Mining Digital Spectrum’s Revenue Potential

In a recent “Jessell at Large” commentary, TVNewsCheck’s Harry Jessell outlined the revenue potential of digital spectrum, noting that “multicasting is a growing component of many TV stations’ top lines” and can represent a “fourth leg” in a station’s business model.

I think Nexstar President-CEO Perry Sook would be among the first to agree with Jessell’s assessment. In an interview appearing in the current edition of MFM’s The Financial Manager (TFM) magazine, Sook describes the digital spectrum as “mineral rights” and believes that most TV stations can be doing more to optimize the value of their digital assets.

However, Sook is not limiting his mining of that spectrum to multicasting. “I think the best use of our spectrum would likely be some sort of data delivery,” Sook told TFM Editor Janet Stilson, who has followed the media industry as a journalist and analyst for a number of years.

“When you think of how television uses the spectrum when the Super Bowl is on, and there’s a lot of action on the screen and rich video, the pipe is virtually full. But when running a talk show, the pipe is less than half full. So that would lend itself to some sort of packet-data delivery. We’re point-to-multipoint, wireless — all the things that people want,” Sook explained.

He went on to say that he believes there could be opportunities to lease broadcast spectrum to the wireless companies, whose networks are bearing an increasing burden of data and video delivery; “And I would rather that be a market-based solution than a government mandated solution, or government-sponsored solution,” he noted.

This isn’t a far-fetched idea. As Sook reminded our readers: “During the transition from analog to digital we leased portions of our spectrum in a couple of our markets to Qualcomm for its MediaFLO venture, and that generated several million dollars to our company. It was a private-market transaction that both parties agreed to.”

When it comes to the revenue potential for mobile digital video, he is less enthusiastic. “My personal view is that mobile video is video on demand, and we already have the ability to offer that through our existing websites and mobile apps. I’m not sure I see the potential in broadcasting live streaming to the handset. I know others in our industry have different views on that.”

While Sook’s interview was several months before the latest rounds of retransmission negotiations between broadcasters and cable MSOs/DBS providers, there’s no doubt about where he stands with respect to a station’s most valuable digital asset.

Nexstar was among the first broadcasters to require cash payments in return for providing retransmission consent. Sook expects the company’s retransmission consent revenue over the next five years to increase by 20% annually. It accounted for $2.4 million in 2012 and is projected at $3 million this year.

“We think we’re at the middle innings of the ballgame, in terms of what retransmission consent will be worth to local TV stations,” Sook said.

In fact, he sees the regional sports networks that hold the licenses to deliver ballgames as “the most direct comparable” for valuing a station’s carriage, observing: “They have exclusive local content, and we have exclusive local content. They carry the game of the week; we carry the content that the national networks provide. And regional sports network ratings are a fraction of what we provide every day at our local TV station.”

Sook, who noted that a regional sports network generates between $2.50 and $3.50 per subscriber, per month, views that type of revenue as “a reasonable, intermediate goal” for stations. “Local television stations, in aggregate, provide 35% of the viewing in MVPD [multichannel video programming distributor] households, yet last year they captured about 8% of the distribution revenue.”

“I’m not sure that we’ll ever get to a one-to-one [ratio], because we don’t give two minutes an hour to the local cable operators like ESPN or USA. But will we get to 25% of revenue for 35% of the viewing? I think that’s possible. That would be almost a tripling of distribution revenues,” he added.

Sook also shared the things that keep him up at night:

“Things that I can’t control, like consumer credit, geo-political events, meltdowns in financial markets — those things affect television advertising. Big-ticket items like cars and furniture and appliances and department stores — those transactions generally happen with credit. That’s what made the Recession of ’08 so severe.”

He does feel fairly confident in the economy’s stability through 2017 or 2018 “as long as consumer credit is available, which drives consumer purchases and ultimately advertising.”  

Perry Sook’s vision of how Nexstar will look in 10 years may not be very different from that of most station groups:

“If you go back to our business at its core, we produce local content. We have a collection of assets known as broadcasting solutions. So I think that broadcast will always be a part of our name and a part of our core.

“If we’re smart, we will use that trusted brand and 24/7 megaphone to leverage our investment in people and infrastructure into other businesses that serve the local markets. We are at our heart a local service business.”

The full interview with Sook is available in the digital version of the July-August issue of TFM on MFM’s website. I encourage you to give it a read. It contains a number of additional and interesting insights about the television broadcasting business and the outlook for Nexstar.

I suspect that there may be some readers and others who will disagree with the comparison of broadcast licenses as mineral rights that other industry groups pay large sums to obtain. Whether or not you like the analogy, there’s no arguing that broadcast license rights are among the most regulated in this country. I will also say that there are few, if any, other regulated entities that exercise their rights as responsibly as local broadcasters. Consider, for example, the many times stations preempt revenue-generating programming to provide life-saving information to their viewers.

I also suspect that the things keeping Perry Sook up at night are also on the minds of many in the industry’s broadcast and other media groups. That’s one reason MFM is hosting its annual Media Outlook seminar. To cover all the topics we’ve identified we are making it a full-day event for the first time this year. “Media Outlook 2014” is scheduled for Thursday, Sept. 12, from 9 a.m. to 5 p.m. at Hearst Tower (300 West 57th Street, near Columbus Circle) in Manhattan. John Drain, SVP, finance of Hearst Television is our host for this event at which attendees can earn up to 6.5 CPE (continuing professional education) credits.

This year’s co-chairs are William “Scott” Moody, CFO of Bonten Media, and Edward R. Nolan, CFO of Greater Media. They have assembled an exemplary lineup of experts to cover such critical topics as:

• The outlook for the U.S. economy
• Ad sales revenue projections
• Regulatory and HR issues such as the Affordable Care Act
• Digital content rights and royalty payments
• Merger and acquisition activities and financing
• Emerging technologies.

Confirmed presenters include Robert Podorefsky, managing director of G.E. Capital and adjunct professor, Brandeis University; Aron Minken, director with PricewaterhouseCoopers’ human resource services practice; Benjamin Conley, an attorney with Seyfarth Shaw LLP focusing on employee benefit plans; David Oxenford, partner at Wilkinson Barker Knauer LLP, who represents broadcasting and digital media companies in connection with regulatory, transactional and intellectual property issues; Robert Driscoll, partner at Davis Wright Tremaine LLP; Deb Squire, VP-corporate controller, Bonten Media; William Drewry, managing director, global media group at RBC Capital Markets; Lee Brown, global head of brand partnerships at Tumblr (now part of Yahoo); and Ken Bronfin, senior managing director, Hearst Ventures.

Media Outlook 2014 will also feature an Ad Sales Leadership Outlook panel moderated by Janet Stilson. Confirmed panelists include Erica Farber, president-CEO of the Radio  Advertising Bureau; Kerry Dyer, publisher-chief advertising officer at U.S. News/Daily News America; and Chris Jordan, EVP of Continental Television sales for Katz Television Group. Speaker updates and more information may be found on MFM’s website.

We hope you can join us for this event, which is recognized by MFM members and others as a highly valuable tool for their budgeting and other financial planning activities. Not only will it help to allay some of the fears that may be keeping you up at night; it will also provide valuable insights for effectively and responsibly mining the mineral resources that have been entrusted to you.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.