Q&A WITH ROBERT PRATHER

GRAY STRATEGY IS AS CLEAR AS BLACK ON WHITE

Gray Television president says the group's growth will come from boosting local revenue and exploiting digital and online opportunities.

Like other TV station groups, Gray Television would rather not see any more years like 2005. National spot advertising declined, while political and Olympic advertising did their biennial disappearing acts. But nothing in the year diminished Gray’s enthusiasm for the station business. In fact, since last November, it has increased its bet on broadcasting, acquiring WSAZ Charleston-Huntington, W. Va. (DMA No. 64); WNDU South Bend, Ind. (DMA No. 87); and WSWG Albany, Ga. (DMA No. 147).

Publicly traded Gray Television (NYSE:GTN) now operates 36 stations in 30 markets with a healthy diversity of network affiliations (17 CBS, 10 NBC, 8 ABC and one Fox). Its strategy of operating stations in state capitals and college towns seems to be a smart one. It claims the top station in 24 of its markets.

In an interview with TVNewsCheck last week, Gray President/COO Bob Prather says the pure-play station group will prosper in the coming years by exploiting digital multicasting, growing the online business, increasing local advertising and maybe even picking up some VOD and retransmission consent dollars. And, he says, the group might not be able to resist another station, if it’s the right one in the right market.

What’s the upside for broadcasting these days?

Our local business is growing good right now. It’s going to continue to be good. We’ve got to take advantage of these multicasting opportunities that we’ve got. Most of the towns we are in are growing faster than the national average so we have some natural growth in the towns that we are in.

That’s nice for Gray, but what about broadcasting in general.

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Here again, I’m not pessimistic at all. I just think we are going to have a new product when full digital comes in, and it’s incumbent on us to figure out how to make it work. It’s going to be a better product for the viewers and the advertisers.

 I wish [the switch to digital] were tomorrow, frankly. I think the NAB made a horrible mistake fighting on behalf of these little guys who didn’t want to spend the money for digital. The NAB danced to that tune for a long time and fought it to the detriment of the whole industry.

You suggest that it’s the growth of local that is driving your business. What’s the story with national spot? You reported that it was down 2% in 2005.

I don’t think it’s going away. I just don’t see it growing much, if any, in the years ahead. I think we will maintain it. Right now, local is 71% of our revenue. My goal is to get to 75% or higher. I would love to get 75% without national dropping any. I would just like local to pick up that much.

There’s been a lot of concern about national auto advertising. Is that money coming back or not?

Yes and no. It was weak. We are seeing it pick up in a couple of markets. Some of it is still weak. It’s funny, it seems to jump all over the board. They seem to be real focused on doing things in individual markets. For example, they will, all of the sudden, pour money for pickups in Texas and some markets in the South. And then the next thing you know they pull out of there and they’ve got big ads going in the Midwest. Right now, our Midwest stations all seem to be doing real good, while our southeastern stations seem to be behind on the national stuff. That’s the good news of being diversified all over the country.

So far, your DTV play has been to use your digital channels as affiliates of second networks. I believe you now have 11 digital UPN affiliates and two digital Fox affiliates.

And all of them are profitable and we couldn’t be happier with them.

What’s going to happen when UPN goes dark in September?

Most of them will convert over to CW. There are a few where we probably will do My Network. Overall, we have the opportunity to pick the one we like the best, frankly. I think we will be in good shape.

It sounds like a nice business—operating two network affiliates from one transmitter.

Right. Sure. It’s a duopoly without having to go out and pay for them. Most of the duopolies I’ve seen have been priced way higher than they should have been.

As you look at your revenue pie, how much of it come from your Web sites today and how much of it is going to come from there in five years?

I think right now we are looking at about two-plus percent. I think it is going to grow into the 20 percent-plus range over the next five years. I really think the Internet is taking money from newspapers and radio. I don’t thing people are taking money out of TV campaigns as much, especially on a local level.

Other network affiliates I’ve spoken to think that the networks should make them partners in the VOD distribution of primetime TV shows over the Internet or cable?

Naturally we think that. The networks don’t necessarily agree with that right now. Here again, we have to prove to them that we can be valuable. Ideally, when these contracts come up again, we’ve got to negotiate better for that. And we’ve got to figure out how to do our own news on VOD.

So, you fully expect to be a partner with the networks on VOD?

I think with CBS we have a better chance than anywhere else, and that’s where we have the largest number of affiliates.

Would you say that CBS is the most affiliate-friendly of the networks?

They seem to be. They are to us anyway.

You’ve also indicated that you are going to be following CBS’s lead on retransmission consent.

They give every indication that they are going to push hard to get paid by these cable guys. They don’t have a sister cable operation that they have to feed like the other networks do so they’ve got more incentive to make the cable guys pay. They are the ones who have to take the lead.

You saw that they just did a deal with Verizon.

Yeah, these phone deals could be great for all of us. The phone companies are going to end up with a better delivery system than cable and they have told us clearly that they are willing to pay for the programming.

Are you in the market for additional TV stations?

I think we have our plate full. We want to pay down our debt over the next year or so. But we are always in the market if we find something that meets our criteria. The last two we got just fit us to a T.

You’re talking about South Bend and Huntington. You’ve said that the station in Huntington [WSAZ] is a great station, a well managed station, and I know you paid a big multiple for it. So, where’s the upside?

For one thing, it’s growing good. Number two, we’ve got three other stations that surround it. We’ve got Parkersburg, W. Va.; Lexington, Ky.; and Hazard Ky., and we are already working on some things that we can do together to save money—newsgathering, bookkeeping, accounting, back-office type stuff that we can get some benefits out of quite quickly.

What about WNDU in South Bend, which you bought from Notre Dame. At the Bear Stearns conference earlier this month you suggested that the station was run like a university and that you would be cutting costs.

We have a big upside there. Its margin is a good bit lower than what we are use to. Its manager retired. We knew that going in. Now, we’ve got an aggressive manager in there, Matt Jaquint. He was the general sales manager in Huntington as a matter of fact. We always try to promote from within.

What about this Albany, Ga., station?

That was a very creative deal. We bought a small UPN that wasn’t doing well and we got a CBS affiliation that goes on the air April 1 and we are going to run it from our Tallahassee station (WCTV). We think we’ve got a real gem.

I hear a lot of broadcasters talk about increasing local programming, but I’m not sure they are serious about it.

We are. That’s our big focus. We get 45% of our revenue from our local newscasts. We only get 19% of revenue from primetime. We are actually trying to expand our local news coverage and other kinds of local programming. We are trying to add more minutes in the morning and ideally late afternoon. We are encouraging our managers to look at doing more news at 4:30 and five o’clock in the afternoon.

You claim that Gray pays less for its syndicated programming than its rivals. How’s that?

We’ve got 24 No. 1 stations. The syndicators keep those barter minutes and they sell them nationally. They are willing to take a lot less cash from us because their barter minutes are so much more valuable on our stations For example, in Tallahassee, we’ve got 60% of the market. The next competitor has 12%. They just couldn’t pay enough cash to get King World away from us…. We’ve got Oprah in 18 markets and it’s basically locked in to 2012 and there is very little increase in that time.

What are you expecting to happen in Washington that will affect your business?

I don’t think anything is happening at all. They are so shell-shocked from everything else that is going on that nobody in Congress even wants to think about broadcasting. The commission is still deadlocked at two and two. I think they are just marching in place and will be until Bush is out of office probably.


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