Local TV station owners, whose business appeared virtually dormant for more than a year until the recent advertising rebound, should brace themselves for a string of transforming changes beginning in 2003.
These changes will reach far past the long-anticipated deregulation from the Federal Communications Commission that will likely lift ownership caps, allow for unchecked cross-media ownership and create more major-market duopolies.
Those rule changes will set off a flurry of pent-up deal activity, resulting in more industry consolidation and the creation of some new and surprising broadcast players. The merger-and-acquisition activity, breaking a long station-trading drought, will be framed by, but not necessarily set by, the healthy multiples paid for periodic big and midsized markets in 2002.
The economy also will play a primary role in determining advertiser spending and pricing, consumer demand and the cost of programming and services-all of which set the pace for TV station economics. At best, analysts predict local TV stations on the average will see flat to minus-2 percent growth in advertising this year.
But still another unexpected force-local cable system operators-also will begin to have a profound impact on local TV stations as headstrong rivals for local viewers and advertiser dollars. Local broadcasters’ ability to leverage what they have more adeptly with cable operators will be tested.
Consider the following:
* Cable operators such as Comcast Corp. and Cox Communications already have become proficient in snaring local advertising dollars with their expanding local cable interconnects. As a result, Comcast is generating about $1 billion in ad revenues, more than The Walt Disney Co.’s ABC owned-and-operated TV stations.
* The growing popularity of regional sports networks has become another way for local cable operators to penetrate what historically has been local broadcasters’ exclusive domain. Just look how quickly and effectively Fox has swooped down into the regional cable sports space in ways that reinforce its cable program leverage, TV stations and direct broadcast satellite business.
* Retransmission consent negotiations will take on new significance as major media companies seek cash payments for distribution of their local TV station signals, rather than cable access for a new cable service or channel in what has become limited shelf space. Local broadcasters-particularly those who are part of a major TV station group-will seek carriage for their new digital channels and services, establishing a long-needed second revenue stream off of the estimated $6 billion in TV station-related digital conversions made.
* The rebroadcasting or time-shifting of local and national broadcast TV programming, most likely on cable or cable-carried digital channels, also will provide a new second revenue stream, which will include both national and locally produced newscasts. That alone could be enough to secure uncertain station economics since local news generally accounts for 31 percent-the largest share-of a local station’s overall expenses while generating as much as 38 percent of total ad revenues.
* Local broadcasters may find themselves aligning with cable operators to counter the onslaught of new technology that is luring viewers from their conventional TV viewing patterns, ranging from personal video recorders and video-on-demand services to online and video game activities. Stations can use their existing news and other resources to create pay platforms and services. For instance, viewers might pay to be able to watch continuous local news, weather, sports and traffic reports. Gannett’s talks with cable operators about carrying America Today, a channel that aggregates and repackages several dozen local newscasts, is the first example of what will be many such services.
Stations already face changes
In fact, increased competition for viewers and ad dollars has snuck up on many local broadcasters. Between 1980 and 2001, local broadcasters found themselves competing against more than 600 new TV stations, 3,000 new radio stations, an average of 53 more channels available in homes and increased cable, VCR and computer penetration.
Overall, basic and pay cable gained almost 15 percent in viewership share as broadcast networks and independent broadcasters lost about 18 percent of their viewers during that period.
But even with a 46 percent share of viewers, cable has increased its share of the national ad dollars only to 31 percent and its share of local ad dollars to 23 percent. Advertising still only accounts for at best one-third of cable’s overall revenues. But there is growing evidence that, too, is changing.
At local TV stations, where it’s all about advertising, an average of 15 percent to 30 percent of advertising-dependent revenues are generated by local news. Another 25 percent to 30 percent of ad revenues are generated by a network’s prime-time schedule, and as much as 40 percent is generated by syndicated programming, said Bear Stearns analyst Victor Miller. Overall, local broadcasters are selling into an oversaturated TV advertising marketplace.
The number of subscribers controlled by the top five consolidated cable operators has grown 28 percent in the past five years-placing more of local TV’s potential viewers in the grasp of its cable rivals. Such increased revenue pressures on a fixed cost base will eventually put a squeeze on broadcasters’ otherwise healthy incremental margins.
A whole new ball game
To continue to thrive, local broadcasters will have to define new ways to align with their respective broadcast networks and with local cable operators.
Ultimately, the key question is how to preserve the broadcast TV model-or if it can or should be preserved. If not, what should it become instead?
If the free over-the-air television model broke down in five years, and the varied, mounting pressures go unabated, Mr. Miller estimates that cable subscribers might have to pay as much as an additional $36.75 per month to support the broadcast TV channels that otherwise would be solely subsidized by advertising revenues. Offsetting the advertising revenues garnered by cable networks also would add another $15 to the average monthly cable bill, he said.
Should local broadcasters move to make a cash payment the basis of their signal carriage agreements with cable operators as a second revenue stream next time around, Mr. Miller estimates that a network affiliate fee-depending upon ratings and markets-might average more than $300 per household annually for retransmission of their signals.
“This would imply there is $7.5 billion in annual affiliate fees that could be due just by the Big 4 networks,” Mr. Miller said, or about the equivalent of upfront advertising spending-which would represent a healthy second revenue stream, to be sure.
It would be a way for stations to break out of the advertising-dependent pattern that is dragging down their primary broadcast networks.
“The networks business is about a $16 billion business that is generating only about $400 million of total operating profits among the Big 3-not a very healthy profit margin. We need a healthy network business to have a healthy TV station business,” Mr. Miller said. On the other hand, the broadcast networks already have covered their bases by controlling or owning all but four of the top cable networks in order to play both sides of the street as well as the dual revenue streams game.
But getting cable operators or viewers to pay for the broadcast signals that have been “free” would be a tough go-a concept that ultimately may be put to the test in several years, when broadcast networks have the right to provide exclusivity of their signals to either cable operators or local satellite providers.
Deregulation: The next best hope
With such formidable gatekeepers in command, Mr. Miller contends the only way to create a more level playing field for local broadcasters is deregulation that will allow broadcasters to increase their reach in markets by owning more stations in each in order to make
more use of the content they own or license, and the sales, marketing and operational resources.
Dallas and Fort Worth, Texas, is one market where some of the first post-deregulation deals could surface, given the high concentration of cable and direct broadcast satellite service. Because of the geographic flatness of the area, cable is not mandatory for reception, allowing free over-the-air broadcasters to compete more independently even though many are owned and operated by the major broadcast networks and a growing number are network-controlled duopolies.
Those kinds of marketplace dynamics could be further complicated in a market such as Philadelphia where a cable operator such as Comcast, which already controls 98 percent of the marketplace, is free to acquire a local TV station and further monopolize things.
Buying local stations could become more of a defensive option for cable operators, particularly as broadcast networks adopt their exclusivity options in 2006, Mr. Miller said.
Such deregulatory possibilities set up broadcasters and cable operators for either working together or tearing each other apart.
All of this said, it wouldn’t take much to knock the media status quo off of its kilter. If the deregulatory stars line up just right in the next year, the media landscape could be faced with the prospect of some pretty formidable change. But there is so much more at work altering local broadcasters and TV station owners in particular, “which is why they have to create an impenetrable local force,” Mr. Miller said.
For local broadcasters who are up to the fight, 2003 is going to be anything but another year of struggling through more advertising and prime-time network ratings cyclicality.
The Deals page is edited by Diane Mermigas, who can be reached by phone at 708-352-5849, by fax at 708-352-0515 or by e-mail at firstname.lastname@example.org.