Collins | Diginets Maturing Into Attractive M&A Targets
When I’m looking to escape, to lean back with some feel-good entertainment, I turn on MeTV. Programs on the Chicago-based Weigel Broadcasting’s multicast channel (diginet) include some that were old when I first saw them — Perry Mason, My Three Sons and The Dick Van Dyke Show — along with some shows I remember from the 1980s. It turns out I’m not alone in my affection for old television shows.
In the current issue of MFM’s member magazine, The Financial Manager (TFM), is an article called “The Little Networks That Could” by Bond & Pecaro’s John Sanders and Jake Lourim. The subject is the rise of, and current prospects for, diginets.
Given my predilection for laughing at old episodes of Gilligan’s Island, I was surprised to learn that MeTV is the “most widely distributed digital network in the country with a 94% household coverage.” It turns out that there’s a big market for what the authors call “archival content that is inexpensive to acquire.”
In fact, that is part of the secret behind the current success of networks such as Bounce, Escape, Laff and Grit. Their business model, according to Sanders and Lourim, is relatively simple making them attractive merger and acquisition targets.
A Little Diginet History
While the June 1999 broadcast television transition to digital signals opened the door to digital subchannels, the diginet business started slowly. The first real network launch was Retro in 2005. Following that “only a handful of diginets were introduced each year.” That launch pace has significantly accelerated in the last five years.
Since 2014, notable new entrants include getTV, Heroes & Icons, Rev’n, Comet, Decades, Buzzer and Justice Network. The appetite for these specialized networks continues to grow, and with many of the diginets achieving coverage of over 80% of the television households in the United States, the authors conclude that this increased breadth and depth has set the stage for the merger and acquisition frenzy.
The first landmark transaction they identify was the $302 million purchase of Katz Networks by E.W. Scripps in 2017. Earlier this year Tegna acquired the Justice and Quest networks in a deal valued at $91 million.
Finally, they note, Nexstar Media Group’s recently completed acquisition of Tribune Media included Tribune-owned Antenna TV, as well as affiliate relationships with other diginets, including Court TV.
Keeping It Simple
According to TV Technology, the diginet business model continues to be powered by direct-response advertising (the familiar 800-phone number with the reminder that “operators are standing by now”) but is evolving into a hybrid model, with more general-market advertisers buying spots on some of the bigger, nationally rated, networks including MeTV.
Sanders and Lourim concur saying the economics are simple: “The networks sell advertising time, typically through national representatives, and hope to build scale by signing up affiliates in a large number of markets, just like a conventional network.”
Further, incremental costs are minimal, much of the programming is inexpensive to acquire with limited demand outside the diginet sphere. The financial reporting requirements of a diginet are less complex, requiring little in the way of staff, infrastructure or other operating costs.
In addition, although in some instances the diginets pay stations fixed fees for carriage based upon household coverage; this requires little in the way of incremental technical or staff investment.
Finally, stations receive a certain number of ad availabilities on the diginets to sell themselves.
The simple business model has made it economical for even smaller players to have an outsize role in the diginet industry, fueled in part by the “surprising viewer appetite for programming reruns.” The proof of this appetite is that “while no diginets appeared in the top 100 most-viewed networks as measured by Nielsen in 2016, eight did so in 2018.”
Here in Chicago, privately owned Weigel Broadcasting operates three additional diginets, Heroes & Icons, Movies and Decades, part of a joint venture with CBS. As the authors comment, with the CBS joint venture, “Weigel moved up a weight class.”
Back To The Future
Now that the business is maturing, some diginets have started to produce original programs. These include Katz Networks, which is producing an original scripted series, Saints & Sinners, for its Bounce network, as well as unscripted trial and true-crime programming for its Court TV and Escape diginets.
Another diginet, NewsNet, has taken what the authors consider a bold step. It is the first free over-the-air 24-hour news channel. Launched Jan. 1, 2019, they say the service is now broadcast on 40 stations with five additional commitments, serving 41 markets.
Sanders and Lourim believe that the mainstreaming of diginet services, coupled with their financial success, means that smaller groups will have a more difficult time developing affiliate relationships. They also point to the proliferation of over-the-top services, most notably from NBCUniversal, The Walt Disney Co. and AT&T, saying they will be competing for the same “cord-cutter demographic.”
Another cloud on the horizon may be the advent of ATSC 3.0. The authors predict it will be a “blessing or a curse for diginets and their owners, depending on individual circumstances.” 3.0 will, as I’ve reported in earlier columns, increase the number of available channels, thus intensifying the demand for programming. This has the potential to drive up programming costs.
Diginets, the authors say, could be at a disadvantage in programming negotiations because of their lack of scale. However, the diginets might find space on 3.0 platforms, which would allow broadcasters to collect subscriber fees in addition to retransmission revenues.
Sanders and Lourim expect a domino effect to occur as the 3.0-enabled multichannel platforms emerge. “The more television broadcasters are able to offer such services, the more incentive there will be for cord cutters to terminate their traditional satellite and cable subscriptions,” they say.
That, in turn, could undermine the retransmission revenues that stations get from the MVPDs because these fees represent about half of station revenues. This tracks with what we are already hearing about the situation for cable operators, who according to public records cited in the article, are losing subscribers at a rate of 2% annually; satellite companies face even greater pressure.
The authors conclude that despite the uncertainties that lie ahead, the diginet industry has rewarded those who have elected to participate in it, yielding a profitable incremental business. And they posit that in the long run, it may prove to be a valuable training ground as “television broadcasters are required to offer a much more complex menu of programming services than they have in the past.”
If you are interested in learning more about this topic, I encourage you to read the article in its entirety. A digital copy of the November/December 2019 issue of The Financial Manager will be available on the MFM website in the coming weeks. This is also sure to be a topic on the agenda for our annual conference — May 18-20, 2020, in Los Angeles.
Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Twitter or Facebook sites.