Mr. Smith goes after Washington

Dec 31, 2001  •  Post A Comment

All eyes in TV broadcasting are on Tallahassee, Fla., these days–and for good reason.
That’s the site of Sinclair Broadcast Group’s latest effort to push the edge of the TV station ownership envelope to the breaking point.
The pioneering aspect of the deal: Sinclair claims it has found a way to legally merge all operations–with the exception of programming authority–of its NBC affiliate there, WTWC-TV, with the ABC affiliate, WTXL-TV, owned by Media Ventures Management. That’s in a market where Federal Communications Commission regulations forbid common ownership of two stations. If the deal survives challenge, it’s expected to serve as the template for a new round of station mergers nationwide–and at least so far, federal regulators appear to be all but ignoring it.
This deal is only one illustration of how Sinclair, under the leadership of the iconoclastic David Smith, has emerged as one of the most controversial and aggressive companies in the broadcasting business. In the following edited interview with Mr. Smith, Sinclair’s president and CEO, he tells Electronic Media why he did the two-station pact in Tallahassee and why he’s considering replicating it elsewhere. He also pitches his case for the broadcasting industry’s needing more regulatory leeway to buy stations. But at the same time, he argues that legislation may be vital to ensure that broadcasters get what he perceives as a fair share of cable’s subscription revenues. In addition, Mr. Smith makes clear that he has yet to throw in the towel in Sinclair’s contentious campaign to revise the nation’s digital TV standard.
EM: How do you describe what you are doing in Tallahassee? It’s more than a joint sales agreement, isn’t it?
David Smith: It’s purely a mechanism by which one can cut costs and get scale. Nothing more, nothing less. It’s about survival–purely about how do you survive a depressed economy and competition.
EM: Are you doing this elsewhere now?
Mr. Smith: We’re not going to make any comment about what we’re doing or not doing. But we’ve disclosed what the model is. We’ve told the FCC this is what we’re doing. And if it makes sense for us to do it in other places because the economics make sense for us and it comports with the rules, then we’re going to do them.
EM: It seems like it’s replicating the model for the rollout of local marketing agreements somewhat, letting stations get together in markets they currently aren’t supposed to be able to get together in under the duopoly rules.
Mr. Smith: The thing to remember here is that we have an administrative agency that can’t keep up with the competitive landscape. It’s an impossible task. We keep up with it on a daily basis because we see it every day. We see forces that are allowed to get together to compete against us. Do I want to die by death of a thousand nicks or just kill me once? Because of the regulatory environment, we’re being nicked to death, one nick at a time.
EM: Tallahassee seems to be about lining up partners beforehand in anticipation of deregulation so you will have somebody to dance with.
Mr. Smith: I don’t think it’s anything that complex or forward thinking. I look at a market and say, `What can I do to better make sure I can survive?’ And I knock on everybody’s door in the marketplace and I say, `Do you want to do this?’ And the first person that says, `Yes,’ I try and get the deal.
Understand something about us. We don’t go do things willy-nilly. Before I blink, I call my corporate lawyer, and then I call my FCC lawyer, and then I call my Justice Department lawyer, and I say, `Guys, I have a competitive situation I want to figure how to deal with.’ After we’ve done that, then we try to construct a deal.
EM: Our understanding is that other broadcasters are considering replicating what you’ve done in Tallahassee elsewhere.
Mr. Smith: There are other broadcasters doing it right now. Everywhere.
EM: Would they talk to us?
Mr. Smith: I can’t imagine. They want to be left alone. You noticed what we did? We exposed it. We’re right on the table. We issued a press release on it.
EM: Why is it that you guys seem to get out front on these issues?
Mr. Smith: You know why? Very simple. Look at the top 20 companies in broadcasting. NBC is so large that they’re like a government. If it was Bob Wright’s company and he was the single-largest shareholder, he’d wake up in the morning and he’d look in the mirror and say, `I’m going to go here today,’ and he’d snap his fingers and it would get done. The only guy in the industry who does that is Rupert Murdoch, because he’s in charge.
