SMALL, LOCAL FILLS BILL FOR PILOT, BARRINGTON

Since he first got his start as a radio DJ is the late 1960s, Bob Pittman has been deeply involved in cutting edge media and marketing, perhaps most notably as a key member of the team that invented MTV in 1981.

Following his pioneering days in cable programming, Pittman ran Six Flags Theme Parks, Century 21 Real Estate and Time Warner Enterprises. And he was a top executive at AOL during its happy, high-growth days in the late 1990s. After the merger of AOL and Time Warner in January 2000, he emerged as COO, but was forced out two years later with the collapse of the dotcom bubble and AOL's prospects.

Now, of all things, he has embraced small-market (DMA 50 and below) TV broadcasting as the one of the great media opportunities of the digital age.

Pittman is a principal at the Pilot Group, a New York private equity firm that is backing the Barrington Broadcasting Group, which under the management of Jim Yager has assembled a collection of 21 full- and low-power TV stations in 15 markets, ranging from Flint-Saginaw-Bay City, Mich. (DMA 65) to Kirksville, Mo.-Ottumwa, Iowa (DMA 199).

Barrington's big leap forward came in August 2006 when it completed the purchase of 12 stations in nine markets from Raycom Media.

Pittman sees Barrington as a sound investment based on a theory of small-market TV broadcasting that he has been promulgating over the past few months in a series of appearance and interviews.

In this interview with TVNEWSDAY Editor Harry A. Jessell, Pittman elaborates on the theory—on why he believes small-market TV is a smart bet and why, if financing were available, he would raise that bet.

You’ve been going around saying you are bullish on TV. Why?

I’ve spent more of my career as a marketer using advertising than I have selling advertising and what I know is nothing works like television advertising. The most effective advertising in the world is your next door neighbor telling you you’ve got to buy that car, you’ve got to go see this Broadway show, you’ve got to go see that movie, you’ve got to go buy this book, you’ve got to eat this cereal. Somehow TV advertising replicates that.

You’re talking about TV in general. I’m asking about local TV broadcasting in particular. Why are you bullish on it?

I like smaller market broadcast television because what we’re seeing is that local means an awful lot to people. Nothing is more important than knowing the local news and what’s going on in the local community.

New York is not a local market; it’s a regional market. The local market around here may be northern Westchester County or the West Side of Manhattan or the eastern side of Manhattan or maybe Soho. Those are local markets.

But when we go to Peoria, Illinois, that’s a local market. When we go to ColoradoSprings, that’s a local market. So those are markets that hang together as local.

Such markets have two advantages. One is the local news is much more important than the regional news that we’d look at here in New York. If a water main breaks here, the stations don’t cover it. But if one breaks in Colorado Springs, the stations would cover it because people are going to want to know why the water’s running down the street and why the traffic was tied up.

The second advantage is the economics: the marketing area of the TV station matches the marketing area of smaller or retail advertisers.

If I build and service swimming pools in northern Westchester County, I’m not going to buy a TV station that covers the tri-state area here, but in ColoradoSprings, that same business, probably the same size with $1 million or $2 million in revenue and the same marketing area as the TV stations, can use and afford broadcast television.

So you’re saying that, in the smaller markets, the broadcasters’ coverage is aligned with the marketing ambitions of many local retailers?

That’s right, but they still aren’t getting a fair share of the local advertising dollars. TV stations maybe get a third of the ad revenue in the markets. Given the decline of newspapers and the decline of Yellow Pages, TV stations ought to be getting probably two-thirds of the ad revenue, certainly 50 percent.

Here’s the problem. TV historically has been a business where for many, many years there was more demand than there was supply.

In that period, somebody turned it into a commodity trading business—CPMs, rating points, etc. Today, that legacy still goes on even though there are many more places to spend your money. It shouldn’t be a commodity business.

In markets like Colorado Springs or Columbia, S.C., the newspaper in the market probably does more advertising than all the TV stations combined. The paper probably gets a $25 CPM, while the local TV stations probably get a $7 or $8 CPM.

Only half as many people read the newspaper as watch the TV stations in that day and those that do will use it for only about 10 minutes. So, why is the paper getting four times the CPM as the TV stations? Because newspapers are not trading as a commodity and TV stations are.

The problem is that as an industry, the TV station business has basically been one in which you wait until people decide that they want television and then you fight the other television stations for your share of that business.

The big upside opportunity is to turn TV stations into sales organizations, not commodity trading organizations. You go to the people advertising in the newspapers and move them to TV. You’d be doing them a big favor. They’d thank you forever and you would have substantially improved the economics of your TV station. To me that’s the upside opportunity.

You can’t do that in a market like New York City because the retail advertisers can’t afford television. The marketing area is too big. But when you get below the top 50, you can. That’s a tremendous opportunity and that’s what makes broadcast TV such an exciting opportunity for us.

The final piece of why it’s an exciting opportunity in the smaller markets is that TV stations can go start the community Internet sites with all the stuff they can’t do on the air—obituaries, school lunch menus, a phone directory like the Yellow Pages, etc. And they can use the power of the TV to promote the sites and re-use all the news and information they gather. They can create another business which in five to 10 years should be just as profitable as the TV stations in those markets.      

Now that’s a fine theory. How is the working in practice at Barrington Broadcasting?     

