Station Rev Status: Spot OK, Retrans Crucial
Let's talk today about what I know is one of your favorite subjects — revenue. Without the top line, there would be no bottom line and then what kind of business would you have?
Revenue was a big topic at the annual SNL Kagan TV and Radio Finance Summit in New York this past Tuesday, but I want to start our discussion with a blog item that Mark Fratrik, the chief economist at BIA/Kelsey, wrote a few weeks ago.
It was about a new way of looking at spot that strips out the up-down effect of political advertising that makes broadcasting look to casual investors as volatile as a penny stock for a South American mining company.
Fratrik continuously averages spot growth (or decline) over four years. By doing so, he explained, "the impact of two election years (one presidential) and two non-election years are incorporated" in any review or forecast.
So, what did Fratrik's arithmetic reveal? Basically, that spot is growing at a 3% or 4% clip and will continue at that pace for at least the next several years.
If Fratrik is correct — and he assures me he is always correct — spot revenue is bumping along at about the same rate as real GDP plus inflation. That's not terrible, but that's not great either. That's certainly not the kind of growth that broadcasters expected in the good old days and it's not the kind of growth that will attract outside investors or cause a spike in station values.
According to SNL Kagan, the TV station trading multiple has been stuck between 7 and 8 for the past few years now.
SNL Kagan’s spot forecast is even stingier than Fratrik's, mostly because it does not see much growth in local spot. Between this year and 2018, it says, local will grow just 10%. With the slow-motion collapse of newspaper publishing, most broadcasters think local will grow much faster than that. [Editor's note: In the original posting, SNL Kagan's estimate of local growth was incorrectly reported as 6.5%.]
But broadcasting is no longer dependent on the single revenue stream. Over the past decade or so, it has been able to develop two other important streams — retransmission consent fees and digital media.
Retrans is more than a mere stream now. According to SNL Kagan, it has grown from $200 million in 2006 to $3.3 billion in 2013. This year, according to the research firm's forecasters, it will jump 30% to $4.3 billion and from there another 76% to $7.6 billion in 2019.
Digital is a trickle by comparison. Even in 2018, Fratrik says, it will still constitute only 5% of the industry revenue, although broadcasters more attuned to exploiting new media will do much better than that average.
But what digital lacks in share of revenue, it makes up with in growth. Fratrik says that it will grow 10% to 12% a year for the next four or five years. In a perfect world, I would note, that would be the growth rate of spot.
Fratrik also thinks there is money to be made from entering the digital agency business, in which local stations shepherd local small and medium businesses through the digital media maze. "That's what you see with some of the large groups buying an agency and other types of services," he says.
But, again, except for a few groups, the agency business is not going to amount for much relative to spot and retrans.
To recap, most of broadcasting revenue growth will be coming from squeezing cable and satellite operators for more retrans money.
Like the SNL Kagan analysts, the broadcasters who spoke at the SNL Kagan conference said they believe there is still plenty of upside in retrans.
Nexstar Broadcasting CEO Perry Sook told conference attendees that the retrans game is still in "the third inning."
Retrans is a "three times opportunity," he said. In other words, he believes his groups can triple its retrans revenue. That figures to $2.50-$3 per sub per month per network affiliates. (According to SNL Kagan, Nexstar derived about 22% of its total revenue from retrans in 2013.)
On the whole, broadcasters draw 35% of the audience on cable and satellite, yet they get only about 9% of the fees the cable and satellite pay to programmers, Sook said. 'There is still inequity in the value we bring to the package and in the value we are being compensated out of that package. "
Others made the same fair-share argument. "We are way below where we need to be," said Deborah McDermott, Media General’s SVP, broadcast markets.
I'll say. We all know that retrans payments are only a fraction of the total programming fees that cable and satellite pay out to basic cable networks. But that's not the worst of it. The latest SNL Kagan research shows broadcasters also trailing cable's regional sports networks — by a substantial margin. This year, the sports networks will take in $6.3 billion compared to the broadcasters' $4.3 billion.