Local TV Broadcasters

Ramping on Media and Telecom Part I

“Television is chewing gum for the eyes.” - Frank Lloyd Wright

Thinking about my own relationship with TV, I realized that I’m a “cord-never”¹. Not because I grew up with streaming, but rather because I went from free over-the-air TV directly to digital without ever having paid for cable. My lack of a consumer experience (struggle?) with the cable companies on the TV side probably made the sector all the more mysterious to me.

With that reflection, I thought I’d start my media and telecom ramp with the local TV broadcasting sub-sector. The local broadcasters are a small sub-sector in the grand scheme of the industry with the largest player (Nexstar, NXST) being just ~$12B in enterprise value compared to the Disney, Netflix, and the telecom operators with enterprise values in the hundreds of billions as of the time of this writing. But as the critical middle-men of television, they touch on nearly all the major topics currently in play including advertising trends, cord-cutting, the value of content, and the impact of federal regulations.

What are local broadcasters?

Local broadcasters own and operate groups of TV stations across a number of local markets in the United States. TV stations are local outposts that have broadcast equipment, a control room to manage the channels, and sometimes a studio to record local news and programs. Here’s a fun YouTube video of a tour inside the KYW-TV² (channel 3) studio in Philly, which is a CBS affiliate³ that is actually owned by the CBS network; for reasons we’ll get into, not all the CBS affiliated stations are owned by the CBS network - they’re owned and operated by the local broadcasters that this write-up is about. Local markets are also specifically mapped out for regulatory purposes - each TV station is assigned to one of 210 designated market areas (referred to as “DMAs”) that are ranked in size according to their number of TV households. The largest one is the NYC area. Each DMA is an exclusive geographic area consisting of all counties or portions of counties in which the home-market TV stations receive the greatest percentage of total viewing hours. The Federal Communications Commission (“FCC”) is the main regulator in the industry and grants broadcast licenses to TV stations. There is a myriad of regulatory requirements that govern local broadcasting markets, which is fundamental to the structure of the industry today - we’ll get into all that shortly.

Each local station is typically associated with one of the major media network operators ABC, CBS, FOX, or NBC (sometimes just referred to as the networks). We call that station an “affiliate” of the particular network it is associated with. The affiliate station licenses the right to use the network’s branding and programming, typically during primetime hours and other specific day parts. In exchange, the network receives affiliation fees and has the right to sell the majority of advertising time during these broadcasts. The broadcaster then produces/procures content for their own programming schedule including local news which they use to fill up the rest of the hours. With this slate of programming in hand, the stations broadcast the schedule over-the-air (sometimes abbreviated as “OTA”) and through MVPDs⁴ such as a cable provider under a retransmission consent agreement. You can receive over-the-air programming for free with just a TV and an antenna, but the signal could be poor if there’s something between you and the broadcast signal.

Inside a TV broadcast station.

A little bit on terminology - you often hear people refer to some channels as broadcast while other channels as cable or premium cable, but at the same time you can get the usual broadcast channels through cable as well, so what’s the deal? Broadly speaking, network/broadcast channels refer to the programming from ABC, NBC, CBS, and FOX or a non-commercial network like PBS which you can get over-the-air with an antenna or get bundled into your cable subscription. Cable channels refers to channels that are exclusive to a cable subscription such as ESPN, the History Channel, etc.⁵ Sometimes people will refer to another category of Premium Cable channels that you usually have pay extra for on top of your basic cable subscription - these include stuff like HBO, Showtime, The Movie Channel, etc. In the past, all TV used to be broadcast over-the-air before people started running wires to locations that had bad signal in the late 1940s. In 1972, Time Warner created Home Box Office or “HBO” to distribute recently released movies - this was sent through the cable wires instead of over-the-air and you could only watch it if you were 1) using cable to receive your programming and 2) paying an additional fee, initially set at $6/month when it first launched⁶. This was one of the first cable-only channels. As an aside, $6 in 1972 is worth ~$7.50 today adjusted for inflation so it would cost ~$45/month today, but Max, the streaming service previously called HBO Max and includes the programming from HBO pay-TV and more, costs just $20/month at the premium tier - a clear example of the historically deflationary pressures in the industry. Returning to the broadcasters; the issue with the original over-the-air system was one of technology as stations needed a wide frequency band and there had to be a lot of clear space to prevent interference. In the past, when spectrum was licensed by regulators for use in TV broadcasting, the same channels were not allocated to adjacent cities because receiver technology couldn’t separate the between the two stations which created all sorts of inefficiencies. You’ll also notice that broadcast channels are quite censored in terms of violence, swearing, and sexual content - this is because the programming was carried over frequencies that were publicly owned and allocated by the federal government. To overcome these challenges, new content providers moved to using cable or satellite to deliver the same broadcast/network programming, which allowed them to bypass some of the bandwidth regulations. Digital broadcasting transmissions were introduced in the late 1990s, which further blurred the line between getting your broadcast programming from over-the-air or by cable.

