Stations’ New World Order

Dec 12, 2005  •  Post A Comment

Local television stations that capture the smallest slice of their market’s advertising dollars and rank toward the back of the ratings pack will likely face an increasingly difficult road ahead as technological and market forces challenge the traditional television broadcasting model, according to several industry observers.

While stations big and small are expected to undergo significant changes with the emergence of technologies such as the video iPod, digital video recorders and television content delivered over broadband, it is the weaker TV stations-especially those in smaller markets-that are the most exposed.

New products that further fragment television audiences are likely to inflict pain first on the weakest players, many of which are already struggling amid a slew of market forces, including the proliferation of cable channels, regulatory uncertainty over station ownership rules, reductions in network compensation and a federal mandate requiring stations to spend sizable sums to prepare for the transition to digital broadcasting.

Now comes a slew of new products and services that not only siphon off viewers, but also give them a greater degree of control over how they consume content. Indeed, with products such as the DVR, video-on-demand and broadband, consumers are now dictating when and where they consume content, a concept that has been lost on many broadcasters.

“When it comes to TV and technology, many [broadcasters] don’t know what they are doing,” said one former operator of television stations. “Broadcasters are used to fighting themselves; they aren’t used to pulling together.”

Added Kathy Crawford, president of local broadcast at MindShare Worldwide: “As an industry, we are at a crossroads. I would suggest that television stations must look into themselves and ask themselves, are they in the same business they were 15 years ago … or are we marching to the beat of a different drummer?”

The situation for most broadcasters represents a new world order for the television industry. For years it was a common perception in the industry that owning a television station was equivalent to having a license to print money. The business model was simple, as advertisers paid dearly to get in front of the local TV stations’ viewers. Profit margins at some of the country’s strongest stations reached upward of 50 percent, while weaker players could still generate margins well into the 30s.

In recent years, however, that model has been challenged on all sides, putting a spotlight on which stations are the haves, with strong ratings and sizable shares of their market’s advertising spending, and which are the have-nots, their weaker brethren.

“The ability to have the kinds of margins experienced in the 1950s through 1980s has become increasingly difficult,” said Blair Levin, managing director at investment firm Legg Mason. He noted that stations are no longer facing competition solely from cable but also from a raft of other sources, such as Web sites and video-on-demand services, many of which have far more revenue stream opportunities than do television stations.

Woes Upon Woes

Exactly what impact these new technological forces will have on TV stations remains an open question. Publicly held station groups do not break out individual station performance, and privately held station owners aren’t obligated to do so either.

However, new technology is likely to add to a series of woes already plaguing the industry. Even taking into account that in an odd-numbered year, political advertising would be expected to be sharply down due to the lack of major elections, TV stations have faced further challenges. Several key categories, including the all-important automotive sector, posted declines in many markets. According to the Television Bureau of Advertising, local broadcast TV ad spending was down nearly 6 percent in the first half of 2005 to $7.8 billion.

“When you think about the economics of the broadcasting business … you’re probably going to see an increase in the disparity between top-tier stations and the others,” said another Wall Street analyst.

But even with the added troubles, few experts expect television stations to go away anytime soon. Local stations still pull in large audiences and are still attracting interested parties, such as private-equity firms lured by profit margins that still beat many industries.

Mr. Levin noted that the margins most television stations generate today would make executives in other industries salivate: “Most people would still love to have the kind of economics that broadcasters have, but none of the trends [taking place in the industry] are going toward the traditional broadcast model.”

That said, even as broadcasters face these challenges, their one saving grace is that they still remain the best way to reach broad audiences-something that advertisers will see as valuable, even in a station ranked fourth in a market. The reason: A station in last place still has a larger audience in its market than most cable channels.

“I believe we are proving as an industry that the No. 4 station in a market may have lower ratings [than the No. 1-rated station], but that would be better overall than some cable networks,” Ms. Crawford said.