Retransmission revenue growth slowed down significantly across the U.S. local TV industry in 2022, to around 3% from around 10% in the previous two years. This has prompted investor questions about our expectations for this key revenue stream and our outlook for local TV broadcasters. Here we answer some frequently asked investor questions.

Frequently Asked Questions

What is S&P Global Ratings' outlook for retransmission revenue growth over the next two years?

We believe retransmission revenue (the fees local TV stations receive from pay-TV distributors giving them the right to retransmit the station's broadcast content) will increase annually in the mid-single-digit percent area over the next two years (see chart 1). Our industry forecast assumes total pay-TV (a service that provides multiple TV channels, including traditional and virtual) subscribers will decline more than 7% per annum over the next two years. This will be more than offset by local TV broadcasters negotiating higher retransmission rates during contract renewals with pay-TV distributors. While retransmission agreements typically have annual price escalators in the mid-single-digit percent area over the typical three-year term of the contract, we believe annual price escalators alone would be insufficient to offset expected subscriber declines. We believe retransmission revenue growth will flatten after 2024 and potentially turn negative after 2025, as more moderate price increases during contract renewals (given declining TV audiences, weaker broadcast network content, and less exclusive broadcast network content) become insufficient to offset subscriber churn.

The parent companies of the broadcast networks are prioritizing putting content on their owned streaming platforms versus their owned broadcast networks, and at the same time, making certain content available on both their streaming platforms and broadcast networks, making the content no longer exclusive to broadcast television. As a result, many of the local TV broadcasters have stated over the last year that the growth in reverse retransmission fees (local TV stations pay a portion of retransmission revenue to the broadcast networks in which they are affiliated) has started to moderate. We expect this will continue over the next couple of years and help offset moderating retransmission revenue growth.

Chart 1

How are individual local TV broadcasters positioned to grow retransmission revenue?

As retransmission revenue matures, we believe local TV broadcast companies with greater geographic scale will more likely experience prolonged net retransmission revenue growth, since scale strengthens a company's ability to negotiate higher retransmission rates with pay-TV distributors. We primarily gauge a company's scale by the percentage of U.S. TV households that its station portfolio reaches. Nexstar has the largest station portfolio in the U.S. (68%), followed by Sinclair and TEGNA (each 39%). We believe scale also improves a company's ability to negotiate more favorable reverse retransmission agreements for network programming. Gray Television is the largest CBS affiliate, while TEGNA is the largest NBC affiliate, Nexstar is the largest Fox and CW affiliate, and Sinclair is the largest ABC affiliate. The timing of individual contract renewals with pay-TV distributors will determine the rate of retransmission revenue growth per year among companies (table 1).

Table 1

What is S&P Global Ratings' five-year outlook for retransmission revenue?

Beyond 2025, we expect retransmission revenue will eventually decline. However, we believe revenue declines will be manageable and no higher than in the low-single-digit percent area within the next five years. We believe broadcast TV will remain a key component of pay-TV distributors' video offerings as the broadcast networks will continue to carry key sports programming. In particular, the NFL's contract renewals with its broadcast network partners (beginning with the upcoming 2023/2024 season) will keep the league's games on broadcast TV through the 2033/2034 season. Additionally, we believe it is important to U.S. federal regulators, in particular the Federal Communications Commission (FCC), that broadcast TV remain widely available to the entire U.S. population for the broad dissemination of information. We also believe there is a base of pay-TV subscribers (primarily sports enthusiasts and families with a variety of viewing preferences) at which the pace of pay-TV subscriber losses could moderate (though we do not expect this to happen any earlier than 2025).

What impact does the networks' direct negotiations with virtual pay-TV distributors have on the local TV broadcasters?

Local TV broadcasters negotiate retransmission deals directly with traditional pay-TV distributors, but the broadcast networks negotiate the carriage of their content directly with virtual pay-TV distributors and then give the local TV broadcasters the option to opt in or out of their deals. In TV markets where the local TV broadcaster chooses to opt out, the virtual pay-TV distributor will carry the broadcast network's national feed, which excludes local programming and local news.

Earlier this year, CBS parent company Paramount Global negotiated a deal with FuboTV with terms that the CBS affiliate board considered below market value and as a result, the CBS-affiliated local TV stations opted out (FuboTV subscribers instead received a national feed). During the blackout, we received investor questions about whether this could set a precedent for future network negotiations with other virtual pay-TV distributors, especially much larger YouTube TV and Hulu Live. We did not believe the FuboTV negotiation was a good representation for the larger virtual pay-TV universe, given the younger demographic of FuboTV's subscriber base and the company's marketing as a sports-oriented service. Ultimately, a new deal emerged in which the CBS-affiliated stations returned to FuboTV less than eight weeks into the the blackout. Still, this highlights the risk of the local TV stations not owning the relationship with virtual pay-TV distributors.

