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Cutting Bait On Subchannels

Strapped stations have held off hooking into potential new profit streams. But can they afford to wait? 1/19/2009 12:00:00 AM Eastern

Things were looking pretty positive for the .2 Network when it began signing up affiliates last year. The startup digital TV network—offering movies, comedies and lifestyle series—was fine-tuning programming and slated a launch date of Dec. 8, 2008.

But like so many media companies, .2 Network has been forced to reassess plans. With the industry slumping and the digital transition on the way, the network delayed its launch until April, hoping to see market conditions improve by then.

“We want to give our existing stations time to catch up on the economic side and not put so much pressure on prospective affiliates,” says .2 President Richard Schilg. “We are ready, but we listened to them and we are waiting.”

The .2 Network, among a crop of new services for TV station digital subchannels, is among a number of companies playing the waiting game, and the holding pattern may continue for a while. These networks were not long ago regarded mainly as an exciting new revenue stream. But at a time when broadcasters' financials are grim, most are weighing how much attention to give emerging businesses like digital multicasting.

Many station owners are focusing on operations and slashing budgets at their main broadcast channels. Some stations are laying off staffers, including well-known news anchors, to shore up finances. And multicasting risks becoming a financial afterthought, at least in the short term.

But digital platforms—including digital multicast channels, mobile video and station Websites—represent areas of growth ready to bring in new viewers and ad dollars, proponents say, making this divest/invest question part of a vital industry balancing act. Classic-TV service Retro Television Network (RTN), the Universal Sports Channel from NBC, and This TV, a movie network backed by MGM and Weigel Broadcasting, are among the choices.

“Broadcasters need to make sure they don't run out of good ideas,” says Brandon Burgess, CEO of Ion Media Networks, which owns and operates 60 local stations. Ion also offers two digital networks, Ion Life and kids channel Qubo, and is developing a third, called Urban Television, with BET founder Bob Johnson. “It is not costly to light up additional channels,” Burgess adds.

With the DTV switchover date approaching (at presstime, the deadline remained Feb. 17, though many believed it would be postponed, possibly three to six months, once the Obama administration took office on Jan. 20), utilizing digital bandwidth is very much on broadcasters' minds. When full-power stations make the switch—either next month or in the near future—they will make a government-mandated conversion from analog broadcasting.

Broadcasters have spent more than $8 billion upgrading to digital and are eager to monetize uses for their increased spectrum. Options include multicasting, high-definition broadcasting and mobile video. High-quality HD is most broadcasters' top priority, station managers say. Mobile video is also garnering significant attention.

But multicasting offers opportunities to attract diverse groups, such as Hispanics or movie lovers. Digital subchannels can be viewed over the air on digital TV sets and also on cable and telco, provided the local TV station strikes a carriage deal.

Growing the Digital Menu

Economic downturn notwithstanding, the number of multicast channels is actually still growing. More than 350 stations currently operate a second digital channel, according to BIA Financial, compared to only a handful five years ago.

Some stations opt for local channels, like news or weather. Another route is a service like the .2 Network, one of about a dozen new digital networks currently either on the air or in development designed to air on a station's subchannel. Youth-oriented LATV targets young Hispanics with bilingual programming; its affiliate deals include big-market Post-Newsweek and Tribune stations. RTN now has agreements with 90 affiliates. Last summer, NBC launched Universal Sports, a network with 2,400 hours of action, for its nine O&Os, and is courting NBC affiliates. And in November, MGM and Weigel launched This TV, which has cleared stations covering half of the country.

“Broadcasters need more options to be able to maintain and grow share,” says Weigel President Neal Sabin. This TV pitches its service as a free movie channel, and also offers a kids block in the morning.

“If you do this right, you can create a new TV station in the market with a lot less money than it would take to buy a [traditional] station,” says John Bryan, MGM's executive VP of broadcast strategy.

But in today's climate, investing in a startup business—even a low-cost endeavor like a digital subchannel—is a tough sell. A station's main channel is its economic engine, typically accounting for 95% of revenue, and ad spending is down among key categories like retailers and automotive dealerships.

“We tell our clients if something comes along that seems unique and compelling, they should do it. But the way the economy is right now, they should stick to their knitting,” says Bill Hague, senior VP for TV consulting firm Frank N. Magid Associates. “They don't need more inventory. They need to maximize the inventory they have now.”

The upside, however, could be inventory that helps a station compete with local cable advertising. Digital subchannels have more inventory and lower costs than main channels, which could appeal to advertisers either searching out high-frequency or looking for options more affordable than the broadcast affiliate's prices.

To ease broadcasters' concerns, digital networks are touting low startup costs, and offering revenue sharing and favorable advertising splits. Most digital networks offer 50-50 barter split on ads, with a station getting five or six minutes per hour to sell to local advertisers.

“If you have bandwidth, why not put another network out there and grow a business?” suggests RTN President Mark Dvornik.

RTN, which airs classics such as Leave It to Beaver and Magnum P.I.—while also adding live nightly talk shows last September, one of them hosted by Robin Leach—tries to simplify operations for stations. The network can act as a master control and handle insertion of local ads. Stations can choose their own customized schedule or take the standard national feed. Affiliates can time-shift programming and insert their own news and specials.