History

TV broadcasting can trace its roots to radio broadcasting as individual experimental radio stations beginning to operate in the 1910s. Early stations were built in Boston, Detroit, NYC, Pittsburgh, and other areas. These radio stations received permission to broadcast with licenses granted by the Federal Radio Commission, which was established in 1926 to regulate the radio industry. Creating content was a costly endeavor so the concept of a “network” was devised to save each station the cost of creating its own programming and to expand the total coverage beyond just a single broadcast signal. This structure was adopted by TV broadcasting stations later on. The Radio Corporation of America (“RCA”), founded in 1919 initially as a patent trust owned by GE, Westinghouse, AT&T, and United Fruit before becoming an independent company in 1932, dominated the radio industry by creating the first nationwide American radio network, the National Broadcasting Company (“NBC”).

As radio became more widespread, experimental TV station and transmissions began to pop up in the late 1920s and 1930s. A broadcasting of a straight line on September 7th, 1927 by Philo Taylor Farnsworth is widely regarded as the first successful, albeit not very interesting, demonstration. Over the next couple years, Farnsworth improved and refined his invention, which was lauded publicly in 1929.⁷ At around the same time, the Russian-born investor and engineer, Vladimir Zworykin, began working for Westinghouse Electric and in 1923, was experimenting with the cathode ray tube to create and show images. However, the quality of the projections were poor and it never made it to the commercial stage. RCA went on to acquire Westinghouse and had a dispute with Farnsworth, arguing that Farnsworth’s patent was too broad and filed a patent interference suit again the inventor. A U.S. Patent Office examiner eventually ruled against RCA in 1935 and the company subsequently lost its appeal in 1939. As a result, RCA ended up licensing Farnsworth’s patents in addition to a $1M payment over a ten-year period.

RCA unveiled the first commercial and publicly accessible TV broadcast at the 1939 World’s Fair held at Flushing Meadows-Corona Park in Queens, NYC. At the opening ceremonies on April 30th, President Franklin D. Roosevelt became the first president to be televised. TV sets went on sale the next day and RCA, through its subsidiary NBC, began regular broadcasts on a daily basis. Initially this broadcast was transmitted to just ~400 TV sets in the NY area with an audience of 5,000 to 8,000 people. By 1941, RCA’s main competition in radio, the Columbia Broadcasting System (“CBS”), also began TV broadcasting, staring with two 15-minute newscasts a day to a small audience in NY. The FCC outlined a unified technical standard so that consumers would not have to get separate TV sets for each individual network. In 1941, the FCC recommended a 525-line system with an image rate of 30 frames per second as well as a recommendation that U.S. TV sets operating with an analog system meaning that broadcast signals were made of varying radio waves. This was eventually replaced by digital signals. Also in 1941, the FCC ruled that NBC had to sell one of its two radio networks, a ruling that was upheld by the Supreme Court two years later. This spun-out network became the new American Broadcasting Company (“ABC”), which itself would enter the TV space over the next decade. WWII saw a pause in commercial broadcasting development as companies like RCA turned their manufacturing efforts away from TV sets and towards military production.

