Executive Session | No Standing Still For Lougee And Tegna

A decade ago, Tegna (then Gannett) was one of several blue-chip station groups with newspaper roots that formed the second tier of TV station groups, below the network O&Os and above a few fast-growing small- and medium-market consolidators and the family-owned outfits. And since then, of the blue chippers, Tegna, with Scripps not far behind, has emerged as the one most committed to broadcasting, steadily accumulating TV stations in a series of deals both big (Belo in 2013) and small (KFMB San Diego in 2017).

Once it closes on the 11 stations in eight markets that are being spun off from the Nexstar-Tribune merger, Tegna will count 62 stations in 51 markets. It will not be as big as Nexstar (post-Tribune) or Sinclair, measured by number of stations, coverage or revenue, but one could argue that it will be better positioned for the rough-and-tumble of the larger TV business because of its strong presence in the top 25 markets where it will have 17 stations, including 14 Big Four affiliates. Four of those affiliates are in the top 10 markets of Dallas, Washington, Houston and Atlanta.

Since 2007, Dave Lougee has been deeply involved in the broadcasting expansion and capitalizing on it, first as head of broadcasting and, starting in June 2017, as CEO of the entire publicly traded company. In 2018, total media revenue swelled to $2.2 billion.

In this interview with TVNewsCheck Editor Harry A. Jessell, Lougee says he will continue to look for stations that meet his performance and market criteria to the extent the FCC ownership limits allow. He also addresses the advantages of scale, automated spot buying, retrans threats, his decision to take national sales in-house, regulation, the weakness of auto spot, the strength of political spot and his hope for ATSC 3.0.

An edited transcript:

Let’s talk M&A. You have been active and you have a lot of running room with some cap room and the two biggest station consolidators out of the game. Nexstar is maxed out and Sinclair is still sidelined because of its FCC troubles.

You are right.  We have room under the cap. We like to be specific. Our current reach is 38%. So, because of the UHF discount, if we bought all UHF stations, we could buy 14% more of the country, but we are not doing M&A for the sake of M&A.

Yes, we have been very active, but we have been opportunistic. For every deal we have done, there has been two or three we didn’t do because it didn’t fit our portfolio. It didn’t fit what we wanted or it didn’t make financial sense.

There are different types of scale. Not all scale is equal, right? We have got great TV stations that have had a tradition of doing great journalism and we are innovating our way to staying and being relevant in a go-forward basis and we are trying to add stations like those.

We added the No. 1 station in San Diego last year and I am sure you are familiar with the Dispatch stations we just picked up, WBNS and WTHR, in Columbus and Indianapolis, respectively. They are great stations.

So, we have a unique portfolio among the public play companies in that we are in larger markets and we own mostly Big Three affiliates. We will have a very small Fox portfolio when we close on the divestitures from the Nexstar-Tribune merger.

You confirmed that Apollo approached you about buying Tegna is February and about merging Tegna with Cox in June. Has there been any further contacts between the two companies since June and, if so, what was discussed?

I would refer you to our statement.

 The Wall Street Journal, which broke the news about Apollo, also said that Standard Media has upped its stake in Tegna to 10%. Where do you think that is leading?

We don’t have a comment.

 What strategic moves are you making to take advantage of your scale?

We have made an organic investment in an industry-leading OTT business, Premion [which sells the inventory on third-party OTT sites]. So, every time we buy a station, we are adding a footprint and sales people to that business. We also have a daily syndication show that produces five live half-hours out of Denver each day called Daily Blast Live. It is growing very nicely year to year. We don’t have to play the syndication game because our footprint is large and there is zero incremental margin of cost to add that programming.

We also now have two new multicast networks, Justice and Quest. We had an interest in them, but we purchased them outright [earlier this year] because over-the-air is increasing. So, they’ve got a natural tail wind of over-the-air growth. The networks are really well targeted at women and men, respectively. Every time we pick up a station, we pick up distribution at no cost. So, there are multiple advantages to our content and sales initiatives and amortizing that across additional assets as we get them.

