Facing Challenges in a Tough Climate

Tribune lives by its localism and banks its future on The WB and smart off-net acquisitions
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Tribune Co. is a great big company that sometimes doesn't act that way. Best known for its flagship properties in Chicago—WGN and the Chicago Tribune—it has managed to build itself into a $6 billion national corporation that makes its money by focusing on local markets.

"Ultimately, our business is local mass media," says Pat Mullen, president of Tribune Broadcasting. "Advertisers need to reach large audiences in local marketplaces, and local broadcast stations are unique and different. They are heavy into news, local sports and network programming that provides broad local audiences. As long as we continue to buy the best programming and have a strong network, we will always have significantly larger audiences [than our cable competitors] and, therefore, have a good business."

To that end, Tribune has created powerful combinations in many top markets. Besides Chicago, Tribune owns TV stations and newspapers in New York, Los Angeles and Miami/Fort Lauderdale. The company would like to add more such combinations to its portfolio but, for now, finds its fate is tied to policymakers and the courts (see story, page 64).

Tribune's headquarters in an impressive Gothic-styled tower—the result of an international architectural competition when it opened its doors in 1925—is a spectacular example of how the Chicago Tribune
viewed itself in the past, when it boldly proclaimed on its front page that it was the "World's Greatest Newspaper." Indeed, WGN, the call letters for its Chicago radio and TV stations, is an acronym for that slogan.

In recent years, Tribune has fashioned itself into a multimedia power with influence far beyond Chicagoland (another phrase the Tribune
invented). Most important, it has become a part owner of The WB network, which gives it strong programming aimed at a youthful audience.

But overall, it has been a slow—and embarrassing—year for Tribune financially, with operating revenues up only 3% in the second quarter to $1.5 billion. Growth is expected to pick up a bit to 4% in the second half of the year.

The company has been forced to restate inflated circulation figures at New York's Newsday
and Spanish-language newspaper Hoy, and that crisis is costing it around $50 million in make-goods to advertisers, as well as a certain amount of pride and public relations.

Tribune Broadcasting also has been somewhat slow, growing only 3% in the second quarter to $450 million. Still, Tribune's broadcast properties are performing better than the overall company, growing 7% in operating cash flow and 8% in operating profit in that quarter. By contrast, Tribune Co. is down 11% in operating cash flow and 14% in operating profit.

Tribune has grown to 26 TV stations that cover 80% of the nation in major markets, notably Boston, Denver, Atlanta, Seattle, Dallas and Houston. Its Superstation WGN, which is a different version of the station Chicagoans see, goes into 57 million homes. That size gives Tribune clout. It can launch shows—there's a separate Tribune Entertainment for that—and make group deals that can make or break a syndicated effort.

"I think they've got a very fine collection of assets on the newspaper side, as well as on the TV side," says James Marsh, senior broadcasting and publishing analyst at SG Cowen. "I think they are very well positioned with those assets."

Marsh offers that assessment with some caveats, however. Newspapers haven't been a growth industry for years, as younger people leave the printed page to get their news from the Internet and 24-hour cable channels. To entice young-adult readers, Tribune started the fact-lite Red Eye
last year in Chicago.

And TV stations aren't the high-margin businesses they once were, facing increased fractionalization and the possibility that many people will stop watching advertisements once digital video recorders are more widespread.

"Our biggest concerns about the TV business are not the near-term fundamental trends," says Marsh. "We think DVRs are going to negatively impact growth rates in the long term. They can be viewed effectively as Napster for TV. DVRs allow consumers to steal programming they should be paying for by watching commercials."

With regulatory uncertainty in Washington, business uncertainty with the onset of new technologies like DVRs and digital television, and massive consolidation, the business of buying and selling TV stations has ground almost to a halt. Just a few years ago, TV stations went at multiples of 13-15 times cash flow; today, no one knows exactly what a TV station is worth.

Tribune still would like to be in the acquisition business, according to its annual report. Last year, Tribune purchased KPLR St. Louis, already a strong station, and KWBP Portland, a less mature property, bringing its total number of stations to 26 and its coverage to more than 30% of the U.S., according to the FCC. The limit is 39%.

"We are going to be very financially disciplined but also opportunistic in our approach toward acquisitions," Mullen says.

In the short term, several factors are making things difficult for Tribune Broadcasting. First, the company is missing out on the double bounty of the Olympics and the presidential election.

While Tribune stations are expected to be flat in August, NBC's O&Os and affiliated stations are expected to be up 35% in the third quarter, after the Athens Olympics performed beyond expectations, according to Ed Atorino, managing director at Fulcrum Global Partners in New York.

"For the most part, Tribune's recent issues can be explained by the Olympic effect, the draining or vacuuming away of national-spot advertising by the NBC stations from The WB's, as well as ABC's, CBS's and Fox's," says Lee Westerfield, managing director and media analyst at Harris Nesbitt Westerfield in New York.

"The media buy for the month of August among young women 12-34 moved to the warm and fuzzy Olympics because it's the only sporting event that skews equally to men and women," Westerfield says. "The WB, therefore, faced gender competition from NBC. That's temporary."

