Digital is a tough racket in any of its many manifestations — websites, apps, streaming, marketing services. But that’s where the real upside for broadcasting is, not in spot or retrans. Station groups have got to keep experimenting with digital, keep investing in it, keep trying to get a foothold.
When we launched TVNewsCheck in January 2006, we heard a lot of bold talk about digital, about how broadcasters were going to leverage their local brands and promotional might to build websites and other digital businesses to keep the top line growing at a brisk pace even as the traditional spot business slowly declined.
We are still hearing that talk — and we have seen a lot of action over the past nine years. Yet, digital revenue, most broadcasters would agree, has been disappointing. If a station group is deriving more than 5% of its revenue from digital, it’s a bona fide industry leader.
Digital is a tough racket in any of its many manifestations. As every account executive has learned, selling advertisers into a website or an app is a dime-on-the-dollar enterprise, not great for accumulating big commissions.
Another problem is that there is nothing particularly special about most station websites and apps. With similar content, broadcasters compete locally with each other’s stations, newspapers and a host of so-called pure plays.
Some broadcasters have plunged into digital marketing services, offering local advertisers the whole panoply of digital offerings from website design to SEO. But I’ve not yet seen the finances of any group transformed by it.
The Big Four are including their affiliates in their streaming efforts — TV everywhere in the case of ABC, NBC and Fox, and CBS All Access in the case of CBS.
Nobody knows how big these services will get or how much money the affiliates will be able to squeeze from them.
To monetize TVE, the affiliates have to coax extra fees from cable operators that want to offer broadcast-laden TVE to subscribers to keep them from cutting their cords.
With CBS All Access, affiliates who want to be part of it are still negotiating to see how much of the monthly $5.99 subscriber fee they will get.
The bottom line on the digital top line is broadcasters need to keep after it every which way they can. Digital has potential for the long-term, double-digit growth that broadcasters used to be able to count on in spot.
Because of growing political ad spending, the spot business is still growing. Every even-numbered year, political comes in in buckets, so fast sometimes that stations have to turn away regular advertisers.
But the core spot business, the dollars that come from all those regular advertisers and account for the bulk of broadcasters’ revenue, is promising only modest returns.
“The days of a TV station saying we’re going to be up 10% or plus 20% in core business, I don’t think we’re going to see those days again,” Meredith’s Paul Karpowicz said in his March 2 interview with me.
Last fall, we asked more than a dozen broadcast groups and research analysts to forecast core spot revenue this year. The consensus was that it would grow 2.4% over 2014.
Checking back with some of the same sources over the past two weeks, we found that last fall’s forecast is still on track. The consensus was core grew around 2% in the first quarter and it looked like it could add another point in the second, despite a migration of some auto dollars to digital.
Nexstar CEO Perry Sook told security analysts this month that the best way to track core is to keep an eye on the gross national product, the metric the government uses to gauge the health of the economy. Wherever it goes, he suggested, core will follow.
Where is the GDP going? According to 63 economists that The Wall Street Journal regularly surveys, the GDP will grow 3% in the second quarter and 2.9% for the entire year.
From my own discussions with broadcasters, most seem to be comfortable — maybe too comfortable — with an annual 3% core growth, knowing that they will be able to complement it with the political dollars every other year.
Keep in mind that under the GDP rule, core spot grows only it the economy is growing. If the economy turns south, core spot could turn negative. That’s the danger of operating too close to flat.
The news is a little better when it comes to broadcasters’ other major revenue stream these days — retransmission consent fees. They are big — an estimated $4.9 billion in 2014, according to SNL Kagan — and getting bigger. They can account for a quarter of a group’s revenue.
For the moment, efforts to weaken broadcasters’ leverage in retrans negotiations in Washington through new law or regulation seem to have abated.
That means that there is still upside. Broadcasters are free to continuing to demand hikes from cable and satellite audience, and they can do it justifiably until they reach parity — that is, until they receive a share of all of the programming fees the operators pay out that’s commensurate with the audience they deliver.
Michael Nathanson, the respected Wall Street analyst, believes broadcasters have a long way to go before they get their due. Take a look at CBS, he told me in an interview this week. “It drives 10% of national viewers and they’re getting just 3% of the affiliate fee pie.”
Too bad the affiliates don’t get to keep all the retrans money they collect. The networks have taken much of the fun out of retrans for affiliates by imposing programming fees on them. Reverse comp is the networks way of recovering some of the retrans revenue that the affiliates are hauling in.
It’s seems that the networks are typically getting half the affiliate retrans money now, and that could go up. “I think the networks will push for an even greater share,” Nathanson said. “Is 70/30 a crazy ask? I don’t know, but I do think you are going to see two of the four networks, CBS and Fox, being pretty aggressive in looking to get their fair share.
If broadcasters manage their affiliation and retrans contracts smartly, they should be able to keep what they are taking in in retrans pacing well ahead of what they paying out in reverse comp.
But you never know. The networks could really squeeze the affiliates, Washington could foul things up or the cable operators and satellite operators might get to a point where they feel they can get along without one or more of the networks.
So, that brings us back to digital. The real upside of broadcasting is not spot or retrans, it’s digital. Station groups have got to keep experimenting, keep investing, keep trying to get a foothold.
At a Borrell conference a couple of weeks ago, James Dolan, of the Cherry Tree financial advisory firm, said that outside investors and lenders aren’t attaching much value to media that aren’t digital.
“Valuations are subjective,” Dolan said. “The market thinks digital has a future. The market thinks legacy media doesn’t have a future.”
Let me put it this way: If broadcaster can’t figure out how to make money in digital, they have nowhere to go — except maybe the FCC incentive auction.