While not all companies disclose their exposure to virtual pay-TV subscribers, we believe the industry still generates most of its retransmission revenue from traditional pay-TV subscribers. Nexstar recently disclosed that less than 10% of its distribution revenue comes from virtual pay-TV subscribers and E.W. Scripps disclosed that 20% of its subscriber base comes from virtual pay-TV subscribers.

As retransmission revenue matures, what are other revenue growth opportunities for the local TV broadcasters?

Local sports:   Recognizing that network content is becoming weaker and less exclusive, the local TV broadcasters are looking for ways to bring their own value-added, differentiated content. Sports content is particularly attractive because it is still overwhelmingly watched live and would complement local news. Acquiring sports rights could provide an opportunity to increase local advertising revenues over the next couple of years. However, in our view, this would not lead to a material increase in affiliate fees (given the already high affiliate fees for local TV broadcasters) and would not make them any less susceptible to the declining pay-TV universe and weakening TV viewership. Additionally, if the local TV broadcasters were to acquire sports rights, it could pressure their margins. This would depend on the type and appeal of the sports they acquire, the structure of the contract (fixed versus variable fee), and the contract price. If multiple broadcasters compete for the same sports contract, it would likely increase the contract's price.

Nexstar and E.W. Scripps could be in unique positions to acquire sports content, given Nexstar's 75% ownership of the CW Network and E.W. Scripp's ownership of the ION Television Network because they fully control those broadcast networks' programming. In contrast, putting live sports games on a big-four affiliated network station (ABC, CBS, FOX, and NBC) could be difficult since the timing of games would likely conflict with network programming, particularly during primetime and on Saturday and Sunday afternoons. Broadcasting live sports games on the CW or ION networks could also help boost their audience ratings, which have historically been substantially lower than the big-four broadcast networks. Nexstar recently signed a multiyear agreement with LIV Golf to air 14 of the tour's events in 2023 on The CW while E.W. Scripps recently signed a multi-year agreement with the WNBA to televise games on Friday nights during the regular season on ION.

ATSC 3.0:   The broadcast TV industry is currently in the process of deploying ATSC 3.0, the next technology standard for broadcast TV geared toward improving the picture and audio quality of over-the-air TV and extending its reach outside the home to mobile devices. ATSC 3.0 could present new revenue opportunities because it improves broadcasters' ability to offer targeted advertising (because of improved geo-targeting) and send data from one-to-many (because of greater network capacity). ATSC 3.0 has thus far been deployed in markets reaching around half of U.S. homes, with an industry goal to eventually reach 80%. We are skeptical as to what extent ATSC 3.0 can be monetized and do not expect to incorporate any benefit from it in our analysis until the industry has demonstrated an ability to sign and implement new contracts and generate meaningful revenue from it.

Acquisitions:   We do not expect material broadcast transactions over the next few years. After significant industry consolidation in recent years, many of the companies we rate have a limited ability to acquire additional broadcast assets within the existing regulatory framework. We believe regulatory reform is unlikely under the current Democratic administration, and even under a different administration, believe the FCC would primarily focus on bipartisan issues such as broadband. At the same time, the FCC has still not completed its 2018 or 2022 quadrennial reviews of its media ownership rules.

What is the credit impact of maturing retransmission revenues on the local TV broadcast sector?

Retransmission revenue currently represents more than 40% of total revenue for most local TV broadcasters (chart 2). Beyond the next few years, we expect core advertising (excluding political ad spending) will become an increasing percentage of industry revenues as TV advertising remains fairly stable, but retransmission revenue declines. We view retransmission revenue more favorably than volatile advertising revenue, which is cyclical (since expectations for consumer spending drive advertising budgets).

Chart 2

What is S&P Global Ratings' ratings outlook for the sector?

Despite growing secular challenges, our outlook for the local TV broadcasters remains stable for now. We expect retransmission revenue will remain relatively stable over the next few years and provide meaningful cash flow to support broadcasters' deleveraging efforts. In particular, Gray Television (5.8x in 2022) and E.W. Scripps (5.7x in 2022) have elevated leverage after making sizable acquisitions in 2021.

Further, we expect the local TV broadcasters will benefit from $4 billion in high-margin political advertising revenue in 2024 given the U.S. presidential election to help reduce leverage. While we expect a shallow recession in 2023 will reduce core advertising by about 3% in 2023, we expect it will largely recover in 2024 as economic conditions improve. To the extent that retransmission revenue growth becomes negative over the longer-term, this could trigger a reassessment of our views on the sector.

Related Research

• Tear Sheet: Gray Television Inc., April 11, 2023
• Nexstar Media Group Inc. Rating Raised To 'BB+' From 'BB' On Lower Leverage Expectations; Outlook Stable; Debt Upgraded, April 5, 2023
• U.S. Advertising Forecast Revised In Light Of A Potential Shallower Recession, March 29, 2023
• Tear Sheet: Sinclair Broadcast Group Inc., March 14, 2023
• TEGNA Inc., Jan. 27, 2023
• Gauging The Business Risks Of Local U.S. TV Broadcasters, April 15, 2021