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Broadcast Investor
Retrans Projections Update: Sub Rates Continue To Rise

U.S. TV station owners' retrans fees from cable, direct broadcast satellite and telco video operators and virtual multichannel service providers is expected to reach $11.72 billion in 2019, up 11% from $10.57 billion in 2018. That is an upward revision from last year's projections based on consolidation in the industry and a continued rise in renewal rates with increased bargaining power on legacy and streaming platforms for major network TV stations. Longer term, we project retrans and virtual sub fees will grow to $16.26 billion by 2024.

While TV station owners have successfully secured higher retrans fees in each renewal period, net retrans margins averaged 50% in 2018 and, in some cases, below that number, reflecting increases in reverse retrans or network programming expenses to pay for the rising cost of live sports rights.

Our reverse retrans projections call for major affiliate owners to send back $3.57 billion to the major broadcast networks in 2019, up 9% from an estimated $3.27 billion in reverse retrans in 2018, representing 50% of total affiliate retrans revenue of $7.08 billion. Major networks include ABC, CBS, NBC, FOX, MyNetworkTV, The CW, Telemundo, Univision and UniMás.

Net affiliate multichannel retrans revenue is expected to grow low to mid-single digits over the next five years, with reverse retrans as a percentage of affiliate gross retrans gradually increasing in each renewal period from 50% in 2019 to 53% by the end of 2024. Affiliation and retrans renewals generally have staggered contract expiration dates so TV station owners have some visibility on their net retrans. Retrans contracts are renewed every two to three years, while affiliation agreements average four to five years.

According to recent investor presentations and executive guidance in first-quarter earnings calls, TV station owners are seeking retrans rates in the $2.50 to $3.00 per sub range for Big Four network stations, increasing to $3.50 or more with annual rate step-ups over the course of the contract. Based on our analysis of first-quarter 2019 retrans-per-sub rates, major affiliate TV station group owners Gray Television Inc., Meredith Corp., Nexstar Media Group Inc., TEGNA Inc. and Sinclair Broadcast Group Inc. lead our ranking at over $2 per sub on average, approaching $3 if including only Big Four affiliates.

Included in our updated retrans revenue projections are virtual multichannel providers that have local TV station livestreaming offerings, such as DISH Network Corp.'s Sling TV, AT&T Inc.'s DIRECTV NOW, Hulu LLC with Live TV, Alphabet Inc.'s YouTube TV, fuboTV and Sony Corp.'s PlayStation Vue. New entrants are typically charged higher average per-sub rates for programming than legacy services, so we modeled the virtual multichannel sub rates as slightly higher than average multichannel retrans rates during the projections period.

For the purposes of our retrans analysis, we modeled virtual multichannel sub fees separately from retrans fees paid by multichannel operators, as the stations are receiving a share of the livestreaming distribution fees after the network deducts their programming expenses. Based on talks with some of the major affiliate station owners, we assumed a virtual multichannel sub fee split of about 60% to the network and 40% to the station, although this could be less. On the owned-and-operated station side, for consistency, we assumed a 50/50 split of both retrans and virtual multichannel sub fees.

Based on our analysis of local TV station availability on streaming platforms, we estimate there will be 8.7 million virtual subs on average in 2019, up from an estimated 6.2 million in 2018. At an average station carriage fee per sub, per month of $3.99, we project gross virtual multichannel fees will reach $1.18 billion in 2019. Of this, $516.2 million is estimated to be the O&O and affiliate station share, at 50% for O&Os and 40% for affiliate stations. We project gross virtual sub revenue will grow to nearly $1.60 billion in 2020 and $1.94 billion in 2021, with the O&O and affiliate station share growing at $691.6 million and $840.2 million, respectively.

Our updated projections call for gross retrans revenues from multichannel operators to rise from $11.20 billion in 2019 to $12.10 billion in 2020 and $12.96 billion in 2021. By the end of the projection period in 2024, we forecast retrans revenues of $15.04 billion. Total gross multichannel retrans and net virtual multichannel sub fees would represent 35% of total station revenue in 2019 and 39% by 2024.

