Operating four TV stations in markets as small as Sioux City, Iowa, and sitting in the inner circle of the NAB gives the Citadel Communications president a good perspective on broadcasting’s challenges and how Congress and the FCC may help meet them.
Phil Lombardo is president and principal owner of Citadel Communications, a group of four TV stations in small Midwestern markets. But his profile in the industry in much larger than his group’s station portfolio.
As the chairman of the NAB, he successfully managed the traumatic transition of the association’s top job from Eddie Fritts to David Rehr last year and he remains a key player at the NAB as an immediate past chairman and member of the executive committee.
And if you are not careful, he will put the touch on you for a substantial contribution to the Broadcasters Foundation of America, the industry charity for broadcasters who have fallen on hard times. He serves as the foundation’s chairman.
In this edited interview with TVNewsCheck Editor Harry A. Jessell, Lombardo acknowledges the challenges facing broadcasters, but says they can be overcome—with a little help from Washington.
What’s the outlook for broadcasting?
I am as enthusiastic about this business today as I’ve ever been.
Why do you say that?
Well, it’s challenging, it’s evolving, I can’t wait to get to work every day. There are a lot of things that are very difficult in our business right now, but I think there are tremendous opportunities. We haven’t tapped the digital potential yet. We’re watching the Internet unfold and how we take advantage of it. To me, to have the opportunity to develop those new avenues and add them to the localism that we have in each of our communities is very exciting.
But that’s really all it is—”potential,” right?
Yes, but if you’re an entrepreneur, that’s fine. What you want is to be in a business where there is potential. If you sit there and you worry about what it used to be like and the difficulties that you’re encountering, it will make you crazy.
At a media conference in New York last week, Hearst-Argyle’s David Barrett said that in the old days broadcasting was a matter of dividing up the pie, but that now there isn’t enough to go around, the weaker stations could fail. I imagine that this is particularly true in smaller markets.
The smaller markets are much more challenging because the revenue pool is so much smaller. The cost structure is the same. The digital transition is just as expensive in a small market as it is in a big market. Network compensation is going away and network compensation, as a percentage of total revenue, was far greater in smaller markets than it was in larger markets. I mean, in small markets, it could’ve represented 25% to 30% of total revenue.
Is that right?
Oh, absolutely. But, in the large markets, it was probably no more than 1% or 2%.
So how do you make up that loss?
Well, once again, if you anticipate that it’s coming then you can put programs in place to substitute for that revenue. That’s why you see a lot of broadcasters have a lot of local initiatives. When times were really good, they didn’t think they needed to do that. They didn’t need to dig for extra local dollars and go and create different kinds of programs in order to bring in smaller retailers and stuff like that. Now, you have to do that.
You’re talking about more local spot revenue.
Local is the future. You have to be focused on developing local. When you look at the advertising dollars in any community, the television stations are still getting a small piece of that pie. Newspapers are still getting an overwhelming piece of that pie. You’ve got outdoor in the markets and radio gets its share. So, the opportunities to develop additional revenue and to be creative in developing additional revenue are on the local side. When you look at the P&L, you’re going to find that local keeps growing and becomes a bigger part of a station’s revenue budget. National spot will keep declining and network is on a trend line to go away.
“Network” meaning network compensation?
Yes, but you’re supplementing that not only with local revenue, but also with retransmission consent fees. They’re not great right now, but satellite companies are paying retransmission fees and the cable companies are paying retransmission fees. They will tell you that they’re not, but they are.
That’s news to me. I thought cable had taken a pretty hard line against paying fees.
And they have, but they there are some systems that pay an out-and-out fee per sub. Some companies are doing that and it’s more than you may think, and, in other circumstances, you work out an arrangement with them, whether it’s advertising, promotion or other things that are commensurate to a per-subscriber fee. So, they may want to say they’re not paying, but they are.
Getting back to Barrett’s comment, do you see stations failing or at least dropping news in some markets?
If we don’t get ownership regulations loosened, that’s going to happen. The FCC has got to realize that the small-market guys are in a pinch and what they’ve got to do is permit duopolies. They’ve got to eliminate this top-four exclusion, because the economics in the small markets are really tough and they are not going to get better because the core structure is going to continue to increase. Now, there are some stations that have already cut back on news operations and things like that.