In 2014, you called for automating spot buying and selling to reduce the transactional cost of buying spot and so increase your share of national ad dollars. How about a status report on automation?

When I gave that speech, I certainly thought things would and should happen quicker than they have. But I think the turning point is finally coming.  Have you heard of the TIP Initiative?

Yes, sure.

We have been part of that. That has been going very well. It’s about getting everybody on open standards so that we are not worried about which platform is the technology platform that wins. I believe you are going to see, in the next 18 months, an increasing amount of business go through automated pipes and I think it really takes off in 2021.

Another scale play was your decision to drop Cox Reps and take your national spot business in-house. Did the advent of automation factor into that decision?

We are going to build a different type of in-house sales organization. The issue is, we want to have a kind of one-stop shopping for the client. The part of the business that has been in the reps’ hands has been more of the commoditize side of the business. That is the side of the business that really does need to get automated to take friction out of the system for the agencies because they are getting squeezed on margins by their clients. Buying stations continues to be the most expensive buy for them to execute and we need to fix that problem for them.

So, our view is by having a direct relationship with the client, we can move to automated more elegantly without negotiating who owns the relationship with that client through a third party. Then our goal is to deploy our talented sales force to do business development with those national clients with the planning and the creative side and embrace the commodity part of that business through automation. That is not a linear path. It is different by client. It is different by agency.

To execute this strategy, don’t you have to have offices in big markets where you don’t have stations now?

I do already have offices. Because of Premion, we have got people in New York and L.A. and Chicago. So that is another part of the industrial logic of this unified national sales organization. We have different products to sell. Premion is a very popular product not just with local clients, but also with national clients. So now rather than having different sales people call on the buyers, we have people who can sell both linear TV and OTT.

OK, by going in-house you won’t have to pay rep commissions anymore. But you are going to pay for use of the automation platform. How much is that going to cost?

That remains to be seen, but it will be a much lower fee than a rep fee because it is more efficient than labor to be honest with you.

Are we talking half a percent, 1%, 2%? What are we talking about here?

It remains to be seen. I don’t want to negotiate against myself in the press. It is early days.

The big growth engine of broadcasting is retransmission consent, but it is constantly being threatened by the MVPDs through legislation, regulations or ventures like Aereo and Locast. What should broadcasters really be worried about?

Since I started running Tegna, it seemed like there was some theoretical, existential threat every year to retransmission, so here is my take: The legal case against Locast is pretty sound, not that I am exactly a Harvard law graduate, and as for STELAR, yes, every five years the MVPDs do try to utilize that piece of legislation and mess with things, but I am very confident in the way that will come out. I am not concerned about that. (Editor’s Note: The so-called STELAR legislation now pending in Congress would extend for five years the right of satellite TV operators to import distant affiliate signals into markets where consumers cannot get local affiliates off air.)

In terms of retransmission growth, there are obviously head winds relative to cord cutting, but that has been offset quite a bit by the virtual MVPDs. The key is that there is still a big delta between the share of viewing that the Big Four affiliates have and the share of subscription revenues that they get. I think our share of viewing is still in the mid-30s [percent] and our share of subscription revenues is under 20%. So, the market is working and dollars are being reallocated appropriately from channels with a lot less viewership to the channels that have the most viewing, which are the Big Four affiliates.

What’s on your Washington wish list these days?

Not a lot actually. But that is where there is a lot of upside for the industry because we are still kind of boxed in, hopefully temporarily. Obviously, the failed transaction last year [Sinclair-Tribune] sort of set the industry back a little bit with the way the DOJ responded to their view of in-market ownership.

We really need two things. We need the FCC to relax the ownership rules. We are competing against an ecosystem with Google, Facebook and AT&T and we can’t own two stations in Duluth. I think the time for that insanity has long passed and the same with the national cap.

