Betting big on local TV

VIRGINIA BUSINESS

Will cord-cutting and new technologies affect the prospects of network affiliates?

• March 1, 2015  

by Richard Foster

Back in the early 1990s when Dennis Wharton was a reporter for Variety covering cable and broadcast television legislation on Capitol Hill, some Federal Communications Commission officials and analysts were predicting that cable TV would soon ring the death knell for local network affiliate stations.

“And here we are 31 years later with a robust and healthy local TV business,” says Wharton, now executive vice president of the Washington, D.C.-based National Association of Broadcasters, the trade industry association for U.S. television and radio broadcasters. “The demise of local affiliates has been written many, many times and the business has probably had one of the best years it’s ever had.”

Richmond-based Media General and McLean-based Gannett are betting big on local TV, joining the ranks of Tribune Co. and other companies in divesting or spinning off their newspaper and print media holdings in favor of owning local network affiliate television stations.
December Media General completed a $1.6 billion merger with Austin, Texas-based LIN Media, creating a new Media General with 71 television stations reaching 24 percent of American households. (Media General owned just 18 stations in mid-2013, before combining with Nashville-based Young Broadcasting.) In late December, Media General became the largest owner of affiliates for the CW Network.

Gannett, which owns 46 television stations and reaches about 30 percent of the U.S. population, is the nation’s top owner of CBS and NBC affiliates. Itannounced last August that it planned to spin off its print media holdings into a new, separate company. Gannett acquired 20 stations from Dallas-based Belos Corp. in 2013 for $1.5 billion and last year purchased six more stations for $215 million from Dallas-based London Broadcasting Company.

Gannett had $1.4 billion in third-quarter 2014 revenues, a 15 percent increase over the prior year. Media General similarly saw a 21 percent increase in net operating revenue over the same time period.

Despite increasing advertising revenues for broadcast and network television, however, some media analysts say that the cord-cutting movement  and fast-changing technologies for how we watch video content could one day endanger local television affiliates in the same way that the Internet harmed the newspaper industry.

Consumers now view network TV content across multiple platforms, including mobile phones, tablets, video game consoles and streaming media players. Some viewers, particularly millennials, purchase network television shows on an a la carte basis through services such as Apple’s iTunes Store and Wal-Mart’s VUDU, circumventing local TV stations altogether. (Congress has also seen some unsuccessful pushes to unbundle cable packages, allowing consumers to purchase channels a la carte, but the latest such effort by U.S. Sen. John McCain, R-Ariz., stalled in committee.)

Still others have eschewed cable subscriptions in favor of less expensive content providers such as Netflix, Hulu and Amazon Prime, all of which now boast original programming. (In fact this year, for the first time, none of the four major networks won a Golden Globe for television programming, but Amazon and Netflix did.) CBS now offers a dedicated app making its programming available for a fee without requiring a cable TV subscription and HBO’s HBO Go service will also be available as a standalone streaming service starting in April. (A recent survey by Dallas-based international marketing firm Parks Associates found that a projected 7 million cable subscribers would drop cable entirely in favor of the HBO streaming service.) And, upping the ante, DISH Network has released a $20 per month streaming-only service called Sling TV that offers a basic package of 12 channels, including ESPN, CNN, TNT, HGTV, The Food Network and The Disney Channel. (But Sling TV doesn’t include any network TV or local affiliate programming.)

In the short term, local television station ownership is a strong, sensible investment, says cable industry consultant Howard Homonoff. But what television-viewing technology will look like 25 years from now is “literally unknowable,” he says. And while online and alternate-platform viewing “especially by young people are certainly potentially great threats, I would view it still as an evolutionary rather than a revolutionary process” in terms of how changing technology will impact local TV affiliates.

"America¹s love affair with TV is stronger than ever, especially at the local level, yet consumers' media viewing habits are rapidly evolving due to technological advances,”  says Media General's President and CEO Vincent Sadusky says. “Media General is a technology-driven company and we are focused on staying ahead of the curve by evaluating and investing in the latest technologies. Our goal is to produce the highest quality and quantity of unique local content and be consumers' and advertisers' number one choice on all screens."

Gregory Fairchild, an associate professor in the University of Virginia’s Darden School of Business, says, “The challenge for media providers … is neither their technologies nor their business models have caught up to what the consumer would like to have. It makes it very hard to predict which models will be the models that will work going forward.”

Standalone streaming services such as HBO GO, DISH’s Sling TV and CBS All Access are game changers and are harbingers of greater innovations to come in content delivery, Fairchild says.
Affiliate owners need to be on the lookout for online services that might emerge to supplant the local news business in the same way that sites such as eBay, Craigslist, Monster.com and Match.com stole away the newspaper industry’s revenue stream for classified ads and personal ads, he says.

