Best known these days for his public battles with cable operators, the CEO of the nation’s ninth-largest TV station group is more excited about developing a whole new business–broadcasting pay programming to viewers on the go.
The Sinclair Broadcast Group has been much in the news lately, mostly for the hard line it is taking with cable operators on retransmission consent negotiation. It wants cash, and has shown a willingness to fight on any ground—the market or the FCC—to get it. Right now, it is engaged in battles with Mediacom and Time Warner. For the latest, simply plug “Sinclair” into the TVNewsCheck search engine.
For this edited interview with TVNewsCheck Editor Harry A. Jessell, Sinclair’s CEO David Smith declines to talk about current retrans negotiations, but explains why he is willing to do battle and lives up to his reputation for outspokenness in commenting on other broadcasters’ limp retrans efforts.
It is also clear from this interview that retrans is not what Smith is most excited about these days. That would be the prospect of using digital TV to broadcast subscription-supported programming directly to consumers with laptops, cell phones or other portable or mobile devices.
According to the BIA Financial Network, the publicly traded Sinclair Broadcast Group in the ninth largest U.S. TV station group with 2005 revenue of $678 million. Its 39 full-power stations reached 22% of U.S. TV homes and include mostly affiliates of Fox and My Network TV.
Here, Smith also explains why he isn’t interested in buying more TV stations right now, even though the company stock has enjoyed a nice upward ride over the past quarter, and why he’s not worried about the networks’ fascination with the Internet or with the poor performance of MNT.
An edited transcript:
Why are you taking such an aggressive posture on retrans?
I don’t really see it as an aggressive stance. I see it as nothing more than if I have content and you’d like to package it and resell it to your consumers so you can make a buck off of it, why can’t I share in that? That’s all. It’s nothing more complex than that.
My signals are valuable because everybody’s watching them. I mean that’s kind of the definition of value, isn’t it? The satellite companies have been paying a lot of us in the industry for a reasonable period of time now, and the phone companies are now gearing up.
In the neighborhood where I live in Baltimore, the phone company is saying they’re going to have everything Comcast has and they make no bones about what’s necessary for them to launch their competitive business. They recognize they have to have content and they have to have the content that everybody wants. Our dilemma as an industry is nothing more than a legacy issue. We’ve been giving it away for free for so long we don’t know how to ask for money. That’s all.
If you know cable is paying 25 cents for channel 250 that six people watch and if you know that you have a channel that has 60,000 people watching, wouldn’t you think it’s worth at least 20 cents?
The cable guys argue that shouldn’t have to pay because you get to use the public airwaves for free.
Let me just set the record straight on a couple of points. No. 1, I paid as a company billions of dollars for my television licenses. I pay annual fees to keep them. Nobody talks about that. What I do in dealing with the network, I give up inventory in those television shows in exchange for the show. I am paying for that content with my own inventory. Nobody wants to talk about that. Nobody on the cable side wants to recognize that as a cost of doing business. And, as a company, we’ve invested $150 million in equipment just to be able to do digital.
I don’t see other broadcasters being so aggressive on retrans? Why do you think that is?
Companies like Nexstar are getting retrans. Hearst is getting retrans. LIN just announced a retrans deal yesterday. I think it was with one of the phone companies. I don’t think we’re the only ones who are doing this.
When I say retrans deals, I’m talking cable operators. Everybody is getting telco and satellite deals.
If you get them, then it’s just a matter of time before you get everybody else.
Well, that may be true for you, but it doesn’t seem to be true for everybody else. Nexstar had some success in ’05, but other than that only you seem to be willing to battle for retrans. Does that surprise you that broadcasters aren’t more aggressive?
It doesn’t surprise me in the least.
Because the broadcast industry, fundamentally, lacks leadership in certain areas. This is not meant as a negative to the guys in the business or the girls in the business, but, generally speaking, the people who run television stations don’t own them. They have no skin in the game and as a function of that, the last thing they want to do is see themselves strewn across the trades being sued in federal court, attacked in Congress, attacked in front of the FCC. Name me one general manager who’s working for a paycheck who would like to see that happen.
I’m hoping that CBS sticks to its guns and says, “We’re going to get paid because cable doesn’t have the leverage it used to have when we had all the Viacom channels.” They have every reason now to say this is what I want, and I hope they get it. Now maybe that’s the dam buster for the CBS affiliate body. I don’t know.
Everybody is watching that closely. You talk about leadership. Broadcasters are looking to [CBS CEO Les] Moonves to raise a flag that they can all rally behind.
Well, that means they’re a bunch of sheep. They’re a bunch of followers. Why don’t they go lead?
You’ve had a big run up on your stock since October, 40% to around $11 now. Do you think that has anything to do with your retrans stand?
No I don’t think so. I think it’s recognition by the analysts that the stock at $7 or $8 was a gift and that the relevant numbers that they need to focus on are free cash flow per share. Interestingly enough, when you go back and look at free cash flow per share in 2004 versus 2006 and compare their to the stock prices, you find that the stock should be about $18 now. Our free cash flow is just staggering. It’s so much more than it was in 2004 that it’s scary.
