In Depth

NEW WORLD OF TV: Testing Granite's Mettle: Reshaping Broadcast TV's Boundaries Has a Price

[Editor’s note: Granite Broadcasting Announced on Aug. 11, 2009 that its Chairman and CEO, Don Cornwell, is stepping down. Don built Granite Broadcasting into the largest TV group in the country controlled by an African American. In this 2000 piece from TVWeek’s predecessor, Electronic Media, we read how Don handled an earlier bumpy situation.]

By Diane Mermigas, Editor at Large , New York

ORIGINALLY PUBLISHED April 17, 2000


The maverick tendencies of Granite Broadcasting Corp. Chairman and CEO W. Don Cornwell and his longtime partner, Granite President Stuart Beck, are being put to the ultimate test.

Granite's stock has plunged, closing at $53/8 a share Friday, off a 52-week high of $141/2 amid criticism from rivals and investors for doing what many admit was inevitable: agreeing to a first-ever cash payment to acquire a major network affiliation, or what some have dubbed "reverse compensation."

"They [Granite] have single-handedly destroyed the value of the broadcasters," veteran media investor Mario Gabelli said recently.

Indeed, Standard & Poor's recently lowered Granite's corporate credit and bank loan ratings to single B from single B-plus.

The negative response to Granite's bucking of conventional wisdom "has been absolutely staggering and amazing to us," Mr. Cornwell said in an interview.

Mr. Cornwell, 52, is a Harvard Business School graduate who first met Mr. Beck, an attorney, during an earlier 17-year investment stint at the Goldman, Sachs & Co. investment bank. But Cornwell has built his 12-year career in broadcasting on pushing the envelope, and he says he refuses to be riled by peers and investors who won't change with the times.

"I've heard as much as I need to hear of people's reactions," Mr. Cornwell said. "I'm obviously not getting a lot of applause."

Granite set off all the controversy by agreeing to pay about $362 million over 10 years to nab an NBC affiliation for KNTV in San Jose, Calif. That came after the intended new owners of KRON-TV in San Francisco, Young Broadcasting, refused to make a more modest payment to keep the Bay area Peacock affiliation.

But the flap is only the most recent and dramatic example of how Granite's founding executives have sought to reshape the status quo in a sanguine broadcast industry where change comes neither easily nor quietly.

As a result of the affiliation fuss, Mr. Cornwell and Mr. Beck now divide their time and energy between innovative projects aimed at tapping into new digital spectrum and more pedestrian--but urgent--concerns such as pumping up Granite's stock price and shepherding KNTV's transformation. The VHF station first will make the unprecedented move from an ABC affiliate to an independent in July and then will become an NBC affiliate in January 2002.

No regrets

"I'm only going to flagellate myself so much," Mr. Cornwell said. "I care about this stock--everything I own is in it, which gives me a little under 10 percent with my options. I'm looking to push our stock price up, come hell or high water."

Industry sources say that could mean modifying the terms of the controversial affiliation arrangement.

Other antidotes could involve a stock buyback by Granite, or--more radically--some sort of merger.
Mr. Cornwell said the latter scenario is not out of the question, but no such plans are in the works.
"People have raised so much hell about these nine payments that in order to placate people, we may go to NBC and say we're going to pay NBC everything upfront," Mr. Cornwell revealed. "We could borrow the money from banks or raise capital by issuing more stock. We are finding that we're being forced to do uneconomic things to force the desire of everybody to fit the round peg into the round hole.

 "Right now, our cost of capital is 91/2 or 10 percent. We have to ask ourselves whether we are willing to spend another $30 million to do that. We would have to negotiate a different deal with NBC," he said. "That isn't happening right now."

Sources close to the situation say Granite could be helped if NBC were to publicly agree to extend its affiliation for KNTV beyond 2011 without requiring cash payments from Granite.

 `First-mover' penalty

Analysts and investors acknowledge that Granite appears to be suffering in part from its willingness to be a "first mover," blazing a new path that others will follow in time. All of the major broadcast networks have been hinting about lowering the compensation payments they've historically made to affiliates, though no one else has yet tried to ask for reverse compensation.
"[Granite] is being punished for being the first to deal with this issue head-on," said one industry analyst, speaking anonymously.

