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CBS Braces for Cable Showdown

CBS chief Leslie Moonves is giving station owners something to cheer about in the war between cable operators and broadcasters over carriage of local-TV signals. But a new Wall Street report on retransmission consent says that it may still be years before CBS or other broadcasters see a meaningful amount of money from the fight.

Last week, CBS made a deal to provide its programming from Verizon's startup video system. The telco secured the right to retransmit CBS' O&O stations on its new FiOS video system, which is directly challenging cable operators by delivering both high-speed data and video services. The deal also gives Verizon certain video-on-demand rights to sell CBS' best prime time shows shortly after they air.

The big news is the price. CBS and Verizon refused to detail the deal, but industry executives familiar with it say that CBS secured terms similar to Hearst-Argyle's recent breakthrough agreement with DBS service EchoStar. That deal gives Hearst-Argyle 50¢ monthly for each EchoStar subscriber in the station group's markets, or around $11 million a year. The payments are funneled through cable network Lifetime Television, which is 50%-owned by Hearst-Argyle controlling shareholder Hearst Corp.

Skeptical of nexstar claims

Because Verizon's nascent video operation has few subscribers, the deal won't cost the telco or pay CBS much money anytime soon. The immediate revenue is far less even than the $12 million or so a year Nexstar says it will collect following recent, tough negotiations with cable and DBS operators. Many broadcasting and cable executives, meanwhile, are skeptical of Nexstar's claims.

The recent deals could mark shifts in the balance of power over retransmission consent, one of the most divisive issues in the TV industry. With ad sales sluggish, broadcasters believe their best path to growth is persuading cable operators to start writing big checks for the right to retransmit local TV stations.

Moonves is eager for a rallying point because Wall Street hasn't found much reason to get excited about CBS' stock. When Viacom split in two, CBS Corp. was designed to be the slow-growth half but would pay a bigger dividend.

Sanford, Bernstein & Co. media analyst Michael Nathanson expects CBS' companywide revenues and operating income to grow an average of just 3% each over the next four years. The company's billboard unit may be fairly strong, but Nathanson sees CBS' TV-network, station and radio units as lethargic. “When you're dealt the hand that he's dealt,” he says, “retransmission consent is the only bright spot.”

Stations argue that cable customers spend dramatically more time watching broadcast programming like CSI than what's on cable. Since operators readily pay many cable channels 25¢-50¢ per subscriber monthly, broadcast stations should be paid as much or more.

After more than a decade of fighting, major cable operators continue to reject stations' demands. They argue, in part, that their customers shouldn't pay for broadcast programming that's available free to anyone with a cheap antenna (or, increasingly, on the Internet).

Systems might commit to buying advertising on a station or carry a new cable network owned by the broadcaster's parent company. However, all but the smallest operators say they have not paid straight license fees.

CBS Executive VP Martin Franks scoffs at cable's stance. “If one of our viewers wants to put up rabbit ears, we're happy to give them our very best programming,” he says. “If a multi­channel provider is going to get between us and our viewer and charge them to watch that same programming, we expect to be compensated.”

Moonves has set CBS' retransmission-consent bar high. Earlier this year, he teased Wall Street with the prospect that CBS will secure “hundreds of millions of dollars” in revenue by breaking cable executives' will.

“We're going to get paid for our content by cable operators,” he said at a recent investor meeting. “Try running a cable operation without the Super Bowl, the Grammys, CSI, The Final Four, Survivor, David Letterman. Why should an [operator] pay a cable network for reruns when they're not paying us for the top shows on television?”

Nathanson estimates that, if Moonves delivers, retransmission-consent payments alone could lift CBS' earnings by 8%. For a company expecting 3% growth, that would be a big lift.

Who has more clout

There's a catch: CBS won't see any material kick for years. In a pair of new retransmission-consent reports by Nathanson and Bernstein's cable analyst Craig Moffett, the analysts note that Viacom had given CBS stations retransmission rights to bolster MTV's negotiations with major cable operators for better terms and carriage of new networks. MTV compensates CBS with payments of just $25 million, or about 5.2¢, for every cable and DBS subscriber in CBS' markets.

And cable operators have more clout than telcos and even DBS. Cable operators are big enough in major markets to take a broadcaster dark in 60%-80% of local homes overnight. That would guarantee immediate pain as major advertisers cancel. But a DBS operator might serve just 10%-20% of local homes, so it can inflict far less pain. Telcos are in the weakest position.

I wonder whether Moonves has promised too much. Perhaps in three years, CBS will have some other good news to tempt Wall Street with. But if he comes up short, expect investors' disappointment to be clearly reflected in CBS' stock price.

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