Don’t mind the title. I’m not calling you stupid. I’m calling everyone stupid. Which means I’m calling you stupid. Actually I’m calling my old boss stupid. You’re not stupid. I’ll move on…
Now that we’ve covered some of the key problems in the content, marketing, and selling of local TV news, it’s time to start getting into the biggest issue facing the industry. Trust me when I tell you, this is the one that will unravel the entire business model and there are few people in leadership positions who truly grasp what is unfolding. To comprehend where local media is going to end up in the next few years, we need to first understand the distribution model.
We need to know what the current media landscape looks like and understand why it’s all getting disrupted. To do that, we’ll take a brief walk through the history of the sector. This will help us better understand how we got to this point and hopefully help us in making educated guesses about the future. You can even put your investment hat on for this chapter if you like.
If you’ve ever talked to someone with “some season” on the old age numeral, you’ve probably heard some variation of “back in my day we only had three channels to watch. And we didn’t watch cat videos or people falling down. It was good wholesome programming like Johnny Carson. Where’s my prune juice? Agatha? Hello? Is anyone there?”
Okay, that was a little much but you get the idea.
These people are not fundamentally wrong. The current pay TV structure we have now, the one that is now unraveling, isn’t how this whole TV thing started.
Legacy broadcast networks used to have a very strong share of consumer video consumption. These national networks are still around today and you probably know them by name. ABC, CBS, and NBC. In addition to these big broadcast powerhouse networks, there have historically been dozens of smaller broadcast station groups that have had affiliation deals with the national networks mentioned above. Affiliation deals enable smaller companies to broadcast the programming of these major national networks. This has historically been a mutually beneficial relationship for the networks and the station groups.
The station groups get popular programming to sell to local advertisers and the networks get distribution infrastructure. Subsidized through advertising, all of this broadcast content viewing was free over the air (OTA) to any consumer with an antenna. To this day, these signals are still transmitted from big towers and broadcast for free. That said, the market footprint of OTA viewers is tough to estimate. It’s probably somewhere between 5 and 15% depending on the city. Generally speaking, the more rural your living area, the larger the footprint of OTA households.
With antenna viewing, the distribution model has just one layer separating the content owner from the consumer. Let’s use the CBS affiliate in Atlanta as an example. The call letters for CBS 46 in Atlanta are WGCL. WGCL doesn’t actually own the CBS content that it provides viewers and CBS doesn’t actually own WGCL. WGCL is owned by a company called Meredith Corporation. That makes Meredith an added layer in the distribution chain between the content and the consumer. This matters, so if you don’t understand it, re-read until you do. If that fails, just ask me in the comments and I’ll try a different way to explain.
Side note: as of writing, Meredith is actually pending a sale to Gray Television. There’s a lot of consolidation happening in local broadcast TV and these full company acquisitions have been really accelerating the last 5 years or so. Ultimately, there will probably only be 4 or 5 that remain when all is said and done. There’s a critical reason for this that I’ll get into shortly. Side note over.
We’ve established that station groups like Meredith have historically been a layer in the distribution chain. Then cable came along. Suddenly, instead of 3 or 4 channels, viewers had dozens or even hundreds of channels to choose from as long as they were willing to pay the cable provider the subscription fee to get the whole bundle. For consumers this was good. In addition to a plethora of new viewing choices, even the local broadcast network affiliate channels were included. Everything was in one place and viewers didn’t have to fuss with antenna signals to get their programming crisp and clear.
However, the emergence of cable and satellite providers added another layer to the distribution model. With added layers come added costs. Cable and satellite operators charge subscribers a monthly fee for the TV bundle that they’re buying. From that monthly fee, cable providers have to pay station group owners like Meredith carriage or retransmission fees for the rights to distribute the content. When these retransmission or carriage agreements were reached, the cost of the programming was always passed down to the customers. It’s critical to grasp this concept because it’s one of the biggest reasons why the business model is breaking down. The local broadcast network affiliates that consumers had been able to get for free over the air with an antenna became not free with the rise of the cable bundle.
