Year of transformation ahead

Dec 3, 2001  •  Post A Comment

Television station owners are grappling with a sobering fact: Even if an economic recovery gets under way in 2002, they will barely muster ongoing low-single-digit revenue growth in what remains a volatile, uncertain market.
The absence of a rigorous revenue rebound, which has saved broadcasters in the past, will trigger a flurry of sales and swaps as owners search for long-term relief amid what is expected to be a new wave of deregulation.
The halcyon days of 10-percent-or-better revenue growth will likely never come again for most TV broadcasters because of trends that already are reshaping the TV station business: consolidation, fragmentation and changed advertiser spending. Even biennial events such as next year’s Olympic Games and elections will bring only a minimal, temporary financial boost.
Station swaps
Many broadcasters are strapped with significant debt, the payments on which have already been renegotiated and refinanced during this ad slump. Most have limited financial flexibility to reinvest in and upgrade their businesses or to expand through acquisition. A handful of broadcasters have defaulted on bank loans and other financing.
That financial squeeze-of dealing with the fallout of a major ad slump on one hand and long-term economic change on the other-has spurred station owners and investment bankers into lively backroom discussions about potential deals. The rumor mill now is in high gear.
To be sure, there will be massive buying, selling and swapping of TV stations beginning next year. Changing TV economics will be the driver, and anticipated deregulation will be the facilitator.
Outright consolidation and the creation and exploitation of duopolies will become two of the few sure ways for stations to create cash-flow growth.
The reason: Stations no longer can expect a return to historic ad revenue growth rates because they cannot justify price hikes against stagnant audience shares and volume. A glut of ad inventory created by new media competition will continue to swell, and stations’ broadcast cash flow will continue to stall as their business costs continue to rise.
One deal already being shaped by these forces is Young Broadcasting’s potential sale of KRON-TV in San Francisco to NBC. If that happens, Young could sell the remainder of its stations to a suitor such as The Walt Disney Co., which wants KCAL-TV in Los Angeles for a duopoly play and could retain or sell off Young’s other TV outlets.
Young paid a full price of about $800 million for KRON at the top of the market. It then lost the station’s valuable NBC affiliation, which is set to switch to KNTV on Jan. 1, and has since become overleveraged during a prolonged and painful ad recession. Add to that intensified competition from digital cable and satellite-and increased audience and advertising fragmentation-and you’ve got a whole new set of financial rules in place for TV station owners such as Young for 2002 and beyond.
The buy-ask price gap on KRON remains the sticking point, especially in light of these shifting financial sands.
NBC won’t pay more than $450 million, while Young wants to recover the price it paid in better times with the NBC affiliation intact, sources said.
No matter how things turn out, KRON will be the victim of marketplace disruption early next year that will only add to its financial woes. The loss of the NBC affiliation is inevitable now, short of NBC buying both KRON and the Granite Broadcasting station in San Jose, Calif., KNTV, that is set to become the new NBC affiliate. Some investment bankers say they are betting on that kind of duopoly move.
KRON, KNTV costs
In the meantime, the unusual circumstances in San Francisco are generating extraordinary costs for all parties. If NBC wins KRON, it will have the cost and hassle of undoing or absorbing all the program deals and other arrangements Young has made to support KRON as an independent, not to mention the cost of minimizing marketplace confusion for viewers and advertisers.
If NBC buys KNTV, it pays Granite a $15 million breakup fee, returns Granite’s recent $27 million reverse affiliation payment and forfeits about another $300 million in reverse affiliate fees that Granite agreed to pay in future years just to snare NBC’s San Francisco affiliation.
All of it, in turn, will have a dramatic impact on Granite, Young and other broadcasters already vexed by the worst ad slump since the Great Depression and changing overall TV economics.
Even the best-managed bigger operators-like Hearst-Argyle Television, Belo, Gannett Broadcasting and Tribune Broadcasting Co.-concede they no longer can depend on historic levels of viewer and advertiser support in better times to offset their continuing high cost of doing business.
The only way they can hope to better manage or sustain themselves is to achieve greater cost efficiencies over a broader station base. That ultimately means going for scale, since most broadcasters already have nearly maxed out on prudent cost cuts.
And even once they are able to spread their costs over a broader base of television stations, they will have to alter their business formulas, expectations and routines. Just going for scale is not enough, as witnessed by Sinclair Broadcast Group. In answer to its own financial woes, Sinclair is preparing for some heavy-duty station swapping by hiring Bear Stearns to study what it should do with its 63 TV properties and duopolies.
Indeed, no one will be spared in the coming station shakeout, since the industry fundamentals change for all: much slower growth, much greater competition and fragmentation, much higher costs.
TV’s competitors gain ground
This shifting bigger picture is painstakingly explored in a voluminous new research report from ABN-AMRO titled “The Television Guide,” which marks the firm’s coverage of the TV broadcasting industry.
“Sustainable long-term growth likely will be the greatest challenge as TV broadcasters fight to maintain ad share against all other media,” writes ABN-AMRO analyst John Martin.
“Secular issues facing the industry prevent us from believing that it is an industry with attractive long-term growth characteristics,” Mr. Martin said.
“In fact, television may struggle to maintain existing share of U.S. ad spending levels over the next five years,” he said, which were 25 percent in 2000 and are expected to decline to 23 percent in 2006.
The report predicts that for the long term, broadcast TV advertising will not grow more than 2 percent or 3 percent annually and that unit pricing will not do much better against static volume. Audience delivery and TV usage will stagnate, and CPMs will grow minimally while TV ad inventory mushrooms due to the increase in competing media.
Ironically, Mr. Martin notes that investors’ anticipation of change recently has boosted many broadcasters’ long-suffering stocks. After suffering double-digit price declines the past several years, some broadcast stocks have actually been outperforming various key market indices this past month. Institutional bond money also is starting to move back into the broadcast sector, the latest example of which was Sinclair’s $310 million high-yield bond deal last week.
The reason for such support is that investor perception of TV broadcasting has not changed. Investors still believe TV broadcast stations and networks will be saved by a cyclical boost to their bottom line. To them, broadcasting remains a fixed-income business with predictable returns, positive cash flow and real asset value. They don’t yet see or even believe the changes ahead, but they are coming.