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Announcement:

Moody's Says Binding Arbitration of Retransmission Consent and Carriage Fee Disputes Would Create a Healthier Environment for Broadcasters and Pay-TV Service Providers

17 Mar 2010

New York, March 17, 2010 -- Moody's Investors Service said that binding arbitration for settling retransmission consent and carriage fee disputes would not have near-term credit implications for broadcasters and pay television service providers, but such a scheme would make sense for their long-term credit health.

Moody's had said two years ago that it expected broadcast station owners (and content owners, indirectly) to get paid for the first time in the form of retransmission consent fees by pay television distribution service companies for the right to distribute network programming. What has become apparent to the markets at large now (albeit something that has been known to industry participants for some time already) is that "the system for negotiating retransmission consent fees from broadcasters and carriage fees from cable networks has become dysfunctional," according to Russell Solomon, Senior Vice President of Moody's.

The high profile carriage-fee battle over New York channel WABC-7 between The Walt Disney Company (A2, stable) and Cablevision Systems (Ba2, stable) on Oscar night has prompted formal letters of petition to both the Federal Communications Commission (FCC) and Congress to be filed last week by parties on both sides of the pay-TV/broadcaster divide.

In the latest twist, most U.S. cable companies joined forces with their arch-rival competitors — including DirecTV (Baa3, stable), Dish Network (Ba3, stable) and Verizon (A3, stable) — sending a collaborative written appeal from "companies that serve over 67 million video consumers" to both the FCC and the House and Senate Commerce Committees. In it, they requested intervention in what the companies' deem to be increasingly unfair provisions of the 1992 Cable Act governing the must-carry/retransmission consent rights of broadcasters and, specifically, the resolution of disputes. They would like the FCC to mandate that station owners cannot withhold programming for the mere failure to enter into an acceptable carriage agreement, and that some form of arbitration-type of process and holding period should be required so that consumers don't lose access to popular programming and thereby get caught in the middle.

The irony of these companies asking for help is inescapable given the pay-TV industry's history of fighting all things regulatory, almost since its inception. For its part, the TV-broadcasting community sent its own letter of appeal to FCC regulators and Congress, strongly supporting long-standing practices of "free market negotiations" and the view that government intervention is appropriate only with respect to bad-faith negotiations, which have notably been absent according to the Chairman of the National Association of Broadcasters.

"Moody's believes that compensation from the pay-TV industry for some of the most popular programming has historically been absent, and it is certain that those days are over," added Solomon. One way or another, someone has to pay for that expensive content, and fully advertising-supported television has high cyclical risk associated with it that needs to be adequately compensated for.

Third-party arbitration would likely result in fewer interruptions for broadcasters and pay-TV operators, which will avoid potentially material loss of revenue on both sides and will presumably keep consumers happy as they continue to maintain access to programming (albeit at inevitably higher rates). However, "the arbitration must be binding in order to be successful, particularly where stations are being grouped in the negotiations with co-owned important cable networks," stated Neil Begley, Moody's Senior Vice President. "If the current system is not fixed, it will cause further disruption for consumers and have negative financial ramifications for broadcasters and pay-TV operators that adhere to a stiffer negotiating posture over the longer term," Begley added.

Increases in retransmission consent and carriage fee payments continue to outstrip the rate of inflation, and these increases are ultimately passed on to consumers, something that regulators are growing increasingly watchful of. Moody's believes that broadcast station owners (and, indirectly, the major broadcast networks) will be successful in their collective bid to build a meaningful incremental affiliate fee revenue stream, nonetheless. The bottom line remains that broadcasters have some of the most popular programming content, and, moreover, that pay-TV companies need this content in order to keep subscribers and remain competitive. But binding independent arbitration may be in everyone's best interest in terms of figuring out exactly what that incremental cost should be — particularly in the interest of protecting consumers, which will surely be at the forefront of any regulatory agenda.

From both the consumer and the pay-TV industry perspectives, perhaps the best case scenario would be if political and regulatory pressure causes the FCC to take the unusual step of actually intervening with respect to these business negotiations, and the agency renews its age-old push for a-la-carte service offerings and pricing. This time, however, the key difference might just be that the pay-TV service providers themselves would likely support the proposition, so long as they are out of the channel-picking business and are assured of being paid some profitable fee for providing connectivity and video channel capacity into the home. Realistically, though, there are a myriad of inter-related business arrangements and contractual agreements that would need to be undone and/or materially modified in order to effect any meaningful transition towards such a radically different business model. Given the multitude of disparate industry participants with long-standing, entrenched business practices and contracts that would potentially be affected, such an outcome would not be possible without substantial legislative intervention, which even if it happened would almost certainly take a long time to play out.

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Says Binding Arbitration of Retransmission Consent and Carriage Fee Disputes Would Create a Healthier Environment for Broadcasters and Pay-TV Service Providers
No Related Data.
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