With Dish Deal, CBS Keeps It Basic

When CBS and Dish Network reached a new retransmission deal last weekend after a one-day blackout it looked like a clean win for the network. CBS got a hike in retransmission fees (although by how much we don’t know) and a commitment from Dish to disable the AutoHop ad-skipping DVR feature for CBS programs during the C7 window. Dish, on the other hand, came away without what it seemingly most wanted: the rights to include CBS’s linear channel in its planned online multichannel pay-TV service.

Turns out things may have been more complicated than that. According to the Wall Street Journal this morning, Dish is looking to keep over-the-air broadcast channels, including presumably CBS, off the basic tier for its OTT service, shunting them instead into a separate tier for which subscribers would have to pay more, in effect turning the traditional programming pyramid on its head. Dish’s OTT deal with ABC includes the right to include ABC in a separate tier if Dish can persuade other broadcasters to go along. But CBS is differently situated from ABC-parent Disney and may have balked at Dish’s two-tiered proposal.

Dish has ample reason to want to reverse the tiers, if that indeed is its strategy. The over-the-air channels have become highly problematic for traditional pay-TV operators. The operators are required to carry them on their basic tiers, and the lopsided retransmission consent regime gives broadcasters the leverage to ratchet up distribution fees despite steadily falling ratings. For operators, OTA channels have become an unrecoverable cost and a steady, growing drain on earnings. That’s particularly true of Dish, which lacks a compelling triple-play offering that would let it recover some of those growing costs indirectly.

No broadcaster has taken greater advantage of its retrans leverage in recent years as CBS. Unlike ABC-parent Disney, which has a robust lineup of basic cable networks led by ESPN, the most expensive channel on the cable dial, CBS is more of a pure-play broadcaster. It owns premium channel Showtime, but has limited presence on basic cable. As broadcaster advertising revenue gets squeezed by lower ratings CBS is becoming ever-more dependent on retransmission fees and is the most aggressive among its peers in pursing them.

The retrans regime is also a lynchpin of channel bundling, giving broadcast owners the leverage to demand carriage and carriage fees even for relatively low-rated cable networks, or to launch expensive new channels, as Fox recently did with Fox Sports 1.

The linear OTT future, however, potentially offers pay-TV operators a do-over — a chance to remake pay-TV economics on more favorable terms. One key to achieving that would be to reduce the leverage of broadcasters by making those channels optional to the consumer and putting a hard price on them.

Whether Dish can assemble a compelling OTT package without the broadcast channels is an open question, of course. Even with their diminished ratings they still pull better than nearly every cable network. But it’s also at least partly a question of price. If  Dish can make its OTT bundles small enough and flexible enough to be priced low enough, it could have a strong appeal to cord-cutters, who are presumably content to access the bulk of scripted network programming from on-demand platforms anyway.

CBS, in particular among broadcasters, has every reason to resist Dish’s strategy, of course. It’s heavily dependent on broadcast economics, which are heavily and increasingly dependent on retransmission fees. If Dish — or any other would-be OTT operator — were able to turn the broadcast network into an optional, premium channel CBS would have to charge much more per subscriber than it does now for retransmission on the basic tier. And it’s not at all clear it would be able to do that, especially if it is unable to offer OTT access to the NFL and other live sports it carries on its broadcast platform.

While that’s all speculative at this point, there’s no reason for CBS to establish a precedent that it may need to reverse in the future.

In any case, the Dish-CBS dispute was but a small skirmish it what is likely to be a long struggle. For both technical and regulatory reasons, linear pay-TV is going to get re-bundled as it begins to go over the top. The battle over what that bundle (or bundles) will look like, and who calls the shots over how the rebundling gets done is still only in the talking stage. — Sweeting.