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Industry Outlook: TMT

Retransmission fees lift TV broadcast revenues as advertising declines

INSIGHT ARTICLE  | 

It may come as no surprise that advertising revenue for broadcast television has been declining for the past decade as on-demand streaming options such as Netflix and Amazon Prime have proliferated. According to second-quarter 2019 Nielsen data, traditional television viewing among 18- to 24-yearolds fell more than 50% from five years ago to a weekly average of 12 hours. Naturally, ad agencies have caught on to viewer trends and shifted their clients’ dollars away from cable and broadcast TV to the internet, creating significant headwinds for broadcasters reliant on ad revenues.

With a very crowded presidential race, broadcast networks can expect a decent spike in campaign advertising dollars, as more viewers tune in to watch real-time debates, town hall events and the like. On-air campaign-related advertising is projected to top $3 billion, according to Bloomberg, compared to $2.6 billion during the 2016 presidential election. While a $400 million increase may not seem significant, one might have expected a decline, given the fierce advertising competition from social media platforms, including Twitter and Facebook, which have been expanding their reach.

Although cyclical advertising revenue tied to the presidential race and major sporting events provides some lift for TV broadcasters, there is still a significant gap to make up for the decline in core advertising. Even amid their waning advertising revenue, TV broadcasters have outperformed the S&P 500 Index since the beginning of 2019 (see chart below). How is this possible?

Retransmission revenues: From zero to hero

The answer lies in so-called retransmission fees. Broadcasters are making up for their ad revenue shortfalls, in part, by placing more emphasis on the fees paid by cable, satellite and streaming platforms to retransmit local TV broadcast signals to their platforms. These fees, which are calculated based on viewership, have overtaken traditional TV advertising as a broadcast revenue source. In fact, just 10 years ago this revenue was virtually nil for most broadcasting companies. Today, retransmission fees are expected to top $10 billion annually in the United States and to grow at a compounded rate of 15% each year (see chart below).

The popularity and acceptance of retransmission fees have sparked a slew of merger and acquisition activities in a race to become the most dominant player in the “retrans” market. Sinclair Broadcast Group’s recent acquisition of Fox Regional Sports Networks for $10.6 billion positions Sinclair as one of the largest local TV broadcasters by revenue. As other notable acquisitions (see chart below) consolidate the industry, it is likely the federal government will keep a closer eye on competition as monopolies or oligopolies start to form.

 

Everyone wants a cut

However, while retrans revenue is steadily increasing, major networks such as NBC, ABC and CBS now want a cut, and are charging broadcast TV reverse retrans fees to stay within their networks. What was once a close relationship between broadcasters and the major networks has become more strained as networks are increasing their fees, cutting into broadcasters’ newfound source of revenues. Networks have justified the fees to continue supplying prime-time content and amid large licensing fees paid to professional sport affiliations like the NFL. According to Bloomberg, reverse retrans fees are projected to rise 4% to $3.3 billion in 2019.

Despite the revenue sharing, retrans fees will continue to give television broadcasters a much-needed lift to their revenues and share prices, at least in the immediate future.

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Steve Ingram  
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