Advertising sales are soft, but lucrative new ad categories like sports gambling and cannabis products may emerge, and retransmission consent revenue will continue to grow at a healthy clip for the foreseeable future.
That was the consensus outlook for broadcasting of three top station group executives at TVNewsCheck’s TV2020 conference in New York last week.
The executives were Perry Sook, CEO of Nexstar Media Group, the nation’s largest group since closing on its merger with Tribune last month; Pat LaPlatney, co-CEO of Gray Television; and Patrick McCreery, president of the Meredith Local Media Group. TVNewsCheck Editor Harry A. Jessell moderated the discussion.
In part one of a two-part record of that discussion, the executives agreed that M&A activity is uncertain with Congress and the FCC is unlikely to loosen ownership restrictions any more than they have. They also concurred that the ability to target advertising and selling other third-party media may be ways to stem the slight erosion in broadcasting’s share of political advertising.
An edited transcript.
At the TVB Forward Conference last month, Marci Ryvicker [an analyst with Wolfe Research] talked about net retrans — that is, retransmission consent revenue minus the reverse comp payments you make to the networks. She figured that would grow at a compound annual rate of 5% a year for the next four years and then go flat. Is that the way you see it, Perry?
Sook: No. We see double-digit growth in the top line and in the contribution dollars. As an industry, we get maybe 18% of the [MVPD’s] distribution fees now with roughly 35% of it viewing so there is a big gap still to be closed until we are at parity.
LaPlatney: Perry’s second point is really important. We are not getting paid for audience right now. We are in 18% of the revenue pool and 35% of the audience. Those numbers are rough, so we think there is some runway there.
The other point that Ryvicker made is that if there was parity, the MVPDs would have to charge $28 a month per sub per month. She thought that was unattainable. What do you say to that?
LaPlatney: Well, we might not get there, but there are probably a fair number of networks out there right now that are getting paid that don’t have viewership commensurate with what they are getting paid.
Cable networks?
LaPlatney: Yes. So, if there were some way to kind of balance that out it would be a good thing.
Sook: I agree with that. We don’t give two minutes an hour to the local MVPDs to sell as WGN America does and all other basic cable networks do. The point is, revenue could almost double and we still wouldn’t be at parity.
Have we hit a plateau on station trading or are we going to see more happening over the next year?
Sook: It’s hard to say. In 2011 there were 36 companies in local television that had a national reach of 2% or greater. That number now is down to about a dozen. There are fewer companies left to buy perhaps.
M&A is not as easy as hitting a button and buying a stock. It takes social issues, a lot of diligence, a lot of dealing with regulatory concerns. I have just seen that movie twice in the last three years. It is complicated. So, do I know what is on the horizon? No.
Well, Patrick, do you anticipate more outside money coming in into the business? Do you see another big equity group like Apollo coming in and trying to make a play in broadcasting? [Editor’s note: Apollo’s acquisition of the Cox Media Group is awaiting regulatory approval.]
McCreery: We are not new and we are not sexy, but we are profitable. So, yes, I see outside money coming in because we spin off a lot of cash and I think that looks sexy to a bottom line. I am the only guy up here who has not bought anything recently and we would like to, but that becomes harder and harder in the space.
So you see yourself as a buyer now, not a seller?
McCreery: We are a buyer, yes. I did dress up in case I got any offers today. Is anybody buying? That is always the rumor.
Well you are sort of just the right size.
McCreery: We are perfect, are you kidding? Look, we would love to buy more stations. I was going to make a comment when you said we were the 13th largest broadcaster. I remember the days when we were 30th and we have not added anything and we have still gone up the list. Pretty amazing, right?
Mr. LaPlatney, any comment?
LaPlatney: I will give you a boring answer. What we have said publicly is that we are going to work on the integration of legacy Raycom and Gray and pay down debt and that is what we are going to do.
As you know, Pat [LaPlatney], it took a long while for the FCC to finally approve Gray’s duopoly of two Big Four network affiliates in Sioux Falls, S.D. It required a waiver of the local ownership rules. Does that waiver set a precedent that will allow the formation of other network affiliate duopolies?
LaPlatney: Well, it is going to be handled on a case-by-case basis at the FCC. There are a number of markets out there where it makes sense, particularly in smaller markets. I hope that the FCC, as they have done with Sioux Falls, will look at those and evaluate them on their merits. There are a number of them out there that would make sense, but I can’t speak for the commission.
Perry, do you see the Sioux Falls approval as precedent to double up with affiliates in some of your markets?
Sook: The simple answer is no. I mean [Sioux Falls] was so highly conditioned and so specifically written that I do not see a broad endorsement or approval of creating more duopolies or combinations of top four stations.
