Largely as a result of the national economic downturn, most broadcasters have viewed the digital conversion as a burden — a large capital and administrative outlay with no readily foreseeable economic return. Ultimately, it might be possible, with 20 to 30 channels of robust over-the-air digital programming in most markets, to turn back the tide of cable and satellite penetration.
The past three years have arguably been the most economically catastrophic in the history of the television industry. Industry revenues declined between 5 percent and 10 percent in 2008, despite being a presidential election year, and 2009 year-to-date revenues are down over 20 percent.
In an industry that used to be perceived as having enduring revenue growth prospects and extraordinary profitability, several large groups such as Tribune, Young and Ion are now in bankruptcy. The private market for acquisitions has virtually dried up and the operating cash flow multiples for those stations that do change hands have fallen from the mid-teens to between five and 10 times.
Not surprisingly, the stock market has punished publicly traded station groups; in the past few months, the prices of many of the remaining companies have fallen below $1 per share, indicating that the industry is viewed as having virtually no equity value.
After over a decade of expectation and delays, the digital era is finally here. Analog licenses have been returned to the FCC to be repurposed primarily by telecommunications licensees. All full-power TV stations are now broadcasting exclusively on their new digital frequencies and the vast majority of these stations are multicasting one to three channels in addition to their original primary channel.
This all raises some critical questions. Do the new capabilities of digital broadcasting offer an opportunity for stations to reclaim some of the audience that has become so fragmented and, if so, can this be accomplished at a viable cost? Can digital broadcasting be the vehicle through which TV stations reclaim viewers, revenues and some of the value that once made them darlings of the investment community? Is there a meaningful subset of the combined cable/satellite subscriber base (well over 80 percent of TV households in most markets) that might actually drop their subscriptions for the right mix of free over-the-air programming?
The answer to each of these questions is a qualified yes. To date, largely as a result of the national economic downturn, most broadcasters have viewed the digital conversion as a burden — a large capital and administrative outlay with no readily foreseeable economic return. Ultimately, it might be possible, with 20 to 30 channels of robust over-the-air digital programming in most markets, to turn back the tide of cable and satellite penetration.
The challenges to achieving this goal, and the initial steps that broadcasters are taking to achieve it, can be seen in what I’m calling the Six Ps of TV (programming, propagation, positioning, pricing, portability and passion) — a derivative of the traditional Five Ps of marketing (product, price, place, promotion and people).
Programming is what ultimately drives audiences and advertising revenues to TV stations. Most broadcasters are testing various digital channel programming mixes to ascertain what is most attractive to viewers, but are also being careful not to make long-term commitments that might limit flexibility. For example, the secondary channels on Media General’s 18 stations feature a mix of The CW, Retro TV, live weather radar and the Universal Sports network.
Most major network affiliates that are now broadcasting three channels of programming feature at least one weather channel, which means that there are often three channels of weather programming where one would clearly be sufficient. In the near term, broadcasters need to look not just at their own channels and how much it costs to program them, but also how they fit into the competitive mix in their markets.
The industry may eventually resemble the radio industry with multiple niche formats that are constantly evolving. Some operators are now designing ways to “beef up” the simple weather channel with informative audio overlays and local news programming.
Propagation represents how effectively a station’s signal is transmitted within its market. While the digital transition generally went smoothly, viewers are still experiencing erratic video pixilation and reception difficulties depending upon weather conditions. The resolution of these issues will depend upon the installation of proper antennas by viewers and the FCC’s willingness to permit stations to increase power. (See “VHF: Now Everything You Know is Wrong,” TVNewsCheck, June 26, 2009.)
Additionally, carriage of digital channels over cable and satellite channels remains a paramount industry issue. Although must-carry regulations do not currently apply to these channels, many stations have had a reasonable degree of success in gaining carriage with retransmission agreements.
Positioning is how free over-the-air television relates to other competing media. Traditionally, television was the quintessential mass medium, unparalleled in its national reach. The digital era provides broadcasters with an opportunity to step outside of this paradigm in several ways.
First, the increased supply of channels offers clear opportunities to segment the market more finely than the traditional and previously successful “mass media” concept. Already stations are offering more finely tuned ethnic programming to communities that had heretofore been underserved. Some stations have elected to lease digital multicast channels to such programmers for upwards of $1 million per year. The possibility also exists that scrambled pay programming could be offered, although technical and regulatory considerations would have to be managed, including a 5 percent royalty that would likely be payable to the government for fee-based services.
Pricing relates to what consumers must pay for a service. For free over-the-air digital television, this is no more than the cost of a digital television or at minimum a converter box and an antenna. This can be as little as $20 with the converter coupons available through July 31, 2009, from the NTIA and requires no ongoing monthly fee. The addition of a limited complement of high quality scrambled pay programming could be provided at a small fraction of the cost of traditional pay TV services.
While a portion of the marketplace will continue to pay for the ability to receive over 100 television channels, there is likely a subset that would be just as happy with a more limited, but much less expensive menu of news, entertainment, sports, and movie channels.
Portability relates to the ability of viewers to receive over-the-air programming on portable devices such as PDAs, cellular telephones and a new generation of consumer electronics containing DTV receivers. Neither the cable nor satellite industries are in a strong position to reach out to the new population of mobile video consumers.
The industry is progressing toward the adoption of ATSC-M/H as a standard for mobile broadcasting and this will eventually provide an unparalleled opportunity to provide high-quality, real-time local video programming to a dramatically expanded mobile audience.
Passion is the creativity and energy with which television broadcasters conduct their business. Over the decades, this passion, as well as limited competition, made over-the-air television the backbone of American popular culture and an extraordinarily successful financial model.
While the industry has seen much of its passion sapped in an era of economic downturn, layoffs, furloughs, budget cuts, increased competition, bankruptcies and business failures, the digital transition provides the creative platform to reignite the industry. The evolution of retransmission revenues paid by satellite and cable companies to local television stations, now approaching $1 billion per year, and the continued dominance of market viewership by TV stations provides clear evidence of the vitality of broadcast programming.
This dominance, used strategically, can provide a springboard for creative programming and effective promotion of the multicast channels. However, the time to act is now, before the opportunity slips away.
The Six Ps provide a general road map and a coherent vision for steps that the over-the-air broadcasting industry needs to take to reinvigorate the industry. The most vibrant years of the television industry may not be in the past, but in the future, and could be a lot closer than industry pessimists believe.
The restoration of the financial health of the television industry will reflect the ability of stations to attract and retain viewers. The opportunity exists to restore value through creative use of the digital multicast channels and the powerful use of the existing primary channels to promote new programming.
John S. Sanders is a principal with the Washington-based consulting firm of Bond & Pecaro Inc., which specializes in providing appraisal, economic and related consulting services to media and communications clients. He can be reached at [email protected].