The Business of TelevisionLocal TV Stations Face a Fuzzy Future
By Sam Schechner and Rebecca Dana,
The Wall Street Journal, Feb 10, 2009
LAS VEGAS -- Lisa Howfield, general manager of KVBC, the NBC affiliate here, watched last year as the broadcast-television business began to shrink. She started cutting. She combined departments. She made do with old equipment, and did away with luxuries like yearly sales getaways.
In December and January, she laid off 15 employees, or 6% of her staff. After the weatherman left last month, one of the morning news anchors took on both jobs. "It's like a bad roller-coaster ride," says Ms. Howfield. Her station's full-day viewership is down 7.7% this TV season from the same period last year, according to Nielsen Co., and Ms. Howfield expects her ad revenue in 2009 will be down 30% from 2008.
Local television stations like Ms. Howfield's dominated the TV business for more than half a century. They inspired the term "network": a web of Channel 7s and 11s that delivered shows from ABC, CBS, NBC -- and later, Fox -- plus local news, syndicated reruns and talk shows. Because the stations owned the licenses to the airwaves that broadcast TV signals, big networks couldn't distribute content without them. In turn, local stations became the vehicles for the greatest mass-market advertising blitz in history.
Now, with their viewership in decline and ad revenue on a downward spiral, many local TV stations face the prospect of being cut out of the picture. Executives at some major networks are beginning to talk about an option that once would have been unthinkable: eventually taking shows straight to cable, where networks can take in a steady stream of subscriber fees even in an advertising slump.
In December,
CBS Corp.'s chief executive, Leslie Moonves, told an investor conference that moving the CBS network to cable would be "a very interesting proposition." Two days earlier, Jeff Zucker, chief executive of
General Electric Co.'s NBC Universal, warned more broadly that the entire broadcast-TV model must change. "Otherwise it will be like the newspaper business or the car business," he told investors.
Many local stations -- once treated like royalty by broadcast networks -- are scaling back their original programming, cutting down on weekend news shows and trimming staff. Nationwide, 2009 TV-station ad revenue is projected to fall 20% to 30%, according to Bernstein Research.
Last week,
Walt Disney Co. reported a 60% slide in operating income in its broadcast segment, including ABC and 10 ABC-owned stations, for the quarter ended Dec. 31, in part because of a 15% drop in revenue at its TV stations. Ad revenue at local stations is "significantly behind" last year's pace, Tom Staggs, Disney's chief financial officer, said in an earnings call.
News Corp., which owns Dow Jones & Co., publisher of The Wall Street Journal, reported last week that its local TV stations, including 17 Fox stations, will undergo "major" cost-cutting in the coming 12 months. The stations are looking at a 30% decline in advertising revenue for the second half of the fiscal year ending June 30.
The weakness in the local-TV market could hammer the big broadcast networks, says Randy Falco, former president and chief operating officer of the NBC Universal Television Group and now CEO of
Time Warner Inc.'s AOL. Cable operators, he says, may lure networks away from some ailing stations with the promise of steady subscriber fees: "Ultimately one of [the networks] will make a break. One of them will try to make a go as a cable network."
Local TV stations won't vanish overnight. Networks' parent companies still own some of the largest stations, giving them a possible incentive to preserve that slice of the business.
And while their profits are down, the vast majority of stations are making money: Local, regional and national businesses, like car dealers and retailers, spent more than $20 billion on local TV-station ads in 2008, according to some estimates. Lucrative licensing deals between the networks and sports leagues still require noncable broadcasts of big events such as the Super Bowl. These won't expire for another few years, and already, there's political pressure to keep NFL games on broadcast networks. In some markets, local stations have recently tapped a new revenue stream: charging cable operators to carry the stations' signals.
Any jump to cable would be five or 10 years away, according to CBS's Mr. Moonves. In an emailed statement, a spokeswoman for NBC Universal, where local media revenue declined 25% in the fourth quarter of 2008, said the company believes TV stations are still "the best way to reach the broadest possible audience."
Back in the 1960s and 1970s, local TV stations often had profit margins over 50%, and there was a lively business in selling them to new buyers at a premium. Networks competed to sign up local stations as "affiliates" and paid them huge fees to broadcast their shows. The networks also owned a handful of TV stations in the biggest markets, like New York and Los Angeles, from which they drew enough revenue to fund the expensive business of making prime-time shows, running farflung news divisions and buying rights to sports events.
Then came cable, and the balance of power between stations and broadcast networks began to shift. Some early battles were over programming. Stations were so crucial to the networks in the 1980s, and generated so much money for them, that studios would agree not to sell reruns of their shows to cable while the stations were still airing new episodes. But by 1993, cable had made headway. That year, NBC affiliates watched helplessly as their airport-sitcom hit "Wings" was sold by the studio in reruns to cable network USA. The once-orderly and profitable system in which TV stations held all the cards had started to crumble.
Networks' parent companies started buying or launching cable networks of their own beginning in the 1980s. ABC bought a controlling stake in ESPN. NBC launched CNBC and, later, a cable network that eventually became MSNBC. Fox started the FX network and Fox News.
