Growing Bigger, Better The Goals At Gray

After representing Gray Television as its Washington communications attorney for years, Kevin Latek joined Gray Television in 2012 as its general counsel. But over the past three years, Latek has left the law behind and moved into a senior management role. Appointed SVP of business affairs in July 2013, Latek is now primarily responsible for implementing the company’s aggressive, but discriminating acquisition strategy and for managing the ever-challenging network relations.

Latek has also become the company’s unofficial spokesman. It is in that role that he spoke to TVNewsCheck Editor Harry A. Jessell about Gray’s acquisition and OTT plans, the outlook of retransmission consent and reverse comp, the incentive auction and more.

An edited transcript:

Gray just netted $176 million in a public stock offering. What are you going to do with all that money?

Our offering was designed primarily to give us dry powder to pursue acquisitions as they present themselves in the near to medium term.

You just made a deal to acquire WAGM Presque Isle, Maine, for $10.3 million. That doesn’t quite fit your profile, does it? I thought it was stations in state capitals or in big college towns.

We also announced in March the acquisition of the CBS and Fox stations in Twin Falls, Idaho [KMVT and KSVT, respectively, for $17.5 million]. I would not say that our profile is state capitals and college towns to the exclusion of all else. What we have really been focused on is trying to find high-quality TV stations that really serve as institutions in their market, that are typically No. 1 or No. 2 in news. When we find those opportunities, we try very hard to find a deal that works for all parties.

So while our preference is stations in college towns and state capitals, there’s only so many of those in the country. But there are stations like WAGM and KMVT in Twin Falls that are strong stations that are exceptionally focused on their communities. We think they really do fit the profile of Gray stations in our other 43 markets.

You say you have the No. 1 news station in 31 of your 44 markets and the No. 1 or No. 2 in 41 of the 44. Do you have deals for other such stations in the pipeline.

Yes. We have a lot of conversations going on with folks, enough to keep me busy full-time and then some. There is nothing that is imminent, but there is a lot of very exciting opportunities.

You just opened a Washington, D.C., bureau for your stations. How big an investment is that and why did you feel it was important to make it?

We have made — and are continuing to make — a significant investment in the D.C. bureau, which is currently the only newsroom on Capitol Hill for a TV company that does not also own a broadcast network or daily newspapers. While the cost is significant, the return is greater because it allows us to provide more and better content to our local markets that otherwise is simply not available.  

For example, the bureau produced a number of pieces involving local plaintiffs, lawyers and affected parties who were in D.C. last week for the Supreme Court’s hearing on same-sex marriage. Those localized pieces were aired on the seven stations we own in Kentucky, Ohio, Michigan and Tennessee.

Just a few days before that, our D.C. bureau was instrumental in helping our Sioux Falls and Madison stations produce the one-on-one interviews of President Obama to which the White House had invited them and just three other stations in the country. Quite simply, having reporters and technology in D.C. allows us to better serve our mid-size and smaller markets, which in the end produce better ratings and better revenues.

Your other recent news is that Gray launched CBS All Access in five markets: Colorado Springs, Waco, Charlottesville, Dothan and Sherman.  Why those particular markets?

We have been working with Syncbak and CBS for quite some time in order to launch stations quickly. These just happen to be the first five stations that got through the various quality assurance testing that CBS, Syncbak and Gray put them through. We are expecting we will have another roughly half dozen stations launched in the coming days and others will be launching in the coming weeks.

You seem to be pretty enthusiastic about this.

We are enthusiastic about trying to reach the consumers via their digital devices. We also launched, if you recall, mobile DTV at four stations a number of years ago. Those experiments were not successful so then we rolled out Syncbak in most of our stations a couple years ago. The technology worked great, but we didn’t have the important network programming so the launches were not as successful as we wanted.

We have been talking with all the networks about trying to get into the digital space and streaming our full signal. In early March, we announced we had reached a deal with NBC to launch on its TV Everywhere platform.

We’re searching for the right model, the right way to get to the consumers with our local news and our local programming and our local commercials. We honestly don’t know what the right answer is, but we are willing to keep experimenting.

Do you think there’s real money-making potential here? As I understand, with CBS All Access you get no more than 79 cents a sub a month and you have to pay fees to Syncbak for the technology.

What I would say is that Gray is in this for the long haul. I don’t know that it’s going to be a money maker in the near-term.  I don’t think it’s going to be a tax on our finances in the near-term, either.  With all of these efforts, it’s a matter of us attempting to try something new. Hopefully if we fail, we fail quickly and we fail cheaply. If we succeed, then we will figure that out pretty quickly as well. 

I had forgotten that you had gone ahead with a streaming service with Syncbak on your own.

We launched all of our TV stations two years ago on Syncbak. When we launched, we were only clearing our local content and some of the syndicated content. We found that the technology worked really, really well, but the absence of the network programming made the product not entirely attractive to our consumers. CBS has now delivered that.

We have also been able to secure additional syndicated clearances including CBS syndicated content and so we really feel we have a product now in our CBS markets that should stick.

But, if I understand you, you have not been able to clear the copyright for all the syndicated programming.

We’re clearing somewhere north of 80% of each TV station schedule. We have essentially all the network content, we have essentially all of our local content and we have certainly the overwhelming majority of our syndicated content cleared at this point.

Sticking with OTT, are you interested in streaming your local signals on Sony PlayStation Vue and the other virtual cable services that are popping up? Is that something the networks will allow you to do?

We have not begun discussing over-the-top distribution with anybody. I think those conversations will probably start when we get more guidance from the networks in the coming months, but as of today we’re not talking with any of the OTT providers.