Despite the current restrictions, a lot of broadcasters have already created virtual duopolies through management contracts with second stations in their markets. Are you okay with that?
I have more then one in my markets, OK? But to me that’s a way of circumventing the rules that are established, the rules of the road. So why don’t we take an open-eyed view and not look the other way and allow people to do virtual duopolies and things like that? Why don’t we just say it’s happening, it’s needed, it’s necessary, it’s really a positive development.
What happens in those circumstances is they consolidate the back office. That’s where the cost savings are. They usually put together combinations of programming that are complementary to each other, not competitive to each other, and, in the instances that I’m aware of, they create an enhanced news presence. Now what’s wrong with that?
Opponents of media consolidation would say that where you once had two voices you now have one.
Would you rather have two voices and one of them goes dark or one of them eliminates news or they cut back on their entertainment programming so that they can survive, or would you rather have one person running two entities that provide as much as and maybe more than what the community was getting before?
Could you see yourself buying another station in some of your markets?
Oh, I’d love to.
Do you see yourself going into other markets?
If the right opportunity came along.
What about private equity? Last week, I did an interview with Randy Bongarten. He hooked up with an equity firm—Diamond Castle—and bought the Bluestone stations. Why don’t you do something like that? You’re an experienced manager.
Yeah right. I’ve had many opportunities to do that. In fact, I did the first leveraged buyout in television in Burlington, Vt. Radio had been doing it and when I decided to leave the public sector and corporate America and start my own company, I did the first deal in television. But the way I did it is that I ended up with the majority of the equity and all the control.
When you use these equity firms, you get sweat equity and that’s your piece of the pie. They control the equity and they control all the voting and operating decisions and make the critical strategic decisions. I’m the kind of personality that doesn’t operate like that. Even when I was in corporate America and running a big broadcast group, I was left alone. I was recruited because of my independence and allowed to be independent. I ran it like it was my own company.
A lot of this private equity seems to be on its way into the business. Do you think that’s a good thing or a bad thing?
I think it’s a good thing. I think it’s a good thing because it enables people like Randy Bongarten to continue to be a part of this business and to be entrepreneurial. Any time we can create an environment that helps people become entrepreneurs, I’m all for that.
But these are pure financial plays. They don’t care if they’re buying a waste management company or a broadcast station. It’s all dollars and cents to them.
Well, they want a return. They want a return on their investment and basically they’re backing entrepreneurs who they feel can create that ROI and there’s nothing wrong with that. That’s very positive.
Are equity firms better than going public?
I think so.
Why is that?
Well, first of all, you know who your partners are. You have constant dialog with your partners. In the public sector, you have a bunch of shareholders, most of whom are faceless, and you’re now into reporting it on a quarterly basis, giving forecasts on a quarterly basis. Private equity doesn’t look at it that way.
Plus, you have to be in compliance with the SEC. So, all of a sudden, you’re adding a layer of overhead to your operation that you wouldn’t have to if you’re dealing with private equity.
Just simpler and cleaner.
How are you doing with the DTV transition?
I have built out Quad Cities. I’ve built out Des Moines. I’ve built out Lincoln. I’m in the process of working out a tower arrangement in Sioux City. That’s been a real problem. There are only two towers in that town. I own a half interest in one, and the other one is owned by the other broadcasters in that town. But we’re coming close to a resolution there and as soon as we do we’ll finish that build out
So you’re most of the way through this?
Oh, yeah. The next phase is, how do we then start to convert the studio. A lot of the equipment that’s already in television station studios is digital and some of the big guys in the major markets are converting their studio cameras to HD.
That’s just begun to happen. There are just two dozen stations broadcasting HD news right now.
Right. What’s happening is that every television station sets aside a sum of money every year for capital expenditures. Now if you’re going to replace old stuff with new stuff, you have to look at digital and HD. So it’s an evolving program.
So we can expect HD news to be introduced at your stations over the next two or three years?
Maybe a little longer for me because I’m not so sure a static newscast needs to go out in HD. It certainly should go out in digital standard definition. I’m not so sure it has to go out in HD. I’m not so sure that my anchors need to have a three-dimensional look.
