Gray to Fight NBC's Reverse Comp Efforts

Gray Television plans to resist NBC's push to have affiliates pay to run its programming, Gray President-COO Robert Prather says.

Prather acknowledged during the company's second-quarter earnings call that Gray faces the likelihood of tough talks with the network over what's called reverse compensation, beginning with Gray's Charleston, W.Va., NBC affiliate, WSAZ.

"We're going to fight that hard," Prather said. "I'm sure they're not picking on us but I think they're being very unrealistic in their demands. We just don't feel like it's warranted. We think we bring more to them than they bring to us. Our ratings are much, much higher than their overall ratings. They have a word to describe this: it's called arrogance."

In the past, networks have compensated affiliates for broadcasting network programming. Fox broke that mold roughly 10 years ago when it began exacting reverse compensation from affiliates.

TVWeek reported that NBC publicly disclosed its plans at its affiliates convention in Burbank in May, disappointing but not surprising station groups.

According to the TVWeek story, many CW affiliates already pay reverse comp and with NBC coming out of the comp closet, other networks are likely to follow.

Upcoming affiliation agreement negotiations for Gray include other NBC stations in 2012, ABC stations in 2013 and CBS stations in 2014.

On the earnings front, Gray is coping with the same economic drags on growth as other broadcasters. Strong markets, an election year, cost-cutting and digital initiatives may be helping temper some of the downturn's impact.

Gray reported revenues fell 1 percent to $78.7 million largely on the weakness of national and local advertising. Net income was $3 million compared to a nearly $11 million loss last year.

Nationally, core spot was down 7 percent. Local core spot was down 5 percent. The biggest drag was auto advertising, which Prather said accounts for about 23 percent of Gray's ad revenues. It was down about 8 percent, said CFO Jim Ryan. Tallies from rep firms show auto advertising down more than 20 percent across the board.

Other categories -- including telephone, furniture, appliance stores, restaurant and business advertising -- were flat to down, Ryan said. While financial was up slightly, Gray saw solid growth in the medical and supermarket categories, he said.

The real bright spots are politics and Olympics. Political was up 88 percent to $2.3 million for the quarter, $8 million for the half. That's not as much as 2004, Prather noted, but better than company projections.

Gray projects about $3.5 million from Olympics advertising. Internet advertising, which accounts for just less than 4 percent of total revenues, was up 34 percent.

Most forecasts for 2009 reflect a continuing sluggish economy. Gray anticipates retransmission fees from cable and satellite operators will ease the pain and brighten the revenue picture.

"I think we have a huge opportunity for retrans in the fourth quarter and the beginning of next year," Prather said. "We're going to be very aggressive, very active in trying to maximize the compensation we get."

Gray has already cut deals with AT&T and Cox and others for about 10 percent of the roughly 4.5 million broadband TV subscribers in Gray's markets. Gray expects to reach agreements covering about 60 percent by year end. The company expects to forge retrans deals for the remaining 30 percent by the end of 2009.

Pointing to successful hardball retrans negotiations by Sinclair and Nexstar that yielded somewhere around mid-20 cents per subscriber, Prather said, "I think that's a goal we should all be working toward."

Moreover, he said, "We want it all to be in cash."

Prather noted during the company's second-quarter earnings call that share prices are down 50 percent from a year ago. He also said that it's an indication of his view of Gray's prospects that the stock makes up effectively all of his retirement accounts.

"I'm drinking my own Kool-Aid, but I think it's going to pay off," Prather said. "I think we're tainted with the 'old media' brush. There's not much we can do about it except show Wall Street it's wrong. When the economy picks back up, I think we'll pick right back up with it."

Gray used proceeds from a preferred stock issued late in the quarter to reduce overall debt to about $855 million. Subsequent preferred stock sales have further reduced that debt. Ryan said that with a 7.24 leverage ratio, the company's within the lender covenant of a 7.25 ratio by year end.