Analyst: CBS/TWC retrans battle could 'alter the economics' of industry

According to a detailed report on the ongoing retransmission battle between CBS (NYSE: CBS) and Time Warner Cable (NYSE: TWC) by research firm SNL Financial, if CBS is successful in obtaining the terms it is reportedly pushing for, the transaction could set a new standard for retrans negotiations. And that, SNL analyst Robin Flynn wrote, "would dramatically alter the economics of the discussion."

According to SNL, CBS was receiving between $0.65 to $0.75 per subscriber per month from TWC, but is now arguing that figure should be increased to $2. If that new price sets a standard in the industry, the money generated from retransmission fees industrywide would rise to more than $12 billion in 2018. SNL said it estimates the industry will generate around $3 billion in retrans fees this year.

To be clear, SNL's Flynn said the firm doesn't expect that other broadcasters would be able to reap the same kinds of fees that heavyweight CBS could. Flynn noted that SNL's current projections show the industry generating around $6.1 billion in retrans fees by 2018. However, Flynn said those projections are based on a $0.56 per subscriber per month estimate--an estimate that could change if CBS is successful.

Specifically, Flynn noted there are a variety of factors that could change the economics and retrans negotiations in the industry. Perhaps most importantly, the growing role of digital rights and online access could push the negotiations into new territories. Indeed, CBS has blocked TWC customers' access to its online TV shows, an indication of the importance of the medium in retrans discussions. Further complicating the issue is TWC's plan to offer free over-the-air antennas to subscribers in New York, Los Angeles and Dallas.

On the other side, Flynn noted that the surprising decline in the number of multichannel video subscribers could affect the value of retrans fees. She noted that multichannel providers lost a total of 366,000 subscribers in the second quarter, putting the industry below its 2012 subscriber count and forcing SNL to update its multichannel customer projections.

"Multichannel operators are experiencing programming cost growth from cable networks as well as from TV stations, leading to a decline in video margins for major operators from 32.4% in 2007 to 25.7% in 2012," Flynn wrote. "Operators are walking a tightrope between stemming margin erosion via price increases and stanching basic sub losses via pricing restraint."

Whatever the outcome of the battle between CBS and TWC, which is turning into one of the longest-running retrans battles in history, the result will likely create a new standard for future retransmission negotiations.

For more:
- see this SNL post
- see this Crain's article

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