On a net basis deducting reverse retrans payments back to the networks, station retrans and virtual sub revenue are forecast to reach $6.30 billion in 2019, $6.93 billion in 2020, $7.52 billion in 2021 and $8.77 billion by the end of the projection period in 2024. That is consistent with company guidance from the major station owners expected low to mid-teens net retrans growth in the next few renewal cycles and high single-digit growth long term.

Please see the related document for Kagan's projections of retransmission fees sourced from cable, DBS and telco operators, as well as reverse retrans projections for U.S. broadcast networks.

Despite that growth, by 2022, the projected $14.68 billion in multichannel retrans and virtual sub fees are expected to represent just 26.6% of the $55.20 billion we model multichannel operators will pay to basic cable networks and regional sports networks that year, despite the much higher TV viewing share for the Big Four broadcast networks.

The average $2.93 retrans fee we anticipate the industry will receive by 2022 puts TV stations above all but two basic cable networks in terms of affiliate fees per sub, per month, with ESPN ($11.08) and TNT ($3.09) still above that average mark. Three RSNs are projected to be above the $6.00 mark, led by YES Network (US) ($7.23), FOX Sports Detroit (US) ($6.93) and Spectrum SportsNet LA (US) ($6.54). And there are nine RSNs above the $5.00 per sub threshold including FOX Sports Arizona (US) ($5.76), FOX Sports Ohio (US) ($5.51), Spectrum SportsNet/Deportes (US) ($5.50), MSG Network (US) ($5.42), AT&T SportsNet Pittsburgh (US) ($5.35), New England Sports Network (US) ($5.21), NBC Sports Philadelphia (US) ($5.17), FOX Sports Midwest (US) ($5.16) and ROOT SPORTS Northwest (US) ($5.03).

We have also updated our reverse retrans projections, which model the funds flowing from the affiliate stations back to their network partners, usually in the form of a programming fee expense. Based on recent affiliation agreement negotiations, all Big Four networks are requiring affiliates in renewals to pay either a per-sub/per-TV-household cash payment or a flat fee per station as a programming expense. Univision Communications Inc. continues to negotiate retrans and online distribution rights on behalf of its affiliate stations, including its arrangement with Entravision Communications Corp., and we have assumed the affiliates receive a straight 40% of those multichannel retrans and virtual multichannel sub revenues.

Our reverse retrans projections indicate retrans payments from the affiliate stations are expected to increase from $3.57 billion in 2019 to $4.91 billion in 2024. We anticipate reverse retrans growing gradually to 54% of affiliates' gross retrans revenues over the same period as affiliates' monthly fees increase over the next few renewal cycles. Including reverse retrans also accruing from the O&Os with a 50/50 split at an estimated $2.06 billion in 2019 and growing to $3.00 billion in 2024, we anticipate 53% of industry retrans fees paid back to the nets through reverse retrans.

The distribution model for TV stations in legacy multichannel and virtual streaming platforms continues to evolve. It is expected to be bumpy over the next three to five years as the pay TV universe becomes more fragmented with new direct-to-consumer offerings from Walt Disney Co. and AT&T Inc.'s Warner Media LLC.

There is also an open question about where Sinclair's focus for distribution fees will be with its $9.60 billion deal for 21 Fox Sports RSNs and FOX College Sports from Disney. Sinclair will also have to negotiate rates for its Marquee Sports Network joint venture with the Chicago Cubs, digital networks Stadium and Ring of Honor Wrestling, ad-supported over-the-top platform STIRR and cable network Tennis Channel, along with its local TV stations.

Major station groups are relying on a larger scale to optimize distribution fees for their stations across legacy and virtual multichannel platforms, including the potential for ad-supported OTT, premium subscription direct-to-consumer offerings and mobile opportunities in Next Gen TV (ATSC 3.0).

Broadcast Investor is a regular feature from Kagan, a group within S&P Global Market Intelligence's TMT offering, providing exclusive research and commentary.

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