Undaunted by the slow decline in national spot, the CEO of the publicly traded consolidator of small- and medium-market TV stations sees plenty of upside in local spot and a new generation of Web sites.
Perry Sook believes the TV broadcasting business will continue to consolidate until just 15 companies own it all (or at least the parts worth owning). And he fully expects Nexstar Broadcasting Group, the acquisitive Irving, Texas-based company he founded 10 years ago, to be among them.
The publicly traded group now owns or operates 46 TV stations in 27 markets, ranging from DMA 54 (Wilkes Barre-Scranton, Pa.) to DMA 197 (San Angelo, Texas). Its annual revenue ($226 million) and national footprint (7.4% of all TV homes) puts in solidly on TV broadcasting’s Top 25 lists.
Nexstar’s station count includes 15 stations that it operates as second stations in markets—as duopolies—through Mission Broadcasting.
Mission is independently owned, but is so connected to Nexstar through various shared services, joint sales and time brokerage agreements that it is a virtual Nexstar subsidiary. In fact, Nexstar includes Mission in its financial reporting.
Mission is Nexstar’s way of circumventing FCC local ownership rules that bar the outright ownership of duopolies in smaller markets. Should the FCC relax its rules, Nexstar’s first move would be to exercise options to acquire the Mission stations.
Sook understands that the national spot market is in decline. But that fact gives him no pause. He believes there is plenty of upside in local advertising and he is actively developing new sources of revenue.
Sook is a hero among many of his peers for his stand on retransmission consent. Last year, he dug in and refused to allow cable systems to carry some of his stations until they agreed to pay for the privilege. That stand cause substantial short-term losses, but is producing long-term gains. In the first quarter, Nexstar posted $2 million in retransmission consent cash payments—3.2% of total revenue of $60 million—and another $1 million in guaranteed advertising buys by the cable operators.
Although Sook is not big on digital multicasting—only a handful of Nexstar stations have full-power digital capability—he believes Nexstar can become a major player online. By the end of the year, he says, the company will begin rolling out new community-oriented Web sites.
In this interview with TVNewsCheck, conducted last Friday, the 48-year-old broadcast entrepreneur shares some of the thinking behind his company’s strategy and explains why he is determined to be part of broadcasting’s consolidated future.
Nexstar seems to be doing better than most. According to your first-quarter report, core advertising revenue for the group was up 11%.
Relatively speaking, we have been focusing on our local business, which makes up better than 70% of our ad business. That’s where we saw the most growth. If you look at our markets, you know we are trying to bring our stations up to maturity, so we have been gaining market share. And also we had a handful of markets where in the prior year the revenue comps were negative due to our retransmission battles with cable. Revenue has certainly come back now that the distribution has been restored. Our guidance has been that the second quarter is going to be more of the same. The third quarter is shaping up, on the margin, a bit more positively and a lot of that is driven by increased political activity.
What’s the state of the national spot market, excluding political?
National is struggling to post positive gains industry wide. Automotive spending—the largest national advertising category—is down, although as we look forward that looks as if it is getting better. But in terms of core growth, you are looking at a flat-to-down world in 2006. But if you include political, you will see mid- to high-single [digit percentage] growth.
Is national every going to come back?
Well, the reason we don’t focus on national is that it is purely a commodity sell. It’s ratings-point, cost-per-point based and very much a flavor of the month. So our focus since we began the company has been increasingly on local where you can have lunch with the owners of the business and you can suggest ideas. If they get excited about them, then things happen. Very little of that happens on the national side.
Right now, we think the Main Street economy is pretty healthy. For example, in the first quarter, we had other category growth great enough to make up for the automotive shortfall, and automotive is a quarter of our ad-supported business. We’ve not seen that kind of depth and breadth in advertising categories in several years. Sixteen of our top 25 advertising categories showed growth in the first quarter and that’s the first time we have been able to make that statement since maybe 2000.
