2010: What A Difference A Year Makes

Coming into 2010, broadcasters were expecting a flood of political advertising dollars to fill coffers depleted by two years of recession.

They were not disappointed.

Candidates, parties and others attempting to influence elections, congressional votes and ballot initiatives spent some $3 billion on advertising this year, and most of that, perhaps $2.4 billion, went directly to TV stations, still seen as the best way by far to target likely voters, according to political ad tracker Evan Tracey.

So fast did the dollars come, that stations’ biggest challenge was managing regular advertisers who were being pushed aside of the campaigners.

The political money, along with the return of auto advertising, which had practically disappeared in 2009, fattened the top and bottom lines of most full-service stations and took some of the pressure off the cost lines.

According to Kantar Media and TVB, spot TV revenue in the top 101 markets surged ahead 27% in the first nine months of the year. Setting aside political, the categories were led by auto (up 77.2%) followed by financial (up 51.2%) and home and hardware (up 37.9%).

The Kantar Media/TVB numbers were underscored by the sharp third quarter top line increases of publicly traded broadcast companies: Scripps (31%), Post-Newsweek (29%), Gray (28%), Fisher (27%), Meredith (25%), Gannett (24%), Journal (22%) and Nexstar (21%).

The strong results prompted BIA/Kelsey to reforecast its revenue outlook for all of TV broadcasting for all of 2010. According to the research and investment banking firm, industry revenue for the year will hit $18.5 billion, up 17% over 2009.

“This year was an affirmation that local television is still vital to any ad campaign, and we anticipate that this won’t go unnoticed by the larger nationwide retailers,” said BIA/Kelsey VP Mark Fratrik.

“Additionally, television broadcasters are making significant progress in enhancing their off-air revenue sources, particularly online, through hyperlocal sites and mobile applications,” he said.

However, the revenue resurgence did little to restore the confidence of Wall Street in broadcasting or awaken the dormant TV trading market.

Despite their strong revenue growth numbers, the share prices of the major pure-play station groups were still way off their historical highs, a sign of the caution with which investors still approach broadcasting.

However, because their stock prices had fallen so low last year, some of the groups managed to post impressive markets gains for the year. Sinclair, for instance, which opened the year at $4.02, rose to $8.31, a 105% gain, while Nexstar rose 59% to $6.01.

The station market is still foundering in a wide chasm between bid and ask. Owners are unwilling to sell at today’s low multiples (7-10 times cash flow), while buyers don’t see the revenue growth that would justify the multiples of just three or four years ago (up to 14 times cash flow).

Consequently, deals were few and far between this year as they have been even since the summer of 2007 when the credit crunch began hobbling the entire U.S. economy. But there was some bargain hunting, mostly by strategic buyers looking to pair up stations in markets as duopolies and enjoy the economies of scale.

LIN Media acquired WIWB Green Bay, Wis., and WBDT Dayton, Ohio, from Acme Communications for $11.5 million as part of Acme’s painfully slow process of disassembling itself. Under an agreement that preceded the sale, LIN was already operating the two CW affiliates in tandem with other stations it had the markets.

Likewise, Local TV agreed to pay CBS $16.5 million for WGNT so that it could have a second station in Norfolk, Va.

London Broadcasting picked up the McKinnon family’s KIII Corpus Christi, Texas, for $31.3 million. Although London doesn’t have any other stations in Corpus Christi, it does have small cluster of similar Texas stations of which KIII will be a part.

Ion Media purchased WQEX Pittsburgh for $3 million in another kind of strategic play. Pittsburgh was one of the few Top 25 markets in which Ion did not have an outlet.

That deal also served as another indication of just how slow the station trading market was. Pittsburgh, DMA 23, was the biggest market to see a sale of a full-power TV station.

The most telling example of the declining value of TV stations was the SJL Broadcast Group’s purchase of ABC’s two, small-market outets, WJRT Flint, Mich., and WTVG Toledo, Ohio, for $30 million.

That price was about one fourth of what SJL had sold the stations to ABC for in the mid-1990s. According to SJL, the same 10-times multiple was used in both deals, meaning cash flow has fallen as precipitously as the price.

