Before the FEDERAL COMMUNICATIONS COMMISSION Washington, DC 20554 In the Matter of ) ) Implementation of Section 103 of the STELA ) MB Docket No. 15-216 Reauthorization Act of 2014 ) ) Totality of the Circumstances Test ) COMMENTS OF GRAHAM MEDIA GROUP Graham Media Group (“Graham”)1 submits these Comments to urge the Commission to retain the current framework for evaluating whether broadcasters and MVPDs have met their mutual obligations to negotiate in good faith under the “totality of the circumstances” test. The retransmission consent marketplace is working as Congress envisioned, and the FCC’s good faith negotiation rules have operated effectively thus far because they have been construed in a manner that does not interfere with market negotiations. The modifications proposed in the Commission’s Notice of Proposed Rulemaking (“NPRM”) are therefore unnecessary and should be rejected for the reasons that follow. I. The Proposed Amendments Are Biased In Favor of MVPDs and Would Distort Market Negotiations. The proposals to amend the good faith negotiation rules, set forth in the NPRM, are largely geared toward shifting the bargaining power to MVPDs. For example, the proposal to factor in “a broadcaster’s failure to make an initial contract proposal at least 90 days prior to the existing contract’s expiration” in determining whether a negotiating entity has breached its duty 1 Graham Media Group owns five local television stations, each in a top-50 market and all recognized as news leaders: KPRC (Houston), WDIV (Detroit), KSAT (San Antonio), WKMG (Orlando), and WJXT (Jacksonville). to negotiate in good faith2—which would apply to broadcasters but not MVPDs—is clearly one- sided and does not reflect the mutuality inherent in the congressionally established good faith regime. Similarly, the proposal to factor in “a broadcaster’s demand that an MVPD place limits on its subscribers’ use of lawful devices and functionalities”3 clearly favors MVPDs by prohibiting broadcasters from addressing devices, such as the “ad-hopper,” that reduce the viewership of local stations’ advertisements and therefore improve MVPDs’ relative position in the competition for local advertising revenue. II. Graham Has Successfully Negotiated Hundreds of Retransmission Consent Agreements. In its retransmission consent negotiations, Graham often faces huge MVPDs, some of which are vertically integrated. Nonetheless, Graham has successfully negotiated hundreds of retransmission consent agreements without ever coming to an impasse or “going dark” on an MVPD. As discussed below, Graham’s experience is not unique. Because the current good faith negotiation rules are largely even-handed, both parties have been able to negotiate toward a mutually acceptable agreement without the government thumb on the scales.4 Modifying the good faith negotiation rules as proposed in the NPRM, will impair—rather than enhance—the ability of parties to successfully conclude retransmission consent negotiations. The proposed modifications would unnecessarily tilt the balance of power toward MVPDs, providing MVPDs with additional leverage to continue to demand below-market rates (discussed below) and incentivize repeat-offender MVPDs (discussed below) to steer negotiations toward impasse. 2 Implementation of Section 103 of the STELA Reauthorization Act of 2014, Totality of the Circumstances Test, Notice of Proposed Rulemaking, MB Docket No. 15-126, ¶ 16 (2015). 3 Id. 4 One exception to this largely even-handed approach is the broadcast-only restriction on joint negotiations, where broadcasters face restrictions that MVPDs do not. 2 III. Market Data Demonstrates That Graham Is Significantly Underpaid for Retransmission of Its Stations’ Signals. Most MVPDs exercise considerable leverage in negotiations with broadcasters. In fact, Nielsen data shows that while Graham’s stations are typically top-rated in their markets, they are paid significantly less than cable channels with far lower ratings. There is an unspoken theme that underlies this attempt by MVPDs to drastically restructure the retransmission consent landscape. MVPDs have almost since the beginning claimed that they are victimized by the rapacious financial demands of broadcasters, who somehow magically have all of the bargaining leverage with the result that they are incredibly overpaid. In keeping with this theme, MVPDs have routinely of late charged a separate and legally suspect “Broadcast TV Fee” or “Broadcast Surcharge” than can be as much as $5.00 or more per month.5 The stated purpose of these fees is to offset the retransmission consent fees, presumably unreasonable, being paid to broadcasters. However, there is no evidence that this fee actually bears any relationship to the fees being paid to broadcasters. The truth is far different, as evidenced by a comparison of Nielsen ratings and subscriber fees of broadcast television on the one hand and popular cable channels on the other. First, a small overview: Despite contributing far fewer channels to the task, broadcasters deliver far more viewers proportionally to cable and satellite systems than do cable channels. For example, 43 percent of the MVPD primetime audience is watching broadcast television.6 Eighty-five of 5 See, e.g., Letter from Cara Trautmann, Government Relations, Charter, to Paul Wyntergreen, City Manager, City of Tillamook (Nov. 19, 2014), available at http://destinyhosted.com/tilladocs/2014/CCREG/20141201_285/1015_Charter%20Letter.pdf (“Due to rising programming costs, effective with your January billing statement, pricing will be adjusted for the Broadcast TV Surcharge from $5.00 to $5.25. This reflects charges assessed to Charter by broadcast TV stations.”). 