No Country for Old Media in Digital Age

Bishop Cheen has been here before.

As a securities analyst for the past 23 years and as a TV and radio station operator, TV reporter and DJ before that, Cheen witnessed, and sometimes invested through, at least four other economic downturns similar to the one that is hammering the mass media today.

And each time he has watched the economy and the media rebound.

Now a senior fixed income analyst for Wachovia Capital, Cheen expects history to repeat itself, although he tends to think it will be awhile before the rebound comes.

What's more, he believes TV broadcasting should come out it in better shape than other old media — newspaper publishing and radio — because the power of digital is making it new again. "TV," he says, "seems to be staying a heck of a lot more relevant."

In this interview with TVNewsday Editor Harry A. Jessell, Cheen discusses the economic and technological forces that are shaping TV broadcasting in these lean times as well as in the hoped-for fatter times to come.

An edited transcript:

How bad is it out there?

It's ugly because there is not a real sense that we're at bottom. It's always scariest, whether you're in the TV business or the doughnut business, if you feel things sliding and you don't have a firm conviction of where bottom is. At the media conference out in Sun Valley, Rupert Murdoch was quoted as saying it is bad, that it is going to be very tough slogging for another year or so.

Rupert Murdoch is as close to a market maker or an oracle in the TV business as we have. There's not that many of them. When he says it's bad, that sets the new tone.

The world has changed in the last 18 months. We went through a very affluent, capital markets crescendo in '05, '06 and the first half of '07. That's when you saw the big LBOs. The world was a different place, filled with what Alan Greenspan used to call "irrational exuberance." That changed in July of '07 when the credit crunch came home, when subprime became part of the national vocabulary.

Whether we're in a recession or not, it feels like one to the ad sales person who's out on the street trying to get an order, trying to sell higher rates, trying to sell out his or her inventory. They can see the retail economy is hurting.

How do I square all that with the networks' strong upfront performance earlier this summer?

I can't square it for you totally, but I don't think we're totally privy to the guarantees the networks offer the media buyers. I haven't seen a whole lot of transparency on that. We know that the world shifted about five years ago. There's guaranteed gross rating points, a guaranteed audience. If the ratings come in less than that, then they don't get money back, but they get additional equal or better spots to run for free. So, part of it is we don't know if the guarantees were even more attractive. At least I don't know.

Do the stations' problems stem from the sharp cutbacks in auto advertising?

It's not all auto. Let's look at the retail economy. Have you seen anything, anecdotally or formally, from an investment standpoint that told you that the branded retail stores are doing great? I've seen just the contrary: all the retailers are worried. Now the only ones who say that they are less worried are the big box discount stores, but, you know, Wal-Mart really doesn't have a long history doing TV campaigns, although they've experimented with it last year some.

Now it is encouraging when we see some flights happening. We just saw that Pontiac and Buick are going to run brand new ad campaigns on traditional ad media trying to underscore the fuel efficiency of their brands. That's refreshing because all we have heard is that the domestic auto makers are cutting back, cutting back, cutting back. It's nice when we see them saying, guess what, we need to raise brand awareness here and we're coming at it in a brand new way, fuel efficiency.

Is this as bad as it's been in your experience?

We've been through these dislocations before. I've invested through them before.'74-75 was no picnic and '80-'81, first half of '82, was no picnic. Late '89 through early '92 was tough. That was quite a crunch and a recession that felt like a depression to the TV business. The end of the dotcom boom, back half of 2000 through 2002 was no fun for the TV business. You had 9/11 right in the middle of it. All of the key sectors were hurt and America was scared. The airlines were hurting and the automakers were hurting. There was a body blow to the normal flow of capital and consumer spending.

But the good news is that we came out of all of those.

We always come out. And now we have a lot more levers and mechanisms in place as a nation and a managed economy to help us manage these dislocations better. You always tend to come out, but it's tough. You go back to what I said originally, that there is a sentiment out there that nobody knows where bottom is.

If you're a consumer, you don't know and you have uncertainty, you spend less. If you are a station manager and you're trying to budget, you're going to spend less, you're going to staff less. You may think, I've got to keep my inventory sold. I'm going to cut my rates. Well, cutting rates is very tough. Once you cut your rates, it's very tough to restore them. It takes a long time.

You're pretty faithful about participating of the conference calls of the public companies. What will you be listening for during the second-quarter calls?

The tenor and the tone of their business. I'm going to be listening for several things. The first thing is, what does the top line feel like? Where are they taking pain? We're going to ask about categories, we're going to ask about auto, we're going to ask about telecom, we're going to ask about any of the top categories.

The next thing we're going to ask about is expense management. Are you still finding expenses to cut that is not bone? The art of managing is to cut the relevant fat — the key word there is "relevant" for the times — without cutting into the bone.