What about the national ownership cap? Perry, this is something you have said you would like to modify in the law to allow groups to reach 100% of TV homes because you are at 63% and have gone as far as the current rules allow. Seriously, do you think Congress or the FCC will relax the rules anymore than they have?
Sook: Seriously, probably not. I mean we are even willing to compromise at codifying the current statute [which allows some groups to go as high as 78%.] That is kind of maintaining the status quo.
It is in the national interest for us to be able to reach a 100% of the country. It has implications on our democracy. And so the way I usually start the conversation on the Hill is what if only 39% of the country could get on Google this morning. Do you think you would hear from constituents? Well, I would say it is almost a First Amendment issue that we are being legislatively and regulatorily kept small. We will continue to press the point, but we are about to enter an election year so progress pretty much grinds to a halt.
If you believe Kantar, broadcasting is anticipating $3.2 billion in political advertising next year. But if you look at the numbers closely it also shows that broadcasting’s share of all the political dollars will fall a bit from 66% to 57%. Are you taking any steps to stem that erosion?
McCreery: We have, yes. We made an acquisition as part of the Time Inc. deal for a digital company, and that gives us the ability to compete outside of our local markets for political dollars. Now we are taking money from a Kentucky race and a Texas race and I don’t own TV stations there. So, we have been able to expand our political footprint from an advertising perspective.
How do you do that?
McCreery: We have local sellers in 50 markets and I only own TV stations in 12. We have digital network opportunities and we are targeting those resources now towards political advertising.
The other thing is the number one category in most local markets is direct mail. That is a place where our company has 42 million subscribers and I can put direct mail in people’s mailboxes for politicians. So that is a space that we are expanding into, not on the broadcast side, but on the mail side.
Anyone else on political and things you can do to stem the erosion or just to grow the space?
LaPlatney: I think political falls into the same general group as all other major categories. If we can target better, we will be able to grow our share of a very high share right now. That is where we need to focus our energy.
The greater portion of advertising is everything else: the non-political, so-called core. That is not growing, and auto has been soft for most companies. What is the good news in core going forward?
Sook: What usually drives growth in television advertising or spot television is the emergence of a new category, and we haven’t really had that. Some think it might be sports betting. It is early days there. The fastest growing category for us right now is attorneys and it is now our number two category behind automotive, supplanting QSR [quick service restaurants].
Automotive dealers are less profitable today than they were three years ago. So they necessarily have less money to spend on everything including advertising. We are a part of that, a systemic change in automotive. Do I think it is going to drop to 15% of our revenue from 28% of our revenue like it did in ’08 and ’09 when we had no credit to finance or lease vehicles? No. But might it lose a share point or two of our core pie? That is entirely possible.
We look out on the horizon for what could be the new category. A lot of these digital companies are using television for reach extension. A lot of that has been on the networks, but there are some folks buying time locally because they realize we are a reach medium. In a bad quarter, we are down 1% or 2% in core. In a good quarter, we are up 1% or 2% in core. That is the business.
When I started Nexstar in ’96, we were 97% advertising supported. Three percent was something called network compensation. Look at the business now and we are probably about 45% ad supported. The rest is digital distribution, retransmission and digital. The industry has shown in the market a remarkable ability to pivot and adapt and change and grow.
Let’s say auto is a secular problem and that it will bounce back once they start selling more cars. Do you see any emerging categories other than sports gambling?
LaPlatney: The legal category for us is really strong. In fact, we have some of our markets where legal is our number one category now. In some ways that makes the business stronger when you have a more diversified revenue base.
This also happens to be a good year for the financial category. Maybe that sticks around, but it is a remarkably resilient business and if auto, for whatever reason, continues to deteriorate, there will be other categories that end up filling that gap.
McCreery: I would just add that historically, professional services, for calendar Q1 and calendar Q2, were, for the first time ever in the history of our company, on par with auto. That has never happened before.
To Perry’s point, we are not as auto dependent these days. And another category that with legislative changes could be big for our business is cannabis. None of us want to touch it with a 10-foot pole right now because of the law, but that that is an area where there is a pot of money and I would like to get my hands into it.
What about that category? Have you been approached by advertisers? Are you trying to exploit that at all?
Sook: We have been approached absolutely, and we have said, listen we are a federally-regulated entity just like the banks. Until it’s deemed OK to do business with these folks we have got a lot at risk. I can tell you that in doing our Tribune diligence, I walked into three or four markets and the No. 1 question was what is your position on CBDs. There is money out there just waiting at the door, but we have actually refused buys that have been put forth.
I wonder if politically it would be good thing for NAB to jump on that because what you are saying is we need the federal government to say it’s OK.
McCreery: Yeah. When I got the keys to my first station I was told not to lose the license and this is one of those issues. We are not going to lose the license, but we could use some relief on it.
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