TV's New Valuation Mantra: Local, Local Local

Television stations are in the same quandary as housing and other industries whose core assets are undergoing excruciating revaluation due to tumultuous economic, technological and competitive change.

The result: new core comps and metrics will become part of the equation; fundamental currency such as advertising will be redefined as asset values are reset. The future asset value of television stations will have as much to do with new digital revenues as with advertising. It will be heavily influenced by the enterprising use of non-TV platforms, devices and alliances to better monetize local video content.

That means broadcasters should be moving swiftly now to adopt one-to-one narrowcasting (from one-to-many broadcasting) by building an interactive loop to facilitate personalized e-commerce and communications between local consumers and advertisers. It is a money machine that can reach far beyond the $1.6 billion in local TV Web revenues by 2010, or less than 10% of all local online revenues, according to Borrell Associates.



The great challenge and promise for local TV broadcasters is mastering the hyper-local sphere of core community and consumer interests--from education to government, according to Television Bureau of Advertising President Chris Rohrs. NBC and Nexstar are among the broadcasters that invest heavily in the online extension of their TV stations.

Developing virtual sub-channels for various community-based ethnic, entertainment, weather, traffic, school, political and other niches is a golden opportunity. Such non-core digital ventures could generate at least 15% of stations' total revenues by 2010 and 25% of total revenues within five years, he said. Station legacy structure and processes radically modified with digital interactivity can eventually reduce as much as 75% of overall costs, others estimate.

Such digital enhancements to station values are being embraced even as local broadcasters bemoan the decline of their longtime double-digit multiples to high single digits. The push is on to reinvent their business models, processes and structures before losing more local leverage to cable, Internet and other new competitors. Integrating super-niche interactive content and target advertising with personalized options, such as search and messaging, can reposition broadcasters that work with regional cable operators and telco services to create an on-demand infrastructure that Forrester Research calls "Personal TV." This addressable ROI business model, which will take more than three years to develop, would boost local TV broadcast revenues and values.

Craigslist demonstrates how effectively simple interactive applications can appeal to the most fundamental needs and interests of digital consumers. It brilliantly recast, and essentially hijacked, local newspapers' core classified business. A flood of Internet services are honing in on TV stations' core competencies of local news and advertising. Any diminution adversely impacts station revenues, cash flow and ultimately, valuations. Coupled with revenue losses from traditional ad categories, local TV stations are bracing for a perfect storm of financial mayhem in 2009.

"These are high-cash, high-margin businesses that will be challenged for growth from this point on," says Bernstein Research analyst Michael Nathanson. "I wonder how the third through fifth stations in a market will survive. It's more than digital; it is also DVRs, VOD and other disruption of traditional TV consumption."

Some industry experts say select broadcasters could begin to collapse in 2009 under the weight of a turbulent economy and cannibalization by alternative distribution platforms. The media conglomerates Nathanson tracks, which continue to own fewer numbers of television stations, can take the hit. Industry executives and analysts concede that some smaller television stations will likely be rolled into larger existing groups, sold to larger station groups, or rescued by private investors. Some won't make it at all.

"There are stations really pulling away from the pack and truly embracing a multiscreen world. They understand that original--not just repurposed--video is the killer app. It will be 35% of all local spending by 2012. You have to make it part of your value proposition now," said Gary Gannaway, president and CEO of WorldNow. "Too many stations are being pushed and pulled kicking and screaming into this space."

The good news is that such capabilities will certainly increase local TV station values. The bad news is that demand in most markets will only support a handful of portals.

For now, even the best-managed TV stations are confronted with amending, extending and meeting the requirements of their credit facilities and debt covenants in difficult times. The deteriorating local banking situation will deal a blow to mid-to-small market broadcasters, many of which are trying to unload stations.

Standard & Poor's notes that because sales are being constrained by deteriorating credit conditions, declining asset valuations and the inability to use low-trading stock as currency, TV station owners such as Tribune, Univision ION Media Networks, Gray Television, Freedom Communications, Nexstar Broadcasting and Barrington Broadcasting could face near-term debt servicing and liquidity issues.

Just months ago, private-equity firms financing the Clear Channel buyout were balking over its $5 billion in debt and $12 billion intangibles, and goodwill depressed its $18 billion in assets. In fact, Bernstein's Nathanson and Lehman Brothers analyst Anthony DiClemente cringed in reports earlier this year at the amount of private equity flowing into TV broadcasting, despite challenged cash flow and traditional return on investment.

For investment bankers caught in the sea change and broadcasters that are unwilling or unable to reinvent their business model, it's not expected, said Nathanson, "to end well."

Editor's Note: This is the fourth in an ongoing series of columns exploring the issues, challenges and opportunities confronting local TV broadcasters over the next 18 months.

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