"The stations were being abandoned by their erstwhile partners," says TV historian Tim Brooks. "Year by year, their clout eroded."
By the time the softening economy hurt local advertising in late 2007, local TV stations were already a much smaller part of the TV ecosystem. In 2007, stations attracted 26% of English-language TV-ad revenue in the U.S., down from 34% in 2000, according to TNS Media Intelligence. Fees from the big networks had dropped in many cases to nearly nothing -- and in some instances stations were paying networks for certain programs, like blue-chip sports broadcasts.
This year, stations also face the transition to digital over-the-air TV signals, which Congress last week voted to push back until June. More than 5% of TV households are still unprepared for digital signals, according to Nielsen, which could further squeeze viewership.
As station owners look to slash costs, many are cutting budgets for syndicated series, the shows that fill many of the hours outside prime time. These include mainstays like "The Oprah Winfrey Show" and "Wheel of Fortune," and reruns like "Seinfeld" and "Two and a Half Men." For years, these shows delivered big ratings and fed viewers into local newscasts. But as daytime ratings decline, stations are increasingly reluctant to spend as much on those slots, according to syndication executives.
Local newscasts are also feeling the pinch. Stations have pulled the plug entirely on some news shows in Lexington, Ky., and Yakima, Wash. In November, some stations owned by News Corp. and NBC Universal said they would begin pooling their newsgathering resources.
Station owners say even with these cuts, there are more local newscasts than the market can bear. "Over time, there will be fewer players," says Dunia Shive, chief executive of
Belo Corp., which owns 20 local stations covering 14% of the U.S. market. On Thursday, Belo reported that its TV-ad revenue declined 11% in the fourth quarter from the year-earlier period, even with a windfall of spending on election-related ads.
Stations could ultimately be forced to consolidate, says Rick Feldman, a former TV-station executive and now CEO of the National Association of Television Program Executives. "At a certain point in time, there just may be too many players and the economics don't support it," he says.
Stations are scrambling to find new revenue streams. Some are testing out technology that will send their signals to cellphones and mobile devices, and beefing up their Web sites to boost online advertising. Others say rather than shrinking local news coverage, they're expanding it, since it's the only original content they still have.
Chicago-based Weigel Broadcasting Co., which owns stations in Illinois, Wisconsin and Indiana, has collaborated with Metro-Goldwyn-Mayer Inc. to create a content provider called "This TV" offering mostly old movies from the MGM library.
Nexstar Broadcasting Group Inc., a Texas-based company that owns or manages 51 stations around the country, launched highly local "community" Web sites. Stations owned by NBC Universal are piping content and ads to TV screens in supermarkets, taxi cabs and their own Web sites.
"These tough times really force you to look at everything," says John Wallace, president of NBC Local Media, the cadre of stations owned by NBC. "It remains to be seen how this is going to evolve, but I do believe there will be a market for local television well into the future."
A potentially more lucrative move stations are trying is charging cable operators to pay to carry them. Federal law requires cable and satellite operators to get the consent of TV stations to transmit their station signals -- and gives stations the right to withhold their consent. That means owners of bigger groups of stations, whose network affiliates air popular programs like "CSI" and "American Idol," have significant leverage.
In 2007,
Sinclair Broadcast Group Inc. temporarily blacked out 23 of its stations from cable operator
Mediacom Communications Corp., in a bid to get Mediacom to pay them for their signals. That instantly stripped 700,000 of Mediacom's households of a major broadcast network. Mediacom agreed to pay Sinclair. Sinclair has since signed deals with other operators, and estimated it took in $72 million in so-called retransmission revenue in 2008.
The national networks are examining this revenue stream, and some are asking their local affiliates to hand over some of the money they're getting from cable operators. CBS's Mr. Moonves recently told an investor conference he expects his affiliates to pay CBS a percentage of their retransmissions fees. "We feel we deserve a piece of it since we provide them with the NFL" and other pricey programs, he said.
At another conference, Mr. Moonves said cable operators have offered to pay the network these fees directly, cutting out the local stations altogether. Mr. Moonves didn't name specific operators and a spokesman for CBS declined to elaborate. "Down the road that's something that very well could happen, but I think it's five or 10 years away," Mr. Moonves said, citing long-term agreements with CBS affiliates, and calling CBS's relationship with those stations "a good one." In the third quarter of 2008, CBS' TV segment, including its CBS network and local stations, saw advertising revenue fall 14%.
The endgame could come sooner for stations where affiliation agreements with networks are due for renewal in the next three or four years. Over-the-air broadcast deals between NBC, CBS and Fox and the NFL, for example, expire after the 2011 season. Some sports events -- like college football's Bowl Championship Series -- have already signed more lucrative deals with cable networks. And as local earnings plunge and media companies take massive write-downs on the value of their broadcast licenses, the networks have fewer incentives to hang on to the stations they own and operate.
In Las Vegas, Ms. Howfield is optimistic her station will survive. She says KVBC is looking for ways to develop new categories of advertisers and to survive on less: "We better operate like there's no tomorrow."
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