SJL Chairman George Lilly, who has been through the ups and downs of the station market for nearly 30 years, believes it will be far more active next year.

Several companies just want out, he says. They took on a lot of debt to buy stations in the mid-2000s when all economic indicators pointed up and the companies were unprepared for the recession, he said. “Some of them went under water and lost a lot of their equity value and don’t see merit in staying in the television business.”

While the surge in sales helped stabilize the finances of most station groups, there seemed to be no help for Tribune Co. and its broadcasting subsidiary.

Just a year after real estate mogul Sam Zell had engineered a highly leveraged $8 billion buyout in 2007, the company retreated onto Chapter 11 bankruptcy to see if it could re-jigger the equity and debt and return to profitability.

Two years later, as 2010 winds down, it is still stuck in bankruptcy with investors and lenders squabbling over control of the company.

Exacerbating the financial problems were management woes, triggered by an October New York Times story that alleged that CEO Randy Michaels had returned to the juvenile behavior that marked his career in radio.

Two weeks after the story appeared, Michaels resigned. His departure was followed closely by several other former radio industry colleagues that he had bought in to rejuvenate company: Marc Chase, Jeff Kapugi and Carolyn Gilbert.

Another Michaels hire, Chief Innovation Officer Lee Abrams, resigned just before Michaels, following complaints that he had sent employees a link to an “extremely inappropriate” video to illustrate a point.

Several months earlier, in December 2009, Tribune had appointed former Clear Channel exec Jerry Kersting COO of the broadcast group, relegating Tribune Broadcasting President Ed Wilson primarily to sales.

That arrangement didn’t last long. At the end of April, Wilson quit and Kersting promptly stepped up as president of Tribune Broadcasting, a job he still holds.

In December 2009, after nine months of negotiations and three months of media speculation, Comcast announced an agreement to merge with General Electric’s NBC Universal.

In exchange for $6.5 billion in cash and $7.25 billion in programming assets, Comcast would acquire a controlling 51% share of the new joint venture.

Although most observers saw the deal as Comcast’s desire to snatch NBCU’s plum cable networks, notably USA, Bravo, Syfy, CNBC and MSNBC, Comcast executives were quick to say they were also committed to the broadcasting business and returning NBC to its former glory.

To close the deal, Comcast needs approvals from the FCC and the Department of Justice, but neither is expected in the waning days of 2010. The parties are now hoping for action early next year.

In reviewing the deal, the feds have a lot to consider.

Because Comcast also happens to be the nation’s largest cable operator, the deal quickly became a lightning rod for concerns about Big Media and about Comcast’s ability to make or break competing cable networks.

Those voicing such concerns don’t really think they can block the deal, but they hope that the FCC will attach conditions to its approval that will provide some safeguards for competitors and the public.

Comcast won the support of all the network affiliate groups by agreeing to a series of such conditions. To win over the NBC affiliates, Comcast promised: A) not to move any major sports off of NBC; B) not to mix retransmission consent negotiations and affiliation renewal negotiations; and C) not to bypass NBC affiliates if retrans negotiations hit an impasse.

Comcast’s agreement with the ABC, CBS and Fox affiliates is primarily concerned with retrans. It prohibits Comcast from discriminating against the non-NBC affiliates in favor of NBC stations in those negotiations.

Confident that the deal would be approved in some form, the prospective owners shook up the management of NBCU. Having gotten the word, beleaguered CEO Jeff Zucker said in September that he would step down upon completion of the merger.

Set to take over the company is Steve Burke, the COO of Comcast who engineered the merger. He will be backed by Robert Greenblatt, former president of entertainment for Showtime, who will head NBC Entertainment; and NBC holdovers Bonnie Hammer (cable networks), Lauren Zalaznick (cable networks), Dick Ebersol (sports), Steve Capus (NBC News), Mark Hoffman (CNBC) and Ron Meyer (Universal film studio).

For broadcasters, a key newcomer is Ted Harbert, currently head of Comcast’s E! Entertainment and former head of programming for ABC. In the new order, he will be in charge of sales, affiliate relations, research, syndication and the O&Os.

