AT HEARST-ARGYLE, DIGITAL IS SERIOUS BUSINESS

Hearst-Argyle Television is as deep into digital media as any station group in TV broadcasting.

The publicly traded TV station group offers local weather on digital multicast channels in 17 of its 25 TV markets, 10 in partnership with NBC (NBC WeatherPlus) and seven in partnership with AccuWeather.

Its TV stations operate lively companion Web sites through Internet Broadcasting Systems Inc., a St. Paul, Minn.,-based developer and national ad rep of Web sites for TV stations.

Not only is Hearst-Argyle an IB client, it is an IB partner—the largest, in fact. (Other equity players include Post-Newsweek Stations, McGraw-Hill Broadcasting and CNN.)

Hearst-Argyle has also made a hefty investment in Los Angeles-based Ripe Digital Entertainment, a producer of short-form broadband and VOD programming that is trying to entice young male viewers with two proven formulas—young women (Ripe TV) and young women and cars (Octane TV).

Embracing the hyperlocal concept, Hearst-Argyle earlier this year launched “vertical” high school Web sites in seven of its markets. The highschoolplaybook.com sites mix station video with user-generated videos and clips from specially trained student reporters. Plans call for expanding the service into other markets next year.

Hearst-Argyle programs several “channels” on the Google’s YouTube, the Internet’s richest video site. And the station group has bonded further with Google by agreeing to rep its AdWord search ads in its local TV markets.

This year, it’s all expected to add up to $21 million in revenue and $15 million in expenses.

Developing and implementing the digital strategy is Executive Vice President Terry Mackin, a veteran broadcaster who started out selling radio time. He joined Hearst-Argyle in 1999 and soon found himself leading the company’s charge in the future. It’s now Web metrics that keeps him up at night.

In this interview with TVNEWSDAY Editor Harry A. Jessell, Mackin says he and Hearst-Argyle are just getting started. Look for expansion of the current digital business and new vertical Web sites in 2008, he says. Today, the digital revenues account for just over 2 percent of Hearst-Argyle’s annual total of $660 million. If all goes well, he says, that percentage could leap to 10 in five years.

An edited transcript follows:

What is the overarching digital strategy?

Local is our strength so our strategy is to figure out how to leverage local and do it at scale in those new media verticals of multicast Web and wireless.

We didn’t just set out to do a local weather multicast channel that created another 100,000 sales units. We thought that the long-term business strategy was to compete with the Weather Channel on the network level, have equity in a larger entity and to get incremental revenue from the local spots that we generate from that partnership.

High School Playbook was never intended just to be a local high school sports site. It again speaks to scale because I think scale right now is driving the digital marketplace. The consumer expects a competitive product or service regardless of where you’re coming from—local, national, regional.

I define our competition as Yahoo!, Google, AOL and anybody that’s in the Web space so the scale helps you invest in a way where you can justify a broader investment than possibly you could just on a local level.

According to your latest earnings report, you’ll have $15 million in digital expenses this year. Where is that money going?

Our expenses in digital comprise all the money that we’re investing in people, on content, on sales and marketing technology. What’s also captured in there is Internet Broadcasting. It serves as the host of all of our station Web sites. Its fee is wrapped into that number as well. So that’s people and hosting fees and design and content development costs.

You’ve been on the air with your digital weather channels for a while now. Is weather your digital multicast play or are you considering other things?

I think weather was the one that we felt strongly about and we’ve executed it in two different brands. But we’re constantly reviewing content proposals from third parties and from people internally. ABC is still floating around out there with their ABC News Now concept. At one time, that was considered a strong candidate for a multicast channel.            

But you think weather is a permanent part of the multicast plan?

Oh, yeah. The weather’s going to hit another surge here in the upcoming year. We’ve been developing complementary Web and mobile platforms that I think represent a game-changing value proposition. It will work for consumers and also for advertisers who want to buy the convergence of linear and interactive media.

Weatherplus.com and Weather Plus mobile will get a lot of attention in the next 12 to 15 months.