Well, the marketplace will decide that.
That’s right. The marketplace will decide. And the more HD programming that gets into the home, the more the consumer’s going to demand it. Right now, sports is absolutely terrific on HD, but not every program is going to be enhanced that greatly.
Earlier you said that you would like to see relaxation of the local ownership rules to allow small-market duopolies. Is that the NAB’s No. 1 policy goal for 2007?
I wouldn’t speak on what the policy goals of the NAB are and say that it’s one goal here or one goal there. But one of the important objectives of the NAB is to further the whole digital rollout both for television and for radio. I mean that’s a very high priority. The NAB is going to put a team on staff in order to focus on that.
But what about media ownership rules and must carry. Aren’t they important to NAB?
Must carry and retransmission consent. We have that now and don’t want to lose it because if we lose it a lot of small-market broadcasters are really going to be hurt because they don’t have any leverage with cable operators.
I think a lot of people were surprised that the FCC didn’t move ahead with extending must carry to broadcasters’ entire digital signal. Is there any way to turn that around next year?
I think it depends on where the new commissioners position themselves.
Everybody knows where the commissioners are.
Well, are you sure you know where Commissioner Tate is? Are you sure you know where Commissioner McDowell is?
I think so. McDowell said he don’t want to play. That was the problem. He was the third vote for must carry that didn’t show up.
I know, but it was very early when he got there. Perhaps he’s become educated now. Maybe he needed to get up to speed on the issues. I would think that, if commissioners are open minded, they would see the necessity of having multicast must carry.
So you think there’s a chance that you can win must carry at the FCC?
We will, as an industry, work very hard to make everybody understand the importance of that. It is so important to the digital transition. Wouldn’t it be unfortunate if we get to 2009 and half of the country can’t see a digital signal? Politically untenable. So what you have to do is to put policies in place to help that transition.
So you see must carry as part of the DTV transition?
Absolutely. You have to have that so that whatever a television station is doing on the digital side, the consumer gets it. There is no gatekeeper. The consumer gets it.
We have the Democrats back in charge in Congress—John Dingell and Ed Markey in charge of communications policy in the House. What does that mean for broadcasters and the NAB?
Well, the first thing I would say about Dingell and Markey is that they’re very knowledgeable about our business and, because they are knowledgeable, you can have a dialogue with them.
So, you believe you’re in good shape going in to 2007 in Washington?
I think we were very fortunate to have been able to encourage David Rehr to become the president and CEO [of NAB]. I think he has proven to be everything that we had hoped he would be. He’s doing a terrific job. He understands the concept of having the members of the NAB being looked at as his shareholders, as his constituents. He wants to bring enormous value to them. He wants to speak with their voice in Washington. Not too many people know this, but he’s got a doctorate in economics. He’s a very smart guy and he’s a hard worker and a good guy.
Is he too Republican for a Democratic Congress?
No. David’s been in Washington a long time and David understands that, when you’re running an organization that’s an advocate for a business, you have to speak to everybody, you have to speak to Republicans, you have to speak to Democrats and now you have to speak to independents because we’re getting more independents up there. He’s very savvy about that. I mean, if you look at the government relations staff, there are as many Democrats on that staff as there are Republicans because he recognizes that labels aren’t the way you get things done. You get things done by speaking to the members of Congress.
Some of these advocacy groups have a lot of clout with the Democrats. Can you see yourself sitting down with some of these public groups to cut a deal for must carry or whatever?
I’ve done that before. I’ve sat down with them. I’m open and there’s a number of people on the board that are open to dialogue. We’ve had meetings periodically trying to see if there’s a way to bridge what their demands are versus what realistically you can do on a market-by-market basis. One of the frustrations is that we never get enough credit for the things that we do and we have to communicate that. We need to do a better job of communicating that.
Do you have any specific plans for doing that?
Oh, I think those dialogues occur all the time. I believe that the legal department, the government relations department at the NAB, they’re always in contact with advocacy groups because they’re a part of the fabric. You don’t ignore them. They have a point of view and you have to know what their point of view is and then if you can work with them you work with them. If you can increase the dialogue and start bridging the gaps between what they think and what you think you’re making progress and you should never stop that.