We’re the same. I’m in charge. I’m the largest-single stockholder in the company. So I get up in the morning. If I look at the competitive landscape, and it’s being reshuffled every day, and I say to myself, `I’m going to be disadvantaged’ … I have to act. When I act, everybody else looks at it and says, `What are they doing? Can we do it?’ Five years later they’ll figure out how to do it.
EM: Why did you recently retain Bear Stearns?
Mr. Smith: We engaged Bear Stearns to look at any number of markets where we just don’t believe in the long term we can be as competitive as somebody else might be. In other words, if I have one TV station in a market where there are 10 other TV stations, if I can’t create a duopoly in that marketplace or some other structure that provides me the opportunity to further compete, then I need to think about moving out of that marketplace.
EM: How many markets are you talking about?
Mr. Smith: It’s a function of whether or not somebody calls me and says, `Hey I’ll trade you this for that,’ and maybe he gets a duopoly in his market and I get a duopoly in my market or some convenient structure that allows us to get the economics of it.
EM: When will this happen?
Mr. Smith: Next year [2002].
EM: Will there be a lot of them?
Mr. Smith: I have no clue. We’re simply asking the academic question, Who out there wants to dance?–recognizing that the competitive landscape is inexorably changing daily; who wants to now restructure the way they do their business and figure out how to compete.
EM: You didn’t hire Bear Stearns to get you out of broadcasting?
Mr. Smith: No. I’m trying to figure out how to get stronger. Sometimes you have to divest of your loads so that you can become stronger in other areas. That’s what the game is all about.
EM: You pioneered local market agreements. How many LMAs were eventually out there?
Mr. Smith: The point of the matter is they [the FCC] don’t know. It isn’t possible. There isn’t an administrative agency big enough to plow through the records of 1,500 TV stations, so they’ll never find out.
There are transactions out there that exist in today’s world that the FCC has no knowledge of. Not in regard to us, because everything we’ve done we put right on the table. But there are broadcasters in radio and TV that do transactions in whatever manner they choose to. The difference between them and us is we tell everybody what we’re doing. We disclose it. You know what happens to the guy that stands up. That’s us. The pioneer who says, `Here’s what we’re doing because we think it’s in the best interests of the industry’? The guy gets shot, or shot at. OK, we understand that.
EM: It seems that the proliferation of LMAs is what forced the FCC to eventually relax its rules to allow some common ownership in some markets.
Mr. Smith: It created a snowball. It was one of those classic stories and one of those classic events in political history where an administrative agency really in effect was behind the competitive times [and] was left with the only practical alternative. Look, the nature of the real world is that private enterprise runs at a different rate than political enterprises do. That’s why we are what we are. The agency I think just has a daunting task trying to keep up with private enterprise and the competitive forces that drive the market every day. To me it’s an impossible task.
EM: How would you prefer that these issues be handled?
Mr. Smith: Let the Justice Department
determine. Let the FCC do what in my view they were originally intended to do, which was manage spectrum space, and let the Justice Department become the ultimate decision maker in terms of what competition is and what competition isn’t.
EM: One battle that you haven’t won was your effort to persuade the government to revise the ATSC/8VSB standard to include DVB-T/COFDM. Is that a done deal as far as you’re concerned? Have you given up on COFDM?
Mr. Smith: We certainly haven’t given up on COFDM. Short history: Three years ago we did a test of the 8VSB standard here in Baltimore. It didn’t work. We didn’t understand why it didn’t work. We got to the root of the problem. I don’t think there’s a rational person in this country who will now look at the 8VSB standard and say it will ever work. And we find ourselves as an industry plagued with the realities of the administrative agency and their adoption of the 8VSB standard without having ever tested it, without ever having the knowledge that we have today because they couldn’t have prior knowledge. We now find ourselves in that terrible position of attempting to modify a television standard that if modifiable will essentially destroy its viability in terms of being able to do anything meaningful as a broadcaster with it.
