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Why Broadcasters Are Seeking Direct Negotiations with Streaming Giants

10.06.2023 | Ray Gilmartin
 

As the media distribution landscape shifts toward OTT streaming, traditional linear stakeholders like MVPDs, broadcasters, and network affiliates are facing revenue shortfalls and searching for new ways to maximize revenue.

Recently, broadcasters have found themselves in a particularly tricky situation. They currently collect a significant portion of their revenue from MVPDs’ retransmission consent fees – which will decline as subscriber counts fall. Meanwhile, network affiliates are negotiating direct deals with streaming services to offer broadcasters’ local content, reducing broadcasters’ influence on the decision-making process.

That’s why a coalition of broadcasters is now pushing to negotiate directly with OTT streaming services, touting the unique value of their local programming and perspectives on TV markets across the country.

In this blog, we take a closer look at how the shift to OTT video distribution is impacting broadcasters and how some broadcasters are hoping to mitigate the impact by bringing their content onto OTT streaming services.

 

Understanding the traditional linear distribution model

To understand the situation broadcasters are facing today, we first need to understand how things have traditionally worked in the linear media distribution model.

The key stakeholders in linear media distribution are MVPDs, broadcasters, and network affiliates:

  • Broadcasters operate television stations and channels that can be picked up locally with an antenna or retransmitted by MVPDs. Typically, broadcasters produce local content (such as news) and often show local advertisements. But it’s usually not enough to fill a 24/7 broadcast schedule. To fill the gaps, broadcasters form affiliations with major networks, who provide additional content for local TV channels.
  • Network affiliates are the video production powerhouses that provide content to local broadcast stations in exchange for a share of the revenue those stations receive from MVPDs.
  • MVPDs (also pay TV operators) own the physical infrastructure required to distribute television channels to audiences via cable or satellite. On the local level, MVPDs license local channels from broadcasters and charge customers a monthly subscription fee based on the bundle they choose.

Increasingly, television stations are owned and operated by broadcast groups. In some cases, network affiliates own the television stations that broadcast their content. Those network affiliates might contract with a broadcast group for services related to operating the station.

 

Financial dynamics between networks and broadcasters

Financial dynamics between MVPDs, network affiliates, and broadcasters are being disrupted as the market moves toward OTT distribution.

Traditionally, broadcasters produced television channels and distributed those channels to MVPDs, which retransmitted the content. In return, broadcasters were compensated by MVPDs in the form of retransmission consent fees.

Broadcasters produce some of their own content, especially local news programming, but usually get a large portion of their content from network affiliates. In exchange for allowing broadcasters to build channels using their content, network affiliates are paid reverse compensation fees. Typically, over 50% of the retransmission fees that broadcasters receive from MVPDs may be passed on to network affiliates.

 

Broadcasters’ shifting perspectives on revenue equality

The business model for pay TV distribution has been stable for decades, but the emergence of OTT is disrupting the delicate balance that previously existed between MVPDs, broadcasters, and network affiliates.

As OTT streaming continues to grow in popularity, MVPDs are seeing declines in viewership, subscriptions, and advertising revenue. The trend of declining MVPD subscribers means broadcasters earn less retransmission consent revenue for their content. This is obviously bad news for broadcasters that depend heavily on that revenue to meet their numbers.

Pay TV revenue is declining each year. Revenue loss for MVPDs puts downward pressure on both retransmission fees for broadcasters and the reverse compensation fees paid to network affiliates who provide content. (Source)

 

Network affiliates are also feeling the downstream effects of declining pay TV revenue and negotiating more competitively with broadcasters to keep the reverse compensation checks flowing. At the same time, some network affiliates are trying to plug the revenue gap by using what some commentators call the streaming loophole.

Under current FCC rules, MVPDs must negotiate carriage of local stations’ channels directly with broadcasters. However, vMVPDs (services like Hulu Live, YouTube TV, etc.) can negotiate streaming rights directly with network affiliates for those exact same channels — without any input from the broadcasters.

Once a deal is made between a network affiliate and a vMVPD, the network affiliate is in a position to dictate the terms of any agreement to share vMVPD revenue with broadcasters. One example, according to industry insiders, is that some network affiliates are offering broadcasters a share of streaming revenue in exchange for higher reverse compensation fees.

Not only are broadcasters prevented from negotiating terms under the current rule, but some network affiliates are leveraging special relationships with vMVPDs (e.g. those owned by the same company) to supply content at below-market rates. This practice can reduce the value of revenue-sharing arrangements between network affiliates and broadcasters.

Broadcasters push for direct negotiations with streaming services

Unhappy with prevailing financial arrangements and under pressure to increase revenue, some broadcasters are now advocating to close the streaming loophole. The goal: to negotiate directly with OTT streaming services for what they consider to be a more equitable share of streaming revenue, based on the value of the local content they provide.

In early 2023, the owners of 600+ television stations formed an organization, the Coalition for Local News, to call for regulatory action (i.e., closing the streaming loophole) that would establish broadcasters’ rights to negotiate streaming deals for their own content and, as stated in a press release, “protect local broadcast news.”

The Coalition for Local News is among the parties arguing that the streaming loophole puts broadcasters at an unfair advantage in a competitive media ecosystem that includes much larger production, distribution, and technology companies. For broadcasters to compete and thrive, they say, lawmakers must update FCC rules to ensure that broadcasters get a seat at the negotiation table.

Shortly after FCC Chairwoman Jessica Rosenworcel proposed an investigation into the matter in July 2023, members of Congress challenged the FCC’s scope of legal authority. Within weeks, Cathy McMorris Rodgers (R-WA) and Bob Latta (R-Ohio) issued a letter of warning stating the view that it is “up to Congress to make updates, not the FCC.”

 

A high-stakes regulatory battle

As pay TV viewership declines, traditional linear media stakeholders that face resulting revenue shortfalls are seeking OTT distribution opportunities that can provide new revenue streams and keep their content accessible to audiences. Revenue sharing negotiations between parties are heating up as MVPDs innovate to compete with streaming services and network affiliates explore new avenues for content monetization.

Closing the streaming loophole from a regulatory standpoint would give U.S. broadcasters stronger rights to negotiate deals for their content and present new challenges to affiliates and vMVPDs. Regardless of how the rules evolve, stakeholders throughout the ecosystem will continue to battle for their share of streaming revenue.

 

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