You mentioned mobile, yet you are not part of the Open Mobile Video Coalition as are a lot of your industry peers. The coalition is trying to develop a scheme for using digital spectrum to do mobile. Don’t you like that idea?

It’s not that at all. We are supportive of the coalition, but, if you look back over the last four, five or six years, our bandwidth has been spread pretty thin on various initiatives. We’ve chosen to follow a little bit on this, but we’re fully supportive of it.

As you know, you’re digital channel is limited. You can’t do everything. So is in-band mobile an either/or sort of thing?

It may be as long as we’re operating with MPEG 2. The requirements for HD remain in the 12.5 to 15 megabits per second range and Weather Plus is probably another 2 or 2.5 megabits per second. So your point is spot on. You can’t do everything. You’ve got to place your bets. While there may still be room to do something else, I don’t think there is enough room for another aggressive multicast play and a wireless contribution.

Do you have a good cable carriage deals in place for the digital channels?

Yes, we do, but we are limited by the cable operator’s build out of their own digital system. So, as they grow, our own distribution for the multicast channels grows with it. The next big leap forward will be adding multicast channels to local-into-local on the satellite side.

But you’ll have to negotiate for that.

They have the capacity now and they have an interest in our content. I think it’s probably a good fit for them.

Doesn’t that sort of conflict with Hearst-Argyle’s promise to get serious retrans payments out of cable and satellite? Are you going to be able to negotiate for digital carriage and money?

Well, we do now. We’ve got carriage and retrans. I don’t think our value proposition gets less attractive. The deals that we’ve struck with the cable companies have been mutually beneficial and I suspect that the satellite deals will look equally as attractive.

Have your high school sports sites gotten any traction yet?

They’re doing extremely well on both the user-generated content side and on the sales side. We are already in the next phase of the product road map so we’ll continue to evolve the Web platform and make it better. The next two phases of the business plan will start to kick in early ’08.

One is a syndication strategy where we’ll bring people outside of Heart-Argyle into the syndication network because High School Playbook is as applicable in markets outside of the Hearst-Argyle markets as it is within. Then we will expand within our own group from the seven that we have to a number that’s considerably higher than that.

When you made your sports announcement, others did the same—Belo, Fox. Are you bumping into some of these guys in any of your markets?

We definitely are. I would say that it’s going to require more investment and better branding. We have had an intense focus on content and features and tools from the beginning and we will continue to do so.

How many such services can one market sustain? One? Two?

Maybe two.

Are you happy with the growth of the traffic on your local station sites?

Oh, my gosh, yes. We’re doing extremely well. You may recall that Internet Broadcasting did a strategic deal with CNN so we benefit from the referral that comes from that relationship. You know when the hostage situation occurred two weeks weeks ago in Rochester [N.H.], it was a classic case of a story happening during the business day and CNN needed our support.

As you know, we own WMUR in Manchester, the dominant news leader in NewHampshire and we were providing almost 100 percent of the coverage. Then, unfortunately, a week and a half later, we had the shooting at the mall in Omaha. Our station site there delivered TV-like numbers for three straight days.

It’s all relative, of course. My impression is that local TV station Web sites are running behind newspaper Web site in most markets. How do you close that gap?

Well, first off, it’s not true everywhere, but as a general comment it’s a fair observation. However, when you break that traffic down and you take classifieds out of that discussion, the gaps narrows pretty fast. They are the No. 1 target for me.

People compare broadcasters to other broadcasters and we don’t see that as our competitive group. We see the newspaper and Google and Yahoo! as the competition. The way we close the gap is by getting deeper on content.

We want to be great in news and we want to be great in weather. And there are other vertical content areas like high school sports that we think are naturals for us. The traffic will increase as you give people more reasons to come in for the first time or to stay longer or to come back multiple times during the week.

You mentioned classified. Are you doing anything on the classified front?

