Everything's in play

On Aug. 5, 1999, the FCC for the first time agreed to permit a single company to own two television stations in a single market, so-called duopolies. Six days later, CBS Chairman Mel Karmazin visited Viacom Chairman Sumner Redstone to talk about what kind of deals they could do, now that the overlapping signals of their TV stations presented an opportunity rather than an obstacle. On Sept. 5, Viacom declared that it would acquire CBS for $37.3 billion.

No one envisions such an immediate and dramatic reaction to last week's startling attack on federal media ownership rules, a court decision that strikes the prohibition against owning a TV station and cable system in the same market and also casts doubt on the federal TV-station ownership cap.

For the past two decades, though, even small changes in FCC ownership rules have unleashed a swarm of deals that transformed the media landscape. Last week's ruling will be no exception. It just might take a little longer.

First, that ownership cap, which limits groups to a reach of no more than 35% of U.S. TV homes, is still in place, and it's unclear how fast the FCC will move to eliminate or relax it (see story, page 20). Also, the recession has depressed the stock price of likely buyers, meaning that stock won't buy as much as the buyers would like.

"I'm not sure there's going to be as much merger activity as there was, say, in the radio business after 1996," Karmazin says, though noting that he was contacted by nine investment bankers the afternoon the court decision came down. "The stock market is in the tank. You use your currency when the currency is high."

Why has he lobbied against the ownership cap so hard, then? "It's America," Karmazin says. "It gives me freedom to expand in a business that we like a lot. Whether we go up to that limit depends on many more things."

Says Jack Sander, executive vice president, media operations, for broadcaster and newspaper publisher Belo Corp.: "It will take a little time to sort out both the cap and cross-ownership opportunities for the industry and Belo. Everyone talks and plans, but now it becomes real."

But pressure to buy will come. "The best competitive hope for free broadcast-television networks is if they extend their distribution," says Barry Diller, CEO of USA Networks and soon to be CEO of Vivendi Universal Entertainment, which will own a movie and TV studio, cable networks but no broadcast outlet.

Also driving deal talk is the expectation that other FCC ownership restrictions will soon be relaxed or eliminated. The agency is already reviewing the prohibition against common ownership of newspapers and TV stations in the same market. And broadcasters in smaller markets are in court looking to loosen duopoly rules, which currently permit jointly owned TV stations only in fairly large markets with a sufficient number of competing "voices."

Sanford Bernstein media analyst Tom Wolzien says rule changes will make a couple of deals easier to do and that will have a ripple effect throughout the market, particularly the TV-station sector.

"Gentlemen, start your engines," he says. "This has broken the wall that has maintained separate, large companies and kept them at arm's length."

Clear movers will be the big media companies that control the broadcast networks: Viacom, News Corp., General Electric's NBC, Disney.

If the 35% cap goes, says Larry Patrick, a leading station broker, the big players will try to extend their reach into markets 15 to 50 with an eye for growth markets like Orlando.

The broadcast networks will also try to double up in markets where they can. "If CBS and Fox have two stations in a market and you only have one, you're in trouble."

Non-network broadcasters, the mid-size and small station groups, have been working to keep the 35% cap in place. Some don't want to be forced into selling to the networks; others simply don't want to see the networks become more powerful than they already are.

Every group with stations in the top 50 markets becomes a target of one network or another. And the larger and the better the group's markets, the more attractive they are. The most-likely-to-sell list includes Sinclair, McGraw-Hill, Gannett, Emmis, Media General, Allbritton, Scripps, Meredith and Paxson.

But even more-substantial groups like Hearst-Argyle, Post-Newsweek and Belo may eventually succumb. "Belo has great stations in great markets," says Patrick. "At some point, it gets an offer that it can't refuse."

Some mid-size groups may be able to resist network takeover by merging. That's what LIN Television seems to have in mind. It is planning to go public and use the cash and stock to roll up other groups. "It's our intention to be a consolidator," says President Gary Chapman.

AOL Time Warner may also make a move in the more liberal regulatory environment. Although it owns The WB, it has been kept out of the TV-station business by the cable/broadcast ban. With that gone, it can begin the hunt for a station group to go along with the network.

An AOL executive acknowledged that Tribune Co. would be the most natural target. The broadcaster and newspaper publisher is a 25% owner of The WB and owns WB affiliates in New York and Los Angeles.

AOL interest in TV stations could be Sinclair Broadcast Group David Smith's dream come true. The group is having financial programs and 21 of its 61 stations are WB affiliates.

AOL's big play would be the acquisition of NBC, which lacks the bulk and scope of the other broadcast-network owners. The AOL and NBC media assets fit nicely together.

General Electric has considered selling all or part of NBC for years, talking at one point to Turner Broadcasting before it was bought by Time Warner and at another to Time Warner before it merged with AOL.

The end of crossownership rules would certainly make any talks with AOL Time Warner's Steve Case much easier. The conflict between AOL's New York City cable operation and WNBC-TV would disappear.

And, of course, the ailing stock market suddenly changes dealmakers' perspective. GE could easily be a buyer, not a seller. With its price fallen to $25 per share, AOL is worth just $100 billion. "That's less that what Time Warner alone was worth before AOL acquired it," notes the CEO of one major media player.

This is analyst Wolzien's favorite prospective deal, in part because AOL has two things NBC lacks and probably needs: a studio and lots of entertainment cable networks. "How many times has GE tried to figure out what to do with NBC?" Wolzien asks. "They were a seller because they could never do anything else with it."

But NBC Chairman Bob Wright discourages such talk. "GE has always been happy with NBC and its performance and remains so," he says. "But it's never been eager to become substantially bigger in the business" because so much of it, like the movie business, is cyclical.

With corporate pressure to keep revenue and profits growing, though, NBC will not be sitting still. "We're out there looking for things to do all the time." The Paxson, ValueVision and Telemundo acquisitions are all examples, Wright says.

AOL Time Warner aside, the freedom to own cable and broadcast outlets in the same market is less compelling than relaxation of the TV-station rules would be. Only News Corp. has shown any appetite for multichannel distribution. Rupert Murdoch has been repeatedly thwarted in attempts to get into the U.S. DBS business. He longs for distribution against which to leverage his portfolio of cable networks, although his company isn't in a financial condition to mount much of a system shopping spree.

Industry executives' other favorite broadcast/cable combination is a takeover of Disney by Comcast. The MSO's president, Brian Roberts, is seen as hungry to get deeper into the content side of the business.

But Steve Burke, president of Comcast's cable division and a former Disney cast member, flatly denies that the company has any interest in buying Disney. "Purchasing a company with broadcasting assets is as far away in our mind than anything you could imagine. We're working on digesting AT&T Broadband," the 15-million-subscriber cable operation.

Wright and Karmazin say they have equally little interest in owning cable systems.

"Cable television is not attractive to commercial industrial businesses [like GE] because it has a lot of capital intensity," Wright says.

Only Cox Communications—the sole top-five cable operator that, through parent Cox Enterprises, is also a broadcaster and newspaper publisher—expresses even mild interest in crossownership. COO Pat Esser says it would be interesting to freely and intensely cross-promote a station and cable system. "If you could use the system to get a one-rating-point improvement in news over a year, that's a lot of gain to you year after year."

The cable/broadcast crossownership rule has fallen. Other ownership restrictions are not far behind. And if history is any guide, major structural changes in the TV industry are on the way.

"You're either a buyer or a seller," says broker Patrick. "If you stand still, you will be run over."