We have not seen new categories emerge, but even with $3 gasoline and all the threats of the world, our local advertisers seem to be very confident. I know there is a lot of doom and gloom out from other operators, but maybe it’s because we are up against some comps that are slightly easier. Our view of the world is more optimistic that others.
I’m under the impression that political has been unexpectedly soft for most broadcasters through the first half of the year.
You’re correct. There were some primary races that that we thought would be contested, but ended up not happening. However, as we get closer to the Fourth of July, the avails request have been increasing substantially. Quite frankly, we think all hell’s going to break loose once we pass the Fourth of July.
We’ve already got money in Indiana for that contested 8th District House race. The gubernatorial candidates in Pennsylvania are spending. We are seeing some money in Texas from the gubernatorial candidates in the general election. It is beginning to perculate. The number will be there. It may be more back ended—the middle of the third quarter through the end of October—but the money is going to be there.
You were able to squeeze retrans cash out of some cable operators, which is now showing up in your quarterly reports. Is there more out there? Or, are you set for the current retrans cycle?
For all intents and purposes, we are done. We have deals with 155 cable operators covering four million subscribers. There are a total of eight systems that represent 20,000 subscribers spread across four markets where we have not reached deals and we are just not carried there. We told them to call us when they are ready to pay.
Your basic strategy is to create duopolies wherever possible. The FCC just opened a proceeding to consider relaxing its rules so that you could own two stations in smaller markets. How important is that proceeding to you?
We are happy the issue is back on the table. We will be engaged in the debate. I just look at the landscape and see that it is perfectly permissible for broadcasters to own two TV stations in Dallas and New York and Boston and other major markets. But under the current rules, in markets with a lot less revenue like Rockford, Illinois; Erie, Pennsylvania; and Wichita Falls, Texas, we can’t own two over-the-air stations. We compete against the same Internet and we compete against the satellite and cable universe and there is a lot less money to work with in those markets to support things like local news.
So, we think the current regulatory scheme is kind of upside down in that it allows relief in the big markets and not in the small markets. All we would ask is, take the current regulatory scheme and apply it universally—allow dual-station ownership in every market. Considering the competitive pressure facing our business, it would be a positive thing in helping this business to survive and prosper.
What’s wrong with continuing what you are doing—operating duopolies through independently owned strategic partners like Mission Broadcasting?
While is allows Nexstar to mine the economic benefit from a second station in a market, it does not allow us the full benefits for ownership, which is to say the agreements are not 100% efficient. Mission has its own corporate overhead, its own staff, its own personnel at the station level, its own regulatory filings. They are expensive to set up. And, every once in a while, people question their validity. It’s an overhang in our business as to whether these agreements are going to be allowed to survive. We do not have absolute control over those stations. Investors would feel a lot better if we had the opportunity to control them, so it would be a positive for the industry—and certainly positive for our company—if the rules were to be relaxed.
Are you looking to buy more stations?
We would if we could find the right opportunities, and if the deals were accretive. We are focused on medium-size markets in the Midwest, Southwest and Middle Atlantic states. If we found opportunities that complemented our existing footprint at reasonable prices we would attempt to find a way to grow.
My thesis is that in five to 10 years there are only going to be 15 companies in this business that people really care about. It will be the four or five network owners and their dozen distribution partners that have substantial scale.In the middle markets, there is such a redundancy of corporate overhead. Mature industries consolidate and it’s been my view for some time that this industry needs to consolidate, particularly outside the large markets.
I heard that you offered more than $200 million to buy the CCA/White Knight stations just before they filed for Chapter 11 bankruptcy. True?
I won’t comment on the price. But we took at interest in CCA and White Knight Broadcasting for a number of reasons. They operate in Texas, Louisiana and Indiana where we have an existing footprint. We thought that at the end of the day we could make a deal that would be good for us as well as the sellers. We are still interested. But now that it’s in the courts, the bat is out of our hands.
What’s your online strategy?