We’re early in the game, but I’m impressed with it. We are making progress. We’re still experimenting, but the markets where we’ve done it the best are the markets where we take our transaction sales people and have them deal with the agencies and continue to talk cost-per-thousand commodity trading. Then, we take another group of people who go after the local retailers and talk to them in terms of how they can get a tangible return on their money. They will ask how many washing machines do you need to sell. If you spend $10,000, tell me how many washing machines you need to sell to make that a good investment for you.

I would say the markets where we have split the transactional sales people from the retail sales people we’ve had the beginnings of some pretty good results. In some markets, it’s actually overcome the falloff in some of the automotive advertising which has probably been the biggest decline for us during this slow time.

The markets where we’re having the least results is where we’re trying to get people to talk both CPMs and selling. We’re finding people are probably either good at one or the other, but not both.

On the Web front, we’ve been able to build community sites now that are getting traffic that is close to the viewership of the TV stations. What I don’t think we’re doing especially well yet is monetizing that. I’m not sure TV people are going to sell another medium very well. Probably in those markets we’re going to have to have specialized Internet sales people just as we did when broadcasters first had radio and TV in the same market. We found out then that we could sell a whole lot more advertising if you had specialized sales people for each medium.           

At NATPE, you said one of the reasons you were bullish on television was because it did well in recessions. Well, I think we’re in a recession and it doesn’t seem to be doing very well judging by some of the first quarter numbers I’ve seen.       

It depends on where you’re looking. Some TV stations are primarily dependent on national advertisers who are basically wholesalers selling to a retailer and don’t have to move the product. They can afford to cut back on advertising because all they’re really doing is advertising in support of the retailer.

If you are in markets where it’s a retail advertiser who still has five washing machines on the showroom floor or still has cell phones to sell or still has clothing on the racks that needs to move, you’re seeing a little bit of different story. I suspect that if you go through the numbers on the big-market stations versus the small-market stations you will see a bit of a split.

When the economy slows down, the national advertising suddenly gets dumped in spectacular ways. I would much rather have a nice stable business in a small market that grows at reasonable rates than something that has the big highs and lows.        

Do you presume that the national money is going to continue to dwindle away for most TV stations?

No. I don’t at all. I think national money in any type of economic slowdown always pulls back. By the way, if I had a wholesale product and the only reason I was buying advertising was to influence my retailers and I really didn’t have to make ring my cash register, I’d pull back, too. Marketing is a big easy number to cut when you need to.

I can now watch many primetime dramas and sitcoms online. Aren’t you alarmed that the TV stations have lost exclusivity to that content?      

No, that’s a completely different experience. Will I watch something occasionally online? Sure I will because I’m on the computer and I can’t get to my TV set. But the computer is really sized and built for a 18-inch-away experience. It’s built with a keyboard, it’s built to be interactive, it’s built to be private. The TV is built more for a passive experience when I’m ready to relax. It’s a six-to-ten foot-away experience, it’s a social experience, it’s “honey, come here, watch this, look what’s going on.” The sound is good.

But that’s sort of a snapshot view, isn’t it? A year from now I may have a device that hooks my TV set directly into my broadband connection so I can watch these shows right on my big screen. That’s coming. Then, what will the broadcasters’ advantage be?

One thing I know from every business I’ve ever been in—from theme parks, to radio, to TV, to the Internet—is convenience is what matters. I have a cell phone in my pocket and it is a big, big hit. The quality is so bad I wouldn’t dare do this interview on a cell phone. So why is it so popular? Because it’s so convenient. I use a microwave oven. It cooks horribly compared to my oven, but it’s a lot more convenient.

If you want to go look at some interesting statistics, look at the difference between response rates where you can do one click and get to it versus two clicks to get to it. It seems so ridiculous that a click would be that big a barrier, but it is.

So when you start asking people to hook stuff up or to do anything that requires additional effort, they always go for the one that’s the least effort even if the quality is not as good.

OK, if TV is so great, are you or Barrington prepared to buy more stations?               

I would love to buy some more TV stations in markets ranked 50 or below where the national advertising probably doesn’t exceed 30 percent of your total revenue. The problem you’ve got today is debt. There’s not a whole lot of leverage available for any transaction.

That’s probably suppressing TV sales right now. Until we get out of this credit crunch, you’re going to see it affecting the value of TV stations. There is no problem with the inherent value of stations. The wonderful thing about them is almost all the earnings are free cash flow. For an investor, that’s a wonderful thing. It pays down a lot of debt and it pays it down pretty quickly.                                   

Do you see the money loosening up at all? Is there any light at the end of the tunnel?   

I’m in New York and I spend a lot of time with these fellows who are experts and all day I hear conflicting stories. I hear some people saying that this is going to be the worst recession we’ve ever seen. I’ve heard other people say that our banking system and our whole financial system is under pressure. Then, I hear other equally smart people saying that we’re through the worst of it and that we should begin to see things flowing again.

With regard to Barrington, what is the exit strategy? Private equity firms usually have a date by which they want to cash out. What’s yours?          

We’re a long ways away from that. We just did the Raycom deal a couple of years ago so we’ve got a long time before we feel any pressure to realize the return. Like everybody else, we don’t want to sell anything in this particular climate because when the leverage is down and the financing is not as available the prices suffer. I don’t see a whole lot of people saying I’m willing to sell it dirt cheap. They’ll just wait until the market is better.      

It sounds like you’ve given this theory of local broadcasting a lot of thought.

Yes, well, we continue to watch it and we continue to put our money where our mouth is.