Stepping aside from the broadcaster development, in 1929 Bell Labs patented the coaxial cable, primarily to improve the telephone but its high capacity made it ideal for farther distanced TV transmission where it could handle a frequency band of 1MHz. AT&T laid the first L-carrier coaxial cable between NYC and Philadelphia and experimented with transmitting TV signals. After WWII, AT&T subsequently completed a 255-mile cable between NYC and Washington D.C. The DuMont TV Network launched the first “commercial TV network” in 1946 by connecting NYC with Washington through this line. NBC soon followed with the first “regularly operating TV network” in 1947 by serving NYC, Philadelphia, Schenectady, and Washington D.C. before adding Baltimore and Boston later that year. In 1948, CBS and ABC began building their own expanded networks.

TV stations were initially linked together in long chains along the East Coast in a practice called “chain broadcasting”. Over time, the networks expanded westward to form major networks of affiliate stations that were connected via coaxial cables. By 1951, the four networks stretched from coast to coast, utilizing the new microwave radio relay networks developed by AT&T.⁸ Only a few local TV stations remained independent of the networks. These four major TV networks originally only broadcasted a few hours of programming a week to their affiliate stations, typically between 8pm and 11pm ET when most viewers were in front of their TVs. The FCC grew concerned that local TV might disappear altogether given the rapid growth in the network’s programming so they enacted the Prime Time Access Rule, which restricted the amount of time that the networks could air programs in the hope that this would foster development of local programs.⁹ However, not all stations wanted to bear the burden of producing their own local content and instead chose to purchase some programs from independent producers. This process of selling TV programs to individual local stations is called “broadcast syndication” and is very common today in addition to network-produced programs.

After the failure and shutdown of DuMont in 1956, there were a few attempts at creating a new network in the 1950s through 1970s, all with little success. In 1986, the Fox Broadcasting Company was founded by News Corporation after it purchased the TV assets of Metromedia and by the mid 1990s, it had risen to the status of the fourth major network. In January of 1995, two other networks launch. One was the WB TV network, which was a JV between Time Warner and the Tribune Company. The other was the United Paramount Network (“UPN”), which was formed through an alliance between United Television, a subsidiary of Chris-Craft Industries, and Paramount TV, whose parent company, Viacom, would later acquire half and subsequently all of the network over time. In September 2006, the CW was launched as a merger between WB and UPN; in practice it seemed like each network took their higher-rated programs and combined it into one schedule to go with The CW while the remaining affiliates was spun into a network called MyNetwork TV.

Publicly traded broadcaster’s station profiles.

Regulations

Under the Communications Act of 1934, TV broadcasters are subject to the regulatory jurisdiction of the FCC. Similar to any heavily regulated industry, there are many nuanced regulatory stipulations that govern broadcasting in the U.S. so we’ll only cover some of the major ones here. For those who are interested in exploring deeper, I would point you to the section of the FCC’s website that covers broadcasting.

Since the early days, the FCC has implemented and refined rules to protect local broadcasters in an effort to prevent a single or handful of entities from dominating the distribution of information in the country. These rules are broadly called Broadcast Ownership Rules, which are reviewed every four years as required under the Telecommunications Act of 1996. In the early days, the FCC permitted a single company to own a maximum of 5 TV stations. This limit was raised to 7 in 1984 and then to 12 in 1992. In 1999 the maximum threshold was revised from the total number of stations to a national market percentage covered by the stations - the currently limit is 39%. Specifically, no group can collectively reach more than 39% of all U.S. TV households - this is called the National Television Ownership rule.¹⁰ However for the purposes of determining compliance with this rule, TV stations that operate on UHF channels (14 and above) are attributed with only 50% of the number of TV households in the DMA as opposed to 100% if the station were operating on VHF channels (13 and below) - this is called the UHF Discount.¹¹ As a result of the Broadcast Ownership Rules, most local TV stations are independent of the major networks but receive programming from those networks via a franchising contract with the exception of a few network owned-and-operated stations and independent stations. In the early days, there were often only one or two stations broadcasting in any local market so stations were often times affiliated with multiple networks and had their choice of what programs to air. Over time as more stations were granted licenses and entered local markets, it became more common for each station to be exclusively affiliated with just one of the big four and carry all of the prime-time programs of that network. Another rule under the Broadcast Ownership Rules is the Local Television Multiple Ownership rule, also commonly referred to as the “duopoly rule”. The duopoly rule states that a single entity is allowed to own two TV stations in a DMA only if (i) the two stations do not have overlapping service areas, or (ii) at least one of the two stations is not ranked among the top four stations in the DMA in terms of audience share. Duopoly markets are efficient for the ownership group as facilities, management teams, and administrative spend can be consolidated, driving higher cash generation per station - Tegna has suggested that in-market consolidate can deliver an incremental EBITDA margin expansion of 10 to 15 percentage points.¹² Broadcasters have come up with workarounds to this rule by having an independent entity set up to acquire a station and then enter into agreements to share ad sales and other functions with another local station through joint sales agreements (“JSAs”) and shared services agreements (“SSAs”). The FCC has considered proposals to place restriction on these workarounds.

