Station Groups Feeling the Pain

Oct 24, 2005  •  Post A Comment

The pain that television station groups were expected to experience in the third quarter is shaping up to be worse than predicted. Difficult comparisons due to the lack of political advertising and Olympics revenue this year are compounded by a soft overall advertising market that is likely to persist into next year.

A number of large station groups are set to report earnings this week, but from those that have already reported there is strong evidence that the declines that were expected in the third quarter of 2005 are being exacerbated by a number of forces, from a weakening domestic auto industry to the recent pair of hurricanes that slammed into the Gulf Coast.

To a certain extent, the trouble related to damage from Hurricane Katrina and Hurricane Rita is the least of Wall Street’s concerns. Though the extent of the damage to station groups’ property has been significant in some cases, and it’s anyone’s guess when New Orleans will stage a comeback, the comparatively small contribution that stations in the Gulf Coast region make to many station groups’ revenue pie has prevented a groundswell of worry among investors.

For example, Belo’s CBS affiliate in New Orleans, WWL-TV, accounts for 2 percent of Belo’s total revenue; and Hearst-Argyle’s NBC affiliate there, WDSU-TV, accounts for 2 percent of that company’s total sales, according to an analysis by Banc of America Securities.

What is proving to be a bigger cloud over the broadcast sector is the state of the domestic auto industry. Advertising from automakers and local market dealer associations combined can account for 25 percent or more of a station group’s total revenue. But with Ford and General Motors each facing a financial crunch amid tumbling sales, the worry is that a major contributor to a station group’s top line may be running out of steam.

“Overall, I think you expect broadcasting to be down in the odd years, given the very difficult political and Olympic comparisons,” said Sean Butson, a broadcast analyst at Legg Mason in Baltimore. “But I think even when you adjust for that, the business is soft.”

Mr. Butson noted that after 12 to 14 consecutive quarters of spending growth, auto advertising appears to be trending southward, challenging the notion that the industry can count on the auto sector to spend on advertising even when times are tough and cars aren’t moving off dealer lots.

To be sure, odd-numbered years are often weaker than even-numbered years, in large part because of the absence of political revenue and the boost that NBC affiliates get from their broadcast of the Olympics in even-numbered years. The move from an even year to an odd year frequently brings with it a drop in revenue and profit.

Many broadcasters attempt to soften the blow of the declines by pushing forth the idea that year-to-year comparisons are misleading because the factors comprising the revenue pictures year to year are so starkly different. Some advocate looking at the business on a two-year cycle, while others compare odd years (2005 versus 2003, for example) and even years separately.

Conceptually, Wall Street appears to appreciate the challenges of year-to-year comparisons, but that appreciation has yet to translate into upward movement on stock prices, which have languished for years.

Station groups have responded by looking for revenue sources that aren’t subject to odd-year/even-year fluctuations. Those that have begun using their digital spectrum are exploring ways to use it to generate revenue, whether it involves weather channels or other forms of programming that could draw advertising dollars.

Still others have turned to their Web sites for help. Taking advantage of the increased ubiquity of high-speed Internet connections and improvements in streaming video technology, many TV stations are beefing up their Web sites to take advantage of the rapid growth opportunities that exist with online advertising.

Jack Sander, president of media operations for Belo, told analysts during an investor call last week that the shifting tides in the auto sector have led to Belo being a lot more creative with its pitches to auto dealers. Using what he called a “mixed media approach,” Mr. Sander said Belo is now pushing advertising deals that cut across the company’s newspapers, television stations and Web sites. To help that process along, the company’s Internet sales force is now consolidated to pitch business for all three platforms.