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Big-market duopolies pay off for Fox

Mar 24, 2003  •  Post A Comment

In just over a year, Fox has turned its large-market TV station duopolies into a gold mine and a platform for in-house production that will help spur the Fox TV Station Group to a record $1 billion in profits this fiscal year.
And the company has only just begun to find out how good duopoly economics can get.
Duopoly stations in New York, Los Angeles and Washington are on their way to doubling their earnings to about 60 percent since Fox acquired those and other weaker, mostly UPN affiliates from Chris-Craft Industries in 2001 by developing complementary station identities around local news and series comedies and integrating most core operations and personnel.
While the popularity of prime-time reality shows has swung Fox TV network’s entertainment schedule into profitability and boosted Fox TV station ad sales, the major-market duopolies are generating permanent cost savings and new revenues.
In fact, the nine duopoly markets will represent as much as 60 percent of the Fox TV stations’ estimated $2.2 billion in revenues in fiscal 2004, according to Morgan Stanley analyst Richard Bilotti. About one-fifth of the Fox TV stations’ estimated $1.2 billion earnings before interest taxes depreciation and amortization this fiscal year will come from cost saving and new revenues generated by the former Chris-Craft stations, Mr. Bilotti said. “It’s duopoly economics kicking in.”
“Rupert Murdoch was quick to realize this works really well, and he was very quick to figure out the economic potential and what kind of portfolio of second large-market stations to assemble,” Mr. Bilotti said.
“Fox got themselves a real operating advantage by doing this. I don’t think anyone else can duplicate it,” he said.
Building Fox’s duopoly empire is an unlikely duo: Lachlan Murdoch, 31, News Corp. deputy chief operating officer. The London-born and Princeton graduated son of News Corp. chairman Rupert Murdoch began overseeing Fox’s TV stations a year ago. The other half of the duo is Mitchell Stern, 48, a New Yorker, University of Chicago graduate and financial whiz who worked for CBS’s TV stations group. Mr. Stern has been chairman and CEO of the Fox TV Stations Group since 1998.
Blueprinting a New Model
Mr. Stern and Mr. Murdoch concede they have a close, comfortable relationship in which ideas and more urgent business are discussed daily.
The younger Mr. Murdoch, who has revitalized The New York Post as part of his command of News Corp.’s global newspaper assets, helped negotiate Fox’s $425 million acquisition of WPWR-TV in Chicago last year after touring most of Fox’s TV stations and creating a duopoly blueprint.
“We’re just at the beginning of learning how to program two stations in a market so they can keep their unique voices but at the same time leverage off of one and the other and a common bank of resources,” Mr. Murdoch said in an interview. “Just having nine duopolies has already changed the broadcast economic model.
Mr. Murdoch said the TV duopolies are central to a three-pronged defense Fox has against cable operator gatekeepers when combined with Fox’s wildly popular regional cable sports networks and what eventually could be its control of dominant U.S. satellite provider DirecTV. News Corp. this week inched closer to an agreement to buy General Motor’s 20 percent stake in Hughes Electronics through bond sales and other fund-raising moves.
“It’s just that a satellite platform in the states would strategically serve us very well,” Mr. Murdoch said. “Having a national footprint that combines over-the-air signals, cable and satellite to launch new cable networks can strengthen our stations.”
Mr. Stern’s command of daily TV station operations has included tailoring original mostly information and reality-based programs produced by Twentieth TV for Fox stations that can be expanded to much of the station group or sold into syndication elsewhere. The duopoly stations especially are a cost-effective program development platform with minimal risk and losses, Mr. Stern said. Twentieth TV’s current contribution to Fox’s owned TV stations group include Good Day Live, Texas Justice, Divorce Court and Ex-treme Dating.
The examples of change are everywhere.
The gains can be immediate, as in Orlando, Fla., where swapping stations with Meredith has given Fox a stronger duopoly, which is generating $1 million more in monthly revenues even before cost savings and program changes.
In Los Angeles, a new “hip” 11 p.m. local news at KCOP-TV, with a strong lineup of popular sitcoms as a lead-in, has boosted ratings and revenues.
In Washington, Fox has expanded with an early evening local news at 5 p.m.
About half of the duopoly-related savings and new revenues come from expanding and better amortizing local news; about one-quarter comes from original programming and the rest from better packaging of syndicated fare.
“These duopolies are a beautifully designed system,” Mr. Stern said in an interview.
“We are becoming less dependent on less talented syndicators. We can open up these dayparts to all kinds of ideas without bankrupting the stations. And it’s not just about Fox. We’re in discussions about whether UPN should expand to six or seven nights. Everyone wins,” Mr. Stern said.
Under 20 Played Out
It will take at least another year to integrate operations, streamline costs and ramp up revenues at all nine of Fox’s duopolies using a business model that offers television stations in general accelerated growth in an otherwise matured, slow growth sector. However, there are limited available top-market stations that can be cherrypicked for new duopolies.
CBS has a handful of TV station duopolies-most notably KCAL-TV in Los Angeles, and NBC has the Spanish-language Telemundo stations.
“This game is over now. It’s done and it’s played out,” Mr. Bilotti said. “The upside of doing this in a market below number 20 is nowhere as significant. There is very little left.”
Among the top 25 markets, where Mr. Murdoch says Fox still could secure duopolies through swaps or acquisition-depending on future deregulation-are Philadelphia, Boston, Atlanta, Detroit, Tampa, Cleveland and Denver.
In the fiscal second quarter, the Fox TV station group grew cash flow by nearly one-third from a year ago to $320 million on a 13 percent rise in revenues to $593 million. For all of fiscal 2003, the Fox TV stations are expected to top $1 billion in earnings, up at least 40 percent from the previous year, on a 14 percent rise in revenues to $2.1 billion, analysts said.
“There has been very tight cash control by the company. We’ve saved across the whole company many hundreds of millions of dollars,” Mr. Murdoch said of News Corp.’s normally frugal cost mandates. But the television station group, valued at more than $13 billion, or more than 40 percent of Fox Entertainment Group’s overall market value, has turned into a growth engine this year because of an aggressive duopoly and cost-management strategy that can ramp up profits when the national network is “on fire,” Mr. Stern said. “When that happens, it’s all good.”