EM: So what’s going to happen?
Mr. Smith: In my view, DTV is a dead issue. It’s not going to happen in my lifetime. Let me tell you what the definition of `dead’ is. The consumer will not adopt it. The broadcaster will deliver it. He has no choice–it’s mandated by law. He will deliver it. But nobody will watch it because they can’t and won’t be bothered with it.
The other thing to remember here is this will probably go down in broadcast history as one of the great tragedies of our industry. And that is not only that our industry adopted a standard that clearly has failed, but that we now as an industry in some circles attempt to defend a standard that has no American footprint on it. It’s owned by a foreign company whose sole purpose in this is their economic survival.
EM: Zenith?
Mr. Smith: Zenith. It’s owned by a Korean company. Think about these pieces. You have what was a bankrupt Korean company who holds the patent. You have an American broadcast industry who you would think its primary interest in life is to reach every man, woman and child in the simplest most efficient way possible in this country. You have broadcasters today who believe that their sole purpose in life is to reach a large box sitting in someone’s living room. They have no interest in ever talking to someone on some kind of flexible [mobile] basis. There are still a huge number of broadcasters who believe the standard doesn’t need to be flexible, doesn’t need to have alternative business capability with it, doesn’t need to be portable in any circumstance and doesn’t need to be mobile. The point of that if you don’t want any of that, why don’t you just stay with what you’ve got? And let’s not have this billion-plus dollar tax that we’re incurring as an industry for no purpose.
EM: Some people in the industry say that maybe you had a point but that maybe the way you made it ended up alienating them.
Mr. Smith: I don’t like the messenger, but I like the message?
EM: Right. That’s kind of what they’re saying.
Mr. Smith: That gives you an example of the mentality that often exists within our industry. `I’m not concerned about your message that is right; I’m only concerned about how you deliver it.’ One of the great tragedies here is that there are a lot of very knowledgeable people in our business in the right positions who don’t have the political willpower to stick their neck out and argue the issue because it isn’t their company.
EM: They’re just working for their companies and don’t have an ownership stake, as you do?
Mr. Smith: Yeah. So they just stand on the sidelines and watch their companies bleed to death.
Somewhere along the line, the federal government is going to find itself in a situation [asking], `Where is the DTV thing, what’s going on with that? I want the spectrum space back.’ Guess what? You can’t because it doesn’t work. Why? Because the administrative agency [FCC] picked the wrong standard–and because the consumer electronics industry, which are all foreign companies, has no interest in doing anything to fix the standard. The fact of the matter is that the foreign companies’ greater interest would be served by having the other standard [COFDM] because they’re already manufacturing sets every day with the other standard. But you know why they won’t say anything? Because one of their own sole livelihoods will depend on whether 8VSB survives. So what you have is the fraternity shtick again, where you have consumer electronics manufacturers that sit around the table and say, `One of our own is going to die if we don’t support them.’ So they cut off their nose to spite their face and say, `I guess we won’t sell television sets in the U.S. for the next 100 years, at least those kind. But we’ll continue to sell analog TV sets at the rate of 20 [million] to 30 million a year that have a 10- to 15-year life to them, and that’s what we’ll live off.’ Rather than say, `Get the right standard, pal.’ Somewhere down the line, Congress is going to have to address the issue and say, `Are we going to fix it, or are we going to be stuck in this mode forever?’ The answer in my view is sooner or later they’re going to have to fix it.
EM: There’s a perception that Sinclair is not a fan of TV news.
Mr. Smith: Anybody who tells you we’re not a fan of news doesn’t read the tea leaves properly. We’re in the business of making money and serving our shareholders in the public interest. The extent to which the content I create internally is not as successful as something else [makes me ] have to deal with the business reality of what do I do it for. That’s all. News is a great business–as long as it makes money. If I can buy `Andy Griffith’ and play it in Anderson, S.C., and have a cost of product of 10 percent, and my news that produces an equivalent rating has a cost of product of 90 percent, you [have to] sit down and say, `I want to make a rational business decision [about which program to run]. Am I interested in doing this or am I interested in doing that?’