As for local affiliates being the sole suppliers of network content, CBS All Access already threatens that model, though the Supreme Court’s ruling last year against online video provider Aereo prohibits online broadcasting of network TV shows by third parties without the consent of the television networks. Fairchild points out, however, that after Napster was put out of business for making copyrighted music available for free, Apple stepped into the void and rewrote the entire industry model for music sales and pricing. Similar online delivery of network television content, he says, could mean that local affiliates will have less bargaining power with network television content providers in the future if more and more consumers seek content from alternative sources.

Last summer, CBS pulled its network affiliation from WISH-TV in Indianapolis and switched to rival station WTTV after a dispute over how much of a share the network would get from the retransmission fees WISH receives from cable providers. Media General was already in negotiations to buy WISH’s parent company, LIN Media, and dropped its buying price by more than $100 million in part due to the CBS dispute.
Nevertheless, for the next several years at least, all the speculation may be much ado about nothing.
For one thing, those cable retransmission fees remain a growing, stable and important revenue stream for network affiliates. Though the law allowing retransmission fee was passed in 1992, stations didn’t start demanding the fees from cable providers until the mid-2000s.

Advertising still makes up the lion’s share of earnings for local TV stations, but the retransmission fees now make up about 20 to 25 percent of the stations’ revenues, a figure that continues to increase, says Justin Nielson, a senior research analyst with SNL Kagan. (Battles between cable providers and networks over these retransmission fees have resulted in high-profile showdowns and channel “blackouts.”)

Gannett’s retransmission fees jumped 67 percent last year, Gannett CEO Gracia Martore noted in September at Goldman Sachs’ Communacopia conference, though she added that there still remains a gap between the value of the content provided by network affiliates and the amount cable providers are willing to pay for it.

Also, points out Nielson, the SNL Kagan analyst, local stations are awaiting a cash bonanza in 2016 when the FCC will allow stations to auction unused spectrum bandwidth to wireless telecommunications providers.

Political advertising remains a major revenue stream for local stations. In an October earnings call, Martore said that “for the foreseeable future [politicians] will continue to be highly dependent on broadcast television to get elected.”

Furthermore, people who watch TV shows the traditional way, on a television and during the timeslots when the shows air, remain the dominant demographic for viewership. In 2014, the average American viewer watched 4 hours and 32 minutes of live television daily, according to Nielsen ratings data. That was down just slightly from 4 hours and 44 minutes in 2013. (Time-shifted DVR viewing largely made up the difference, Nielsen concluded.) Broadcast network television viewership ratings also consistently dwarf competing content from cable networks.

TV shows and live sporting events, awards shows, musicals and reality competitions are driving factors keeping timeslot network television viewership strong, Wharton says. Cord cutters usually can’t purchase television shows online until at least a day or two after the shows have aired, and that can make you feel alienated around the office water cooler, he says.

And in poorer areas where residents generally can’t afford a monthly cable subscription, HD antennas drive viewership of local affiliates as well as the affiliates’ additional digital broadcast channels, which can include content such as the popular African-American network Bounce TV, Wharton adds.
Additionally, social media has been a huge boon for live television viewership. “Twitter is probably one of the greatest inventions for live, local network broadcasters because of the amount of conversation and dialogue that’s going on during shows, whether it’s snarky comments during the Emmy Awards or the Grammys or just TV shows like ‘The Good Wife’,” Wharton says.
Also, he adds, locally generated news and weather reports remain a vital service to viewers that online-only distributors can’t offer. “Compelling content will always rule the day and there is demand. Particularly in a weather or emergency situation, there’s no substitute for local broadcasting.” For instance, when Buffalo, N.Y., was hit by a major snowstorm last November, local news viewership rose to the level of NFL football game ratings. (Gannett and Media General both own stations in that market.)

At least for the near future, local network affiliates aren’t going anywhere.
“We feel really good about the way each of our businesses is positioned amid today's increasingly digital media landscape,” Martore said in September. “Clearly our publishing and broadcasting businesses are buttressed by strong digital strategies. The needs and preferences of our readers and viewers may be changing, but we have used that dynamic to our advantage as we have developed and continue to develop new and innovative ways to reach them.”

Says Homonoff: “Media companies … have to continue to aggressively invest in their online and mobile presence [but] even though there are different platforms to get local media, people still know the names of their local media providers and people still care about the local news and events in their own communities and the local broadcaster has to continue to be the key player in that local media marketplace and that’s a business I think has growth potential.”