According to one of your presentations for analysts, Gray hung on to 70% of its retransmission consent in 2014 and passed along only 30% to the networks in the form of reverse comp. But that goes to 50/50 in 2016 and 2017. Any thoughts about where it goes after that?

I think that the overall compensation that broadcasters receive is going to continue to grow and it needs to grow. At this point most everyone has acknowledged that we are in a period of some disequilibrium in retrans fees. We are still nowhere near parity with our ratings or the value we deliver, and I think the retransmission fees will continue to march forward until we get to a point of some rational parity. 

The share that is paid to the networks is going to depend a lot on how fast the market moves and also any individuals negotiations with between affiliates and their networks. Reverse comp is just one of many terms to get negotiated by the parties. So it’s hard to sort of estimate at this point how we would resolve one particular point in the next network negotiation when we don’t know what some of the other deal points would be.

So as a general matter I can really only answer the gross number on retrans revenue, which I expect is going to continue to grow and grow at a significant rate.

What’s your read on retrans reform?  Cable and satellite got shut out last year. Is anything going to happen this year?

I don’t expect that this Congress is going to tackle too many thorny or controversial issues. They have truly important issues to keep them busy over the time between now and when the elections really ramp up.

What about the FCC? Couldn’t it make retrans more difficult for broadcasters by eliminating the network non-duplication and syndicated exclusivity rules or redefining what it means to negotiate retrans in good faith?

I don’t see any near-term cause for concern. If the FCC wants to give the retransmission regime a wholesale review top to bottom, I think they would need to consider the actions of the MVPDs in creating blackouts and mass hysteria and harm to the public interest that has pretty much been absent from the debate so far.

A truly bottoms-up wholesale review of retransmission will show that the system not only has worked really well, but it’s worked really well despite some pretty obvious and frankly unfair tactics by a small number of MVPDs with tremendous clout and resources.

You are well positioned for political advertising. On a pro forma  basis, you took in $118 million in political advertising in 2012.  I guess you’re looking to beat that in 2016, yes?

We expect we will beat that, but beyond that I don’t think we feel comfortable predicting where 2016 political revenue is going to come in. In Washington, I can’t find a consensus on what ’16 spending is going to be other than it’s going to be a lot more than 2012.

According to your disclosures, Gray gets about 5% of its revenue from digital. That’s typical for the industry, but it’s not particularly impressive.  How do you plan to increase that share?

Our digital revenue is, as you said, a fairly small share overall and we put a lot of resources into growing it. It seems to be rapidly evolving and we’re always both trying to stay ahead of the curve and catching up to quick changes. So it’s a difficult place for any broadcaster to excel.

That said, we’re sort of proud of the fact that our digital revenue is almost entirely organic. It comes from the station websites or station apps or and station verticals. We do not have any digital businesses outside of the broadcast business.

We put a lot of emphasis on growing digital because we can clearly see that that it is a area of growth, but we’re also mindful of the fact that it is only 5% of our revenue. We try to be careful not to neglect the source of the vast bulk of our revenue. which is our television station operations. So it’s a difficult balance. What we did achieve is our margins on our digital revenue is about 50%.

I saw that Gray’s capex spending was up 19% last year to $32 million. Where is all that money going?

We don’t believe that No. 1 TV stations can rest in their laurels and maintain their leadership without constantly investing in the latest technology — the latest weather systems, new vehicles and the best field news gathering equipment. That stuff is expensive.

We pay the same amount for an AT&T data plan for our iPads that the stations do in the largest markets. We pay the same amount for cameras and other gear that people do in very large markets. But we’re not in a position of being able to amortize those costs over a very large populations that a lot of the larger broadcasters have in a lot of their markets.

In your presentation for securities analysts, you say that you plan to seize the opportunities presented by the FCC incentive auction. What are those opportunities?

Gray does not own any redundant television stations. We don’t, as you know, have any JSAs, SSAs, LMAs or anything like that in any market. So we’re not in a position of having extra sticks that we could put into the auction.

We see other opportunities. We expect that in some of our markets, we will see our competitors exit the business entirely. As they do, they’re going to leave behind some network affiliations, potentially some very good talent, and other assets that we would like to be in a position to be able to pick up. 

So there’s nothing specific we have identified. It just is a general sense that there’s going to be some folks who leave the business and there’s going to be some very good assets that will need to find a home.

So you don’t anticipate selling any stations yourself?

We don’t see that the value of any station of ours in the auction exceeds the value of that station to us as a going concern.

Are you excited about ATSC 3.0?

I think it is it certainly has a lot of promise. It’s absolutely worth pursuing. We have not heard or seen a single reason that the industry should not proceed as quickly as it’s doing right now, which is fast and remarkable. I would not say that we have a business plan for  ATSC 3.0, but we would certainly welcome the change. 

We certainly think it makes the most sense to implement any technical standard change in conjunction with the auction and the repack. 

What do you think about Nielsen and its code reader solution for the diary markets?

We are currently under contract with Nielsen for most of our markets and we are looking very cautiously at the new program…. We’re looking at it, but we’re not enthusiastic.

I noticed in your revenue pie that your national advertising has slipped from 17% to 13% of total revenue over the past few years. Do you believe that programmatic buying can stop or reverse that slide?

We’re not expecting programmatic is going to have much impact one way or the other on national.  Frankly, we, like a lot of broadcasters, have been putting a lot more emphasis on local.  We have a lot more control over our local business. Our brands do exceedingly well and generally better than the national advertisers do and we see local as just really our strong point.  Half of our revenue comes from local advertising. National is still important, but it’s less relevant to us. 

So programmatic, we think, is marginally negative or marginally positive depending on how it rolls out. We’re keeping an eye on it, but it’s nothing that is particularly alarming or exciting for us at this point.