The last set of regulatory frameworks I want to explore actually relate to MVPDs (which I will use interchangeably with cable companies in this write-up unless otherwise noted). While the cable companies’ TV efforts are subject to more lenient regulations than broadcast stations because they don’t occupy publicly owned spectrum in the same way, there are FCC rules governing their relationship with the broadcasting stations. Under 47 CFR 76.56, the cable operator must allocate a number of channels to local broadcasting stations with a quota being determined by how many total channels they operate.¹³ These rules were implemented because small local broadcasters argued that cable companies, who were replacing local channels with cable channels - some of which the cable companies themselves owned, were hampering access to free broadcast TV. These rules are referred to as “must-carry” rules. The FCC has established versions of the must-carry rule since the 1960s. The current set of must-carry rules were first enacted in 1992 via the Cable Television Protection and Competition Act and were upheld in a 5-4 decision by the Supreme Court in 1994 in Turner Broadcasting v. FCC. As a result, broadcast stations have a choice of electing their “must-carry” option or proceed with “retransmission consent” (commonly shortened as “retrans”). If a broadcast station chooses to exercise the must-carry privilege, MVPDs must carry one of the station’s programming streams in the station’s local market but does so without paying a fee. On the other hand, broadcast station that choose retransmission consent forego the mandatory carriage rights and instead negotiates with the MVPD to carry the station’s signal for a fee. Both stations that participate in must-carry and stations with retransmission consent agreements count towards the MVPD’s carriage quota under the Title 47 part 76 rules.¹⁴ Most of the stations owned-and-operated by the local broadcasters today choose the retransmission consent path. The fees that the broadcasters receive under these agreements are referred to as “retrans fees”. Retrans fees are a big deal for the local broadcasters, having grown from basically 0% of total revenues in the early 2000s to roughly 40% of total broadcasting revenues today and surpassing other sources of revenue that have been pressured. Retrans is also a point of tension between cable and broadcasters as negotiations that fail to to come to an agreement often ends up with blackouts for those channels in particular regions. Subscribers that churn as a result of blackouts often times do not come back.

Business Model and Financials

Local broadcasters make money primarily from 1) selling ads in their programming, 2) retrans fees received from distributors, and 3) a broad “other” category that includes monetizing a collection of media assets. The major U.S. publicly traded local TV broadcaster comp group consists of Nexstar (NXST), E.W. Scripps (SSP), Gray TV (GTN), Sinclair (SBGI), and Tegna (TGNA). These businesses generate significant free cash flow but are also heavily levered.

Advertising

Advertising revenues currently account for ~40-60% of total revenues and comes from broadcasters selling air time to local, national, and political advertisers. Local and national is typically grouped together and called “core advertising” in contrast to political advertising given that the latter exhibits two year cycle because we have congressional and/or presidential elections, driving significant political advertising spend in those even numbered years. For instance in 2021, political advertising revenues were approximately 1-2% of total broadcasting revenues while in 2022, it was closer to 11-13%. Given the meaningful swings between even and odd numbered years, it’s typical to look at broadcaster financials on a 2-year average basis.

Broadcaster revenue breakdown by category.

