As UK Broadcasters Angle For £200M In Retransmission Fees, Showdown Looms for BSkyB, Virgin Media

Last year, the U.S. broadcast networks collected over $3 billion in retransmission fees from cable providers. Their UK counterparts are taking notice. In recent weeks, the chief executives of Britain’s top commercial broadcasters, ITV and Channel 4, called publicly for cable and satellite operators to start paying for the right to carry their programming. ITV even commissioned a study to back its demands. The issue has attracted so much attention that Culture Secretary Sajid Javid weighed in, saying that he would review it.

With an estimated £200 million at stake, UK broadcasters have an incentive to press their case, which has been brought up intermittently in the past. Theirs differs in one key aspect from U.S. broadcasters that have survived a number of serious challenges over retransmission money: In the States, pay-TV customers shell out for broadcast networks in their monthly cable bills. In the UK, they get them for free.

David Abraham James MacTaggart Memorial LectureIn late August, Channel 4 chief David Abraham revived the argument when he delivered the prestigious MacTaggart Lecture (previous speakers include three Murdochs, Eric Schmidt, and Kevin Spacey) at the Edinburgh TV Festival. Abraham called for cable operators like the Murdoch-controlled BSkyB and the Liberty Global-owned Virgin Media to pony up. “The UK is now one of very few major markets in the world where public service broadcasters receive no payment for the immense value their channels bring to pay platforms. Now is the time to correct this and we need new rules to do it,” he said. (Sky has historically received carriage fees from broadcasters, but it has reduced this greatly over time, and Virgin does not charge the PSBs to carry their channels.)

Public service broadcasters, or PSBs, are deeply ingrained in Britain, where the major networks have a legal obligation to serve the public interest. All U.S. broadcasting licenses carry a similar public-interest component, but when one thinks of a public broadcaster, the mind turns quickly to PBS and such programming as Sesame Street for kids and POV longform news for grown-ups, along with a slate of British imports like Sherlock and Downton Abbey. The natural equivalent in the UK would be the BBC, although it also airs much more varied fare.

Somewhat confusingly in the UK, however, the highly commercial and publicly traded ITV — whose revenues were nearly £2.4 billion for 2013 and whose ITV Studios division has become the biggest indie TV producer in the U.S. — is also considered a PSB. Same goes for Abraham’s Channel 4, which is largely self-funded but ultimately publicly owned, and for Channel 5, recently acquired by Viacom.

Their broadcast licenses dictate that obligations to offer news programming and a balanced schedule. In exchange, the broadcasters have a huge chunk of spectrum that gives them access to about 99% of UK households. They’re are also listed at the top of the electronic programming guides. So when Abraham, followed by ITV in calling for retrans fees, pipes up, the reaction from Sky, notably, is that the broadcasters are looking for what essentially amounts to a subsidy on top of a subsidy.

“Just four years after pledging to stand on its own two feet in the marketplace, Channel 4 is again calling for a subsidy to compensate for its declining performance,” Graham McWilliam, Sky’s Group Director of Corporate Affairs, harrumphed on the day of Abraham’s MacTaggart talk. “This proposal amounts to a discriminatory tax on millions of license-fee paying viewers to watch public service content that is supposed to be free. C4 should not be allowed to walk away from the obligations of universally free access which come with the very significant benefits of public service status.”

For the BBC, it’s a particularly sensitive issue. The corporation is funded by a license fee paid for by the public (frozen since 2010 at £145.50 per year). That will change in 2016 when the Beeb signs a new charter. If the broadcaster were to receive a fee from the Skys and Virgins of the world, it would ostensibly be on top of the license fee. That in turn would be expected to raise the hackles of Britons who would feel they were being taxed twice. (Then again, some have suggested a reduction in the license fee if retrans payments were to go forward.) As for the other networks, although they are free-to-air, if the cable platforms began paying for their services, there is concern that the cost will get passed on to the customer, leading subscribers to pay for something they already have the ability to receive gratis.

