there is nothing we are going to do that won’t make total sense for us. Joe [Ianniello] and his team are looking at every deal that comes down the pike, but we haven’t done anything in a long time.”

SNL Kagan revised its retransmission consent fee projections, saying Monday that it expects broadcasters to reap $9.3 billion in charges by 2020, nearly twice the $4.9 billion they are expected to gain in 2014.

The growth projections are based on rising per-month, per subscriber fees for TV station owners in recent negotiations, Kagan said in a statement, as well as a new set of expectations for what broadcast networks are asking in programming compensation from their affiliates. This comes despite recent regulatory efforts to  chip away at TV stations bargaining positions. SNL Kagan’s projections call for retrans revenues to rise to $8.78 billion by 2019, versus their 2019 projection of $7.64 billion from last year.

Kagan estimates that the average retrans fee will rise to $1.32 per subscriber per month by 2017, putting TV stations above all but five basic cable networks in terms of affiliate fees per sub per month, with networks such as ESPN ($7.72) and TNT ($1.92) all still above that average mark. Most RSNs are projected to be significantly above this $1.26 benchmark.

SNL Kagan has also updated their reverse retrans projections, or the money that flows back to networks from their affiliate stations. Kagan nnow predicts that reverse retrans could increase from $1.53 billion in 2015 to $3.22 billion in 2020.