Advertising is, of course, the commercials you see between your favorite programs on TV. Within core advertising, local advertising is bigger than national with approximately 60-70% local and 30-40% national depending on the broadcaster. Local advertising is sold by each station’s sales staff who reach out to local businesses and sometimes advertising agencies that represent these businesses. It’s important to have an experienced local sales force that knows the local community well and produce content with a local appeal such as promoting local events and activities. The sales force is incentivized on a commission-based sales model. On the other hand, national and political advertising is primarily sold through advertising agencies or through third party sales representative firms that reach out to the advertising agencies, who in turn represent the advertising customer. Digital advertising on certain online media assets sometimes will sell through programmatic exchanges as well. Revenue concentration in core advertising is pretty well diversified on a customer level but there are certain sectors that account for large portions of the overall pie including the automotive, retail, and services industries on a local basis and CPG, pharmaceutical, and insurance on a national basis. Automotive (of which auto dealers is a big portion) is the largest sub-sector accounting for 16%/15% of core advertising revenues at Nexstar’s in 2021/2022 and 17%/17%/20% at Gray TV for 2021/2022/2023.¹⁵ Advertising is pro-cyclical (better macro conditions => more advertising demand) but local advertising is generally more stable and predictable as it sees less of an impact than national advertising from macroeconomic uncertainties. As one can imagine, linear TV advertising has been steadily losing share to other digital formats as viewership declines, driving advertisers to shift marketing budgets away from the broadcasters.

Retransmission Consent

Retrans revenue, also called distribution revenue, account for roughly 40-50% of total broadcaster revenues, having grown rapidly from basically nothing just 20 years ago. This is the compensation that the broadcasters receive from MVDPs such as cable and satellite providers in return for the rights to carry the TV signal to their customers. The economics of this revenue stream is typically a fee per paying subscriber at the MVPD buying a bundle that includes the broadcast channels. The numbers are measured and reconciled by the cable companies quarterly and reported back to the broadcaster 3 to 6 months after the quarter is over. These contracts typically last three or four years (consistent with FCC regulation requiring broadcasters to formally elect either the must-carry or retransmission consent for their stations every three years) before they are renegotiated between the broadcaster and the MVPDs. As mentioned under the regulatory section, broadcasters have had an option to elect retransmission consent since the early 1990s but it didn’t become a focus until the mid-2000s when the rise of virtual alternatives began having a material impact on advertising revenues. Nexstar was the first to choose retranmission consent over must-carry in 2004/2005 before Sinclair joined in shortly after. Both shifts resulted in public disputes with distributors and saw channel blackouts, but set the stage for other broadcasters to switch to the retrans option as well over time. Not all of the subscribers that are part of the retrans consent of a broadcaster are renegotiate at the same time so analysts need to be aware of the renewal schedule to account for when and how much the per-sub fee goes up by. In the FCC’s 2022 Communications Marketplace Report the commission noted that retrans fees per subscriber per broadcast station for the industry grew at a CAGR of 30.6% from 2013-2021.¹⁶ The significant price increases upon each renewal more than offset the declines in pay-TV subs over this period of time, resulting in strong retrans growth for the comp group. In retrospect, it’s quite silly to read earnings call transcripts from the late 2000s where analysts were stripping out retrans fee to get to the “underlying” business trends of the broadcasters. Quarterly retrans fee per sub currently lies around the $4 to $5 range. Below is a chart of retrans revenues for Gray, Nexstar, and E.W. Scripps since the early 2000s.¹⁷ You can sort of see the step-functions in retrans revenue every 3 to 4 years corresponding with large percentage of subs being renewed at higher prices.

Retransmission consent revenues.

