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Digital a Windfall for Gray Stations

Nov 27, 2006  •  Post A Comment

Gray Television in October launched its 24th digital television station, cementing its position as the broadcaster that has most aggressively embraced the format.

To create Fox-affiliated WHSV-DT in Harrisonburg, Va., Gray made use of part of the digital signal being broadcast by WHSV-TV, Gray’s analog ABC affiliate in town. It’s a formula the company has been using for two years to bolster revenue: augmenting analog stations in a market with a digital signal from a competing network.

Most of Gray’s digital stations, which piggyback on the physical plant and human resources of its analog properties, become cash-positive in four months or less, said Gray President Bob Prather. The strategy also helps push the company toward a future where all TV stations are under government mandate to switch to exclusively digital signals in early 2009.

In the modest-size markets where Atlanta-based Gray generally operates-and where cable operators are inclined to carry the digital signals-the company’s digital strategy makes sense, said Jim Goss, an analyst at Barrington Research.

“It’s minimal investment, relatively speaking, and pretty much all upside,” Mr. Goss said. “So even if the upside isn’t huge right now, it is visible.”

In some areas, cable TV companies have resisted Gray’s attempts to distribute the additional digital channels, Mr. Prather said.

“The cable operators played hardball with us. They pushed us to their digital tier or wanted us to pay, which we just refused, or to extend retransmission agreements with them,” Mr. Prather said. “That’s hurt us in a couple markets. In one of the markets where we decided not to do a deal for a position on the analog tier, we lost 50 percent of our market.” He declined to identify that market.

Mr. Prather said Gray has taken the position that in “two years we’ll be able to renegotiate, and we’ll be in a lot stronger position at that point, and it just wouldn’t have been worth giving [cable operators] extra because we figure we’re going to get paid in a couple of years.”

WHSV-DT in Harrisonburg is Gray’s fifth digital Fox affiliate and raised the network’s coverage to 99.28 percent of the TV homes in the country.

“It’s the best we’ve ever been,” said Jon Hookstratten, Fox executive VP of network distribution.

Gray initially was planning on creating digital UPN affiliates in markets where it already owned a station. As the strategy has evolved, the company has come to own as many as three stations in some markets by expanding digitally.

Cash Flow

The creation of The CW in September from the remnants of The WB and UPN didn’t slow Gray’s digital shift.

“We were feeling good about it,” Mr. Prather said. “We had just gotten our 11th digital channel on the air when they announced they were getting rid of UPN.”

Fox then launched MyNetworkTV to supply programming to former UPN and WB affiliates that didn’t end up allied with The CW.

Gray currently has nine CW stations and 17 MyNetworkTV stations.

While Gray’s profits fell during the recently concluded third quarter, costs for starting digital stations didn’t directly cause the decline, Mr. Prather said.

“That’s more related to two acquisitions we made last year,” he said, noting that the company judges its performance more by cash flow than by net income. “We go strictly by cash flow. Our cash flow was great, close to an all-time record. We had a real good year. We’re going to keep doing what we’re doing.”

In its third-quarter earnings report, Gray said that year over year, local advertising revenues for all stations, excluding political ads, was $47.7 million. Its expanded channels (the two acquisitions and the new or rebranded digital channels) accounted for about $6.4 million of the company’s overall increase in local advertising sales.