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January 29, 2007

A Potential Headwind For Comcast

Keep on eye out for some negative publicity that could hit Comcast (CMCSA/K) in the next few weeks. Sinclair Broadcast Group (SBGI) and Comcast are getting close to the drop dead date over their negotiations for payment of retransmission fees by Comcast to Sinclair so that Comcast can continue to carry the TV broadcast signals of Sinclair local TV stations. If no deal is struck, Comcast customers could lose access to Sinclair's network affiliated TV stations is some pretty sizable markets. Fights like this have garnered national publicity in the past.

Historically, cable operators have not had to pay cash for the right to retransmit signals of local broadcasters. Cable operators do pay cash to transmit the signals of cable networks such as ESPN, CNN, and HGTV. Typical fees range from 20 cents per month per sub for a less popular cable network to $2.50 per month per sub for ESPN. In fact, a significant part of your monthly cable or satellite bill is nothing more than these fees being passed along to you.

Sinclair and CBS (CBS) have been leading the charge for retransmission fees over the past year....

Les Moonves talks about it all the time and hopes to begin receiving 50 cents per month for his CBS signal in 2009/2010 when many of the current retransmission deasl expire (those deals gave local TV stations no compensation --- usually it was traded for carriage of newly launched cable networks by the corporate parent).

Sinclair has had a big fight with a small cable operator, Mediacom (MCCC) which has led Sinclair to take their signal off of MCCC's cable systems since early this month. MCCC serves mostly smaller markets in places like Cedar Rapids and Iowa City. Last week, Sinclair came to an agreement with Time Warner Cable (TWCAV) where TWCAV agreed to pay an undisclosed retransmission fee. MCCC quickly announced that they would agree to the same deal but Sinclair has yet to say yes as no doubt they gave TWCAV a big volume discount as the second largest cable operator in the US.

So far, Comcast has taken a hard line in public stating they do not plan to pay retransmission fees. Comcast says that local TV is free to anyone with a TV and an antenna and taxpayers are already "paying" for the signal by virtue of the government having given away the right to provide the signal free of charge.

In reality, I am sure that Comcast has no interest in paying an average of maybe 25 cents per month per sub for each of its 25 million subscribers. Even if you multiply that times four for ABC, CBS< FOX, and NBC, the money isn't huge by Comcast's standards, maybe $300 million a year against an EBITDA base of over $10 billion, but any payment comes directly off the bottom line.

Nevertheless, the stakes for Comcast are high. Sinclair reaches about 3 million households in Comcast territory according to Lehman Brothers. And these are subscribers are in sizable markets such as Pittsburgh, Baltimore, Minneapolis-St. Paul, Richmond, and Tampa Bay. The drop dead date is 2/5/07 and apparently Comcast is warnings subscribers in these markets they may lose Sinclair signals after that date. Sinclair has a lot of Fox stations so that means bye-bye American Idol is some cases.

I suspect that if it goes down to the last minute or the signals are pulled it will be a pretty high profile story with a lot of media coverage. Prior battles of a similar nature recovered a lot of press. As I stated, the financial stakes for Comcast aren’t too high but the shares have had a huge run and sentiment is now very positive. Therefore, if this blows up to a national story, there could be some downside in Comcast shares.

If so, use it to buy more as the story looks very good over the balance of 2007 and into 2008 as stable pricing, continued penetration of the triple play, and initial forays into the small and medium business market should drive double digit revenue , EBITDA, and free cash flow growth.

Posted by Steve Birenberg at January 29, 2007 02:04 PM in Comcast/Cable TV