Local TV Ad Plunge: What Would Google Do?

Local TV broadcasters besieged by an advertising freefall and maneuvering the transition to digital have to be asking themselves: "What would Google do?"

It might not be a bad idea to wonder what the online giant--which is hotly pursuing broadcasters' unused wireless white spectrum--would do to fashion a digital salvation plan for local TV in what is shaping up to be the worst local TV advertising market in decades. It's far from over, and in the end could have a devastating impact on some TV station owners.

Local TV advertising appears virtually flat so far this year, before beeing bosted by the bulk of political advertising and the Olympics in the second half of 2008. The largest TV station owners--from CBS, ABC and Fox to Hearst, Gannett and Belo--generally delivered lower-than-expected second-quarter local ad revenues, which depressed overall earnings and resulted in more dismal outlooks.

Double-digit declines in the sales of leading U.S. automobile manufacturers, and a four-year high in unemployment reported Friday, suggest that things will get worse. The underlying currents of a credit crisis that reaches deep into the largest U.S. financial institutions and a plummeting housing market suggest that the first signs of a recovery could be more than a year away. 2009, which was expected to be a non-quadrennial challenge for local TV broadcasters, has all the makings of a revenue disaster.

Forecasted ad trends appear more optimistic than can be justified by key mid-year metrics and the weakness in top local TV advertising categories including automotive, telecommunications, restaurants, real estate and financial. For instance, the TVB expects total spot TV revenue to grow as much as 10% in 2008, followed by as much as a negative 4% decline in 2009. Industry analysts have steadily reduced their local ad TV revenue forecasts. BMO Capital Markets expects spot TV advertising to be up as much as 4.5% in 2008 on political buys, but down 9% in 2009.

No matter how bad the news is about other media sectors, the latest quarterly earnings suggest that local TV broadcasting is a time bomb waiting to go off. Local TV owners, often connected to even more strained newspaper assets, do not have the buffer of a larger corporate base and diversified assets of their affiliated networks: Disney-owned ABC, GE-owned NBC, News Corp.-owned Fox, and CBS. These conglomerates are selling off all but their largest market-owned TV stations to reduce their own exposure to local broadcasting pressures.

Local TV stations could see a 7% to 9% decline in ad revenues in 2009, based largely on the instability of the auto industry--which comprises 25% of their revenue base, according to Wachovia analyst Bishop Cheen. Even the best-positioned local TV broadcast groups cannot reposition themselves fast enough to generate more new digital revenues. For instance, Hearst-Argyle Television reported a 17% decline in net income on a 5.6% decline in second-quarter revenues based on weak local advertising at its 26 TV stations. In the same period, its retransmission consent revenues climbed 26% to $6.8 million and its net digital media revenues grew 13% to $5.7 million. Scripps' television group operating profit declined 22% on a 5% decline in revenues without the buffer of its recently spun-off lucrative cable networks.

The problems extend to even the biggest and best local TV station group owners (including Hearst, Belo, Gannett, and Scripps), which have been doing all the right things in extending the news and community service brands to the Web, offering local advertisers multi-platform buys and making digital carriage deals with cable operators. Second-quarter local television ad revenues declined mid- to high single digits at many of the leading stations' owners.

Google is among the Internet companies that has sought to provide solutions to--as well as capitalize on--the untapped digital potential of local TV stations. While Google's local TV Ad sales service also has been sluggish, the Internet giant has forged an ad-supported news search service on the backs of local TV stations and radios that eventually can generate $100 million in revenues.

Google's proposed unlicensed use of unused "white space" for universal Wi-Fi could indirectly advance local TV broadcaster and newspaper Web enterprises. But traditional media remains skeptical.

Although local TV stations generally are perceived as being ahead of the digital curve, struggling newspapers' Web sites attract faster-growing audiences (collectively up 12% in the second quarter) even as their related revenues are flat or declining. Local TV stations will represent about $1.2 billion and newspaper about $3.7 billion of the $13.1 billion in local online advertising spend in 2008, according to Borrell Associates.

Still, local TV broadcasters have options that require them to decisively and strategically change their mindset. Some will, and some won't. Some companies will wrestle with mounting financial strain. At least eight local TV broadcast-related companies have been identified by Standard & Poor's for liquidity pressures including Nexstar Broadcasting, Tribune Co., Univision Communications, Gray Television and Young Broadcasting. Pappsa Telecasting TV stations (including Fox, CBS and CW affiliates) filed for bankruptcy protection in May.

Potentially lucrative revenue-generating business opportunities include linking station resources and franchise brands with consumer electronics manufacturers (especially Apple, Intel and others planning in-home digital TV hubs), GPS operators, mobile telephone and personal data manager companies (from Apple iPhone to RIMM), and local retransmission deals with cable, telco and satellite operators. TV station owners can better leverage their position with Google, Yahoo and other Internet players seeking to capitalize on selling their available ad inventory. Wachovia reports that cable retransmission pacts have averaged 20 cents to 40 cents per broadband TV subscriber per month, per broadcast channel. Others speculate that rates are well over $1 per broadband subscriber for the most successful TV groups. SNL Kagan estimates that retransmission fees could collectively top $1 billion by 2010.

I will be devoting some of my future columns to analyzing these and other options, as well as overall digital conversion issues and challenges for local TV broadcasters. All of these options represent double-digit growth businesses and local TV branding opportunities. ABI Research forecasts that location-based mobile social networking will be a $3.3 billion within five years, in which community-anchored TV broadcasters have a vested interest. It is critical to leverage their local franchises and resources in such new business models as a counter to declining ad revenues, capital challenges, and the general inability to sell assets at reasonable multiples.

While they work diligently to adjust, TV broadcasters could find some support in unexpected places. Comcast, the largest cable operator, has been known to increase its agressive broadcast TV ad spend as much as double. Let's hear it for recession-proof media.

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