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CBS, Fox reap rewards of robust owned stations

Oct 28, 2002  •  Post A Comment

The CBS- and Fox-owned TV station groups are blowing the lids off their 2003 earnings projections largely due to a more robust than expected advertising market and the positive early impact of duopoly economics.
But there is more going on there than meets the eye, especially at CBS, where the refortified owned TV stations are poised to make the most of the broadcast network’s continuing ratings momentum.
Although CBS and Fox executives concede this prosperity remains precariously hinged on fragile economic and network ratings stability, both broadcast network-related TV station groups are on track to achieve uncommon double-digit cash flow growth next year just on the strength of existing ad sales, competitive investments that are increasing market share and improved cost amortization over second duopoly stations in large markets. Those catalysts will continue to drive TV stations revenue and cash flow growth for Fox and CBS even in the event of another economic dip.
That is important to Fox and CBS because, while the broadcast network and station businesses remain joined at the hip, the real profit margins are in the station business, where both companies’ margins are soaring.
Last week, Merrill Lynch analyst Jessica Reif Cohen increased her overall Fox television earnings estimates by $100 million to $915 million for fiscal 2003, which represents a stunning 71 percent rise over the previous year, due largely to the performance of the Fox TV stations group. The Fox TV stations are on track to achieve an uncommonly strong 32 percent leap in cash flow to $1.05 billion on a 15 percent rise in revenues to $2.15 billion-far overshadowing the Fox TV Network which will be lucky to cut its losses to $135 million on $2.15 billion in revenues of its own.
Even with only three of their nine duopoly markets fully integrated, the Fox stations, buoyed by last year’s Chris-Craft industries acquisition, are realizing 10 percent to 20 percent margin improvement and pushing their market share of revenues beyond 21 percent. Although bullish fiscal 2003 estimates for the Fox stations are bolstered by this fall’s political ad spending, Ms. Cohen notes they remain vulnerable to a “material falloff in Fox network ratings.”
At CBS, similar double-digit cash flow growth in 2003 is backed by nothing but upside as Viacom’s underperforming station group aggressively rebuilds under new management, supported by the CBS Network’s dominant ratings.
Morgan Stanley Dean Witter analyst Richard Bilotti estimates that in 2003, the CBS TV stations will post 25 percent growth in cash flow to $540 million while achieving 48 percent margins on a 7 percent increase in revenues to $1.1 billion. Some analysts predict CBS TV station cash flow could easily top $500 million this year, even with an estimated $550 million-plus in program expenses, sending next year’s earnings even higher than formal estimates. (Even the UPN TV stations CBS manages for corporate parent Viacom are expected to post 24 percent growth in cash flow to $181 million on a 10 percent rise in revenues to $449 million in 2003.)
By comparison, a worst-case scenario in 2003 could have the CBS TV Network post an 18 percent earnings decline to $240 million on a 7 percent increase in revenues to $3.8 billion, and UPN could see nearly flat cash flow of $363 million on a 4 percent rise in revenues to $1.44 billion, Mr. Bilotti said.
Still, Mel Karmazin, Viacom president and chief operating officer, told analysts last week that because CBS is the only Big 4 broadcast network to post gains so far this season in prime-time household and 18 to 49 demographic ratings, it has spurred the CBS TV stations to double-digit increases in their late news ratings and brisk high-priced ad sales in a spillover from the networks’ tight scatter market.
“Prime time is where half the money is for a local station,” Dennis Swanson, chief operating officer of the ViacomTV stations group, said in an interview. “We have our most upside potential where most of the money is.”
Mr. Karmazin said his mandate to the management team led by Fred Reynolds, president of Viacom’s television stations group, is for the group to “outperform the market every single quarter” and continue to push its now 33 percent cash flow margins (up from 21 percent a year ago) to a targeted 50 percent. The benefits of eight duopoly markets, seven of which match CBS and UPN stations, is helping that process along.
In addition to the well-publicized front loading of well-regarded seasoned station managers at CBS stations, Viacom has spiked program spending at the stations by 60 percent, which includes multiyear license fees to select New York Yankees and Boston Red Sox baseball games and committing to stronger syndicated fare, including Viacom’s own first-run “Dr. Phil,” syndicated runs of “Weakest Link” and “Who Wants to Be a Millionaire” and increased local news-gathering resources and personnel.
The positive results were evident in the third quarter. For instance, WCBS’s early news in New York was up 55 percent in the third quarter on stronger lead-ins, Mr. Karmazin said. “We bought some major television station commitments. … But our revenue has grown more than our expense has grown.”
Overall, the TV stations were up 22 percent last quarter, even without the strength of newly acquired KCAL-TV in Los Angeles factored in.TV station pacings are up 19 percent through year-end even without political advertising factored in. In some cases, “Dr. Phil,” which has doubled and tripled time-period ratings on the seven CBS stations carrying it, has garnered as much as 75 percent scatter price premiums from the upfront, Mr. Karmazin said.
“The ripple effect is absolutely enormous,” Mr. Reynolds told me. “The feeling is if the stations get stronger, the network gets stronger. They go hand in hand.”
In a recent report, Ms. Cohen dramatically made that point , citing the recent conversion of KRON-TV in San Francisco from an NBC affiliate to an independent. Without network programs and connections, the station lost $150 million in revenues and $55 million in cash flow.
In CBS’s case, its owned and affiliated TV stations generate about $1.3 billion of cash flow ($470 million from network-owned stations), for a total market value of about $17.5 billion. Of that total, $11.7 billion is attributable to network-supplied programs, she said.
It’s no wonder Viacom is anxious to tap its underleveraged balance sheet to acquire more TV stations in a new round of TV ownership deregulation in 2003.The goal is to emulate NBC, whose owned TV stations this year will generate an estimated $665 million on $1.5 billion in revenues this year, compared with the NBC Network’s $625 million in operating profits on $4.7 billion in revenues. Layer on top of that Viacom’s 180 radio stations and cable networks, and you have the makings of a new, unshakable power base from which to sell and price ad time.
“The goal [for a broadcast network] is to recapture the value lost to its affiliated stations, including the spillover benefits to local news dayparts,” Ms. Cohen said.
It’s giving a whole new meaning to the term “local broadcasting.”