Local weather channels have been by far the most popular choice for stations' digital subchannels. Broadcasters already invest heavily in weather technology and a staff of meteorologists, and a 24/7 weather channel allows them to maximize those resources. About 50 stations, including the ABC owned-and-operated outlets, partner with weather information provider AccuWeather.

NBC Weather Plus had been the biggest player in the category. It was the first jointly owned digital venture between a network and an affiliate group to program and hit on an area both sides could easily exploit. After launching in 2004, WeatherPlus grew to 90 markets.

But this past July, NBC agreed to pay $3.5 billion to buy The Weather Channel with two private equity funds; this signaled a shift away from WeatherPlus. NBC planned to cease its operations on the channel by the end of 2008, although many affiliates were expected to keep their Weather Plus services, revamped as all-local entities.

Other hyper-local options include 24/7 news, community information and local sports. In Connecticut, Meredith's Hartford affiliate WFSB offers both local news and sports channels. “Our research shows people want local content and local products. They want us to be part of the community,” says WFSB General Manager Klarn DePalma.

In 2007, the station launched a digital news channel, EyeWitness News Now. On Dec. 1, WFSB and local PBS affiliate CPTV partnered to launch the Connecticut Sports Network, featuring coverage of 20 small colleges and 41 high school championships.

After considering several uses for its secondary digital channels about a year ago, Scripps-owned KNXV Phoenix launched a hyper-local traffic channel, Go AZ. The traffic channel, says Janice Todd, KNXV's VP/GM, caters to the Phoenix area's growing gridlock snarls and viewers' intense demand for information.

Phoenix's growth, she says, “has created traffic problems that are similar to what Southern California went through 20 to 30 years ago. We saw a big need for consumers trying to get traffic information.”

Other stations are opting to affiliate with programming services. This TV is one of the fastest-growing of these services; it has struck deals with major station groups including Hearst-Argyle, Post-Newsweek and Sinclair.

The channel immediately started getting audiences with minimal promotion, says Weigel's Sabin. But a major obstacle for any digital network is how to crack the top 10 markets. Except for NBC, the networks are largely waiting on developing digital channels for their O&O groups. Distribution in top 10 markets is essential to crafting national ad buys and qualifying for national Nielsen ratings. “You aren't real until people can turn it on in their offices,” says Howard Bolter, chairman of LATV.

Now in 33 million homes, LATV, which offers bilingual programming to young Hispanics, is carried in six of the top 10 markets and nine of the top 10 Hispanic markets.

As word spreads through station groups and the industry, LATV execs say they are getting more interest. “I'm getting calls from places that I wouldn't consider heavily Hispanic, like Dayton and Savannah,” says Starrett Berry, LATV's head of distribution.

NBC Universal has shifted its digital focus to sports. Last June, the network acquired control of the fledgling World Championship Sports Network and revamped it as the Olympic sport-themed Universal Sports Channel. NBC hopes to keep Universal Sports mostly on NBC affiliates, but will shop the service to other stations if a local NBC station declines, says NBC Olympics President Gary Zenkel: “Stations see this as an opportunity to have compelling programming and make some money.”

The View From Station Groups

Despite economic hardships, many station managers say they are still engaged in multicasting. Some, however, are taking a measured approach. Belo Corp., which operates 20 stations, has dabbled with a few locally focused digital channels, such as a local news channel in Boise, Idaho.

Peter Diaz, Belo's executive VP of broadcast operations, says multicast channels need to offer something new to compete with existing networks. “Just because you build it doesn't mean they will come,” he says. Belo is bullish on using its digital spectrum for high-quality HD and mobile video services, he adds.

Multicast allows stations to create virtual duopolies in markets where there aren't enough full- or low-power stations. Gray Television is particularly aggressive, using multicast to add affiliates in more than two dozen markets, including 11 MyNetwork TV stations and eight CW affiliates. In Nashville, Meredith Broadcasting operates a Telemundo affiliate on its NBC station's digital subchannel.

Meredith is experimenting with other models, too. It operates several local weather and news channels, and has signed with .2 in Portland, Ore., and Kansas City, Mo., where it operates duopolies. “We look for something that will be valuable and of interest to the community,” says Meredith President Paul Karpowicz.

Ion is one of the most aggressive broadcasters on digital strategy. Besides guiding the company's three digital networks, CEO Burgess also heads the Open Mobile Video Coalition (OMVC), a consortium of broadcasters working to develop industry standards for mobile DTV.

Urban TV, the joint venture with BET's Johnson, is a good example of thinking creatively with digital, Burgess says: “There are genres that are underserved, like lifestyle, health, food and news programming for the African-American audience. It is an example of thinking of using public spectrum to respond to public interest and finding a business opportunity in an underserved market.”

Regarding spectrum management, Burgess says broadcasters can offer multiple services. “We have more than enough spectrum to go around in this industry,” he says. “If we run out of capacity, we'll partner with broadcasters who don't have enough ideas.”

More than 800 TV stations have affiliated with OMVC. BIA Financial predicts that mobile video services, if deployed aggressively, could generate $2 billion in advertising revenue by 2012.

Such numbers garner attention in a depressed economy, but station managers say they're open to both multicasting and mobile DTV. “We think there is opportunity to have one or two digital subchannels and a strong commitment to mobile,” says Brian Lawlor, senior VP of television for the Scripps station group. “We are impressing on GMs and chief engineers to become as much spectrum managers as anything else.”

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