After a few days of threats and warnings, cable distributor Time Warner Cable (click ticker for report: ) dropped CBS (click for report: ) programming from its content offering as the two failed to reach an agreement on retransmission fees. Retransmission fees are charged by basic cable station owners (think CBS, NBC, and ABC) to distributors that wish to carry the content.
Time Warner released a statement to its customers blaming CBS for outrageous demands. Current retransmission fees per subscriber hover around $1 a month, but rumors have suggested CBS would like to double this price. Time Warner believes that allowing the fee to double would set an unhealthy precedent, especially when considering that CBS is free via antenna TV.
Thus far, it is difficult to gauge the reaction. If Time Warner doesn’t receive material cancelations, then we may see a realization that the consumption medium is as important as the content itself. In fact, it may prove more costly for CBS than Time Warner in terms of declining revenue from retransmission and advertisements.
Interestingly, Best Ideas Newsletter holding DirecTV (click ticker for report: ) issued a statement in support of Time Warner and its crusade against CBS. Naturally, the firm claimed that CBS was overly aggressive in forcing subscribers to accept the same programs at an elevated price and that Time Warner was working for consumers. DirecTV benefits from any victory against content creators, but it also has the opportunity to pick up market share if the blackout persists.
It is hard to say exactly what will happen in the near term, but we expect the firm that experiences the most revenue pressure will eventually cave in (and re-tie the knot). Because the end of the summer isn’t necessarily the best time for programming, we think CBS could feel the pressure of losing some eyeballs and advertising revenue, especially since Time Warner subscribers may not want to go through the process of cancelling service and finding a new provider. Consumers may simply watch other shows rather than bothering to seek out CBS’ programming.
Ultimately, it may take until the beginning of the NFL season for a deal to occur. NFL TV ratings remain sky-high, even if they were a tad lower in 2012 than in 2011, so we think it is quite possible that the beginning of the most-watched TV in America will force a deal.
Valuentum’s Take
The law of diminishing returns seems to be coming to pass in the content business. Time Warner’s blackout of CBS isn’t the first time such an event has occurred, but it certainly will impact more viewers than any previous deal. A victory for Time Warner (retransmission fees don’t increase by a tremendous amount) is a victory for the entire distribution industry and will highlight the value of the distributors. It is possible that this could mark the inflection point the industry needs to combat increasing content costs.
In any case, we will be keeping a close eye on how the issue is eventually resolved, but we think it will undoubtedly have a greater impact on the retransmission industry. If the content owners such as CBS and Disney (click ticker for report: ) are perceived as “gouging” consumers, we could see some regulatory intervention, potentially capping retransmission fee increases—a major win for distributors.