The other part is the DOJ. The DOJ has got to modernize its definition of the media marketplace [when it reviews the antitrust implications of mergers.] Ironically, they have gone backwards in the last couple of years in a very anachronistic way. Yet, there have been some hopeful signs. They held that hearing down in D.C. and, since then, there have been conversations about taking a hard look at that definition of the video marketplace to include the Silicon Valley players.

Where would Tegna like to see the national ownership cap set?

I support the NAB position: 78%

Let’s talk about the basic ad business. Auto has been pretty soft across the board in broadcasting.

Yeah, but I would actually reverse the headline. The story on auto is, it is just not that big a piece of our business anymore. For us, subscription revenues and political on a two-year basis will be more than 50% of our revenue going forward, not because of a decline in advertising, but because of a growth of the other two categories.

Auto has actually been on a pretty nice run for the last few years, but, yeah, I think it is soft this year, not terrible, but it is soft. And as I reported on our last earnings call, we are still up in advertising. Traditional core, which will don’t report any more, was up in the last quarter and that is despite auto being down.

Look at the services category, which we broadly define to include everything from pest control to air conditioning companies to dentists. That category alone was up more for us than auto was down in actual dollars.

Auto is interesting. I remember painfully the recession of ’09 when subscription was a small percentage of our revenues so we were totally advertising dependent. I think auto was more than 30% of our total business. So, it was a nightmare when the world fell apart. Today, it is about just over 10% or right in that area and it will be lower.

But you don’t see anything deeper in the numbers of auto manufacturers or dealers leaving television behind?

No, nobody does. Television is a part of every auto buy. The different agencies and different OEMs have different points of views in different years about how they are allocating their budgets, but television is still the centerpiece of any brand campaign.

Is there any chance that the wheels will fall off of political?

Not at all. Far from it. If you talk to the largest political buyers, they will tell you that you don’t win state races on Twitter. It is a zero-sum game. They either win or lose and broadcasting is at the center of any local or statewide race. I mean they move dollars around from other media, but broadcasting is core. We have got the largest reach and we have got voters. Our viewers are voters. And I think if anything is evidence to that, it is that 2018 was an all-time record.

Are you expecting another all-time record in 2020 when Trump will be in the game spending big?

We normally never say it, but I have already said it publicly: it will be a record. And we have a footprint that will attract money not just from the presidential campaigns. With Dispatch, we have increased our portfolio in Ohio. We will have two stations in Pennsylvania when we close on the Nexstar-Tribune deal, we will have three stations in Iowa and we have already got great stations in Florida, Arizona and Colorado.

Two of the three biggest senate races will be Arizona and Colorado and then we are in 87% of Texas, and Texas is going to be pretty interesting to watch. Whether it will be in play for the presidential campaign next year remains to be seen, but as you have seen in the last few weeks, a number of Republican House members have resigned. So, you know, in ’18, the money in the House races was quite amazing. So, we have got quite a tremendous footprint already and, with our acquisitions, we have intentionally increased the size and quality of our political footprint.

How about ATSC 3.0? We had another big press conference at NAB in April, but I haven’t seen a whole lot of progress since. What’s happening?

I am pretty optimistic about it. Actually, I am more optimistic about it now than I was three years ago. Look, when I was told five years ago that this was going to be a voluntary transition, I was actually really pessimistic. I didn’t say that publicly, but I was.

But I think we are now in the early stages, but we are on our way. There are good healthy conversations about transitioning markets. The stations that are being repacked are the ones that will line up the fastest. There is this lighthouse concept and I have been having some meetings around that myself. It is not going to be easy, but I think there is a pretty good spirit of cooperation to figure it out. The focus now is really on the top 30. The first thing to do obviously is to get the transition done and then the business models follow.

Is it important for CBS and ABC to get declare their support for ATSC 3.0?

Yes. It is important for all the major players in the ecosystem to participate.