For whom the gloom

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If Wall Street's view of the TV-station business and its prospects
were accurate, you'd think that all the local signals were about to go dark,
that business is so bad that local operators are just going to fold their tents
and find another industry to toil in.

That won't happen, the fantasies of spectrum-hungry would-be wireless
service providers notwithstanding.

But there are signs that, in the short term, growth will be marginal.
Many are betting that industrywide revenues are sure to be down next year,
coming off record levels of political and Olympics spending in 2000.

There are signs of softness in the current advertising market at both
the national and local levels. Increasingly, talk of a slowing economy has
advertisers jittery and very anxious about their upfront commitments.

Anecdotal evidence suggests that advertisers are preparing to exercise
options in record numbers to cancel some of their upfront buys for the first,
second and third quarters. Some are already predicting that next year's TV
upfront advertising market will be down significantly from this year's record
$8 billion.

And the national spot market, already shaky after a down year in 1999,
is looking less stable this year, exclusive of political and Olympics money.
Analysts suggest that advertisers will probably cancel some fourth-quarter buys
as a prelude to cuts they will make in January when options to pare upfront
commitments kick in.

Prices for network scatter inventory are said to be substantially
lower than last year's 20% to 30% gains and, in many cases, lower than the 11%
average price increase for this year's upfront.

And conflicting pronouncements last week from several media moguls
only made the picture less clear. Gerald Levin and Steve Case, the men who
would be merged at Time Warner and AOL, vigorously denied any softness in the
advertising economy.

"There's been a lot of swirl in the market," Case said. "AOL's
advertising growth is right on target."

Levin went further, saying that the whole question of a slowdown is
"spurious." Yes, spending by dotcom companies has dropped, but some big spender
is always fading and being replaced, just as dotcoms replaced free-spending
pharmaceutical companies, which had replaced long-distance companies, which had
replaced videogame makers.

"There is no advertising issue," he said, adding, "We have the most
resilient economy in the world." Like most stocks in the media sector, both
Time Warner and AOL have been hammered lately on concerns of a slowing
advertising economy. But both stocks got a nice upward push (more than $3 each)
last Wednesday when Case and Levin presented their happy scenario to
reporters.

But half a world away at his company's annual shareholders meeting in
Adelaide, Australia, News Corp. Chairman Rupert Murdoch braced investors for a
downturn.

He warned of "weakness" in the U.S. TV advertising economy. "I have to
say the immediate future for us and our competitors looks a little uncertain,"
he told shareholders. "There are signs of weakness in the next couple of
months." News Corp. stock dropped almost $3, to a little more than $40.50 on
the news.

Then there's the digital-TV conversion, which few deny has ground to a
halt. Some believe it has evolved into a $70 billion white elephant that has
viewers yawning, networks punting on digital programming commitments, and
station executives scratching their heads wondering how they're going to make a
$2 million to $3 million (per-station) DTV-conversion investment pay off.

Station values are plummeting, particularly outside the big markets.
Although FOX is paying top dollar for Chris-Craft, station prices outside the
top 20 markets have fallen in the past four months from an average 15 times
cash flow to about 10 to 12 times cash flow, analysts say. At least one
mid-size-market station sold for only nine times cash flow.

That trend also highlights the struggles of small- and
mid-size-market operators, for which the situation is a lot worse than
for big-market stations. Network compensation is being phased out, and that
comes directly off the bottom line. For big-market affiliates, compensation is
a relatively small percentage of profits. In smaller markets, it's a much
bigger percentage.

National spot dollars are also a lot less available in markets No. 50
and below.

"I don't think there is upside short term," said David Woods, who owns
and operates WCOV-TV Montgomery, Ala., in the No. 117 market. Not all markets
are participating equally in the political and Olympics windfalls. In
Montgomery, national spot in the third quarter was down 10%, while total TV ad
revenue was down about 5%, he says. On average, that means stations' operating
income in the market will drop nearly 10%.

"The next year or two could be soft," Woods continued. "But it's
almost two different industries. You have larger and smaller markets, and the
dynamics are a lot different in markets 50 and below."

For one thing, according to Woods, inventory is much tighter in the
bigger markets and advertising rates are a lot higher. That has forced some of
the bigger advertisers to put more of their national spot budgets in the bigger
markets. "If you can't deliver the rating points you're planning in New York
City," he observes, "you start pulling money out of the smaller markets."