Tribune stations also are taking a hit by not getting any political advertising in this election cycle. While Tribune stations in major markets—WPIX New York, KTLA Los Angeles and WGN Chicago—have major news operations, what has hurt them is that New York, California and Illinois are not swing states in this election, and so media buyers' political budgets are focused elsewhere.

And in Chicago, where WGN expected to reap some revenue from a hotly contested Senate race between Democrat Barack Obama and Republican Jack Ryan, hopes faded when Ryan had to drop out of the race due to a sex scandal that surfaced during his divorce proceedings from actress Jeri Ryan. Although Alan Keyes took Ryan's place, the race is no longer considered close, especially with the national exposure and positive reception Obama received in July during the Democratic National Convention in Boston.

However, it's not like Tribune expected to be raking in the political or Olympic bucks, and Tribune executives say the company makes it up in off years.

"In non-political, non-Olympic years like next year, we tend to be up 10% when everyone else is flat to down," Mullen says.

But it's not just missing out on political and Olympic advertising that's making today's environment tough. Spot advertising this year is slower than most thought it would be.

"The economy has not bounced back as strongly as some people thought it would," SG Cowen's Marsh says. "And local cable and the Internet have siphoned off some of those ad dollars."

In fact, cable has become more aggressive in its local-ad-sales efforts, particularly Comcast, which has focused more on such sales since it acquired AT&T's cable assets. While local-ad revenue is almost like "found money" to cable companies, says Marsh, cable's recent aggressive play in the local space is having its effect on stations' local-ad revenue.

Finally, Tribune stations have the additional challenge of soft ratings at The WB, the network in which Tribune owns a 22.5% stake (see page 60). In the 2003-04 season, The WB's ratings were off by more than 20%.

Mullen says that, overall, the network accounts for only 17% of the stations' revenues, although analysts put the number between 25% and 50%.

Tribune has high hopes for The WB's recovery this season. Surprise summer successes in Spelling Television's Summerland, starring Lori Loughlin, and Blue Collar TV, a sketch show featuring redneck comic Jeff Foxworthy, were encouraging signs.

In the new season, the much-hyped Jack & Bobby
opened well among women but didn't do as well among broader 18-34 and 18-49 audiences.

"It's a terrific show," Mullen says. "It's the best pilot I've seen since Everwood." (Jack & Bobby, incidentally, also was created by Greg Berlanti, who cut his teeth on one of The WB's first big hits, Dawson's Creek.)

Also new this fall is The Mountain, starring Creek
alum Oliver Hudson (brother of Kate). One Tree Hill, starring WB fave Chad Michael Murray, was on a growth trajectory when the season ended last year. Everwood, in its third season, opened flat year-to-year, while WB veterans 7th Heaven
and Charmed
saw 15% declines in their premieres, indicating that these aging shows are nearing the end of their runs.

"The WB was down a little bit in ratings this past year, but that is coming off the historical highs of the prior year," Mullen says. "That's not unusual at all for an immature network. It will grow again, and each time it will plateau at a slightly higher level."

Typically, the Tribune stations outperform the network in most of their markets. In the top three markets, Tribune stations are major players, right up there with their rival-network affiliates.

"On the positive side of the equation, Tribune's WB stations dramatically over-index and outpace The WB network," says Westerfield. "However, neither overachieves other broadcasters."

While Tribune always wants to see the network performing at the top of its game, the group's access and late-fringe blocks of off-net sitcoms are much more important to the stations, accounting for 40% of revenue.

Right now, those blocks are filled with syndie top performers Friends, Everybody Loves Raymond
and Will & Grace. Tribune has made some key buys for its stations in coming years, including Twentieth's Malcolm in the Middle
for stations in 10 markets, often paired with the always popular
The Simpsons. And Sex and the City, a show that has improved TBS by leaps and bounds on Tuesdays and Wednesdays at 10 p.m. ET, is coming in 2005.

Other purchases include Buena Vista's My Wife and Kids, starring Damon Wayans, likely a 5 p.m show next year. And Buena Vista's According to Jim
will get a slot on most Tribune stations in 2006.

Earlier this year, Tribune let Seinfeld
and Everybody Loves Raymond
go to Fox in some markets. Tribune would prefer to keep its sitcom lineups fresh, rather than keep renewing aging shows. Marc Schacher, Tribune's vice president of programming, worries that the dearth of hit comedies has Tribune looking elsewhere for ways to stay competitive.

"To protect ourselves, we have to start investigating alternative program categories to play in those time periods," Schacher says. "We have to look either to ourselves or to partnerships to develop first-run originals that can play within our sitcom blocks so we're not totally dependent on off-net shows.

"If, in fact, the next access sitcom does not come along quite as soon as we need it," he adds, "we have to have a good idea about something that can play in those areas."

That could include developing an entertainment-news show geared toward younger audiences or a comedy/game-show hybrid, Schacher says, although the company is only in the early stages of such discussions.

Wall Street doesn't hardly worry about Tribune because its strong assets are well-positioned for the future. With some regulatory help, it's also a media company that aims to get a lot bigger.

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