Image source: Flickr user Davis Staedtler.

When Comcast (CMCSA 0.82%) finally passed regulatory approval to buy NBCUniversal in 2011, NBC was the last-place broadcast network and had been since Friends went off the air in 2004. Earlier this month, NBC announced that it was the No. 1 network for prime-time and late night for the third year in a row.

In the process, NBCUniversal CEO Steve Burke has managed to increase the network's retransmission fees -- the fees broadcast networks charge pay-TV distributors to carry their channel -- from practically $0 to an expected $800 million this year. That's still behind CBS (PARA -0.48%), which expects to generate over $1 billion this year. Still, the growth is remarkable and ought to remain a steady source of cash flow for the Comcast subsidiary.

A leading indicator

Savvy investors saw this coming for NBC. Television ratings often serve as a leading indicator for retransmission and affiliate fees. It makes sense that if more viewers watch a network, that network ought to command higher compensation from distributors.

While broadcast networks such as NBC and CBS generate most of their revenue from ads, they're increasingly supplementing that revenue with the fees they charge to distributors. Comcast even started explicitly displaying those fees on their customers' cable bills a couple years ago.

Both companies derive significant portions of their revenue from the fees. As mentioned, 15% of NBCU's broadcast television segment revenue came from distribution. CBS doesn't break down its revenue sources at the segment level, but $1 billion in retransmission fees would equal roughly 11% of its 2016 revenue run rate for its entertainment division.

Although both numbers represent relatively small portions of total revenue, they're growing much faster than other revenue sources and ought to continue to do so. Advertising revenue will have a tendency to fluctuate with ratings and certain content rights such as the Super Bowl. Content licensing fluctuates every year based on what productions are coming up for licensing. Retransmission fees, however, generally ramp up steadily. That makes them an important source of cash flow for both companies.

What's more, CBS CEO Les Moonves once described retransmission revenue as "dollars that fall right to the bottom line." Naturally, retransmission fees are very high-margin revenue, since broadcasters don't have to do anything more than their regular operations to receive them.

What can investors expect?

While Burke didn't provide any outlook for the company's retransmission revenue, Moonves isn't afraid to make bold projections. The CBS chief expects his company to bring in $2 billion in retransmission fees in 2020. With NBC quickly closing the gap in fees and maintaining its position in prime time and late night, it's not unreasonable to expect a similar number from NBCUniversal.

If Moonves' statement about having retransmission dollars fall straight to the bottom line is accurate, a $1.2 billion increase in NBCU's operating income would represent 19% growth from 2015. It would also represent 7.5% growth on Comcast's consolidated operating income.

With Comcast facing significant headwinds in the cable industry, NBCU and its growing retransmission fees could be a significant source for revenue and operating-income growth.

Challenges await

One of the biggest threats facing NBC is the growth of digital distributors such as Sling TV and PlayStation Vue. Burke doesn't believe many customers will sign up for those services compared with traditional cable, and he's not aggressively pursuing deals to get his networks into skinny bundles.

CBS, meanwhile, is playing hardball with digital distributors, and it's using its own over-the-top service as leverage against them.

The problem digital distributors pose is that most of them don't carry broadcast networks, particularly regional affiliate networks that license content from NBC and CBS. If digital distributors grow more popular, NBC and CBS will probably miss out on a significant source of retransmission fee revenue or have to accept less palatable terms.

So while NBC has done an excellent job growing retransmission fees as a source of revenue, the struggles facing the traditional cable industry could also have an impact on its ability to continue growing them into the future.