We are trying to bring the same passions and focus to the new media as we have to broadcasting. I have hired a senior VP of new media out of the CBS radio group. His name is Rajiv Lulla. He and I are working feverishly on a business plan and a model that will allow us to go beyond the current concept of a television station Web site. Ultimately, what we are trying to do is create communities of interest in the Internet, leveraging our local content assets. I’ve got three kids—14, 18 and 20—and the last thing they would want to do is visit a television station Web site. Our focus is going to be on building verticals—communities.—rather just repurpose news.
As my Dad said, “You have to hunt where the ducks are.ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€šÃ‚Â If the fastest growing advertising category or sector is online advertising and the next big thing online is video, then it seems to me that we have a rightful place at the table. But we have to build it and give more than lip service to it, which is what a lot of us have done up to this point.
What are the rollout plans for the new service?
We have a presentation to our board in mid-July. We will then make that presentation to the senior staff and general managers in early August. I think you will see our new Web sites launching in the fourth quarter. We will do that with some fanfare.
Each of the networks are experimenting with distributing primetime programs over the Internet, essentially bypassing affiliates. How much does that bother you?
These are experiments and it remains to be seen whether there is a real business there. I think that it is important to note that the affiliates and the O&Os still get the first airing of every show. And at least two of the big four networks—ABC and Fox—have said that whatever they do online, they see as additive promotionally or otherwise to the mother ship.
If the deals are constructed as partnerships so that the affiliates have an opportunity to share in the business proposition, I think that there will be support and they will go forward. But as our CFO said, these are basically coffee fund ventures at this point.
But aren’t you concerned that the coffee money fund will turn into some real money eventually and affiliates will be cut out?
At the end of the day, the only thing I truly have control over is my local content and so we are looking to build our own business. We are not waiting for the networks to offer us a partnership or somebody else to build it for us. We are looking to build our own online presence around our local content.
Keep in mind: each of the network affiliation agreements provides for various amounts of repurposing. To me, I don’t know if it’s a whole lot different if Law and Order runs 17 times a day on cable or on somebody’s iPod. It’s still all a rerun. It’s still programming that runs after it’s run on us. And, again, the jury is out on the long-term viability of some of these businesses.
The NAB is fighting hard for multicast must-carry rules at the FCC. I know that it’s not something that you care much about. Why?
I have not spent a lot of time arguing about real estate that I have no plan or clue yet on how I am going to develop. Our philosophy with regard to distribution, which, I think, we have been able to prove out, is that if we have a product that the consumer wants we will receive economic benefit or payment for it. I cannot envision us under today’s circumstance electing must carry. We have never done it for our primary signal. I think the marketplace is a better place for that proposition to be worked out. Many broadcasters underestimate the market leverage they have. I would rather it be a negotiation than anything mandated by the government.
Given the flat national spot market and the fact that no broadcasters have yet figured out how to make big bucks from digital multicasting or the Internet yet, how come TV stations continue to demand such high multiples?
A lot of the buyers are strategic buyers who buy stations because they are adjacent to their existing footprint and see synergy that allows them to pay up for them. The financial buyers are out there because the bank market has been robust. They see a lot of opportunity to put a lot of leverage on these businesses. If the banks are willing to lend an extra multiple then that’s an extra multiple that you can pay and it won’t affect your return.
Plus, it’s still a good business. As David Poltrack of CBS said, “I’ve been working in a dying business now for 26 years.ÃƒÆ’Ã‚Â¢ÃƒÂ¢Ã¢â‚¬Å¡Ã‚Â¬Ãƒâ€šÃ‚Â The sky has been falling for 26 years. It is more competitive, yes. But we have assets that have not been affected. Our major assets are our local content and our relationship with local business owners and our reputations in our local communities. As I tell our people all the time, the only reason we are in business is to make somebody’s cash register ring. We are a service business. As long as we are providing advertising solutions that make local cash registers ring—whether it’s online or on air or some other means—then there is always a business for us.