Given how lucrative and fast growing retrans fees have been, you can imagine that the networks who provide the programming probably woke up one day and said, we want some of that too! This happened and is called “reverse retrans" or “reverse compensation” and is grouped as part of network affiliation or licensing expenses for the broadcasters. When I first started looking at the space, I thought the term reverse was a reference to the fees going in the opposite direction to retrans fees but that’s not it. There’s actually an interesting history here because in the early era of TV broadcasting, the big networks paid the TV stations to carry their network’s programming (remember that the networks made money from the advertising slots during the programming). In the early 2000s, this network compensation began to disappear - if you look at the broadcaster financials from that time, you can see that network compensation stood at ~MSD to LSD percentage of total broadcaster revenues and shrank rapidly as most broadcasters stopped reporting it by the late 2000s. Around the same time the networks, seeing the cash-heavy retrans fees flowing to the broadcasters from the distributors, began to demand that the local broadcasters pay to carry the network’s programming - this reversal of payment between the networks and broadcaster is why it’s described as reverse. The reverse compensation are similarly negotiated privately between the affiliates and networks so there isn’t a lot of information publicly available on how it developed. However, its likely that the networks began asking for reverse retrans a few years after the broadcasters started receiving retrans fees as contracts with the affiliates came up for renewal. There was likely a number of different structures being considered when implementing reverse retrans and while we’re not privy to the details of each contract, the majority of the contracts currently contemplates an economic structure where the networks receive a flat fee from the broadcasters with annual pricing escalators. Another structure that was used early on was charging the broadcasters by paying subscriber, which is how broadcasters receive retrans fees from the MVPDs, so this was effectively splitting the retrans fees between the network and broadcasters based on some fixed percentage. My understanding is that NBC is the only network that has a meaningful percentage of its affiliate contracts under this model.

Given that broadcasters earn retrans fees and pay reverse retrans, analysts will often look at net retrans (retrans minus reverse retrans). Net retrans margins are in the roughly high-30% range with the exception of Nexstar, which appears to be higher given the greater size compared to peers. Tegna margins are also higher and I think could be due to its higher NBC affiliate exposure as a percentage of paying subs, which has a different reverse comp structure. Scale and size are competitive advantages for a broadcaster when it comes to retrans fees as greater scale allows for greater negotiating leverage and often leads to better results with the MVPDs. Similarly, greater scale allow for greater negotiating leverage with the networks when it comes to the reverse compensation as well. The trend for retrans and reverse retrans is always a hot topic of discussion. First staring with retrans fees, one might ask whether there is still room for growth when per-sub rates have already grown at a 30% CAGR over the last decade while pay-TV subscribers continue to decline. Most analysts and certainly management teams believe the answer to be yes, pointing to the fact that retrans fees as a percentage of all linear channel programming fees paid by the MVPDs is smaller than the percentage of viewership that these same programs capture compared to the rest of the MVPD’s channel bundle. The latest set of numbers I’ve seen on this come from Gray TV’s investor presentation from Oct’23 citing retrans as 22% of MVPD’s costs but accounting for 44% of all linear TV ratings. Next, the question usually turns to, what about net retrans? The case here for the broadcasters isn’t as strong since the pace of growth in retrans fees has decelerated meaningfully from MVPDs pushing back on per-sub rates hikes and pay-TV subs continue to decline. All the while recall that reverse retrans is typically a fixed fee, causing net retrans margin to decline in the recent past. Management will point you towards net retrans dollar profits growing but they’re not oblivious to the margin pressures - Gray TV’s Chief Legal & Development Officer has noted that the structure of receiving variable income and paying the networks a fixed fee is unsustainable for the broadcasters and will have to change over time.

