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Broadcasters Aim for New Pay Service

Apr 26, 2004  •  Post A Comment

In an ambitious plan designed to monetize the digital spectrum, Emmis Communications Chairman and CEO Jeff Smulyan used his podium time during last week’s National Association of Broadcasters convention to talk up his sweeping industry initiative for a new multichannel pay television service.
The service, which could be up and running in about a year, would be made possible by broadcasters pooling their digital spectrum. It would include 30 to 50 of the most popular cable networks along with high-definition versions of the broadcast channels for $25 a month and a one-time $99 set-top box fee.
“If you look at the trends for our industry, it is a stark, stark picture,” Mr. Smulyan said at the convention in Las Vegas, where he detailed the initiative. “If we launch this, we will be in the habit of paying ourselves,” he said.
In addition to Emmis, Mr. Smulyan said, 11 other broadcasters are on board with the initiative. They are: Nexstar Broadcasting Group, Scripps, Clear Channel, Sunbelt Communications, Prime Cities Broadcasting, Meredith Corp., Raycom Media, Media General, Citadel Communications, Fisher Communications and Barrington Broadcasting Co.
Mr. Smulyan’s goal is to bring every broadcaster in the country into the fold, and he plans to put forth a business plan and a term sheet in the coming weeks to present to his colleagues. The premise behind the initiative rests in the $3.5 billion in capital that broadcasters already have spent on the transition to digital. A new multichannel service that is competitive with satellite and cable would allow broadcasters to leverage the investment and compete with cable and satellite operators on the same playing field, Mr. Smulyan said.
“We pool our spectrum and come together as an industry to offer it at a lower price. Every broadcaster receives retransmission and can monetize the digital spectrum,” he said.
Broadcasters would be paid through retransmission payments, cable network licensing fees, ad revenues and a share of the profits. The consortium of broadcasters could reasonably generate revenues of $4 billion to $6 billion within five years, with margins in the high teens to mid-20s, Mr. Smulyan said.
Start-up costs would be about $500 million to $700 million over three to four years, with most of that money going to the development and production of the set-top boxes needed to enable the service. The capital investment would be modest, he said, compared with cable and satellite, since broadcasters have already paid for the digital spectrum that would distribute the multichannel service.
The investment could be varied for each broadcaster. Some might contribute only spectrum while others would offer spectrum and capital.
While Mr. Smulyan would like to get every broadcaster on board, he believes the effort could work with less. Even if only half the broadcasters signed up, the plan could fly, he said.
Prime Cities Broadcasting President John Tupper said the group would need only about 3 percent to 6 percent of the customers in a market to be profitable. Prime Cities runs two Fox stations in North Dakota and is a one of the initial members of the consortium.
The multichannel pay service is possible today because of technological advances in chip sets, compression technology that expands channel capacity and antennas that optimize reception, Mr. Smulyan said.
He said the service should pass regulatory muster because it protects and enhances the over-the-air options for consumers, provides a multichannel alternative and increases the speed of HDTV penetration.
The Emmis plan is not unique. Sinclair Broadcast Group’s outspoken CEO David Smith proposed a similar idea five years ago. The difference now is that today’s TV sets do a better job of receiving the signal, said Del Parks, VP of engineering operations at Sinclair, which has not signed on to the Emmis plan.
Mr. Parks said the idea has potential. For the meantime, Sinclair is working with U.S. Digital Television, which offers a new and similar over-the-air digital subscription TV service in Salt Lake City and Las Vegas.
Sinclair’s two Las Vegas stations, independent KFBT-TV and WB affiliate KVWB-TV, have leased their spectrum to U.S. DTV for the service that launched this month in Las Vegas. “Anything that broadcasters can do to monetize their investment in the digital spectrum is very important,” Mr. Parks said.
Mr. Tupper said the consortium would like to bring U.S. DTV on board. Mr. Smulyan’s model is different in that the consortium would be 100 percent owned by broadcasters.
One of the challenges Mr. Smulyan could face with the plan would be negotiating with cable operators, who also own much of the cable content that the service will want to carry, said Deana Myers, senior analyst with Kagan Research in Los Angeles.
Mr. Smulyan said that under program access rules, Time Warner could not, for instance, hold back providing CNN to another multichannel provider.
Emmis worked with Monitor Group to produce a consumer survey, in which 27 percent of respondents said they would be likely to switch to the service if the box cost $99, and 49 percent would be likely to switch if the box were free.