BTIG analyst Rich Greenfield points out that Bamboom is the first of what is likely to be next-generation Internet Protocol options that, if widely adopted, could eventually render retrans fees obsolete. That's not a farfetched notion -- and that has the biggest cable, satellite and telephone program distributors panting.
In short, why would broadcasters be foolish enough to assume that consumers' use of wireless technology will stagnate through the next cycle of retrans negotiations? They won't.
For its part, Bamboom provides consumers IP access to over-the-air broadcast television channels while sidestepping copyright infringement and other legal issues faced by other over-the-top broadcast TV services such as Filmon.com. IVI.com and Zediva, according to Greenfield.
Bamboom customers use their own proprietary micro antenna to receive and code broadcast content for IP delivery without having to rely on any middleman provider. Consumers are legally allowed to access and control single copies of over-the-air programming. Until now, consumers buying digital TV antennas for their TVs, adding stand-alone DVRs (such as a TiVo) and Slingbox to make content portable, still need to work through an enabling broadband provider.
Consumers have access to broadcast network content through Bamboom even if their multichannel service provider (cable, satellite or telephone video platforms) stopped paying retrans fees for the content and could no longer carry the broadcast network programs. With Netflix and YouTube offering more catalog on-demand movies and television shows, consumers will have increasingly less incentive to pay for the video services of multichannel providers.
Video content cloud services being developed by Apple, Amazon, Google and others will surely render similarly alternative low-cost direct-to-consumer content access options. Comcast is testing a new TV service at MIT that will be delivered over its own Internet Protocol infrastructure to computers and video game consoles to protect its domain.
However effective Bamboom proves to be, it is an example of how digital connected technology will continue to disrupt the existing television ecosystem by giving consumers liberating choices (call it constructive innovation). Broadcasters prefer to label such tech options as "destructive innovation," because they can render their new revenue assumptions unsustainable.
But betting against advancing technology is a dangerous game -- and that's exactly what broadcasters are doing. They are assuming that connected digital technology will remain static and a limited threat to their new revenue source. The advent of Bamboom demonstrates this is not the case. Consider the following facts, according to JP Morgan's new TV Fact Book:
*Local TV stations are becoming extremely reliant on the direct payments from multichannel program distributors that are expected to grow 15% annually over six years and could total more than $3.6 billion in 2017. By then, retrans fees could account for nearly 15% of total TV station revenues, compared with 2% today.
*Even for the broadcast network station owners, retrans is a very big deal. CBS expects its TV station group to garner $250 million in fees by 2012, compared with less than $25 million in 2007, JP Morgan analyst Michael Meltz reports. SNL Kagan estimates 70% of retrans revenues are concentrated in the top 25 largest TV markets with stations owned by the national TV networks.
*At the same time, CBS is charging its local TV station affiliates reverse compensation that it expects to collectively generate more than $200 million within a few years. The most profitable of the four broadcast networks is making ends meet by sucking revenues out of affiliates' TV stations, whose financial future dangles precariously on CBS' unpredictable ability to attract sufficient viewers and advertisers.
*Like CBS, Fox also charges its TV affiliates per household program license fees and ABC expects a cut of affiliates' retrans fee revenues. NBC (which is owned and controlled by Comcast, the largest cable operator) is set to negotiate with multichannel program distributors on behalf of its affiliates. Essentially, the broadcast networks are double-dipping: getting their retrains fees from multichannel program distributors and taking a share of fees paid to their affiliates.
*Broadcast networks and their corporate parents say it is justified. Retrans fees typically comprise more than 20% of local stations' profits, providing critical support to local TV stations maintaining better than 25% earnings margins even as the most successful of the broadcast networks -- CBS -- musters only about a 10% profit margin. The broadcast networks take all the risk by financing the production and acquisition of programs while struggling with tech-driven shifts in ROI.
For now, retrans is in a vicious cycle. Cable operators and other multichannel program distributors are passing on these increased content access costs to consumers, who generally have little choice but to subscribe to their services if they want access to the networks' live sports, live programs such as "American Idol" and pay network programming (HBO/Showtime).
Greenfield says broadcasters are using their "big bats" of live event programming and live sports to command upwards of 60 cents to 70 cents monthly per subscriber today, and are banking on that rising to a retrans fee of $4 monthly per subscriber over the next six years, according to SNL Kagan. That would be a $4 billion business built on 100 million multichannel homes in the U.S. that barely existed three years ago, Greenfield points out.
But it also could be a new business quickly marginalized by emerging competing technology that would be financially disastrous for broadcasters that think retrans is here to stay.
Outside of the Big Four networks, the top 10 station owners such as Tribune, Hearst, Belo and Sinclair only account only for about 35% of all revenues and have none of the same cost-offsetting options. Meltz observes that while most local TV broadcasters are in a better financial position than they were several years ago -- due to retrans fees, political advertising and a slowly improving economy -- all of the industry's basic metrics are wildly variable. He points out that the broadcast networks ratings continue to decline or flat line, and ad revenue growth is back in the single digits -- and it is not likely to get better.
Because retrans fees have become a critical element in determining whether broadcaster TV owners survive the digital diffusion of viewers and advertising dollars, they should be ardently developing other ancillary revenue streams, such as leasing digital spectrum to businesses for non-broadcast uses and partnering with community agencies and companies to provide unique interactive hyperlocal services.
The sustainability (or not) of retrans fees also will determine whether the Big Four broadcast networks and their corporate parents remain in the TV station ownership business. They do not need to. TV stations have long since ceased as a required distribution vehicle for the networks, which are now fixed on how to prevent what's left of their proprietary program proposition from slipping down the digital rabbit hole.