Joining Zucker on the outs are entertainment head Jeff Gaspin, communications chief Allison Gollust and head of sales Mike Pilot.

Retransmission Consent

Advertising sales were not the only bright spot for broadcasters in 2010. They also made considerable progress in developing their second revenue stream — retransmission consent fees.

According to an SNL Kagan report, the average TV station in 2009 was getting 26 cents per subscriber per month for letting cable and satellite operators retransmit its signal. But that number surely grew during the year as broadcasters, big and small, took harder lines and demanded bigger fees in negotiations with the multichannel operators.

Fox may have been the most aggressive broadcaster in the retrans bargaining. It began the year by cutting a lucrative new deal with Time Warner Cable and capped it in October with another with Cablevision, although it did not come easy.

To show it meant business, Fox yanked its signals from Cablevision systems in New York and Philadelphia for two weeks during the baseball playoffs. The move had the desired effect in the negotiations, but drew unwanted attention from Washington (see below).

In August, CBS reached a 10-year agreement with Comcast that would, according to one analyst, pay fees starting at 50 cents and escalating to about $1. This deal “says to the marketplace, ‘Yes, people are paying for retransmission,’ ” said CBS CEO Leslie Moonves.

Despite the increasing demands of broadcasters over the past five years, they receive only a small fraction of the programming fees paid by cable and satellite operators to the many cable networks.

Of the $26.2 billion in programming payments in 2009, according to SNL Kagan, broadcasters got only $762 million or 3%, even though they account for 30%-40% of all TV viewership on any given night.

But the outlook is positive. SNL Kagan estimated that retrans revenue would rise to $1.1 billion this year.

Network affiliates were cheered by the new retrans benchmarks the networks were setting, but they continued to grumble by the networks’ insistence that they were entitled to a large share of the retrans money the affiliate were getting.

The year, ABC made retrans sharing a major deal point in affiliation renewals, demanding as much as half of affiliates’ retrans take.

The ABC affiliates were prepared to push back.

“I don’t relish a nasty fight, but we’ll be fiercely protective of a revenue stream that I’ve created to preserve my local TV stations in these marketplaces,” said Nexstar CEO Perry Sook. “It’s not like my network primetime ratings are going up.”

Fox may even be tougher. It walked into affiliate renewal negotiations, demanding a fixed amount even if it was more than the affiliate was getting. Hoping that there is strength in numbers, the Fox affiliate board has stepped forward to try to come up with a reasonable blanket agreement that all can live by.

At year’s end, all eyes were on the retrans showdown between Sinclair and Time Warner Cable. But those negotiations were complicated by news that Fox, in its deal with Time Warner, had agreed to allow the cable operator to pick up network programming should any affiliate deny TWC access to its signal.

If retrans is the second revenue stream for broadcasters, multicasting may be the third. No station has gotten rich from airing second and third channels with their extra digital spectrum, but many keep trying.

Multicasting

ABC showed that it is serious about its multicast network, Live Well Network. It poured money into original productions and convinced five Belo station to join the ABC O&Os in carrying the network.

And at least four additional multicast networks emerged during the year: Antenna TV, a classic TV offering from Tribune Broadcasting; The Country Network, a country music channel; The Cool TV, an eclectic music service; and Me-TV, another classic network from Weigel Broadcasting.

Management

Tribune and NBCU were not the only broadcast companies (above) to experience change in the front office.

In May, Rebecca Campbell took over for  the retiring Walter Liss as head of the ABC Owned Television Station Group. She was the likely successor. For the prior two-and-a-half years, she was GM of flagship WABC New York.

Doreen Wade lost her job as head of Freedom Communications’ TV station group as the parent company emerged from bankruptcy. Tom Herwitz, former head of the Fox Television Stations, was tapped to take over by his former Fox boss, Mitch Stern, who is now CEO of Freedom. The question is, is Herwitz there to operate the stations or get them ready for sale?

In February, Gannett upped Gracia Martore from EVP-CFO to president-COO. In the new post, she continues to report to CEO Craig A. Dubow.

In July, following the sudden resignation of Steve McPherson, former ABC Family President Paul Lee was named president of the ABC Entertainment Group with orders to reinvigorate the sagging primetime schedule.

