I’m conflicted over Sinclair CEO David Smith’s proposal to turn local D.C.’s NewsChannel 8 acquired in the Allbritton deal into a national cable news channel fueled by local stations. The cynical half of me says that Smith cooked up the idea of a national network to distract investors from the fact that he paid an unusually high, above-average multiple. The other half says let's wait and see. Smith sees value where others don't, and there may be more behind his strategy that he was letting on this week.
Smith’s Puzzling Cable Net Plan Worth A Look
It came as little surprise that Sinclair won Allbritton Communications this week. From the day last May when Allbritton hung out the for-sale sign, it was seen as the likely new owner.
It’s been the most aggressive bidder for just about every station that has come on the market over the past couple of years and it’s been the high bidder for most. Plus, Allbritton’s flagship WJLA Washington makes Sinclair a Top 10 market operator and it’s right down the road from Sinclair’s Baltimore HQ and Fox affiliate WBFF.
But what I wasn’t prepared for was the strategic spin that Sinclair CEO David Smith put on the deal. It’s not just WJLA and the other six small-market ABC affiliates that he coveted, but the opportunity to launch a cable news network to compete with CNN, Fox News Channel and MSNBC.
In the press release, in a conference call with securities analysts and in a phone interview with me and TVNewsCheck reporter Price Colman, Smith said his plan is to transform Allbritton’s regional cable news operation NewsChannel 8 into a national network with a mix of local and national news within the next couple of years.
Like most outsiders, I saw the sleepy news channel as a throw-in on the deal. In the conference call, Smith called it “the most exciting take away from this transaction.”
What would distinguish the network from CNN, Fox News Channel and the others is the “customized, local presence,” he said.
As Smith envisions it, the “hybrid” network would rely on local stations for that presence — Sinclair stations in the 71 markets where it produces news and stations belonging to other groups in other markets — and for extending the reach to the entire country.
The risk of the venture is “very, very, very low,” he told the analysts. The capital cost is “essentially immaterial.”
And the upside is great, he said. “We’re very confident that, over time, we’re going to build a local/national news audience that’s going to compete directly with every other cable news channel, and I don’t have any doubt that we’re going to get paid for it.”
How much? Figuring that the new network would draw at least as many viewers as CNN, Smith said it should be able to command the same programming fee from cable operators — 57 cents per sub per month. At that rate, he said, the network would yield $300 million year in revenue, not counting advertising revenue or programming fees from outside the Sinclair footprint.
Well, we certainly have to give Smith points for boldness, but the whole enterprise seems half-baked.
He admitted to Colman and me that he is unfamiliar with the NewsChannel 8 operation, that he hasn’t given much thought to the balance of local and national news on the network or to any supplemental programming and that he had not spoken to other broadcasters about the venture — the broadcasters he will need to boost coverage from 38% of the country (Sinclair’s current footprint) to 100%.
And his basic argument that he shared with us and the analysts for why viewers might turn from CNN and Fox News to the Sinclair news network doesn’t cut it.
The argument is that viewership of TV stations blows away the local viewership of cable news networks. He cited the ratings of his Fox affiliate in Columbus, Ohio, WTTE. According to Smith, viewership in the 25-54 demo for the paid programming that WTTE runs at 5:30 a.m. is three times greater than what Bill O’Reilly pulls on the Fox News in prime time in the market and nine times the almost non-existent audience on CNN in prime.
Smith couldn’t help tweaking CNN on the conference call. “I’m sure we’ve all heard of Wolf Blitzer, 4 to 7 in the afternoon on CNN, right? It is not measurable, so I’m not sure what’s going on in his Situation Room, but he’s got a real situation there.”
So, I get how viewers in Columbus viewers prefer their local stations over any cable news network or virtually any other single cable network at most times — the programming is generally better, particularly in daytime — but I don’t see how that translates to greater viewership on an unproven cable network, even if it has a tie to a local station.
If a viewer in Columbus wants local news, he can go to his favorite TV stations. If he wants international, national or business news, he can go to any of any of several existing cable networks, including such solid, second-tier players as Bloomberg Television, CNBC, Fox Business Network and the soon-to-launched Al Jazeera America.
I don’t see Smith making the big investment required to compete in international, and business news and he said as much. As Smith anticipates, TV stations can supply much of the national news — local stories of national interest — but they are already doing that for the major cable networks. CNN’s news-sharing partnership with stations goes back 30 years.
So, the only value-add I see in a Sinclair network is local news at odd times of days when it’s not usually being broadcast — overnight, late morning, early afternoon and the first two hours of prime.
Hardly the stuff that he needs if he’s going to persuade a cable operator to ante up a nickel a sub, let alone 57 cents. Maybe Smith thinks that with enough size — Sinclair is now the largest TV group by most measures — he can extract the payments in retrans negotiations.
The cynical half of me says that Smith cooked up the idea of a national network to distract investors from the fact that he paid an unusually high, above-average multiple — 8.7X — for Allbritton, which, he told us, was inflated by three rounds of bidding.
If that was his aim, he may have succeeded. Right after the deal was announced on Monday, Wells Fargo analyst Marci Ryvicker issued a memo to investors saying that the news channel plan has “significant value” and brings the effective buyer’s multiple for Allbritton to less than 3X just as Smith said a day later on the Tuesday conference call.
The other half of me — the half that wants broadcasters to be innovative and daring — says let’s wait and see. Smith sees value where others don’t, and there may be more behind his strategy than he was letting on this week.
Maybe, just maybe, Smith can make a go of it. To do so, he will need the cooperation and support of his fellow broadcasters, whom he hasn’t spent much time wooing or consorting with over the years.
If he comes knocking, I say, hear him out.