Other revenues

Other revenues include a variety of production networks and web/mobile asset. There are also a few larger assets to call out for some of the broadcasters. Nexstar owns a 75% interest in The CW Network, which is the fifth major broadcast network in the US having acquired it in late 2022 from Warner and Paramount at effectively no cost.¹⁸ It also owns the cable news network, NewsStation from its acquisition of Tribune in 2019.¹⁹ Gray TV owns the video program company Raycom Media, which it acquired in 2019 and has recently developed its Assembly Atlanta studio production facility, a 43-acre complex with multiple soundstages, production offices, and warehouses which it will lease to NBCUniversal Media. E.W. Scripps owns a portfolio of broadcast TV and streaming networks through its Scripps Network division including the broadcast network ION, which reaches roughly 80M households in the U.S. The division generates ~39% of Scripps’ total revenues and accounts for the greater advertising exposure compared to the other players (given the size, this is included in the category breakout from chart showing revenue mix instead of being lumped into other). Tegna owns True Crime Network and Quest as well as Premion, an OTT²⁰ advertising platform. Notably, Tegna had struct a deal to be acquired by the investment manager Standard General for $8.6B in EV in early 2022 but the deal was ultimately terminated when the FCC held up the deal and prevented it from going through after it received criticism from members of Congress on concerns of higher TV prices for consumers in mid-2023. Sinclair owns the Tennis Channel, a cable and satellite TV network focused on racket sports events, having acquired the asset for $350M in 2016. Sinclair, together with Allen Media, formed Diamond Sports Group (“DSG”) in 2019 after acquiring 21 RSNs²¹ from Disney for ~$9.6B. However, COVID hit shortly after, causing Sinclair to take a $4B write-down in 2020. After struggling for a while with the asset, including being blocked from participating in day-to-day operations by the board of Diamond Sports Group²² and subsequently de-consolidating it from report financials, DSG declared bankruptcy in March 2023. In July 2023, it sued Sinclair for $1.5B alleging that the management services agreement between Sinclair and DSG was unfair to DSG and certain distributions from DSG to Sinclair was inappropriate.²³ The two parties ultimately settled in January 2024 with Sinclair agreeing to pay $495M to DSG.

Broadcaster financials.

Some thoughts from my cursory reading on the publicly traded broadcasters; Nexstar is the largest and seems to me to be the most well-run of the bunch. It’s size allows for greater negotiating leverage with both the networks and distributors while its greater exposure to lower cost networks like The CW further adds to net retrans (and subsequently EBITDA) margins. The greater retrans rate also has an added benefit during consolidation as the acquired TV stations have a most-favored-nation clause allowing the acquired station to be part of the better retrans rates negotiated by Nexstar. The company has taken advantage of this over the years with a number of station acquisitions including 78 stations from the acquisition of Media General in January 2017 and 42 stations from the acquisition of Tribune in September 2019. Gray TV is smaller but punches above its weight through high quality stations with 90% of its local markets having the #1 or #2 ranked station, higher than any other broadcasters. Gray’s stations arguably has the best political exposure with more weighting to election battleground areas. E.W. Scripps has the greatest exposure to advertising revenues given its large portfolio of media brands. Its greater focus on content positions it well for cord-cutting by embracing OTT and other video streaming trends. Tegna is the least levered amongst the broadcasters and given its revenue breakdown feels like the pure-play option amongst the group. In its 4Q23 earnings call, it noted that the majority of its reverse retrans is now tied to variable model instead of the fixed fee that is typical with other broadcasters, rendering net retrans margin to be more stable compared to compressing margins for the group as a whole. Lastly, Sinclair has faced operational distraction from DSG and now having to pay a nearly $500M settlement that could otherwise have been used to de-lever the business. With that said, while Sinclair isn’t the cleanest story, these distractions are mostly behind us and there is a case to be made that the path is clearer from here on out.

Some quick-fire industry trends:

• People don’t expect retrans rates to keep growing at the pace it had been, this will compress net retrans margins. Nexstar and Tegna seem to be the two that are navigating this the best with scale at the former and better contract structures at the latter. Cord-cutting is continuing to hurt pay-TV sub numbers and the trend hasn’t slowed down - this impacts retrans revenue negatively as well, especially as the pace of rate increase might not be able to keep up with pay-TV subs decline longer-term.

• When a pay-TV sub churns and moves to a vMVPD, will they still want broadcast channels? Broadcasters will tell you that the value of their content is strong, especially local news so vMVPDs will need to carry these broadcast channels as well. There’s a debate as to whether the subs on a vMVPD will generate the same level of revenue/profit as a sub on cable. It’s not really clear in my opinion.

• Broadcast advertising continues to lose share to OTT and other digital formats. From that perspective, I think you would want more exposure to subscription-like retrans than core advertising from a mix perspective.

• On the other hand, political advertising spend has been growing in the high-teens CAGR since the late 80s. Gray TV seems to have the best exposure here although I’ve seen reports pointing to Tegna’s exposure as a close second. There are however questions as to whether there will be enough contention in the 2024 election cycle to drum up substantial advertising spend.

