Broadcasters' historical reliance on the automobile and retail industry for 35% of total advertising revenues is now haunting. "Five years ago, 80% of the national ad dollars in the auto business were spent on local TV, and local car dealer dollars were shifting from newspapers. Now, the category has lost at least 20% of its business and is increasingly shifting its spend to online," Miller said.
Retransmission fees paid by cable and satellite providers drop straight to the bottom line, and could offset about half of lost local TV ad revenues. They could carry many broadcasters through these difficult economic times. Proactive broadcasters such as Nexstar Broadcasting President and CEO Perry Sook have set the bar high by setting a goal for 20% of total revenues coming from non-advertising-related sources to offset lost ad revenues. The company expects its $18 million in retransmission revenues in 2007 to grow by double digits this year and in 2009. Kagan Media has forecast that broadcast retransmission fees can collectively top $1 billion by 2010.
Sook and others are also breathing new life into weaker stand-alone and duopoly local stations with cooperative marketing, service and sales agreements. Others, such as Gray Broadcasting and Entravision, are using cable systems to break even on virtual stations. But even the major station group owners that control the leading broadcast networks (NBC, Fox, CBS and ABC) are selling their owned TV stations in all but the largest markets.
TV station valuations plummeting to single digits continue to attract some private equity and other financial buyers to the fold. While there will continue to be some bailouts and even some collapses, stations are generally in control of their destiny. "The wheat and the chaff will be separated violently in the next five years," Miller said.
Stations must rely less on their diluted ties to broadcast networks (whose programming generated about 30% of related ad revenues) and more on their deep-rooted ties to local community and news directly tied to 35% or so of their budgets. Any station that hung its bets on NBC's stellar Olympics ratings during the past two weeks only got a pop that may not carry over to the network's prime-time season performance, while failing to play its Games rights more aggressively online--which would have benefitted NBC and stations in the long term. But not even milking their local news resources and strengths are guaranteed paths to success at a time when unlikely powerful players from Google to Cablevision are aggregating local news.
While the advent of digital multichannel 24-hour local news and sports sounds promising, such parallel programming efforts may not generate much money during a protracted economic slump. On a broader scale, it's all about establishing yourself as the authoritative source for quality, detailed micro-local information on TV, the Web, cable, radio and mobile. Other diminishing local media, such as newspapers and radio, will need to join forces with TV brethren rather than waiting for antiquated rules to be rescinded by the FCC. In an exploding video broadband marketplace, "local is the new gold mine for TV stations," Miller said.
The most efficient new business models could be embedding local TV signals on cell phones for pennies a month with the hope of unearthing a $4 billion to $6 billion business. But it must reach beyond predictable TV simulcasts to more distinctive interactive ad-supported local information, as well as the marketing of local goods and services to which consumers can immediately respond.
While it costs stations millions to convert their infrastructure to digital, they will fundamentally benefit by having their power costs reduced by about half, Miller said. Indeed, well-managed stations' repositioning to capture new digital revenues have attracted increased support from private equity and private buyers (such as Sam Zell), although none appear to have a magic potion for what ails local TV. No matter how deep the cost cuts, how ravaging the headcount reductions, local TV broadcast stock prices and valuations continue to plummet. An index of eight of the largest TV station owners is down nearly 40% so far this year, with a collective market cap of just $4.2 billion (45% of which is comprised by Hearst-Argyle TV), according to Bernstein Research.
For the first time ever, TV station owners cannot say with complete certainty where shifting and emerging revenues streams will fall in the future, making investments and growth tentative. The only answer is for "free" local TV to charge someone, somewhere for the ad-supported distinguishing micro-local content they produce and the network or syndicated programming they still carry. Under the traditional TV model, stations have been lucky to see 22 cents of every $1.04 generated from network programming. The TV networks get 81 cents of that in broadcast ad revenues, in addition to all of the DVD sales, online downloading and online streaming revenues related to that same programming, Bernstein says.
The best-case scenario and new business model for stations forging digital monetization, or what Miller calls "digicasting," looks like this: 10% of revenues will be generated from retransmission fees, 5% to 10% will be generated from the Internet, 2% to 4% will be generated from mobile, and 7% to 12% will continue to come from even-year political spending. That means pure TV advertising could be pared back to as much as 64%--or less than two-thirds--of stations' overall income. Put another way, 24% to 36% of local station revenues could emanate from non-traditional TV ad revenues by 2012 that are completely developed and controlled by station owners--that is, if local TV station owners choose to forge that path. They should have started yesterday. Editor's Note: This is the second in an ongoing series of columns exploring the issues, challenges and opportunities confronting local TV broadcasters over the next 18 months.