NEW YORK – The major U.S. television networks' demands for compensation for the cost of creating content will put the earnings and credit quality of local broadcasters under more pressure over the next several years, according to a new report by Moody's Investors Service.
Retransmission fees, which broadcasters collect from pay-TV operators that air their content, are the TV broadcasters' second-largest source of revenue, after advertising. But reverse-compensation fees that networks like ABC, CBS, Fox and NBC have begun putting in their contracts with broadcasters will dilute the value of these retransmission fees, and will negate the near-term increases in retransmission fees that the broadcasters receive, the report continues.
Broadcasters have already struggled with steep ad revenue declines since 2006-2007, says the report. Since the rules for reporting retransmission revenue are ambiguous and remain non-standardized across the industry, it is possible that the U.S. TV broadcasting industry is facing a reverse-compensation burden greater than previously acknowledged.
"As the four major U.S. networks renew their multi-year contracts with broadcasters, the networks have increased their demands for 'reverse compensation,' which will pose a risk to broadcasters' cash flow in the near term”, said Carl Salas, a Moody's VP and senior analyst. "The broadcasters can only offset this pressure if they can negotiate significant increases in retransmission fees from cable and satellite television providers."
Retransmission fees have been the fastest-growing source of revenue from 2006-2010 among the pure-play, speculative-grade U.S. television broadcasters that Moody's rates. Over those four years, retransmission revenues increased by a compounded 54% annually, and the report forecasts continued double-digit annual growth in fees, resulting in a three-fold increase in retransmission revenues by 2017.
While pure-play broadcasters will generate higher revenue in 2012 from retransmission fees and political advertising, by 2013, the stress of reverse compensation fees will be more obvious, as political advertising from the 2012 election season disappears, the report adds. The networks' increasing demand for reverse compensation fees will have a near term negative credit impact on broadcasters. The report recommends that in addition to negotiating higher retransmission fees, broadcasters will need to strengthen their focus on growing advertising revenues and expanding digital strategies over the long term.