This pay TV model worked well for a while. Beyond just advertising revenue, local station groups started building out a secondary revenue stream through carriage fees. But around 2012 or so, things began to change. Frustrated with the ever increasing monthly costs and scores of unwatched channels, consumers began cancelling their pay TV subscriptions. This became affectionately known as “cutting the cord.” With pay TV households in America declining and the rapid rise of Netflix, a new era in media began taking shape.
eMarketer is now projecting that there will be more non-pay TV households than pay TV households by 2024. You know this. I know this. The problem is, the local TV station groups aren’t yet grasping what their true exposure is to this trend. Years of easy money are coming home to roost.
A few years ago, the local broadcast station groups like Gray, Meredith, Nexstar and Sinclair noticed something. Even though cable-only entities like ESPN were generating ridiculous amounts of stable monthly revenue through these carriage fees, it was actually still the core broadcast networks that were getting most of the viewership from the average TV household. Afterall, just because a customer subscribed to cable or satellite, it didn’t mean they were watching ESPN or CNN despite the fact that they were paying for them anyway. The local station groups realized they weren’t getting compensated for allowing carriage of their signals the way ESPN was and they arrived at the conclusion that they needed more bargaining power when retransmission contracts were being renewed with the Dish and DirecTVs of the world. If the pay TV providers wouldn’t agree to the terms, the station group would cease allowing carriage. This is what is called a “blackout” and you’ve probably experienced this phenomenon once or twice if you’ve ever tried to watch a local station through your cable provider and were instead presented a full screen graphic saying that you can’t.
Executives at companies like Gray and Sinclair understood that the threat of a blackout on a local cable provider wasn’t as daunting if the station group only held 20 local stations as opposed to 100. Thus, the consolidation began to accelerate. As larger companies gobbled up smaller ones, suddenly the local TV station parent companies like Gray had greater leverage at the bargaining table with companies like Dish and DirecTV. This proved brilliant at first. With more stations threatening blackout at each retransmission renewal, the amount of money the cable and satellite companies had to fork over for the rights to carry the local broadcasts began to ramp. In the last 4 or 5 years, these large local station groups have seen their retransmission fees as a percentage of their total corporate revenue balloon from the mid teens to 40-50%.
Fair or unfair, I can’t say. Truthfully, I’m not going to even attempt to justify or decry these increases in carriage fees for the local stations. In many cases, these fee increases were probably necessary because the major networks began squeezing the local station groups for more at each affiliation renewal. Afterall, somebody has to pay for those expensive NFL contracts that CBS, NBC, and FOX agree to. The fact of the matter is, increased fees are generally passed to the consumer. Consumers unknowingly were paying a convenience fee to not have to switch inputs on their television when they wanted to change from a cable channel like TNT to a local broadcast channel like CBS. For the local station groups, this was easy money. Finally, a stable revenue stream insulated from the market action of advertising. In hindsight, everybody who wanted a piece of the easy money pushed the customer too far.
This all brings us to now. Netflix has done something spectacular. It has helped create a market expectation of on-demand viewing. To be clear, the Netflix business model is certainly not without issue. Sustainable or not, Netflix has proven a concept. And that concept is streaming, on-demand video. This market expectation is disrupting the media landscape to an incredible degree. And if you missed the investment ride in Netflix, don’t worry, this shift in video consumption is really just beginning. Because Netflix helped prove out the streaming consumption method, content owners have figured out that there are layers to the current distribution model that may not be necessary.
Who are these content owners? There are actually a lot of them. Disney is a big one. Disney owns ABC, ESPN, Star Wars, Marvel, and a whole bunch of other shit that kids like. Ever heard of Disney+? Okay, stupid question.
“Hey, want to watch Mandalorian?”
“No, Dad. Toy Story again.”
Ah the joys of fatherhood.
Anyway, the success of Disney+ is just the beginning. Now, a whole bunch of other content owners are building out their own direct to consumer streaming platforms too. Some of these content owners absolutely must do this because they are so big, they actually have exposure to the pay-TV apparatus as well. Exposure to that model threatens to erode revenue significantly if they don’t plan for a streaming solution. Comcast immediately comes to mind. That’s a big pay-TV provider that also owns NBC, Bravo, Universal, and a whole bunch of other shit that kids like. Ever heard of Peacock?
“Hey, want to watch The Office?”
“No, Dad. Kung Fu Panda again.”
