CBS prepared to play rough with affiliates over money

CBS fired an opening salvo in what could become a disruption for network affiliated television stations.

WISH TV, the LIN Broadcasting owned station in Indianapolis will no longer be the CBS affiliate starting January 1, 2015. CBS is moving from LIN owned WISH-TV to the Tribune owned station WTTV, currently the CW affiliate. Tribune also owns the FOX station in Indy.

The move will cost WISH about half of its revenue, according to one media analyst, who added it will serve as a warning to other network affiliated stations. CBS is sending a signal that it is prepared to play rough when it comes to the percentage of revenue that local stations pass along from the retransmission fees that cable companies pay the local stations. In TV terms, the money that an affiliate pays a network is “network compensation” often called “net-comp.” Side note: A couple of decades ago, networks sent compensation to local stations and it is now the other way around.

Local stations hoped that agreements with cable companies would be a stable and significant new income stream. But now, networks, stressed by the high costs of athletic contracts, are putting new pressure on the affiliates to hand over more of the cable income. SNL Kagan, a leading media research firm, says within three to five years local stations may be handing over 50-to-60 percent of their cable retransmission income to the networks. The cost of resisting could be high.

CBS initiated the talks when Tribune approached the network about extending CBS agreements for other stations it owns. CBS spokesman Dana McClintock said the deal has been in the works “for months” and confirms that the cable retransmission fees were a key reason for the Indianapolis affiliate switch. McClintock also agreed that while it is unusual for CBS to change affiliates, it is not unprecedented. And he said cable transmission fees will become a bigger issue in future affiliate negotiations around the country.

Justin Nielson, Sr. Justin Nielson, Research Analyst, SNL Kagan

Justin Nielson, Research Analyst, SNL Kagan

Justin Nielson, Senior Research Analyst for SNL Kagan told Poynter.org that he estimates a CW affiliate in Indianapolis generates $10-$15 million in annual advertising revenue. He estimates that a CBS affiliate generates $30-$40 million a year. “On top of that,” he said, “You would add the cable retransmission income, which would be significantly higher for a CBS station that has more viewers than a CW station.” Nielson said by losing the CBS affiliation, WISH will likely lose millions of dollars in revenue. How much depends on whether the station can land a new affiliation agreement with another network or whether it tries to “go it alone” as a fully independent station, which would be unusual.

WISH TV does not mention the affiliate switch on its website.  The soon to be new CBS affiliate announced the change on it’s co-owned FOX website.

Not only does WISH give up CBS programming including news and entertainment, in Indianapolis, it gives up Colts football.  CBS holds the rights to AFC games.

In a statement posted on its corporate website, Tribune said the new affiliation with CBS means it will add local news:

“This comprehensive agreement further expands our strong partnership with CBS and allows us to provide an array of outstanding programming, including leading live sports, news and entertainment,” said Tribune Broadcasting President Larry Wert. “Through WTTV’s new affiliation, we look forward to significantly enhancing our sports offerings, local news coverage and commitment to the community.”

The shakeup happened just one week after Tribune spun off its broadcasting properties from its print holdings.

WTTV hopes to have local news when it launches the new affiliation January 1, said Jessica Bellucci, Tribune director of communication. She said the Fox station that Tribune owns in Indianapolis already produces more than ten hours of news a day and the CBS station may share a newsroom and some resources. But she said, the CBS station will not just repurpose or repeat stories from the FOX station. Bellucci added Tribune believes the FCC will have no problems with the company owning both a FOX and CBS affiliate in this case.

Tribune also used the opportunity to lock up it’s CBS agreements in Memphis, Huntsville, Ft. Smith Arkansas and Richmond, Virginia. None of those agreements were due, but Tribune and CBS re-upped the agreements early.

LIN media finds itself in a delicate spot.  In March, LIN announced it would merge with Media General. As soon as the news broke about the affiliate change, LIN stock dropped nearly 4 percent, it was off even further on Tuesday. Media General stock dropped about the same amount and also continued to drop on Tuesday. But both have enjoyed highs since their merger announcement and are above 2013 levels. LIN has 10 other CBS affiliates around the country and will have to face CBS negotiations again as affiliation agreements come due.

Other network affiliates will be watching what happened in Indianapolis, Nielson said. “CBS has significant costs to cover, including its new NFL Thursday night football rights.”  And while he expects networks to stay with their current affiliates if they can, the shakeup in Indianapolis this week sends a signal that networks are willing to change channels if another owner is willing to pay what the network wants.

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