Well, it’s not scary. I mean we’re just running a slightly different business than we were in 2004. We continue to tell Wall Street that you shouldn’t focus on us as a broadcast company or anything else. You should just focus on what our free cash flow per share is, period, because at the end of the day all that’s relevant to the shareholders is how much money is being pushed out the door. Whether you have a TV station in Des Moines, Iowa, or Timbuctoo really isn’t important. It’s just a free cash flow analysis for us.
I read somewhere that one of the other broadcasters has said that they’re going to find other places to go spend their capital other than the broadcast business. That’s a valid notion only because at this point I kind of look at broadcasting as an industry in transition. For people who have significant balance sheet capacity, it’s time to go find other places to deploy capital that can produce significant rates of return for you.
But isn’t this the time you should be putting money into the broadcasting industry because it is, as you say, in transition? It needs capital.
We’ve put all the money we can into it from a standpoint of infrastructure and things of that nature. We’re just waiting now for the rest of the world to catch up to us.
Explain to me how you get this cash flow growth when the top line looks so bad. If you take out the political money, your third-quarter numbers were flat to slightly down. Even with political, your revenue was up only slightly.
Controlling cost, just controlling cost and doing what we do to run the business on a day-to-day basis. Look at our free cash flow. When you see the numbers at the end of this year, it’s conceivable we might give some guidance for 2007, which would be a rarity for us. I’m not telling you we are, but we’re giving consideration to it because there are a lot of things that are going on that we think are noteworthy.
You’re involved with Samsung in developing and testing the A-VSB DTV standard that it says would allow you and other broadcasters to broadcast programming to laptops and other portable and mobile devices. What’s your interest in all this?
Look at it as a retrans business. The phone company, the guys who are selling the phones, will not be able to use our content unless we agree to let them use it because there are things that have to be done to it in order to make it useable on a telephone.
It’s conceivable that when you walk into a Verizon or Cingular store, the sales person goes over all the things you can get. One of them will be television and it will cost you 25 cents a month or a dollar and a half a month or whatever it happens to be.
Under that scenario, I expect we’ll reach some kind of accommodation with the phone companies whereby we’ll make our content available to them and they’ll resell it, which is generally what they do, and we’ll take our cut. They’re not originators of anything. They’re simply retransmitters, if you will, or processors and collectors of fees.
So your plan is to take a portion of your DTV signal and use it to broadcast programming for cell phones?
I’m saying we have the capacity to do that right now. We’ve had the capacity. I told everybody that 10 years ago. Ten years ago—I remember this like it was yesterday—I pulled a cell phone out and I said, “Do you see this cell phone? We’re going to be talking to this cell phone and people are probably going to be paying for this. The only issue is what day.” Ten years later, we’re seeing the demonstration.
How close to reality is this. Is this a real, live service?
It’s alive as soon as the phones are available and you’re going to see the first phones. It’s alive as soon as the broadcasters decide they want to make that content available to the phone companies.
And you’re confident that the technology works now. You were highly critical of the VSB standard 10 years ago?
We were critical because 10 years ago it didn’t function and, frankly, in today’s world, it still doesn’t function the way the European standard does, not even close. In order to get even close to what the European standard does, there’s a huge sacrifice in the payload so you have to give up an enormous amount of data capacity in order to do what they do normally.
You’re talking now about Samsung’s Advanced VSB. How far away is that from a real product?
You can reach out and touch it.
But from what I understand, the Samsung standard is still a work in progress.
I would say the standard will be a work in progress the rest of our lives. It will be a constant modification process. What I’m suggesting to you is that Samsung is way down the path in terms of putting phones on the street that are able to receive over-the-air television if we’re ready to give them the content—and that’s just an economic deal.
Do you think somebody will be offering me this service by the end of next year?
I think it’s very conceivable, yes.
And you see this as a subscription service. Then, this is just like the service that USDTV tried to launch, except the receivers will be in your hand instead of on the set top.
That’s exactly true. It’s going to be in your watch, it’s going to be in your phone, it’s going to be in your laptop, it’s going to be in your car, it’s going to be on your desk, it’s going to be wherever you want it to be.
Do you think this is the application for DTV?
Oh, that I couldn’t tell you. I’m just telling you it’s one of the thousand and they’re all subscription businesses.
All subscription businesses?
All subscription businesses, no different than what satellite is, cable is, the phone company is, the Internet is or the people that are selling Xboxes and charging kids $9 a month for the games.
So free over-the-air doesn’t have a future here.
Oh, that is still a great business.
But you just said you were going to use your extra digital bits for pay services.
Sure. I’ll use them for anything I can make money with.
Unlike a lot of your peers, you seem to have a clear idea about where DTV is going.
But as frightening as this may sound, I sat on committees with people—some of the biggest names in the business—seven or eight years ago who said very matter of factly, “I have no interest in portability, I have no interest in mobility, I’m a single purpose business and I only want to talk to the piece of furniture in the corner of the house.”
