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A tough year ahead for stations

Jan 14, 2002  •  Post A Comment

Local TV broadcasters are not going to find an easy way out of a new year that promises zero advertising growth and a protracted economic recession.
And there’s still more bad news. A recovery, when it comes, will not restore advertising to the robust levels local and national television broadcasters have seen in recent years. Too many financial dynamics clearly have changed.
Local TV broadcasters are facing increased defections by national advertisers to cable and broadcast networks that can only be temporarily countered by decreasing their own rates. They are losing business to national multimedia firms that now can price their time low enough to compete with local stations’ national spots. During this worst ad slump ever for local TV broadcasters, they have lost network compensation while trying to satisfy mandated high-cost digital conversion. That’s all on top of local TV broadcasters having lost 13 percent of their advertising dollars and 34 percent of their audience the past 25 years to six new broadcast networks, 52 new cable networks and 500 new TV stations.
The bottom line: Even when the economy and ad market recover, there is no return to the days of good and plenty, and there is a limit to how much cost-cutting can offset some of the permanent revenue losses.
If the 2002 upfront advertising market proves as problematic as last year’s, it will set off another “weak chain of national upfront markets (in broadcast, cable and syndicated TV) that does not bode well for local stations that rely wholly on the scatter market,” said Bear Stearns analyst Victor Miller.
At that point, many TV station group owners will be forced to devise new survival tactics or decide to sell out or merge with other broadcasters long before their modified and suspended bank loan covenants come due in 2003.
Station groups on the block
Last week the industry buzzed with speculation that some leading banks are engaged in “workouts” for a handful of the most financially troubled TV station groups that could result in the announced “sale” of some groups within the next month. In a workout the acquirer assumes a company’s debt obligations and the operation of its assets, rather than buys them outright.
While smaller operators such as Benedek Broadcasting are ripe for such activity, and many are sure to be folded into each other, larger station groups also are gearing up for full or partial station sales. Young Broadcasting, Granite Broadcasting and Sinclair Broadcast Group have hired investment bankers to advise them on single-station or whole-group dispositions.
Executives at Gannett Broadcasting, Hearst-Argyle Television, Post-Newsweek Stations and Scripps Howard Broadcasting Co. conceded they too are weighing their options. Sources said NBC has been in discussions with Gannett and other groups about acquiring some or all of their TV stations. More major market TV station acquisitions are imminent for NBC, which recently announced its $2.8 billion acquisition of Telemundo and its acquisition of Granite’s KNTV in San Jose, Calif.
MGM has approached Paxson Communications about investing in or acquiring its TV stations, which now reach more than 85 percent of U.S. TV homes. Paxson is challenging NBC’s acquisition of Telemundo on the ground it prohibits NBC’s intended acquisition of Paxson and, therefore, Paxson shareholders’ ability to realize a return on their investment. Paxson wants to be free to deal with MGM and other interested suitors.
Local broadcasters are fast coming to the realization that scale and the ability to vertically integrate with other media may be the only antidotes for a media sector ailing from its exclusive reliance on advertising as income. And that will likely result in only a half-dozen or so big-market TV station owners being left after the next round of consolidation.
Mr. Miller predicts 2001 cash flow will turn out to be 19 percent lower than originally expected for pure-play television broadcasters (such as Hearst-Argyle, Sinclair, Young and Granite) and 27 percent lower for companies with combined broadcasting and publishing interests (such as Gannett, Tribune, E.W. Scripps, Belo and Knight Ridder). That makes each of those companies a candidate to be acquired or merged.
This new fiscal reality for broadcasters will likely hasten a new round of deregulation that will lift ownership caps and allow for more cross-ownership by newspaper and cable companies. That will some big players like AOL Time Warner to jump into the fray-perhaps eventually making a run at The WB-affiliated Tribune Co. Sources said either Viacom or NBC will win the bidding for Granite’s WDWB-TV in Detroit, and that Young is prepared to reopen talks with NBC and Disney about its KCAL-TV in Los Angeles.
Ways to survive
Given the access commercial time available across the board, even this year’s elections and Olympic Games won’t generate the advertising relief they have in the past, Mr. Miller said. It has prompted some local TV broadcasters to aggressively negotiate “annuals”-the local station version of upfront booking a year in advance-just to write some business.
Indeed, large-market TV duopolies could emerge as one of the few survival tactics bigger broadcasters can almost immediately put into place if deregulation arrives enough to get business moving again.
Mr. Miller points out in a recent report that without NBC’s announced acquisition of Telemundo and Clear Channel’s proposed acquisition of Ackerley Communications, merger and acquisition activity would have amounted only to about $500 million in 2001.
But there are reasons to believe that, overall, things are only going to become more challenging for broadcasters.
A study by Jack Meyers indicates there already has been a significant shift in home usage from the television to the computer, particularly among younger consumers who now spend more time on average online and playing video games than watching TV. The rollout of new digital cable services will only make it worse. One way broadcasters who want to hold out can counter some of this is to more aggressively leverage their connections with local consumers and advertisers across all media platforms. That will require the development of new business models and new ways of doing things.
It will require TV station broadcasters to become more interactive, more cross-marketing oriented and more creative. It may mean having to cut unprecedented deals with streaming media companies to get their product online or to work in new ways with local radio and newspaper outlets owned by competitors. It may mean finding new ways to approach sales, marketing and programming with unlikely partners.
In the end, it might just mean reinventing broadcast TV from the inside out, and it might just mean its survival.