But it's not just smaller stations that are feeling softer ad sales.
Analysts say the entire sector is under pressure. Drew Marcus, media analyst at
Deutsche Bank Alex Brown, wrote recently, "We continue to underweight TV
station stocks due to audience fragmentation, slow ad growth, deteriorating
[network compensation] and deteriorating program exclusivity."

PaineWebber broadcasting analyst Lee Westerfield maintained that there
will be no growth at all next year for TV stations on average, with national
spot decreasing by 2% and local sales rising perhaps 2%. And that, he stressed,
is the best-case scenario. Westerfield says local station operators are
"hamstrung" by the ownership caps. Remove the caps, he said, and operators can
more efficiently scale costs, particularly for better programming, across
larger distribution systems.

One of the scarier questions confronting the industry is whether the
signs of ad softness and a slowing economy are signals of a recession on the
horizon. For Sanford Bernstein media analyst Tom Wolzien, the jury is still out
on that. "The market is almost acting like it is, but there isn't enough
negative information to make a 'we're-headed-for-recession call,'" he said.
"But we certainly have all the signs of a correction or softening." Station
executives privately admit, he added, that "ad cancellations are running at
record rates."

Francis L'Esperance, managing director and head of broadcasting and
communications at Veronis Suhler & Associates, said forecasts of an
advertising downturn are just the latest negative implications for the TV
business.

Such concern has taken its toll on station values in smaller markets,
L'Esperance continued. "The secondary markets have seen lower than expected
valuations." That has led some would-be sellers to pull their stations off the
sales block to wait for more-favorable conditions. So far, though, major-market
valuations are holding up well and in the mid-teens, he noted.

Over the past 18 months or more, he added, there have been underlying
concerns about the impact of increasing competition to local TV from cable,
radio and satellite services, coupled with the confusion over the migration to
digital "and the outcome of spectrum negotiations with Congress." Adding
concerns about a slowing economy amounts to a sort of "double whammy" for the
station business, he said.

And the confusion over digital will cause many stations to miss the
2002 FCC deadline for converting. The National Association of Broadcasters is
working behind the scenes to get the deadline moved back. Wcov-tv's Woods hopes
the NAB is successful but said he may miss the deadline regardless. "With
receiver penetration at less than 1%, those DTV costs are more frightening than
ever," he added. And the cost of converting a station in Montgomery is the same
as the cost of converting a station in New York.

It's not just the smaller guys that are worried about the 2002
deadline. Some of the bigger groups aren't sure they'll make it either. At
Hearst-Argyle, for example, a source said, "We're in a holding pattern on DTV.
The whole thing is being debated, so its hard to say" whether the group will
meet the 2002 deadline or not. "Where that debate ends up is anybody's
guess."

The debate centers on the 8VSB transmission standard. Some question
the standard's ability to cover entire markets with a quality picture. Others
are concerned about being shut out of new business opportunities because 8VSB
transmits poorly to mobile receivers such as Palm Pilots.

But despite all the doom and gloom, broadcasters remain optimistic
about the long-term prospects for their business. Even Woods said the industry
will "weather this storm," as it has previous downturns.

Most of the broadcasters contacted for this article say they have to
make themselves indispensable to local viewers. If they do that, they say, they
will thrive, regardless of DTV and no matter how big or powerful the gatekeeper
(such as a merged AOL Time Warner) passing along their signal.

For LIN Television Executive Vice President Paul Karpowicz, localism
is key. "Those stations that have positioned themselves well as leaders in
local news, public affairs, local community service and local sales will be
well positioned for the future. Those who have not will be in trouble."

Emmis Communications Chairman and CEO Jeff Smulyan is still very
bullish about local TV because it's still the most efficient mass-audience
medium, and he doesn't see that changing. And he put his money where is mouth
is this year, buying 10 local stations for almost $700 million.

Smulyan sees three areas of upside for local TV. "It's got to be run
more like radio," he explained. "You've got to find local dollars. If you
depend on national spot, you will not grow your business. National spot is
going to get fragmented over cable channels, the Internet, radio and every
other form of advertising." Within a few years, Smulyan said, Emmis' 30-plus
TV-station group will derive 80% of its revenues from local sales and just 20%
from national spot.

