Good News on Your Local TV Stations

A couple of television events are converging and could have a meaningful impact on operating profits in the broadcast TV and cable TV industries:

1. On Dec. 31, a large number of retransmission agreements between local TV stations and local cable companies expire.
2. On Feb. 17, analog over-the-air broadcast TV signals will be turned off as the industry switches to 100% digital transmission.

The money is in the retransmission agreements. Historically, local TV stations have received no compensation from cable companies for retransmitting their signal to the cable company's subscribers. Cable TV networks such as CNN, ESPN and HGTV, on the other hand, have always been paid monthly affiliate fees on a per-subscriber basis by cable companies. These fees range from a few pennies per month for an obscure, lightly viewed channel such as Outdoor Channel to $4 per month per sub for ESPN. Channels such as Discovery and CNBC get 25 cents to 30 cents, while TBS or CNN get 45 cents to 50 cents.

To put this in perspective, Comcast (CMCSA - commentary - Cramer's Take) has 25 million subscribers who receive ESPN. As a result, Comcast pays ESPN owner Disney (DIS - commentary - Cramer's Take) $100 million per month (25 million subs times $4), or $1.2 billion per year (25 million subs times $4 times 12 months). Time Warner (TWX - commentary - Cramer's Take)-owned CNN gets $12.5 million per month (25 million subs at 50 cents), or $150 million per year form Comcast. These fees are in addition to ad sales, providing cable networks with a dual revenue stream, one half of which is virtually guaranteed and usually contains an inflation escalator.

Local TV stations, including those owned by Disney, News Corporation (NWS - commentary - Cramer's Take), CBS (CBS - commentary - Cramer's Take) and General Electric (GE - commentary - Cramer's Take), rely solely on advertising. Local TV stations not owned by these owners of the big four broadcast networks have never received any value for their content from cable companies. The big entertainment conglomerates never received affiliate fees, but they were able to trade retransmission rights for their owned TV stations in return for launching for new cable networks.

With new network launches dwindling to virtually nothing and local TV stations under massive secular pressure from lower ratings and the decline of key advertisers such as automakers, station owners are increasingly looking for cash compensation in the form of affiliate fees.

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At time of publication, Birenberg was long General Electric in a handful of client accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.