Washington

This was the year that the chairman of the Federal Communications Commission declared that TV broadcasting was an “obstacle” to the communications infrastructure that he believes the U.S. needs to maintain its competitiveness in the world.

According to Julius Genachowski, broadcasting is standing in the way of an expanded and more capable wireless broadband service by hanging on to spectrum and not efficiently using it.

In March, an FCC task force under his direction called for the reallocation of 40% of broadcast spectrum (120 MHz out of 300 MHz) from broadcasting to wireless broadband.

According to the National Broadband Plan, the FCC would free up broadcast spectrum for auctioning to wireless broadband providers by repacking the band and by encouraging broadcasters to give up some or all of their spectrum by cutting them in on the eventual auction proceeds.

Broadcasters who may want to relinquish some spectrum, but stay in the business would have the option of doubling up on channels.

Some broadcasters are intrigued by the idea of cashing out, but want to get some idea of how much they might get for their spectrum before signing on. That will take awhile since it will take an act of Congress to authorize sharing of auction revenue and there currently seems to be no urgency on the issue.

The FCC got the ball rolling on spectrum reallocation in November by launching a proceeding that would set the stage for band repacking and the so-called incentive auction of broadcast spectrum.

The NAB says it has “no quarrel” with voluntary reallocation of spectrum, but warned that it would oppose any proposals that would involuntarily take spectrum away or degrade the broadcast service.

Other than the spectrum push, Genachowski paid little attention to broadcasting policy in 2010. IThe FCC made no move on the controversial media ownership rules, although it will have to revisit the subject next year in keeping with a congressional mandate.

And for the most part, Genachowski stayed out of the retransmission consent fray, even during the very public dispute between Cablevision and Fox in October.

However, the latest word from the FCC is that it will be moving ahead with a proceeding early next year to determine if new rules are needed to insure that negotiations are fair and to avoid service interruptions. “We will pay close attention to … future developments in the marketplace,” said FCC Media Bureau Chief Bill Lake in announcing the plans.

“Are the disruptions of the last year an anomaly — perhaps just a sign of friction as prices move to a new level? Or will we see a continuing pattern of disputes that threaten viewers’ access to programming?”

With news of the FCC initiative, Senate Communications Subcommittee Chairman John Kerry (D-Mass.) said that he would table his retrans legislation, a relief to broadcasters who feel it would have tipped retrans negotiations in favor of cable and satellite operators.

Congress, meanwhile, passed two laws late this year that will have a direct, but minimal impact on broadcasters, the Twenty-First Century Communications and Video Accessibility Act and the CALM Act.

The former directs the FCC to restore the requirement that the Big Four O&Os and affiliates in the top 25 markets air four hours of programming a week enhanced with video descriptions for the blind.

The court threw out the FCC’s original video description mandates in 2002, finding that the FCC had overstepped its authority. With the law, there’s now no question about the FCC authority.

The aptly named CALM Act mandates that all TV networks as well as local broadcasters take steps to regulate the loudness of commercials. It seems that lawmakers, as well as many of their constituents, had finally had it with spots that play much louder than the programming before and after.

“The FCC will now focus on implementing the law to give consumers back the volume control on their TVs,” said Genachowski the day after final passage.

The midterm elections ushered in a new order in the House of Representatives, giving the GOP a majority in the chamber and control of the committees, including those directly affecting TV law and regulation.

When the new Congress convenes next month, Michigan Republican Fred Upton will chair the key House Energy and Commerce Committee, replacing Democrat Henry Waxman of California.

Upton has a pro-broadcasting record and his leadership of the Commerce Committee is considered good news for the TV industry.

Perhaps an even more significant development for broadcasters is the appointment of one of their own, Rep. Greg Walden (R-Ore.), as chairman of Commerce’s Communications Subcommittee. Walden is the former owner and operator of five radio stations.

Click here to read Part II of our Year in Review, which covers programming, journalism, sales/advertising and new media.

Click here to read Part III of our Year in Review, which covers 2010’s top trends in technology.

Click here to read Fade to Black, our remembrance of some of those who died in 2010.