He also said broadcasters have to get cash for retransmission rights
to their signals. "Americans are paying billions for TV, and they're paying for
what they don't watch [cable], and they're not paying for what they do watch
[broadcast stations]. What's wrong with this picture?"

He also said the digital spectrum would pay
off-eventually-when the industry figures out what new services can
generate income. For now, he and others acknowledged, such services remain
elusive.

At NBC, Jay Ireland, president, the NBC Stations, sees a rough patch
for station operators ahead and believes it's difficult to say how long it will
last. "We're starting to see a little bit of a slowdown now. It's not going to
be as robust as it's been."

But he stressed that there is "still a base of business there that we
will be able to tap into. We've just got to knuckle down and keep churning out
profitability and trying to grow the revenue base." There's no way NBC Stations
will match 2000 revenues next year, because of this year's huge political and
Olympics windfall. But the group can come close on profitability, he said.

Longer term, the upside for broadcasters will depend largely on the
ability to "have as strong a Web presence as we do a broadcast presence in each
of one of our markets," said Ireland. "We've got to be the local news,
information, entertainment and commerce portal for whatever city we're in."

Broadcasters have to use technology and the Web in ways that
streamline their operations, he said. Case in point: using the Web to eliminate
the paper trail of advertising sales transactions. That way, he explained,
greater focus can be put on "having a value discussion" with clients instead of
a "reconciliation discussion."

Stations also have to pinpoint other "leverage points for changing the
way we do business," Ireland said. "We can't operate 13 stations all doing the
same thing 13 times over. We have to take the power of what we can do as a
group and leverage that where possible." Technology can help eliminate
duplicative backroom administrative functions. At some point, he said, it may
be possible to have one master-control room for the entire group. "We're
exploring all those ideas."

Not everybody is feeling the pinch. The CBS Stations group is
budgeting strong double-digital sales and profit growth for 2001, according to
President John Severino. That's on top of what will be double-digit revenue and
profit growth for 2000.

Of course, the CBS stations are riding the wave of some huge ratings
gains for the CBS prime time schedule so far this season. And in the first
quarter of next year, the network has the Super Bowl,
Survivor II
and the NCAA basketball tournament.

But Severino acknowledged that, as strong as business is, "it's not as
strong as we thought it would be. But we're outperforming everybody else."

And if the economy does take a downward turn, said Severino, CBS sales
people will be out in force trying to convince advertisers that "that's the
time when they've got to advertise more, not less."

Will it work? The CBS Stations sales staff will die trying. "You've
got to push the sales people," he claimed. "If you give them enough push, drive
and determination," they will sell.


Forecast 2001/TV industry
analysts offer a fairly broad range of projections for ad sales in 2001. The
following chart compares percentage growth or loss projections from the
Television Bureau of Advertising with estimates from a cross-section of
financial analysts.

<p> <span class="small" id="d9e113-51-small">Source</span> </p><p> <span class="small" id="d9e120-55-small">Local</span> </p><p> <span class="small" id="d9e127-59-small">Spot</span> </p><p> <span class="small" id="d9e134-63-small">Nets</span> </p><p> <span class="small" id="d9e141-67-small">Syndie</span> </p><p> <span class="small" id="d9e148-71-small">Cable</span> </p>



TVB



+3-5



+1-3



+7-9



+6-8



+13-15



McCann Erickson



+2-4



0-+2



+2-4



+6-8



+14-16



Veronis Suhler



+2.5



+1



+1



+4.2



+13.4



Bear Stearns



+3-5



-1-+1



+10-15



+8-10



+18-20



Chase H & Q



+2



-2



+5



+4



+14



DLJ Corp.



+4.5



+2



+8



+6.5



+12



First Union Sec.



+4



+3



+10



+9



+17



Georgia Advisors



+8



+4



+9



+7



+12



Lazard Freres



+2



-2



+5.5



NA



NA



Merrill Lynch



+2-3



+2



+8-10



+10



+20



Morgan Stanley



+2



0



+8



+6



+16



Paine Webber



+2



-2



+8



+6



+15



Sandler Capital



+3



-1



+2



+2



+12



Wasserstein Perella



+4



+2



+2



+10



+15

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