Then, I'm going to ask them about the balance sheet? Are you still out making these little tuck-in acquisitions? Are you still trying to goose your stock with a dividend? Most companies have gone through a very sobering experience and are all about saying no. Every penny of free cash flow right now is going to reduce debt. That's what investors want to hear. They don't want to hear that a company's leverage is going up, while its earnings are going down.

So, this is not a time for big acquisitions.

The problem is it's not just a weak economy. You also have a credit crunch. And that's different from the 2001 slowdown. After 9/11, the Fed purposely went out to all the banks and said, look guys, these are tough times. Unless you have a corporate client who's going to hit the skids anyway, don't push them, work with them. They jawboned and, by and large, they kept the capital markets fluid. It kept capital available.

Here you have this thing called subprime and it's global and all of the big banks seem, quarter after quarter, to be telling us that they're going to have to write down, they're going to have to raise capital, even though I think the Fed's done a great job in trying to keep the system as liquid as possible.

But the bottom line is the big banks just aren't lending to the private equity groups as they were. And if those groups can't get the very attractive financing to leverage their equities, they can't go out and make these big bids on assets. So it's a vicious cycle.

The last LBOs were done in the first half of 2007. You haven't seen any big ones initiated since.

You have a few of the public companies that are making strategic acquisitions, but they are the ones with the best balance sheets. Sinclair stepped up and paid $85 million to do a strategic acquisition of a TV station in Richmond. They have a pretty clean, underleveraged balance sheet. They can afford it. It was the right time for them. It's going to create cash flow.

But a lot of these companies bulked up and expanded in the go-go years — 2005-06, first half of '07. They can't afford to take up more debt leverage now. They're focused just the other way. What can we sell? How can we reduce our debt?

So what's the upside for broadcasting?

The big game changer, the positive game changer for local television is digital. The station operator was forced to go on this expensive capital campaign and march into the digital age. They didn't choose it. They didn't say with one voice, hey, you know what, let's all go digital. It's going to cost us two, three, four, five million bucks per station, but let's just digitize the heck out of our plant. They didn't do that voluntarily. They were forced to and the culmination is this February 2009 deadline. But, you know, what has come out of that has been what I believe is the killer app for television.

And what is that?

The killer app is as simple as can be. It's HD. Five years ago, if I would go into an investment meeting and say that such and such company spent a fortune to digitize and they're going to start transmitting in high definition, the investors would go, that's nice, let's talk about something else. High def meant nothing to them. They didn't see it. There wasn't a large install base. But now we're way past the tipping point. Walk into any electronics store. All you see are the flat paneled HD receivers.

HD may be the killer app for consumer electronics. But what about broadcasters? How is a killer app for them? How do they make money from it?

I'll tell you exactly how you make a dollar. In 1992, after a very contentious fight with cable, broadcasters won retrans rights, but they really didn't get much of anything out of it. They didn't get any cash payments. The world went along like that for 15 or 16 years. Now they are and the difference is HD. Nothing else changed. The broadband operators said, look, we've got to have HD pictures and the TV broadcasters had them. So, the operators reluctantly paid up retransmission consent fees. What do you think made retransmission consent fees possible? It wasn't the localism of TV stations. It was the pretty pictures.

What about multicasting and mobile? Do you see them as real opportunities for broadcasters?

Absolutely. It's a very exciting world. I'm not going to say with conviction that mobile TV is going to be a gold mine. I don't know what it's going to be, but I'm glad they're going to try. I'm glad they're going to have skin in that game. To paraphrase the Academy Award winner, this is no country for old media. The only thing older than TV stations in media is radio and newspapers and TV seems to be staying a heck of a lot more relevant than either of those because it's got exciting new technologies.

What about the broadcasters' initiatives on the Web?

Newspaper have been doing it for 10 years and have grown their Web revenue to 7.5 percent of their top line. Broadcasters think that they can push their Web revenue higher. Why? Video streaming. When I go to the ABC sites and Lost and see the quality of that streaming, I'm impressed. So, I know that stations can improve streaming. I can see an upside.

I know that TV station broadcasters have spent a fortune digitizing their plant and they want to harvest and monetize it. TiVo allows viewers the flexibility to time shift and to do video on demand. Well, that's an opportunity. Why shouldn't local broadcasters provide that same flexibility on their Web sites. Let's see if the TV guys can take their sites and move them farther as a financial tool than the newspapers have been able to so far.

Pretty soon, consumers will be able to plug their big screens into the Internet and choose whatever programming they want. Isn't that going to severely undermine broadcasting, not to mention cable and satellite?

I'm not so sure. The Internet cannot replace the other media. The truth is, I don't think we have enough infrastructure to serve 110 million households with big bit, intensive, high-definition, beautiful pictures on demand at peak times, all the time. I don't think we have enough towers, enough fiber, enough satellites to do that. I think it's going to take decades to get that infrastructure in place to do that.