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What's in the Cards for Stations

Everyone in local television agrees that 2012 will be unfathomably lucrative, thanks to politicians spending on commercial time with the kind of impulsive freedom usually reserved for sailors on shore leave. What’s far murkier, however—despite it being upon us right now—is the earning power for the second half of 2011. Automotive production out of quake-stricken Japan, an unclear start date to political spending, and a general skepticism toward the economic recovery have conspired to make for what many are calling an iffy third and fourth quarter for local television.

Many broadcasters are hoping their second- half 2011 earnings can simply stay level with the core business they posted in 2010. “I think flat is going to be the average. Some people will squeak out some gains, but I just haven’t seen the pressure on inventory,” says Bill Hague, senior VP at Frank N. Magid Associates. “I think there are some gray clouds on the horizon.”

polled a dozen broadcast executives, from group presidents to senior consultants to rep " rm chiefs, to see how they forecast the second half of 2011, taking last year’s landmark political spending out of the equation to keep the comparison fair. Fully half predicted a flat third and fourth quarter for their local business outlets, while the remainder forecasted single-digit revenue gains in the second half—for an average of around 3%.

Perhaps it is reason for optimism that no one predicted a negative number.

Auto Not Immune

Considerable anxiety exists, much of it centered on the continued uncertainty stemming from the all-important automotive segment. Japan’s devastating earthquake and tsunami in March seriously hampered not only the auto manufacturers based there, such as Toyota and Honda, but the myriad manufacturers in other countries that rely on Japan for GPS units, stereos and other automobile parts and pieces. That in turn kept new vehicles out of U.S. showrooms, and kept automotive spots off television, reminding many of those bleak days of the recession, when car and truck advertising all but screeched to a halt.

It’s anyone’s guess as to when production will be back to full cycle in the Far East, but most parties agree the showrooms will again be flush somewhere around the end of the third quarter and start of the fourth. Such production shortcomings will drain secondand third-quarter earnings, but should help to make Q4 numbers robust, as automakers push hard to make up for lost marketing time. “It’s not a demand issue, it’s a supply issue—it’s really that simple,” says Steve Lanzano, president and CEO at the trade group TVB. “The demand is still there on the consumer side, and that could be very good.”

Automakers traditionally ramp up their ad spend to reestablish the brand and regain consumer confidence following crises, say industry watchers, such as the massive recall stemming from Toyota’s gas pedal problems in recent years. Those in broadcasting are banking on that being the case this time as well. “The uncertainty in Japan may result in more brand awareness advertising,” says Michael Alcamo, president of investment bank M. C. Alcamo & Co. “I haven’t seen specific evidence of it yet, but I expect the auto industry to come on strong.”

Party Set to Start

Equally vexing, and just as critical to stations’ financial well-being, is the political landscape as the field for the 2012 presidential election comes into focus. Most broadcast chiefs agree that there will be some political spending, both on candidates and issues, toward the tail end of 2011, particularly in Iowa and the greater New Hampshire region, as Republican candidates blanket the airwaves in advance of those states’ harbinger caucuses and primary. A few other key battleground markets, such as South Carolina and Florida, may see 2011 cash, too.

All agree that 2012 will witness record spending, thanks in large part to the 2010 Supreme Court decision that essentially removed caps on political donations. By some estimates, President Obama will cough up a billion dollars to keep his job, most of it going to local television. The “U.S. Broadcasters Get Ready for Record-Breaking Political Ad Spending in 2012” report issued by Moody’s in June estimates a 9%-18% increase for broadcasters from the $2.3 billion spent on political advertising in 2010.

But stations looking for a bellyful of that this year don’t figure to be getting much more than a few sips. “We’re not seeing a ton in the second half of this year,” says Ken Goldstein, president of Campaign Media Analysis Group (CMAG). “Some markets may see intense stuff, but I don’t see it being particularly significant at all in 2011.”

If there’s anything station group chiefs can take heart in, it’s that politicians almost always spend earlier, and spend more, than reasonable forecasts have called for. And an extraordinary batch of hot-button political issues, including those related to healthcare, federal tax cuts and unions’ collective bargaining, will likely kick cash to stations, too.

