Suppliers Await Decision on Ownership Cap

The effect of greater concentration of buying power is a concern

Washington and the FCC aren't the only places abuzz over the impact of potentially relaxed media-ownership caps. Broadcast-equipment manufacturers across the country and around the world are quietly waiting to see just what impact larger groups will have on their business. Whether the impact is good or bad, many just seem relieved that the decision will be made.

"It removes uncertainty in the market so that stations can make more capital purchasing decisions," says Pinnacle Systems Senior Vice President Bob Wilson.

New caps, new acquisitions

Manufacturers say that, once it became clear that changes in the ownership caps were looming, capital expenditures were further deflated as station owners looked to keep balance sheets as lean as possible in an effort to remain attractive to potential buyers.

The new caps are expected to open up new acquisitions for the larger groups and further consolidation among smaller groups. And manufacturers believe that, once the acquisitions are completed, new equipment will be brought in to create new operational efficiencies. Large or small, efficiency is the goal.

"Everyone thinks about networks and big broadcasters, but we're seeing smaller groups buying other stations to have some benefits [of consolidation]," notes Harris Broadcast President Bruce Allan.

The phrase "economies of scale" does cause some concern among manufacturers. Economies of scale usually leads to lower unit prices. So quantities involved in a sale may rise, but drops in price could erode revenues. The upside, however, is a greater presence in more facilities, and that does lend itself to greater longevity for a product and more stability for a manufacturer.

Consolidation benefits

VizRT Americas President Isaac Hersly says companies like his could benefit greatly from additional consolidation as they earn the trust of major broadcast organizations. Companies like CBS or the AOL Time Warner properties, he says, will "move our technologies downstream to every level, buying one solution for many different stations."

The number of stations that Hersly defines as "many" won't be as large as some manufacturers hoped and others feared. It appears that the cap will be increased to 45% of national TV-household reach. Wilson believes the ownership cap will be revisited every couple of years, most likely resulting eventually in an industry without caps.

"The challenge for manufacturers will be how to help content producers reduce the cost of producing each stream," he says of the growing channel universe that has provided the diversity of voices that have made the cap expandable.

But even a 45% cap will have an impact on manufacturers. The market has already been tightened by the slumping economy and the still-recovering advertising market. The DTV transition has also shifted capital expenditures into different areas of the broadcast plant.

"It's going to force us to be more competitive in a market that has already seen prices dropping and competition from all sides," Hersly says. "In the long run, consolidation will impact the engineers [at the stations as well]. But technology isn't at a level where you can do a cookie-cutter installation and spread the same plan at each station. Plus all the plants are of different ages."

With or without a cookie-cutter approach, the larger broadcast groups will find more power to negotiate. Allan, who gained experience in the consumer-electronics market working at RCA, says, "The larger they are, the more pressure they can exert on a vendor." And that is why manufacturers will continue to offer more than just products: "While always sensitive to pricing, our services and support now put us in a different category [than simply selling equipment."

Smaller groups, fewer buys

The buying advantage won't go only to the larger groups. Smaller groups will gain leverage simply because there will be fewer stations and groups for manufacturers to reach. And, with fewer buyers, each remaining buyer is much more important, something that has salespeople across the country on edge.

There will, however, be at least one new opportunity: more demand for centralized operations. With the possibility of duopolies turning into triopolies, centralized operation becomes a focus as the best way to gain operational efficiencies.

"Centralization is one of our levels of expertise," says Hersly.

Wilson says that, while nationwide centralcasting continues to face last-mile connectivity problems, the duopoly model has proved to offer cost savings. "Centralization in local markets shows operating efficiencies. "And," he adds, "if duopolies work, why not triopolies that share new resources?"

Groups with 35 to 40 stations are already taking a hard look at the centralcasting model, Allan says. "The key is to come up with a footprint that provides benefits to smaller groups."