As posted by: Wall Street JournalNext up on your local television station: a real-life version of "Survivor."
The new year is shaping up to be crunch time for much of the TV-station industry. Having been walloped in 2008 by a sharp drop in auto advertising, which accounts for 20% to 25% of total revenue for many local stations, conditions are set to worsen in 2009. This year's results were helped by ad dollars tied to the November elections and the Olympic Games. Both those pots will disappear in 2009.
Industrywide, that means a 13% drop in TV-station revenue to $19.6 billion, estimates Sanford. C. Bernstein. Among those affected are TV-network-owning media companies such as CBS and News Corp. (owner of The Wall Street Journal) as well as pure-play station groups like Hearst-Argyle Television, Belo Corp. and Sinclair Broadcast Group.
That revenue drop will hit bottom lines even harder because stations are high margin operations. CBS's outlets, for instance, account for 10% of 2008 expected revenue but 18% of earnings before interest, taxes, depreciation and amortization, Bernstein estimates. Sinclair, Belo and Hearst-Argyle are expected to have Ebitda declines of 29% to 35% in 2009, JP Morgan estimates, while CBS's overall Ebitda is expected to fall 15%.
Some pure-play station groups, like Belo and Sinclair, are carrying heavy debt loads that will exacerbate the impact of next year's likely cash-flow drop. Belo, for instance, faces tightening loan conditions.
Like newspapers, TV stations are being hit by the double whammy of the recession and a longer-term secular decline. Bernstein's estimate of 2009 revenue is only 2.9% above its 1995 estimate. Stations are fighting fragmentation of both audience and ad dollars because of more cable networks and online video. In addition, the stations' original purpose -- broadcasting a network's signal -- has been undercut by cable and satellite services that now provide TV for nearly 90% of the population.
The ties between stations and networks could fray further in coming years. A factor in that relationship will be station groups' success at getting paid cash for letting cable operators carry their programming. Hearst-Argyle, for instance, derived about 4% of its revenue in the first nine months of this year from such fees, about 23% higher than a year earlier. Networks are likely to ask for a share of that growing pile.
To restore itself to health, the industry needs to reduce overcapacity. That means shuttering weaker stations and consolidating ownership of others in individual markets to allow for greater cost-cutting.
One of the biggest costs is local news operations, which can account for between 25% and 33% of net revenues. Allowing one top station to buy another would spread such costs across a bigger revenue base. Regulators might consider relaxing ownership limits given the industry's parlous state.
The February transition to digital-only broadcasting, which is expanding the amount of broadcasting capacity, enhances the argument for consolidation. Some broadcasters are developing new programming services to air alongside their primary channel on the digital spectrum. Ion Media Networks, for instance, is airing a new children's channel.
But adding new channels is the last thing the industry needs, particularly next year. More promising is the effort by Ion and other broadcasters to develop standards and technology for mobile live broadcasting, and to pool a portion of their spectrum for mobile services.
The winners from a shakeout are likely to be the stronger players that can seize the chance to scale up. That includes big media companies like CBS. While it has sold small-market stations in the past year or two, it may be interested in big-market outlets at the right price. Then there is Hearst-Argyle, one of the few independents to have a relatively healthy balance sheet, which could step in to pick up a bargain.
