It appears that CBS (NYSE:CBS) CEO Les Moonves has become the de facto representative of the broadcast industry, and he has been pushing aggressively to be rewarded with higher retransmission fees from cable, satellite, and telecom companies (retransmission fees are paid by cable companies or other video distributors for the right to carry broadcaster programming). Retransmission fees are important because it's considered the growth area of the industry over the next couple of years, since TV advertising revenue is projected to remain flat through 2015, and even fall some.
He is also pressing to change commercial ratings from C3 to C7, and is even telling investors he wants a C30 metric in place. The current means of measuring the number of viewers is C3, which refers to commercial ratings with an additional three days of time-shifted viewing. With C7 and C30, it would include 7 and 30 more days of additional time-shifted viewing.
If it was considered relevant by advertisers, it would increase ad revenue from existing content.
On the retransmission fees side, Moonves has been also very aggressive with the pace at which he wants the fees to increase. This has brought about a negative response from content distributors like Time Warner Cable (NYSE:TWC), which enforced a 30-day blackout on CBS. Time Warner Cable finally had to cave in when the fall and winter sports season arrived, however.
While Time Warner Cable was publicly defeated and lost approximately 300,000 subscribers, there was really no winner in the deal. CBS will enjoy higher retransmission fees for the duration of the agreement, however.
For Time Warner Cable, it could take a year or two to recover from the loss of customers, which also included some loss of potential new customers, based upon lines at the company being clogged from the large number of calls from the blackout ordeal. Some of the new customers will come from an initiative by the company to penetrate the DSL market it has a footprint in.
As for the immediate effect of the blackout, the variety of plans offered make it impossible to know the depth of the loss, and the company says it won't release figures based on a new policy it implemented.
Dish Network (NASDAQ:DISH) has also been very vocal about the rising costs of retransmission fees. The company points to the fact that it doesn't have the margins to "absorb those costs and are forced to pass them on to consumers."
This isn't just an assertion by Dish, as it's confirmed by research firm SNL Kagen. The firm's data show that retransmission fees from broadcasters have soared approximately 372% from 2008 to 2012. By 2018, estimates for revenue generated from retransmission fees will climb to $6.1 billion.
The question is, how hard can the broadcasters (led by Moonves) push the fees up? It doesn't appear that the rising prices are sustainable, and it could lead to an all-out war between content providers and distributors before something is settled.
On the TV ad spending side of things, commercial ratings are the currency of the content providers. Moonves has also been very aggressive on that front as well, pushing to change the way views are counted by extending the C3 ratings to at least C7 and possibly even out to C30. This would result in content providers attempting to raise ad revenue against their content when negotiating prices.
What's important about this is Moonves and the networks are attempting to make it appear that the real number of people viewing their TV shows is far above the C3 count. This is true, but with a caveat.
The caveat is that the majority of additional viewers over any period of time are those using a DVR to watch the content. One can make the case for huge additional numbers as Moonves noted with the CBS drama "Hostages," when he said that viewership almost doubled when using a C30 metric. That sounds impressive, but there is little commercial value to it since the majority of these extra viewers are DVR users.
The more popular shows could boost ad revenue of course, as evidenced by "Sleepy Hollow" on Fox. When measured on a C30 scheme (including streaming and VOD), the number of people watching the show increased by about 3 million for the period.
For the very top shows there is some room for potential ad spending increases using this system. On the majority of the shows, however, it would have little if any effect. There is also the question of how all of this would work out for time-sensitive commercials. Marketers would have to be convinced that later viewers are as valuable as those watching TV content on or soon after the day that it is scheduled.
This could be interpreted as desperation
Taking into account the pressure from Moonves for C30 and retransmission fees, it can be taken two ways. First, it could be interpreted as an aggressive, positive attempt to extract all of the value from content that networks offer on TV. On the other hand, it could be interpreted as an act of desperation based on the changing way that people choose to access video content.
When considering the consequences for cable, satellite, and telecom companies paying retransmission fees, and the uncertainty regarding the value of ads offered much later in a viewing period, I see this as desperation. I say this because it has resulted in some content distributors beginning to petition politicians to reconsider retransmission fees, and it has yet to be proven whether or not marketers will accept the longer period of time when counting those watching the content.
The issue isn't metrics but rather the ability of the broadcast industry to successfully adapt to a rapidly changing market. What happens when these short-term strategies reach a ceiling? What will the content providers do when everyone realizes that fewer people are watching their content? No amount of tinkering with metrics will change that reality.
Over the short term, these strategies will give the industry a boost. This is especially true in regard to retransmission fees. The industry as a whole must figure out a way to scale its content and generate more revenue from it. That ultimately comes down to the quality of the content, and no temporary fixes can change that.
Gary Bourgeault has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.