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OK, Networks, No More Excuses

With retrans cash flowing and ad market showing signs, now it’s time to perform 3/15/2010 07:13:00 AM Eastern

Once a sector in
so-called “secular
and cyclical
decline,” broadcast
networks
are suddenly as welcome on
Wall Street as the first crocuses
of spring.The mainstream TV
business is no longer subject to
endless downbeat stories about
ratings declines and ad revenue
shifting to cable. There are new
revenue streams to talk about:
from a network’s own affiliates,
from cable distributors, from Apple
and soon from Hulu. And the
backdrop is an ad market looking
stronger by the day, and Wall
Street seems to be buying in.

So, the question is simple: now
what? Network margins will be
greatly improved in 2010, thanks
to restructuring and the legions of
staff no longer on payroll. With
costs reined in and revenues
seemingly on the rise, there are
no more arguments for not being
able to run these businesses effectively.
It remains to be seen if big
media is up to the task, and can
truly position these businesses for
the evolving media landscape.

Far and away the biggest news
is the multi-billion-dollar annual jackpot from pay-TV distributors.
Then there’s the strong likelihood
of a subscription tier this
year on Hulu. And don’t forget
Nielsen’s willingness to let the
networks count online viewing
on an equivalent basis with TV
viewing; this should help stem
the decline of ratings points.

Optimists might also point to
a host of subscription revenue
sources on the horizon, among
them Apple iTunes. Networks,
including Spanish-language net
Univision, are talking to Apple
about variable pricing for shows
on iTunes. If there is an agreement
on pricing and the iPad
launch on April 3 is a success,
network shows sold via Apple
could grow much faster than they
have on current Apple devices.

The ad market is also back,
thanks to an upswing in autos, an
influx of political dollars and the
Olympics. It adds up to a big, fat
momentum for the networks.

As for stations, Needham &
Co media analyst Laura Martin
says; “Retrans is good [for stations].
Adding a new revenue
stream gives them a cyclical
bounce, and it’s making the station
economics more powerful.”

While affiliates may have to
hand back half of the new cash
to their network backers, it’s still
a powerful story for Wall Street.
“It makes stations and the parent
more valuable,” Martin says.
Nexstar Broadcasting’s stock hit
a 52-week high on Thursday,
reaching $4.92 before falling
back to close at $4.79.

Studios will also have an eye
peeled for moving fees back in
the upward direction. The organizers
of the Olympic Games
were smart in postponing their
2014 rights sale to a time when
things might look better for the
media economy. Other rightsholders,
including the Emmy
Awards, can perhaps make a better
argument for bigger dollars in
the light of the retrans wars.

A stronger upfront—even if
that doesn’t translate into bigger
annual ad revenues—will also
play into the positive themes
for broadcast networks.

But not everyone’s buying it.
Jason Helfstein, a senior analyst
at Oppenheimer & Co., says,
“Long-term audiences will migrate
to targeted channels. At the
end of the day, retrans money
will go straight to the bottom
line, but over time that money
will get absorbed. It’s a one-time
boost to profitability.”

So, it’s up to the CEOs to
make sure that’s not the case.

But the new money won't come without its frustrations. Nexstar CEO Perry Sook told analysts last week that his company has a CBS affiliate agreement expiring before the end of the second quarter, and renegotiations with Fox stations will come at the end of the year.

Moonves said he wouldn't hesitate to yank the signal if affiliates don't play ball, while Sook told analysts on the company's fourth-quarter earnings call, "A network without affiliates is not a network at all. Maybe it's a cable network, and I think we know what original-program ratings are on cable." He added that's never been a threat, but simply these talks are a "tug of war over money." No kidding.

Since network suppliers see new dollars in the system, there's the inevitable debate over where those dollars flow. Time Warner CEO Jeff Bewkes has already spotted his piece of the pie, telling investors that retrans fees are good for his company. "We are a very interested party with strong relationships selling series to broadcast networks," he said at the Credit Suisse media conference. "We have a very big business, we sell to all four networks, and their ability to continue that profitable business is good for Warner Bros. and good on the Turner side."

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