"Some investors we sit down with don't want to hear about the positives, because the momentum and perception about the deal is so negative they don't want to hear about it," Mr. Cornwell said.
"I don't get the impression there is much we can do to change people's minds, short of abandoning the deal," he added. "So, I'm not sure I want to burn up the goodwill I have at NBC trying to restructure this deal. I'd much rather make sure I deliver on my promise to shareholders."
Some observers believe the NBC-Granite deal still could be derailed or modified prior to full implementation. Some speculate that NBC could end up owning KRON. Young Broadcasting is slated to acquire the station from Chronicle Broadcasting this spring.

If Young's deal with Chronicle were to collapse, it's speculated NBC could acquire KRON itself. If that were to occur, the NBC affiliation for KNTV would be off, and NBC would pay Granite a fee.

"I think a lot of people are in the land of wishful thinking on this," Mr. Cornwell said. "They think that's where this is going to land up. [But] NBC has been very honorable. If NBC ended up owning KRON, they would probably find a way to make us whole."

But even though Mr. Cornwell and Mr. Beck would like to put all the fuss behind them, the likelihood is that the KNTV deal could well determine Granite's future business fortunes.
Analysts say Granite's affiliation gives NBC enough warrants to buy an 18 percent stake in the company. Doing so could prompt a renegotiation of the affiliation agreement. Granite could sell to NBC or another company.

"We have said all along that if somebody comes to us with something attractive, we're more than receptive," Mr. Cornwell said. "Historically, our perception of value is different than a lot of people. We're not about to give anyone any bargains. We're not conducting a fire sale of our assets. But if it makes sense to join forces with somebody, then we do it."

 Industry rebel

Mr. Cornwell expressed pride in a history of iconoclastic thinking at Granite, taking credit for forward-thinking initiatives, including an early movement into Internet-related ventures.

"We do unconventional things; that's how we got our biggest station in Buffalo for a very cheap price," he said. "And from our perspective, we have done the same things with San Francisco, although we're not getting a lot of credit for it on Wall Street. We have tried to find ways to think outside the box in order to increase the value of our company to shareholders."

Granite acquired WKBW-TV in Buffalo, N.Y., in 1995 for about three-quarters the price fetched by comparable stations at the time by acquiring the previous owner's outstanding debt.

Mr. Cornwell and Mrs. Beck launched Granite Broadcasting in 1988 with $45 million to acquire stations in Duluth, Minn., and Peoria, Ill., backed by a handful of original investors. Two of them--Goldman, Sachs and Oprah Winfrey--continue with the company today.

Today, Granite includes a group of 10 network affiliates in eight markets, covering 7 percent of U.S. households and generating almost $200 million in annual revenue. Its two WB affiliates in Detroit and San Francisco are growing at an annual rate of about 24 percent.

Granite is operating or developing duopolies in San Francisco, Buffalo, Detroit and Fresno, Calif.
In 1997-1998, Granite snatched WB-affiliated stations in Detroit, WDWB-TV, and San Francisco, KBWB-TV, out from under rival Tribune Co. Granite initially was chastised by Wall Street for overpaying for the properties; it was heralded a year later when the stations began churning out profits and federal regulators agreed to allow market duopolies.

Took ABC's cash

Last year, Granite turned a tenuous situation into a gain by agreeing to a $14 million payment from ABC for relinquishing its ABC affiliation for KNTV five years early. The Walt Disney Co. was intent on consolidating two Bay area affiliations into one at the time.

Granite's TV station earnings margins fell to 28 percent in 1999 from closer to 40 percent prior to 1998. But its claim to fame remains improving the financial performance of stations within a year or two of taking them over.

It has relied on aggressive and creative sales of advertising time and use of promotions, improved local news and community affairs. For instance, Granite acquired KSEE-TV in Fresno for 32 times cash flow in 1993 and improved station performance within a year, enough to cut that comparison to a multiple of six.

 When Granite sold its Austin, Texas, station, KEYE-TV, to CBS in 1999 for $160 million, it represented a $100 million return on investment after less than $10 million in capital upgrades since its 1995 acquisition. Still, the sale of KEYE significantly impacted Granite's 1999 results, in which broadcast cash flow dropped to $57 million from $71.3 million a year earlier.
An important key to Granite's boosting the value of its stations has been extending the properties' local franchises, customer connections and advertiser relations. Those strides have been made through new technology and other innovative means, observers say.

Granite was the first broadcaster to provide local news content from its TV stations to Yahoo! in 1996 before the Internet giant went public. "But I made the mistake of not buying Yahoo! stock at the time," Mr. Cornwell conceded.

Granite itself was one of the first pure-play media companies to go public in 1992. Granite also was among the first broadcast groups to negotiate the right to televise local sports games over streaming media on the Internet.

