Former LIN CEO Gary Chapman is looking to get back into the TV station business. He says he believes that the keys to a profitable operation include lowering costs through duopolies, hubbing and news sharing, while adding revenue from retransmission consent, the Web and maybe even mobile. But to get back in he’ll have to come up with much more equity than he would have needed three years ago when he left the business.
Still holding some of the LIN Television stock that he accumulated as CEO of the station group, Gary Chapman understands full well the misery that TV broadcasters are now experiencing — the falling revenue, rising competition and dwindling cash flows.
Nonetheless, three years after his retirement from LIN, Chapman sees opportunity in getting back in when the industry is down.
In this interview with TVNewsCheck Editor Harry A. Jessell, Chapman says the key to operating stations these days is subtracting cost through duopolies, hubbing and news sharing, while adding revenue from retransmission consent, the Web and maybe even mobile.
An edited transcript:
What are you up to these days?
I can’t give you all the details at this point. It hasn’t been worked out, but I’m partnering with some equity firms with the goal of buying up television properties and recreating the LIN model, which is to pair up No. 1 news stations in a market with affiliates of an evolving network. The second station could be Univision; CW; My Network TV, which is really a syndication play now; or maybe even Fox.
How can you buy stations if you can’t borrow any money?
You have to have equity partners. You have to have somebody that is willing to put a lot of money into a transaction.
But you have to borrow something, don’t you?
Yep. But it would not be like five or six years ago when you would have highly leveraged transactions.
So how much of a purchase price can you borrow these days?
I don’t think you could get more than 20 or 30 percent.
So you’re talking about doing a deal where you put in 70 or 80 percent equity.
Yes, that’s correct.
Wow. That’s almost the reverse of where we were three years ago.
Absolutely, and there aren’t a lot of people that are willing to do that.
But there are some who still believe in this business?
We’re having discussions [this week] and we’ll find out. Based on initial conversations, there are some willing to do such deals.
Are you surprised by how fast the business has deteriorated since you left it three years ago?
Yeah, I am. I had no expectation of that. Everybody describes it the same, as the perfect storm. So many things — financial, automotive, the general economy and then, of course, homes — hit at the same time. What happened in real estate affects all the people that provide dishwashers, appliances and other household goods.
So it kind of brings things to a screeching halt. By and large, the industry has been reactive, in most cases by addressing the expenses.
By expenses, do you mean people?
Yes, but it’s more than that. More and more stations are using the hub-and-spoke concept, centralizing master control, business functions, HR functions into a hub. They’re turning TV stations into basically sales and news organizations.
Then, in news, more and more stations are cooperating in covering routine, scheduled events like the mayor’s press conference or a store opening. Instead of three or four stations covering them, they will have just one. It will get that mayor’s speech and everybody will use the same material.
The same thing’s true with regard to helicopters. They are being shared too. Over the course of time at LIN, we acquired some 11 helicopters. They are not only expensive to buy, but they’re expensive to operate.
Is this industry going to be able to rebound to a point where people are going to be comfortable paying 10 or 12 times cash flow again for stations?
Can’t say. All I can say is they are not today. We’re seeing this awful decline in national revenue and to a certain extent local too. Cash flow is well below last year because you can’t cut expenses as fast as what has taken place on the revenue side. You just can’t do it.
But over time things may improve. You’re sharing helicopters and news crews as we’ve discussed and you’re saving on not having to purchase massive amounts of digital and high-definition technical equipment anymore. When you hub your stations, you will be able to create efficiencies where one master control operator will be operating three television stations. I used to talk about how eventually we’ll have one guy in a white coat walking around in a warehouse full of computers. That, in essence, is what TV stations are becoming. You’re doing this all with computers, all with technology.
There are some other positive things happening, retransmission consent and monetizing of the Internet.
When you were chairman of MSTV, you advocated the formation of a broadcast lab. It didn’t happen. In retrospect do you think broadcasters hurt their prospects by not creating a place where they could jointly develop technology for themselves?
