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Marshaling the Troops

Jeff Smulyan is a tired but happy campaigner. After three days of pitching his bold wireless-cable plan at the NAB show, the Emmis CEO can claim success. "It's been very gratifying," he says. "I haven't found one broadcaster who isn't interested."

Forget interested.

Think committed.

Twelve TV-station groups publicly endorsed
his plan for turning digital TV stations into wireless cable systems, offering a low-cost alternative to cable and satellite (see B&C, 4/19). The power players in Smulyan's new frontier came from five Top 25 TV-station groups: Scripps (No. 15), Clear Channel (No. 16), Raycom (No. 17), Meredith (No. 18), and Media General (No. 20). (Emmis Communications is No. 23 on B&C's annual ranking.) Also backing Smulyan were six smaller groups: Barrington Broadcasting, Citadel Communications, Fisher Broadcasting, Granite Broadcasting, Nexstar Broadcasting, Prime Cities Broadcasting, and Sunbelt Communications.

"Jeff provided us with the traction we have been looking for," says Clear Channel Television President Bill Moll. "He brings credibility, a group of stations, and the leadership needed to unify the industry."

Echoes Ben Tucker of Fisher: "We are prepared to invest money as well as spectrum."

Of course, Smulyan knows his plan is embryonic. He must recruit more and larger broadcasters and parlay support into firm contracts. (He hopes to have signatures within 30 days.) His mission is revolutionary, giving broadcasters a second revenue stream—monthly subscription fees—in addition to ad dollars. But practical issues remain. He is mum on how the new company will be structured, when it will launch, and how much broadcasters will ante up. But he's clear he wants to be "the managing partner."

Smulyan's pitch: urging broadcasters to pool their capital and their digital TV channels in a jointly owned venture. With the channels, they would roll out wireless cable in markets across the country. At NAB, Smulyan argued that pay multicasting was their chance to cut out the cable and satellite "middlemen" who have created $350 billion in value on their backs. It's also an opportunity to forge a direct relationship with consumers, stunting the growth of cable systems that compete for local ad dollars.

As he sees it, cooperating digital stations in a market could offer four to six HD broadcast networks and 30 "must-have" cable networks for $25. Subscribers would buy a set-top box to receive and decode the digital signals. "This works well under 10%," Smulyan says, "but we believe consumer acceptance will take it beyond 15%."

Providing the backbone for the local services, the venture requires a capital investment between $500 million and $700 million over three to four years, he says. But it could generate revenues of as much as $6 billion within five years with margins "in the high teens to the mid 20s."

One twist: competitor USDTV, the pay-multicasting venture already up and running. Over the past few months, the startup launched its service in three markets: Salt Lake City; Albuquerque, N.M.; and Las Vegas. At his NAB presentations, USDTV chief Steve Lindsley declared himself in "violent agreement" with Smulyan on the pay-multicasting concept. Indeed, he sounds like him: "The game is now on for broadcasters to monetize their digital spectrum and compete for recurring pay-TV revenue."

Yet USDTV's service is more modest than Smulyan's. The USDTV package includes 12 cable channel and sells for $19.95 per month. So far, the soft launches have yielded 1,200 subscribers. But Lindsley expects that number to rise once his May marketing campaign begins. Unlike Smulyan, USDTV has definitive agreements to use broadcasters' digital channels. If it concludes additional agreements with broadcasters in the next few months, USDTV will roll out service in up to 30 markets and count 200,000 subscribers by year's end. Targeted cities: Los Angeles; Sacramento, Calif.; Fresno, Calif.: Dallas; Houston; San Antonio; and Norfolk, Va.

"These two guys have to consolidate their ideas," says Roger Odgen, senior vice president of Gannett TV, the eight-largest TV group. "If they come together, we will take a hard look at it." But a merger seems unlikely. Smulyan wants the venture to be "100% owned by broadcasters" and not include venture capitalists who may not have the necessary long-term commitment. "I don't see a third party controlling our destiny," he says.

Lindsley dismisses such concerns, claiming that venture capital has allowed USDTV to survive. Plus, he adds, broadcasters could be brought into USDTV in a way in which they would eventually "own and control it."

Still, objections to Smulyan's plan remain. Some station owners think getting broadcasters on board will be tough. Says Paxson Communications' Bud Paxson, "It's like herding cats."

His digital stations reach 65% of the 108.6 million TV, and he wants to exploit them. As many as 15 entertainment and educational entities, he says, have inquired about leasing the digital spectrum, offering as much as $1.50 per home per month. The best offer he has received from pay multicasters has been 30¢. "I don't think we have seen the right plan," he says.

Bishop Cheen, an analyst for Wachovia Securities, chimes in that cable networks will undoubtedly try to gouge the venture on license fees.

Smulyan isn't fazed.

He'll supply different levels of participation and says equity would be proportional to contribution. More importantly, he needs a big broadcast network to crack a major market. Of the Big Four, ABC is said to be the most interested, although execs there declined comment.

Second-tier station groups Tribune, Gannett, Hearst-Argyle, Sinclair, and Belo are talking to Smulyan and
USDTV, but none is jumping. Sinclair has some spectrum deals with USDTV, but neither party would say how many markets are involved.

Ogden says broadcasters have to be cautious. "To make a long-term bet on something that is unproven can be a problem," he says. Multicasting is one idea; "there are more to come." (Gannett and other NBC affiliates have pledged to set aside one SD digital channel and work with NBC to jointly develop a local weather/news alert service.)

Clear Channel's Moll is more optimistic. He believes the large broadcasters will eventually come around and join him on the Smulyan team. Moll says, "I don't think it's that they said no. It's just they haven't said yes."