EM: Do you think more Sinclair stations might get out of the news business?
Mr. Smith: In the grander scheme of things, as an industry, given the proliferation of news on cable and more news that’s coming to cable on a local basis, the competitive landscape for local television news will become more problematic. No question about that. All broadcasters are going to face a new reality of local cable news channels. And they’re going to get better. You know why? Because they’re funded with our money. You’re paying to watch me, and that money is turned around and used right against me.
EM: What do you do about that?
Mr. Smith: The reality for our industry is we should be permitted to negotiate en masse on a local basis. Why shouldn’t I be allowed to do that? Why can’t all the television stations in Baltimore pool their efforts and have one conversation with the monopoly cable company? It’s OK for a cable company to have a monopoly in the marketplace. I’m OK with that. I’m not arguing that they shouldn’t have that. But if it’s OK for them to have a monopoly in terms of what the consumer can watch, [it should be] OK for us as a supplier of content to get together and have a discussion about what we might be paid for that content, given that roughly 60 percent of the content you watch as a consumer comes from us.
I’ll presume to speak on behalf of the industry, since I’m one of the larger broadcasters in it. The single largest issue facing us, independent of the economy, is the ability for us as an industry to get to the real value of what we deliver to consumer by being paid for it.
EM: From cable?
Mr. Smith: From whomever.
EM: What’s the model?
Mr. Smith: Either [asking] the Justice Department, by virtue of us as a lobbying group … for a waiver [of the] antitrust restriction so
we can get together and negotiate, or asking Congress to legislate fee structures just like states legislate fee structures, or [just like] the government legislates how much you as a consumer are going to have to pay the cable company. They’re a public utility. They control the rates.
EM: Why should you be able to do this?
Mr. Smith: Because I control for all intents and purposes 60 percent of what you watch. And you’re paying the cable company, not me.
EM: If you don’t get it, what’s the prognosis for the industry?
Mr. Smith: The prognosis for the industry if we aren’t able to find some alternative opportunities to compete are problematic, at a minimum, because every day there’s another cable channel that starts that siphons off a fraction here and a fraction there. You have to remember that when you look back at the evolution and history of cable, that cable was permitted to start and was supported by the federal government and state governments not for the purpose of being a competitor for broadcasting. It was started and allowed to proliferate as a mechanism for you, the consumer, who couldn’t watch over-the-air free TV because of your geographic circumstances, to be able to get television.
The point is that cable took its initial charter and said, `Let’s grow a business out of this.’ And God bless them because they did it. And God bless America because they had an opportunity to go do that. Well, while they were running around unfettered, we were being regulated. And in a perfect world, what should happen is since they are effectively an unregulated monopoly, we should be allowed to be unregulated so as to compete. That’s all. Nothing more, nothing less.
You don’t hear the FCC or Congress talking about the content of `Sex and the City’ or `The Sopranos,’ or anything else you see on cable, do you? Help me understand that. Sixty-five percent of the people in the country have cable and watch that. The fact that they paid for it–what’s that got to do with anything?
Let the marketplace decide what should and shouldn’t survive, not me, not the government or anybody else. If you can go home to your house and watch `Sex and the City,’ as an example, on your cable channel, why can’t I deliver it to you over the air? Tell me why I can’t. Why would Congress and the FCC be upset about that? Reconcile that for me. If it’s on satellite, if it’s on the Internet, if it’s on cable, why can’t I deliver it?
EM: FCC Chairman Michael Powell has been pointing out that as more people pay for television, there’s less rationale for broadcast channel space.