Absolutely, because the faster you can develop technology that will improve your efficiency, the more stable your business is going to be.
Hubbing is something that the labs could have worked on, I suppose.
Could have, should have. Eventually television groups like LIN started doing it on their own.
When we were talking about upside before, you didn’t mention mobile. Does mobile DTV — simulcasting the regular broadcast schedule to cell phones and other mobile devices — gives stations some real upside?
No one knows what the business model is for sure. If you want it to be an advertiser-supported business, you could go for the kids in the backseat of the car. But most cars don’t have the ability to receive over-the-air television yet and people aren’t buying new cars so it will take some time for that market to develop.
The other outlet, of course, is the cell phone. I don’t see that being a tremendous money maker mainly because there are only certain events, maybe sporting events, that people are going to be interested in when they’re away from home.
You don’t see people using their cell phones to catch Oprah in the middle of the afternoon or Judge Judy or the news as they’re coming home from work?
I don’t think you’re going to have a great demand for that and I’m not quite certain that the advertising model supports that.
Back in the early 1990s you were a big proponent of retransmission consent fees. Broadcasters are just now getting some. I just did an interview like this last week with John Tupper, the Fox affiliates chairman. He thinks that broadcasters, if they’re going to survive, have to get $1 or $2 per sub per month in retrans fees. Do you think that’s possible?
Not for everybody.
Well, do you think it’s possible for solid station groups like LIN. Can they get $1 or $2 for their best stations?
I think they can over time. Of course, the cable industry is fighting this, claiming that it’s the small cable systems that are being made to pay the most fees. That may be true.
There are several things that play into what you’re going to be able to get in your retransmission bucket. One is being a major network affiliate and having market exclusivity where you don’t have a tremendous amount of spillover from affiliates in adjacent markets.
Now, the next thing you want to be is a duopoly with the No. 1 news station in that market. If you’re in that position, obviously you’re in a much stronger position than if you’re the eighth television station in the market.
And you have to have the audience. If you have a large share of audience, the people in the market are voting and they vote every day with their remote controls. If they’re voting for you, it means you are at the top of the value proposition.
And then you might be able to get that $1 or $2?
Yes, but you’re not going to do it overnight because today the average paid is 25 cents.
What kind of help should the industry be getting from Washington these days?
We’re under tremendous distress because of the changes in the marketplace, specifically on the revenue side. I’ve been a champion of relaxing the local ownership rules for more than 20 years.
We did get some relief, but it was not sufficient. The rules are still much too stringent. Of course, we never did get cross ownership between newspaper and broadcast and there were a lot of newspapers that wanted to do that, including Media General and Tribune.
Do you think you can get some relief from the new Democratic FCC?
I don’t know. I don’t know if it’s one of those situations where the baby has to die before the doctor comes. It’s sad because we have proposed many different models and, quite frankly, we thought we were going to get more relief during the Bush administration. It never really happened.
I get that, but isn’t consolidation what has so many groups in financial difficulty today? In accumulating stations, they piled up a lot of debt and now they can’t manage the debt.
LIN was one of the first and biggest consolidators and certainly one of the groups that has the strongest balance sheet today. So I would say no when it comes to that. I don’t think Young consolidated any of those television stations. They didn’t have duopolies. Consolidation had nothing to do with them going into receivership.
But a lot of groups are on the verge of defaulting or at least of breaking their covenants just because they have all this debt that they can’t deal with right now.
Now that’s true, but that has nothing to do with consolidation.
Well sure it does. In many cases, the debt comes from acquiring stations, right?
In some cases, yes, going out and buying television stations at 12 times cash flow and throwing debt on that. All of a sudden you’re tripping right through your covenants because the revenue is down 20 percent or 30 percent. That is really the death star in this scenario: too much debt. Some of the banks and hedge funds are going to work with you; some won’t.