“Those could create a national opportunity for committees to start spending early,” says Val Napolitano, president and CEO of rep firm Petry Television. “All of these political hot potatoes " oating around could generate some spend.”

Wild Cards

Other factors continue to keep the forecast cloudy for the rest of 2011. Several station chiefs voice concern over the ongoing NFL labor lockout, though almost all are more optimistic after recent negotiations between player reps and owners than they were a few weeks ago. A loss of preseason games may not affect the NFL’s competitive landscape much, but it would hit stations hard. “Once we hear, yes, you’ll have the preseason, and yes, you’ll have the regular season, then we can start to book those dollars,” says Paul Karpowicz, Meredith Local Media president. “Given the enormous amount of money involved, I’d be surprised if the players and owners couldn’t come to a resolution.”

A much larger problem is the general economy. A lack of consumer optimism, plagued by persistently high unemployment and stagnant housing values, continues to worry broadcast leaders—and, presumably, the general population that patronizes the auto dealers, restaurants and telecommunications providers that buy ads on television.

On June 23, Media General took the unique step of mandating 15 unpaid days off for employees in the second half, citing the weak economy. “As we approach the midpoint of 2011, the much anticipated economic recovery continues to be unevenly felt across our markets and, more recently, the economy has faltered,” Marshall Morton, Media General president/CEO, wrote in a memo. “While new revenue and Website growth initiatives have been successful, these efforts have not produced enough revenues to offset declines in our traditional lines of business.”

Economic horror stories out of Greece and unrest in the Middle East only serve to remind people that all members of the global economy are connected. “The big thing is how resilient the U.S. economy is,” says Mark Fratrik, VP at researcher BIA/Kelsey. “When we see those lackluster employment numbers, that’s not good. Unemployment and underemployment affect everyone—everyone knows somebody who’s unemployed.”

Others harbor concern for whatever unforeseen force might strike down the fragile economy, and even more fragile American psyche, as the dreadful BP oil spill did last year. “You just don’t know what event might set things off,” says Lanzano of the TVB. “It makes it very difficult to give guidance. My concern is, what’s the next event, because there is always something.”

Closer to home, stations are contending with the new calculus of retransmission consent as the second half gets under way. What once represented an unfettered revenue stream has turned into, for many, a major expense, with networks squeezing affiliates for a big piece as part of their affiliation agreements. Stations with contracts coming due are learning just how costly it can be to partner with a network. “Retrans is pretty much done [as a major revenue stream],” says Mark Toney, senior VP at consulting ! rm SmithGeiger. “The days of making that money came quick, and it went just as quickly.”

TV Is Timeless

Station groups are up against brutal, and perhaps unfair, comparisons when third- and fourth-quarter earnings are pitted against their 2010 counterparts, which were amplified by the billions spent on political ads. Fratrik says the $17.9 billion in revenue forecast for stations in 2011 compares favorably with 2009’s $15.8 billion, but notes that 2009 represented the depths of the recession. Station revenue in 2011 doesn’t hold up as well against 2007, the last year before a presidential race, when stations took in $21.5 billion. “This year is a healthy increase over 2009, but we’re still not back to the levels of the mid-2000s,” Fratrik says.

Still, most everyone was encouraged by a sanguine upfront season, and what looks to be a strong scatter market. NBC seems invigorated by new parent Comcast; Fox looks like it has an American Idol-esque big-tent show on its hands in The X Factor; CBS had little changes to make to a thriving grid; and ABC appears to have solved the comedy conundrum that has plagued network TV for years. On the backs of these and other developments, the Big Four networks rang up about $8.7 billion worth of commitments for primetime advertising during the 2011-12 season, up 9% over last year. Add in The CW, and it rises to $9.1 billion. Moreover, advertisers paid between 9% and 15% more for commercials on a cost-per-thousand (CPM) basis than they did in 2010.

Amidst all the gray clouds, the durability of television offers reasons for those toiling at the local level to be optimistic. “Fundamentally, people still look at our business as a mass reach vehicle that is unparalleled,” says Meredith’s Karpowicz. “That bodes well for stations.”

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