• In the long-run do the local broadcasters deserve to exist? A blunt question to ask but an important one for any middle-men-esque business. Why can’t the networks work directly with the distributors? What happens if half the population moves to OTT? A less pretentious way to ask this is whether the industry structure is sustainable. I think the answer is yes for now; one reason that is easy to point to is that local content such as news is an important programming segment and requires local expertise to execute, so it makes sense that it is handled by the local broadcasters. More importantly though, the ecosystem is in a delicate balance - having a handful of broadcasters negotiate between the networks and distributors forms an equilibrium that limits the leverage that either group has over the other. The broadcasters keep the pay-TV ecosystem in check.

I’m not going to dive more into individual company trends here because readers will be better off reading recent sell-side coverage on the names and because this write-up has already gone a lot longer than I originally intended. Ultimately, these ramp notes are meant as a starting point to understand the basics with a bit of historical context. As mentioned in my original post about ramping on media and telecom, these are my preliminary research notes and I invite those who know the industry well to comment with their thoughts!

1. A term that refers to someone who has never paid for a cable TV plan. This demographic skews younger and typically consumes streaming services for their entertainment needs. It’s a close cousin to the “cord-cutter” concept that’s been around for much longer.

2. Stations are typically identified by these capital letters referred to “call-signs”. Call-signs starting with K, N, and W are reserved for the United States. Call-signs that start with “K” is typically reserved for stations west of the Mississippi while “N” is east of the Mississippi. You’ll notice that KYW-TV is actually one of the few exceptions to this rule.

3. An affiliate of a network, in this case CBS, just means that the station has a contract with the network to use the network’s brand and will carry that network’s programs.

4. MVPD stands for Multichannel video programming distributor and is a term defined by the 1996 Telecommunications Act that refers to any video service provider that delivers multiple TV channels to subscribers and including cable and satellite companies.

5. Although there are now streaming options for some of these as well. So maybe the better comparison is that you can’t get these for free OTA.

6. https://www.company-histories.com/Home-Box-Office-Inc-Company-History.html

7. https://www.cs.cornell.edu/~pjs54/Teaching/AutomaticLifestyle-S02/Projects/Vlku/history.html

8. Microwave radio relays were replaced by fixed-service satellites in the late 20th century while some terrestrial radio relays remained in service for regional connections.

9. https://www.britannica.com/art/television-in-the-United-States/Media-versus-the-federal-government

10. I know I said that the Broadcast Ownership Rules are reviewed every four years but the National Television Ownership rule is the exception as it is no longer subject to the FCC’s quadrennial review.

11. https://www.fcc.gov/sites/default/files/fcc_broadcast_ownership_rules.pdf

12. TGNA Analyst/Investor Day 5/17/17.

13. A cable operator with 12 or fewer channels must allocate 3 of these to local commercial broadcast stations and those with more must allocate 1/3 of their channels.

14. https://www.fcc.gov/sites/default/files/fcc_broadcast_ownership_rules.pdf

15. It looks like NXST’s 2023 10K didn’t disclose the the automotive revenue concentration like they did in previous years.

16. Page 176 of the report: https://docs.fcc.gov/public/attachments/FCC-22-103A1.pdf

17. I passed on compiling historicals for SBGI and TGNA because there were a bunch of restatements and I couldn’t be bothered.

18. This is because The CW generates ~$250M in EBITDA losses per year. Nexstar anticipates The CW to generate profits by 2025.

19. Nexstar’s 2023 10K notes that NewsNation reaches ~69M TV HHs and is America’s fastest growing cable news network.

20. Over-the-top, which refers to a distribution via the internet as opposed to a traditional method like cable or over-the-air.

21. RSN stands for Regional Sports Network and refers to a channel that focuses on sports content catering to particular local markets.

22. https://www.sportico.com/business/media/2022/diamond-sports-unseats-sinclair-as-bally-sports-operator-1234697443/

23. https://www.sec.gov/Archives/edgar/data/912752/000197121323000011/0001971213-23-000011-index.htm