OK, Networks, No More Excuses

With retrans cash flowing and ad market showing signs, now it’s time to perform

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."