ABC Banks on Its Local Strengths

There haven't been many recent success stories at ABC. Its parent, The Walt Disney Co., is in trouble at the top. The network has floundered in prime time, and there aren't many expectations that the upcoming fall season will reverse the outgoing Nielsen tide of recent years.

But then there's the ABC group of owned-and-operated TV stations.

Through all of ABC's woes, the station group continues to be a vital profit center. Last year, according to estimates by Sanford C. Bernstein & Co. Senior Media Analyst Tom Wolzien, it had revenues of approximately $1 billion, generating net earnings before interest, income taxes, depreciation and amortization (EBITDA) of $450 million to $480 million, with profit margins in the mid- to upper-40% range.

As a group, the 10 O&Os reach 24% of the nation's TV households. In its top five markets—New York, Los Angeles, Chicago, Philadelphia and San Francisco (which Nielsen combines with Oakland and San Jose)—ABC is No. 1 sign-on to sign-off, according to Walter Liss, the taciturn head of the stations group, and has averaged a healthy 46% profit margin over the past five years.

ABC, in the early decades of its existence, hardly competed with NBC and CBS but had the advertising wisdom to target demographics. So, while NBC had Bonanza and CBS aired Gunsmoke, ABC went younger and more edgy with shows like Shindig, Peyton Place, Voyage to the Bottom of the Sea and, years later, of course, Roots.

That strategy worked. ABC stations' profit margin was closer to 60% a decade ago, when its prime time was clicking, and cable was less of a factor. According to a Morgan Stanley report, operating cash flow at the ABC station group fell in 2003 to $450 million, down a monumental $150 million since 2000. That's a chunk of change.

The big-network-owned groups all have stations in the largest markets. Not all are in the same markets, though, so comparing them isn't precise. But, on a station-by-station basis, "NBC is probably doing a little bit better than they are, and CBS is doing somewhat worse," Wolzien says of the ABC group.

ABC's local-market prowess also owes a debt to Capital Cities Inc., the relatively small broadcast group that surprised the world in 1985 by acquiring ABC, one of TV's storied original Big Three.

That unexpected acquisition was the spark that set off the modern era of merger-mania in the TV business, and the fireworks continue to this day.

Cap Cities, supporters and detractors alike agree, knew the station business, and it ran a tighter, more cost-conscious ship than its profligate network-owner competitors of that era. It knew its own station communities better, too, in the days when broadcast was nearly the entire TV game, industry insiders say.

Liss, the current head of the station group, got his start at WPVI, the O&O in Philadelphia, during its days as the Cap Cities flagship. Even today, WPVI continues to take in more advertising revenues than any TV source in the No. 4 market, Wolzien notes.

And to this day, those Cap Cities attitudes and practices continue to serve the ABC-owned stations well, even as the network has suffered a prime time ratings meltdown, particularly in the coveted 18-49 demographic.

"ABC was [always] a stations company," says Dennis Swanson, a 10-year veteran of the group. He rose to become its president after heading WLS, the Chicago station, and ran the group until after the Cap Cities acquisition. "The stations were profitable before the network was," he says, "and so the stations held great sway in that company."

ABC does it with strong local newscasts, veteran personalities and now, particularly, by owning the early-morning hours. For the last three sweeps, all 10 ABC O&Os led their NBC and CBS rivals in adults 25-54, says Cathy Egan, senior vice president of new business at ABC. Says Ben Sherwood, the new executive producer of Good Morning America, "The O&Os set things up for us in a powerful way and help us promote our show. They're critical to our success." In the markets where ABC owns stations, GMA owns the morning.

Swanson is now chief operating officer of the Viacom Television Stations Group, his former group's newly invigorated competitor, but he knows the ABC way.

"The stations personified all the things that we talk about, in terms of strong local-news presence, community outreach and service. And they have this wonderful program called Oprah Winfrey, and that's tough to compete against," Swanson says. "And when you put Wheel [of Fortune] and Jeopardy in there, with strong local news, they are a very formidable competitor."

Without a doubt, the ABC-owned stations are well-served by the group's long-term relationship with all of those shows—distributed by King World, which in this era of consolidation is now owned by Viacom, which owns CBS. Small world, part 2: In a previous life, Swanson put Oprah Winfrey on the air in Chicago, and that led to Winfrey's presence at the other ABC- owned stations.

King World programming leads out of the ABC network news in many markets, too, where the Jeopardy/Wheel duo can be counted on to reliably deliver time-period winning ratings.

The Oprah Winfrey Show lead-in to local news at many ABC stations is as important as any news anchor its stations have. Oprah and the other King World shows are contractually locked up for ABC until 2008, according to Roger King, CEO of Viacom's CBS Enterprises and King World Productions.

For years, the three shows have been "mainstays" for ABC, King says. "When you have top product like that, there's less change, the audience knows where it is, it's a habit. ... There's a synergy between Wheel and Jeopardy and Oprah." Of course, the shows also are valuable promotional vehicles for ABC's prime time.

Despite the network's horrible prime time in 2003, ABC-owned stations still raked in the chips. For example, flagship WABC New York took in an estimated $286.3 million in revenue, ahead of every station in the No. 1 market except mighty WNBC, which took in almost $50 million more, according to the most recent data available from BIA Financial Network.

In Los Angeles, the traditionally cutthroat and competitive No. 2 market, 2003 was a revenue dogfight. Fox O&O KTTV edged past KNBC $251 million to $250 million, according to BIA estimates. But KABC was just behind with $247 million, versus KCBS's distant fourth-place $150 million tally.

In Philadelphia, WPVI was the 2003 revenue leader by a wide margin, with some $178 million, beating its closest competitor, Viacom's KYW, by more than $75 million. And in San Francisco, the No. 5 market, ABC's KGO was in second place, almost $30 million behind Cox-owned Fox affiliate KTVU, according to BIA.

ABC says Liss has a long-standing policy against talking to the press, and the network declined to make other senior division executives available in his place.

He'd rather let ratings talk for him, and that silence, so far, is still golden, even if there's less of it. Liss first joined WPVI, then the Capital Cities Philadelphia flagship, in the early 1970s. He has headed the ABC station group since 1999. Early in 2001, he briefly resigned but, after a regime change at ABC, reconsidered just before the official announcement of his departure was due.

Prior to heading the group, Liss was chairman of Buena Vista Television (1996-99). Previously, he had run WABC New York for nine years (1987-96) and, prior to that, was president of Cox Broadcasting (1983-87).

Generally, top-market revenue races are as tight as revenue races. The bottom-line question then becomes, how long can ABC's biggest O&Os maintain ratings and revenue leadership in a era when their parent network has faltered?

Not surprisingly, the answer is "quite awhile," says analyst Wolzien, who notes that, historically, the NBC stations did well even when the network was in the pits in the early 1980s. The key at the ABC stations, he says, is "maintenance of the local-news franchises. If they let that local-news franchise start to slip, they're dead. What you do locally," Wolzien says, "can cover a lot of sins at the network for a long time."