Mr. Smith: In the grand scheme of things, do you honestly believe GE, Viacom, ABC and Murdoch would be buying TV stations and spending billions and billions of dollars on them if there was one inkling that Congress or the FCC would take their spectrum space away from them?
It’s when you’ve got nothing else to think about that [Mr. Powell’s observation] is what you think about. Meanwhile, the world goes on, there are important things to deal with. Probably the most important thing is deregulation. I haven’t seen any deregulation come out of Washington for all the conversation that existed prior to the new administration. All the talk about, `We’re going to have a deregulated FCC.’ The only thing I’ve seen happen is there are four cases [filed by industry representatives, including Sinclair, challenging the FCC’s ownership restrictions] that are or are going to be pending before the U.S. Court of Appeals that are going to do it all for them.
There are a lot of issues that face our industry, and we would be much better served as a business with less regulation. No question about it. I don’t think anybody in the industry would argue that. And the public would clearly benefit from it. They have benefited from it by virtue of the things we have done and that other broadcasters have done. I find it a very difficult pill to swallow as somebody who is in the broadcast industry when I see all these other unregulated businesses continuing to get larger and more aggressive, and we’re being held back. It’s like we’re being asked to play the game with one foot held up in the air and one arm tied behind our back. I just think that needs to change. Unfortunately, the passage of time and the courts will probably make all that happen when it should just happen right at the agency level.
EM: Is the advertising market ever going to come back for broadcasters the way it was before?
Mr. Smith: I haven’t the foggiest idea. I think anybody who tells you that they have a crystal ball that says it is just poofing on you.
Our business is under significant economic pressure brought about by a number of issues. [It is] brought about by just the fundamental failure of the economy and the Sept. 11 tragedy and competition.
Cable is a very real competitor for local advertising and national advertising. In the real world today, go into any market in this country–and not to pick on CBS–but pick any market where they are and look at the cumulative audience [CBS parent Viacom] has in television and cable and compare that to everybody else in the marketplace. And what you’ll see is they have amassed such a diverse audience that a local television station [is really disadvantaged] when faced with the reality that he goes into a local advertiser and says, `Buy my television station,’ and the fellow from CBS says, `You cannot only buy my television station, but you can buy my 10 cable channels’–if it’s 10 or 12 or 14 or six or whatever the number happens to be. It changes the competitive landscape. And I am OK with that principle. But don’t tell me as an administrative agency that I can’t have two television stations in a marketplace when somebody else can have effectively 10. That’s irrational to me. And I watch a dollar every day being siphoned out of my pocket as an over-the-air broadcaster to a cable broadcaster.
EM: You’re also said to be a pioneer of liquor ads.
Mr. Smith: I don’t think we’re a pioneer in that regard at all. I think there are other people way out in front of us on that issue.
EM: But you’ve been doing it.
Mr. Smith: We do them selectively … in time periods that are just purely designated for adults, not kids or teenagers or whatever. The thing to appreciate here is, again, you have this dual-standard issue. The television broadcaster who is regulated has one set of standards, and the cable industry [has] no regulations at all. None. Zero.
EM: How do you feel about being considered to be TV’s bad boys by the industry’s establishment fraternity in Washington.
Mr. Smith: The difference between me and the fraternity brothers is that the fraternity brothers are employees. I’m an owner.
EM: They say your attitude is if you can’t get what you want, you’ll blow things up, that you are constantly pushing the edge of the envelope.
Mr. Smith: I thought [that’s what the edge of the envelope] was there for. There’s always going to be that element within this fraternity that has to argue Sinclair are bad guys or they really break the rules or they do whatever they like to do. They have to say that, because if they don’t, then their boss is going to ask them, `Why aren’t you doing what they do?’ And if they ask the questions and then the response is, `Because it’s against the rules,’ then the risk for them longer term–as I continue to advance the growth of my business through any means I think is clearly legal and appropriate–[is that] they get asked the question, `What happened? If it was so bad and so wrong for them to do it, then why did they do it and why are they where they are today vs. where are we as a company?’