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Can This Man Save Broadcast TV?

Emmis's Smulyan describes plan to profit from digital 4/18/2004 08:00:00 PM Eastern

After months of plotting in secret, Emmis Communications CEO Jeff Smulyan is unveiling a plan that he claims will resolve broadcast stations' greatest quandary: how to make money off their new digital signals.

Onstage and in meetings during the NAB show in Las Vegas this week, he'll lobby his fellow TV broadcasters to pool their digital spectrum in a bold effort to offer a new wireless cable service in cities nationwide. Under the plan, stations would offer subscribers a package of 15 or so of the most popular cable networks for $25 a month—a big discount from cable and satellite TV.

Smulyan's plan, unthinkable only a few years ago, turns a time-worn TV business model on its ear through a clever trick of technology. The cable industry was born in the 1950s by retransmitting local TV stations. Now, using new digital spectrum, broadcasters would retransmit the signals of cable networks—over the air.

"I want to preserve the future of over-the-air broadcasting," Smulyan told B&C last week in an exclusive interview, "and I think I have the answer."

The issue, he says, is greater than helping stations exploit their new digital real estate and to somehow recover the $3 billion they spent upgrading stations and towers. He casts the business as a way for stations to rise up against cable and, in the process, end their total dependence on a single revenue stream, advertising. Stations are feeling increased pressure these days from cable networks, which are diverting viewers away, and local cable systems, which strike at the stations' hearts with stronger local ad-sales operations.

Smulyan's quixotic quest faces an array of technology, business, and political obstacles. To succeed, he needs to build a partnership of major TV-station owners, a notoriously uncooperative and risk-averse crowd. Entering the biggest cities will require the collaboration of the big networks—particularly NBC and ABC—whose stations dominate large markets. CBS has already said it has no interest in other multicast plans.

Smulyan concedes that he has not settled on a business model or technology approach, and he plans to provide stations more specifics within 45 days. Existing multicast technology is still plagued with reception problems under certain conditions. Even if the system works well, it's unclear how many people will pay for a limited selection of cable channels.

Consultants hired by Smulyan estimate that 10%-15% of TV homes could be drawn to a low-cost service, and he estimates that three-quarters of the customers would come from existing cable and DBS consumers who consider their service too expensive.

For their part, cable and DBS operators see profits in more channels and features, not fewer. Smulyan shrugs. "There's a market for low-end product in any business you can name," he says.

Nonetheless, the plan is getting the attention of major broadcasters. Indianapolis-based Emmis is a relatively small player in TV stations (No. 23 of B&C's Top 25 TV Station Groups; see page 50) and is best-known as a radio-station group. But Smulyan talks about TV with the zealotry of an old-timer and is passionate enough to bring key players into the tent, even if he can't totally convert them. Big groups like Post-Newsweek and Media General have expressed interest. "We are very supportive," says Gary Chapman, CEO of LIN Television.

But broadcasters sold on the idea of retransmitting cable channels have other choices. One group, USDTV (see page 34), is well ahead of Smulyan in launching similar systems and faces similar obstacles. The Utah-based company, backed by a venture-capital group formed by ex-Wal-Mart executives, is leasing spare spectrum from stations in Salt Lake City and Albuquerque, N.M., and plans to launch in Las Vegas this week. At least two similar ventures are trying to get off the ground.

So why should broadcasters back the Emmis model over others? Smulyan preaches with fervor that the business should be homegrown, started by broadcasters, owned by broadcasters. He sees USDTV as an echo of a trap broadcasters fell into when cable systems started retransmitting their signals: permitting an outsider to stand between TV stations and their viewers.

USDTV CEO Steve Lindsley doesn't see much distinction between himself and Smulyan. "There is not really a significant difference between the plans," he says. USDTV's plan has always been to get up and running then asking broadcasters to buy in. "It's very important for the broadcasters to understand that our interests are allied with their interest."

But Smulyan's sermon hits home with some station owners. Jim Zimmerman, president of Media General Broadcast, says Smulyan's plan "allows us to maintain control of our spectrum."

Smulyan envisions broadcasters in each market launching a service charging $25 monthly for all local HDTV broadcast signals plus 12 to 15 cable networks such as CNN, MTV, or Discovery. The goal: to hawk the most popular channels, since most cable and DBS subscribers tend to watch a just a handful of channels regularly. Key to the plan is development of a low-cost set-top box that would decode the encrypted digital signals and display them on TV sets ranging from 30-year-old B&Ws to the latest widescreen HDTVs. Smulyan expects to sell it for $99 and claims they can eventually be produced in volume for just $50. USDTV's similar gear currently costs $250.

Under one financial model, stations would be paid retransmission consent fees of 40¢ to 50¢ per subscriber—an uncertain financial gain for broadcasters. In Emmis's biggest market, Orlando, Fla., where it owns The WB affiliate WKCF, TV stations sold $175 million of advertising last year. If a multicast cable system had secured 10% penetration, it would net around $12 million, to be divided among the national parent company and five stations.

Despite the naysayers, Smulyan argues that his is the best suggestion for use of the digital spectrum, especially given the lukewarm reception of affiliates to network ideas for starting local weather and news channels.

Smulyan says early conversations with broadcasters energize him: "The last 10 days have been the most satisfying in my 40 years in the business."

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