We are. We have auto classifieds now in 10 of our markets and we will expand that in ’08. I would expect real estate classifieds will follow that. We’re already in the directories business, the local search business. For example, if you go to KCRA.com and its vertical nav bar, you’ll find the KCRA A-List. It’s a list of the best restaurants, clothing stores, the best of Sacramento. It’s been really quite successful.

How is Internet Broadcasting doing as a company? Has it turned the corner?

It’s fabulous. It turned the corner in my opinion five years ago. We have some lofty goals. We just recruited a new CEO from AOL, David Lebow, and we thought he brought a fresh set of new ideas and disciplines that would help the company create a scalable model that I referred to earlier. Internet Broadcasting is a classic case of a scalable Internet model. They have 83 markets that they cover and they have a network-local model that works quite well for them.

You just did a deal with Google to sell AdWords locally. What’s that all about?

If you and I were going into the local key word business and our business plan said we’re going to go compete against Google, there would probably be some banks that would be encouraging us to consider Plan B. So, in this case, we have Google as a partner. And we may sell key words beyond Google.

Are you the exclusive local agent for Google in your markets?

We are not exclusive. Exclusive is not a word you hear a lot coming out of Palo Alto and Google. I suspect somebody will follow us as they have on high school sports. But these aren’t business strategies that can be turned around overnight. It took us quite some time to put this strategy together and we’ll be executing it over time. There’s more to it than just signing up with Google on key words.

What do you get out of the channels deal with YouTube?

It’s a rev share deal where we both succeed together. They’re not going to benefit from my traffic anymore than I am. Actually I benefit more than they do. At the same time, we benefit from some of their technology, particularly the ability to take user-generated content and put it into a branded environment.

How’s your investment in Ripe Digital doing?

They have a really interesting business model. I’ll just give you the 10-second version. It is a combination of VOD and broadband so on the revenue side they bundle the media between broadband and VOD and the target is men 18 to 34, with a pretty high concentration in the 18 to 25 range. It’s all advertising driven and they have distribution on the VOD side with both Comcast and Time Warner, which is also invested in it with us.

We like the business a lot. You know, it’s not something that you would have probably speculated that we’d be invested in, but it gave us a great early look at VOD and some great experience with broadband. The management team is very experienced in broadband.

So what’s next out of your shop?

You’ll see us focusing on the next product launch—something as big as High School Playbook that will have big shoulders. And there are other verticals under construction and we’ll start to roll some of those out next year.

So, early ’08, mid ’08, late ’08, ’09, it will be a continuous stream now. We’re going to do some overall redesigns and revisit the architecture of our sites and how we present the content. There are lots of interesting technologies out there that you’ve got to keep pace with in order to entertain the consumers.

At $21 million, you’re about 2 percent of Hearst-Argyle’s total revenue. How do you see that percentage growing in five years?

I don’t know. Higher than 2 or you won’t be interviewing me in five years. I don’t know what the right number is. I know that we have aggressive expectations and we put more money into our digital strategy than anyone else that I know—in head count, resources and strategic partnerships. So we believe in it and we’re going for it.

We’re also interested in buying businesses as well. We can build a lot of the stuff, but I think we’re going to have to buy some, too.

We’ve got to get to somewhere between 5 and 10 percent. Ten sounds better to me than five.

That ought to hold them.

I thought you might ask what is it that keeps me up at night.

OK. What keeps you up at night?

The fact that we still don’t have a common currency in the digital space and the Internet space. I’m encouraged that IB and comScore and Nielsen are submitting to a panel so that we can take a step forward, but it can’t get here fast enough. This business can’t grow at the rate that it’s growing without some agreement on what the common currency is going to be.

You mean what a unique visitor is, things like that?

Yes. And how do we place a value on it if Nielsen and comScore have no relationship to each other, no common research standards.

But you’re saying that those people are sitting down now and trying to work that out?

Yes. The Interactive Advertising Bureau has been leading the charge on this. There’s been a lot happening and so they are working together because advertisers have identified this as a core issue, publishers have identified it as a core issue. The business is growing rapidly. We’ve got to get this fixed.