ITV chief executive Adam Crozier received total remuneration of £8.4m last yearITV, it’s understood, disagrees with this thinking that the cost would trickle down. Instead, the belief is that the likes of Sky have so much cash on their balance sheets that they could easily afford to pay the PSBs for the privilege of airing them. And, the increased revenue would be useful for continuing investment in programming. Adam Crozier, Chief Executive at ITV, recently said, “Introducing retransmission fees would have clear benefits to the UK creative industries and the wider economy — as well as to viewers right across the UK — by enabling PSBs to continue to invest in the original programming people love to watch. The majority of viewing on these pay-TV platforms is PSB programming yet ITV, whether as producer or broadcaster investing in creating that content, doesn’t receive any payment — despite the fact that pay-TV platforms pay commercial terms for other channels.”

ITV recently called for the major platforms to end “what is effectively a multimillion-pound subsidy to Sky and Virgin,” it said, and pay up. The move followed the publication of a report that showed how retransmission payments to broadcasters in the U.S. have contributed significantly to the new ‘golden age’ of television. The retransmission consent scheme, introduced in the U.S. in 1992, means free-to-air broadcasters are paid for delivering content to competing platforms. The research cited by ITV, carried out by NERA Economic Consulting, revealed that in 2013, U.S. free-to-air broadcasters received around $3.3B in retransmission payments. The report says those fees account for less than 3% of cable operators’ revenues, and have little or no impact on pay-TV prices.

Some in the UK industry question the comparison of the local and American models given their vast differences. Enders Analysis’ Toby Syfret tells me, “Systems develop the way they do in different ways. You can’t just take one system from another country you like like to justify your wishes in your own national market.” A Sky spokesperson suggests, “It’s untenable for UK PSBs to look to the U.S. and cherry pick from a very different market.”

Speaking at the Royal Television Society recently, newly installed Culture Secretary Sajid Javid said the government intends to “look at whether the time is right to remove Section 73 of the Copyright, Design and Patents Act, which could allow PSBs to invest more in high-quality content. And that’s why, in the coming weeks, I will be taking a long, hard look at the balance of payments between broadcasters and platforms.”

“This is a complex area and it’s a high stakes game for everyone,” said Javid. “But that’s not going to stop me asking questions whenever I see a highly-regulated market. Can we do this better? Can we take government out of what should be a private matter between two private companies?… As with every other industry, broadcasting works best when the consumer is king… And, as with every other industry, that can’t happen if government red tape keeps getting in the way.”

He added that he wouldn’t “rip up the rule book or promise a whole new regulatory framework designed to meet the demands of 2014. .. We don’t need a regulatory regime that can answer all the challenges of today, or even of the next decade. We need one that can adapt to whatever the future may throw at us.”

A lot has changed since the 2003 Communications Act, he pointed out, “YouTube didn’t exist. Netflix was a DVD rental service. The idea of Web 2.0 and user-generated content was a minority interest. The Act was cutting-edge when it was passed, but before the ink was dry it was already out of date.”

So change might be afoot — but skeptics abound. The broadcasters are known to be lobbying in favor of fees and the platforms in turn are lobbying the other way. When Abraham made his comments in Edinburgh, a Sky spokesperson said, “Either Channel 4 don’t understand how our platform works or they choose to ignore it. But it is really very simple. Satellite viewers don’t pay to receive free-to-air PSB channels and Sky doesn’t pay for content that is given away for free on other platforms… Let’s be clear, if additional charges were introduced, ultimately millions of households would end up paying for PSB channels. Who wants that to happen?”

itv logoThere’s another issue at stake for cable outlets like Discovery and Viacom, says Syfret. “In the event of ITV and Channel 4 being awarded retransmission fees, it would inevitably be at the expense of others… Either Virgin and Sky accept a reduction in profit, or they take it out on others.”

The resolution is likely to come down to politics, but isn’t likely to be wholly addressed until a new regime is in place after the general election in May 2015. Given Rupert Murdoch’s involvement in BSkyB, a UK exec points out, “The irony is, in contrast in the U.S., News Corp has led the charge in favor of fees for channels on platforms.”

One ace the UK cable companies hold is the 2003 Comms Act, which prevents the over-the-air webs from going dark. So they can’t hold viewers hostage, as we’ve seen happen in the U.S. when there’s a dispute between, say, CBS and Cablevision and suddenly football fans are staring at blank screens.

Shows from UK public broadcasters accounts for about 50% to 70% of what Britons watch, and they’re also among the most exported in the world, so there is a clear reason to keep the PSBs turning out quality content. “I’m glad to say that, in the 21st century,” Javid noted in his RTS address, “we have succeeded in maintaining a PSB sector that is the envy of the world.”

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