Sadly, there are still a lot of people who still believe that. They’re only interested in talking to large screen television sets and the notion of doing something outside that box is so foreign to them they might as well go build airplanes or something. Again, that’s not a criticism of them. It simply points to the reality that people in the broadcast business only think one thought, period. They take somebody else’s content or content they make themselves and they distribute through this thing they call over the air and that’s all they do and they make a fortune doing it, period.
I think that’s why many broadcasters like the idea of retrans. It’s a way of getting paid more for essentially doing the same old thing.
Why don’t they go get it then? Why don’t you ask them why they don’t go get it?
Do you see yourself creating new content for the mobile marketplace?
Absolutely yes. Well, I shouldn’t say me. I see myself partnering with people who want to use my pipeline to reach phones. I had a meeting two hours ago with a guy who came in here and said he wants to use my pipeline because he wants to talk to cell phones.
So you can do multiple streams of this and you don’t have to create every one of them?
Absolutely. I don’t have to do anything. All I have to do is be a pass-through or, if I think that I’m smart enough to create something, I’ll create it. But I’m not that smart.
Are you interested in the Internet as a programming platform?
I don’t think of it in terms of that as yet, but in the end it is it going to be a platform. I just can’t tell you what day that’s going to happen, but I believe it will. It will be another place for people to watch us.
In fact, I saw an interesting story on the Internet this morning about David Poltrack up at CBS. The gist of it was, the more places people have to watch television, the more they watch. There’s an interesting notion for you. So I guess that means if they can watch it on the Internet, someday that’s just another place for me to sell advertising.
If broadcasting is such a great business how come you’re not buying more TV stations?
Cause I already got plenty.
But we just reported that there may be more stations on the block than at any other time in the past 10 years.
No I’ll tell you why I’m not [a buyer]. It’s because I believe that everybody who’s buying stations today will be selling them in five years.
You’re talking about these private equity companies?
Yes. You don’t think they’re buying them and holding them, do you?
No. So they’re going to buy them and sell them in five to seven years. That’s the nature of their model. So I’d rather wait to see how the technology thing evolves and once I have a view of the horizon as to what that’s going to be, then I may look at buying television stations again. Of course, I see the upside potential in retrans fees.
You were sort of the inventor of the virtual duopoly—owning one station and operating another in the same market under contract.
We did the first duopoly in 1991 in Pittsburgh. You know what, there are still people today, there are still lawyers in Washington representing broadcasters who say, he can’t do that.
Oh, I know. I have posted stories in which they’re attacking Schurz and Granite.
Is that a comedy? Those are the same people who are saying that nobody flew into the World Trade Center and there wasn’t a Holocaust. Nothing surprises me.
Is it important to you to have the ownership rules changed so you could purchase some of the stations that you now operate under LMAs or whatever you call them.
I’m happy to buy them anytime the government wants to change the rules.
But it doesn’t bother you that you can’t today? It’s not a big deal to you?
No. It doesn’t change my model.
But it’s always better to own than to rent isn’t it?
Well, let me suggest something to you. If you don’t have to own, but you can get the economics of it, why would you own? If you can go get an apartment building and get somebody to give you all the money that comes out of it then why would you want to buy the building if you get the money for free?
Let me ask a couple of network questions. You’re a big MNT affiliate. Are you disappointed in the performance of the network?
Yes, I am disappointed there, but it doesn’t surprise me because I remember in 1986 when the Fox network launched and everybody said they’ll be out of business in 30 days and then I said, well, let’s wait and see what happens
I kind of said the same thing this time. Don’t bet against what they’re capable of doing. The fact of the matter is that after 20-something years, they’re still around as the Fox network and my sense is that they have a huge vested interest in making sure that the thing survives. Fox has billions of dollars invested in its television stations. They clearly have a bigger interest certainly than Time Warner did in the WB.
So what are they telling you? I mean what’s plan B?
I couldn’t tell you what plan B is.You’d have to call up them and ask them, but my sense is don’t ever count them out under any circumstances.
You have 19 Fox affiliates, 10 ABC affiliates. Are you concerned by the loss of exclusivity? The ABC and Fox programming is popping up all over cable and now the Internet.
There’s been a lot of yakking about that and, frankly, I haven’t seen the effect of it anyplace. Everybody said the world was going to come to an end and so on, but I haven’t seen any effect. I looked at the ratings. Nothing happened. The fact that you might be able to go watch some television show five days later or something on the Internet or two days later or whatever it happens to be hasn’t done anything that I can see.
Getting back to DTV for a moment. I take it that you’re a believer in HDTV, too.
If they give it to me, I play it.
What about producing it locally?
I think we’ll produce it to the extent that we need to in the context of news. I think the world will transition that way. Yes.
Beyond HD and beyond mobile, is there anything else that you can do with that digital signal?
To be honest with you, I’m not smart enough to have conceived it all. All I can tell you is that when you have a pipeline that’s as big as ours, people are going to figure out how to use it to make a buck off of it and all I have to do is stand back and wait for them to call me.
If I can’t figure out how to make a buck off of it where I get a hundred cents off every dollar, I’m happy to take 50 cents off of every dollar and act as a pipeline.