Thinking, acting locally

Meanwhile, localism always has been at the heart of Granite's operating strategy.

"The importance of your station locally ends up being the determining factor as to whether you win or lose," Mr. Cornwell said. "So, it's no accident that in some of our smaller markets like Fort Wayne [Ind.] and Peoria [Ill.] where we have stations that are very important, we get a way-disproportionate share of the revenues as compared to what one would expect."

 Meanwhile, the company's broadened NBC relationship will provide new negotiating muscle for syndicated content acquisitions, the Granite chief said.

"If we hadn't done the NBC deal, it would become harder for us to be competitive in the acquisition of program rights," he said.

Granite's San Jose property is expected to generate $7 million to $9 million in annual cash flow as an independent, analysts say. They estimate that will jump to $36 million when KNTV becomes an NBC affiliate in 2002.

"We took this thing from Avenue B and put on its 57th and Fifth," Mr. Beck quipped. "It's a grand slam anyway it comes down."

Granite plans to triple local news broadcast time at KNTV to nine daily hours this summer, doubling the news department's budget and personnel. KNTV's overall expense budget will double to about $30 million in two years, two-thirds of that tagged for news.

KNTV's expanded news presence will service a soon-to-be relaunched regional Web site to be called AbouttheBay.com, which will be developed by Granite into a full-service Bay area portal supported by KNTV, KBWB and NBC. It also will integrate material from CNBC and MSNBC, while primarily serving as a local destination and city guide.

"It will feature NBC national news content and Granite's local content and services," Mr. Beck said. "It will generate revenues and help create a new network-affiliate paradigm."
NBC's investment will accelerate Granite's local digital TV initiatives and already has assigned top cable, Internet, news, promotion, sales, technology and public relations executives from its ranks to assist Granite with various transitions.

NBC also is helping Granite negotiate with AT&T Corp. to expand the cable footprint of KNTV, Mr. Cornwell said. Granite will expand KNTV's current facilities or move to a new location in downtown San Jose, he said.

But Granite is not waiting for its NBC affiliation in San Jose to become official before brainstorming its use of the digital spectrum.

It recently organized the Broadcaster's Digital Cooperative to collectively lease and program spectrum across hundreds of local stations in at least 132 markets.

The new group is expected to call on Microsoft Corp., AT&T, Intel Corp., Yahoo! and other media giants that have expressed interest in acquiring expanded spectrum through channel auctions.
"People are really bogged down in old models, and it's really been hard to get people to think about anything new," Mr. Cornwell said. "So, it's taken little bitty Granite, in an industry rapidly consolidating, to get the broadcasters together to cooperatively pool and sell digital spectrum."

Digital

KNTV is the first U.S. TV station to lease digital spectrum to a client--in this case, Geocast. The data distributor is marrying Internet content and digital spectrum, aided by Sky-Stream Networks and Harris Corp.

Granite lost several million dollars backing Datacast, a 1996 forerunner that transmitted data over the analog spectrum.

Mr. Beck recently demonstrated the results of some digital multicasting research for attendees at an industry executives summit of the National Association of Broadcasters. The test involved a digital multicast experiment with full-motion video relayed off Granite's San Jose tower to PCs.
One of the company's intended applications for the technology--code named "pirate TV"--will get a test run this summer. And the intended use for such media tools likely will involve live local weekend concerts transmitted over wireless devices, television sets and PCs, officials say.
Granite is also working with local content producers, whose work will be showcased on the new digital spectrum.


"We are the only VHF station licensed to Silicon Valley, and we will be Silicon Valley's primary interface with the world," Mr. Beck said. "We're going to create the model for the rest of the country, because in San Francisco we have the most wired market in the world. So, they will be the most receptive to it."

NBC has first rights to four megabytes of Granite's spectrum.

Granite is also experimenting with 50 percent owned MyTVShop.com, an early e-commerce opportunity for television stations that allows viewers to buy products associated with the TV shows.

Minority role model

As the head of the nation's lone influential, minority-owned broadcaster, Mr. Cornwell has been a vigilant campaigner for greater diversity in media ownership. And Granite is a supporter of the newly formed Prism fund designed to help minority entrepreneurs acquire their first media properties.

 "What's been lost in all the hubbub is that NBC has created an African American-led and -controlled company as the first minority owner of a Big 3, major-market affiliate," Mr. Cornwell said.#

Filed under: Don Cornwell, Granite Broadcastng