6 The Higher Math of Retrans, TVNewsCheck (Winter 2014), available at http://www.tvnewscheck.com/assets/files/ExO-Winter2014-LoRes-pg6.pdf. 3 the 100 top-rated shows nationally are on broadcast television.7 Despite this disparity, MVPDs paid basic cable channels nearly ten times the amount of fees that were paid to broadcasters.8 The experience at Graham highlights this disparity, as seen from a simple comparison of the Nielsen Household Ratings of its stations to five of the most popular cable channels. Those channels, and the reported estimates of the 2015 average per subscriber fees paid to them by MVPDs,9 are as follows: Estimated Average Per Subscriber Fee Fox News $1.25 Disney Channel $1.34 ESPN $6.64 TNT $1.65 TBS $0.85 For a point of reference, the average estimated per-subscriber retransmission consent fee paid to broadcasters in 2015 is $1.05.10 When Nielsen ratings are included in the mix, it is clear that broadcast television is a bargain; “bargain” being another way to describe grossly underpaid. On a given day, the five 7 Id. 8 Id. 9 Average per subscriber fees for 2015 are based on SNL Kagan data. 10 Peter Leitzinger, Average Retrans Per Sub Fees Reach $1.05 In Q1, SNL Kagan (June 4, 2015, 4:42 PM), available at http://www.snl.com/InteractiveX/ArticleAbstract.aspx?id=32811520. MVPDs sometimes argue that comparing cable channel fees with broadcaster retransmission consent fees cannot be done because MVPDs are commonly given offsetting value in the form of advertising inventory. Graham has in the past analyzed the value of such inventory and it does not materially alter the analysis. 4 Graham stations on average substantially out-deliver audience to cable and satellite systems as compared to five selected cable channels11: Graham Comparative Audience Size Graham v. Fox News 278% Graham v. Disney Channel 323% Graham v. ESPN 422% Graham v. TNT 387% Graham v. TBS 523% If the retransmission consent fees paid to the Graham Stations reflected the audience being delivered as compared to the selected cable channels, the projected retransmission consent fees would be: Projected Graham Retransmission Fee Graham v. Fox News $3.48 Graham v. Disney $4.33 Graham v. ESPN $28.02 Graham v. TNT $6.39 Graham v. TBS $4.45 Suffice it to say, these projected fees far surpass both Graham’s actual retransmission consent fees and the 2015 broadcast average of $1.05. A most dramatic example is Graham’s station in Detroit, WDIV. The cumulative Nielsen ratings for the five cable channels is 3.4, exactly the same as WDIV’s rating by itself. The 11 The Nielsen data which is the basis for the analysis which follows is based upon M-Su, 24 hour, Households Using Television, Live-Same Day Ratings for the period October 30, 2014, through May 20, 2015. Data from the five Graham station markets was used. 5 cumulative average fee paid by MVPDs for those channels is $11.73. WDIV’s average retransmission fee is a fraction of that.12 Several things are clear from the foregoing: • The MVPD fixation on broadcast television is not factually supported. • Protestations to the contrary, broadcast television is not the ruination of MVPDs. • Broadcast television is underpaid. As it bears on this proceeding, the conclusion is compelling: as demonstrated by market data, the comparative bargaining position of MVPDs and broadcast television is at best unevenly tilted in favor of MVPDs. The instant attempt to further tilt the playing field is unwarranted and should be rejected. IV. Problems That Have Arisen in Retransmission Consent Negotiations Stem from Certain Repeat Offenders. Instances of unsuccessful retransmission consent negotiations that lead to an impasse are rare, and the problems that have arisen in recent years stem from a small number of MVPDs that frequently steer negotiations toward impasse. Industry data indicates that there have been 81 retransmission consent impasses since 2012, which represents just a fraction of the negotiations that have taken place between broadcasters and MVPDs in that time frame. In 52 out of these 81 instances, either DIRECTV or Dish Network was the MVPD involved in the negotiations. In other words, negotiations with just two MVPDs have led to approximately 64 percent of all 12 The disparity is even more egregious when one recalls that most MVPDs have turned broadcast television into a revenue source.