UGH.
The point is, content owners are going direct to consumers. ABC is owned by Disney. NBC is owned by Comcast. CBS is owned by ViacomCBS. Disney has 3 streaming services. Comcast is making an effort with Peacock. ViacomCBS is doing the same with Paramount+ and PlutoTV. Even FOX bought Tubi. The writing is on the wall for the local station groups. Like it or not, a ton of the content they’re leasing from the major networks is going to be available directly to the consumer in a streaming platform. So what does this mean for the locals?
Look, I’m not going to sit here and say all of these local affiliate agreements are dead in the water. I think there is still probably a benefit to sharing programming and infrastructure between the station groups and the networks. But I don’t think all of these local stations are going to survive. Each station group and property probably needs to be assessed on an individual basis. And we need to remember, a lot of these local affiliates are paying the major networks for the rights to the programming. At what point is that no longer economical for the local TV stations? I’d wager for CBS, FOX, and NBC affiliates it would be whenever the NFL finds an exclusive home on the various streaming platforms that are sure to place bids down the line.
Earlier in the chapter I used Atlanta’s CBS affiliate WGCL as an example. A big city affiliation like that one is probably relatively safe for both parties but what about a town like La Crosse, Wisconsin? Does WKBT, the CBS affiliate in La Crosse, continue as a CBS affiliate much longer? How about FOX affiliate WYZZ in Peoria? That station is owned by Sinclair shell Cunningham Broadcasting while Nexstar produces WYZZ’s news in a studio that it shares with Peoria’s local NBC affiliate, WMBD. It’s a massive confusing clusterfuck. And it’s widely unnecessary to have the same newsroom producing content for two different TV stations in a town the size of Peoria, Illinois. The town clearly can’t support as many TV stations as it used to so why is the business forcing it to?
How many TV newsrooms do these small towns need? If affiliation agreements go away, how can a station like WKBT go from filling 30 to 40 hours a week with locally produced content to ALL of the hours? It can’t. And if it’s forced to do that, it probably just folds instead. This is what local stations are probably going to be up against in the next 5 years if not sooner.
Whether they realized it or not, pay TV consumers in the US were paying for all of the local content they could have easily watched for free with an antenna. This stable subscription money eventually grew to a revenue stream that rivaled the advertising buckets of the local TV station groups. The major networks sell content to local station groups. Local station groups sell the rights to that content to cable and satellite providers. Then the cable and satellite providers sell it to consumers. Two full layers of middlemen between content owner and end user. Two layers of added costs and inefficiencies disguised as efficiencies. Is it any wonder the consumer finally opted out?
Before the internet, a reversion to free over the air viewing may have been possible as pay TV bundles became too expensive. But just as the internet disrupted physical printed newspapers and analog radio stations, bandwidth has again improved and it’s finally video’s turn to face the reckoning. Now though the entire content consumption preference has shifted from appointment television viewed in real time to streaming video on demand. Local TV executives took this very critical consumption change for granted.
Historically “the demo” always watched live TV, just not local news. TV executives have always seen “the demo” start watching live local news as they grew their families and started paying more in taxes. Well, this time it truly is different. The only live TV people in “the demo” seem to watch is sports and they even appear to be getting tired of that. TV rested on its laurels. TV people expected you to be there because you always were. You were just a little more selective in your viewing. Now you’re not there at all and they still haven’t really figured it out.
Taken together, we have a drop in viewing. Which will undoubtedly lead to an acceleration of TV’s eroding ad-supported model. We have a drop in pay TV subscribers. Which will lead to a big decline in the retransmission fees that local station groups collect. The two core revenue buckets for local TV news properties are both getting shredded at the same time. And the programming that these businesses have relied on through network affiliation agreements isn’t guaranteed to be available forever. It’s a truly terrible fundamental setup. I can’t think of many investment sectors I like less than local TV news station groups. Maybe banking institutions. But honestly, it’s a toss up. Love her or hate her, Cathie Wood isn’t wrong.
The good news is, I’m not here to just shit on everything without providing solutions. I have a roadmap and a station structure that I will share in the sixth and final chapter.
Miss any chapters? Catch up: Chapter 1 - Chapter 2 - Chapter 3 - Chapter 4
