Call it luck, or a federal bailout. Television broadcasters got a big break last week from a Federal Communications Commission ruling that will, in many cases, allow them to own two stations in a local market.
Voila! We now see an exit strategy for Paxson Communications Corp. and USA Networks Inc., which have fallen far short of their goals to build new TV empires with weak-signal UHF stations. They can sell to or merge with direct competitors.
Paxson’s effort to build a family-friendly network has not caught fire with advertisers or audiences, while USA Networks Chairman Barry Diller has stalled, if not scrapped, his efforts to convert 13 TV stations from a home shopping format to distinctive local programming he calls CityVision.
The FCC decision to ease its “duopoly” prohibition sets the stage for a wave of consolidation. FCC staffers say mergers will be permissible in at least half of the nation’s 100 top markets. Who will stay and who will go?
Debt-laden Paxson Communications has already retained an investment banker to explore its options. Standard & Poor’s Corp. last week said it might raise or lower its credit ratings on Paxson bonds and preferred stock, depending on the outcome of those exploratory talks.
If Paxson is practically hosting an open house (Chairman Lowell “Bud” Paxson dubbed his company the “prettiest girl at the dance”), USA Networks insists it is not.
“We are probably buyers or traders; I don’t think we are sellers,” says Diller.
But even for Diller who launched the Fox network for News Corp. in 1987 broadcasting in the late 1990s has been a tough nut to crack. Three years have passed since he announced plans to convert his stations to largely local programming; only one has made the switch.
Diller stubbed his toe on his CityVision experiment in Miami last year, and scaled back local programming there dramatically. He even held talks about merging USA Networks with NBC, but the plan fell apart in mid-1998 over issues of control.
But unlike Paxson, USA Networks does not depend on TV stations for its bread and butter. USA has profitable businesses in its cable TV networks, Home Shopping Network and Ticketmaster holdings. Diller’s other media properties might help lure a broadcast partner. His No. 2 executive, Barry Baker, says the company will “be opportunistic.”
Beleaguered broadcasters won relief from the FCC after a year of intense lobbying for relaxation of the “duopoly” rule that barred common ownership of two TV stations in the same market. The broadcasters argued that they deserved a break, to compete with cable and satellite television.
Diller, for example, told the government agency in February that costs at his Miami station, WAMI, could be cut in half if WAMI could pair with a stronger TV station in the same market. The savings would be achieved by using the other station’s sales force, or even its physical plant.
The USA Networks chairman told the FCC that he canceled three local shows in Miami “after reluctantly concluding that, restrained by current FCC rules, we could not sustain costly local production of those programs.”
WAMI retreated to more conventional fare, although it still offers news and “10s,” a show that sends a roving camera in search of Miami’s beautiful people.
It’s unclear how vigorously USA Networks will pursue CityVision at other stations. “The format is constantly in flux, but it will be locally influenced programming,” says Baker, the president and chief operating officer.
Next up for conversion: the Dallas station, but tellingly, there are no immediate plans for a local newscast.
USA Networks reported a $30 million operating loss for its TV station group in 1998 and has told Wall Street analysts that it could spend $200 million over the next three years to shift other stations from the home shopping format.
Wall Street, of course, welcomes the FCC relief act. With the relaxed duopoly rule, analysts are betting that TV broadcast companies will see a jump in their market valuation, much like that of radio companies and cable TV operators that went through a period of consolidation.
SG Cowen & Co. analyst Edward Hatch raised his estimated value of USA’s TV stations by 50 percent as a result of the FCC ruling. He says the stations now “could be worth $1.5 billion, or more.”
Paxson’s business plan differed from Diller’s in the number of stations (more than 70 acquired) and its brand of programming. The company founder a self-styled, born-again Christian chose wholesome programming that eschews vulgar language, violence and explicit sexual behavior. When the Pax TV network launched in August 1998, it showcased reruns of “Touched By an Angel” and “Dr. Quinn, Medicine Woman.”
Initially, Paxson projected $400 million in advertising revenue for the network’s first 12 months of operation, but analysts estimate its ad sales won’t top $155 million for the network’s first nine months.
While Paxson is laying out cash faster than it brings it in, many analysts have focused on the value of its TV stations, which have suddenly become easier to sell. Bishop Cheen, an analyst for First Union Capital Markets Corp., says Paxson’s total assets are worth $2.5 billion “on a pure liquidation basis.”
Paxson shares climbed for five straight days after the FCC ruling, rising a total of almost 28 percent.
But there remains the question: Can Paxson find a buyer or partner for the whole company, or would it sell off its assets piecemeal? Only 42 of its stations are located in the top 50 markets, where most of the FCC-sanctioned mergers are likely to take place. Not all of the remaining 30 stations are even in markets where another broadcaster can buy a second TV station under the new FCC rules.
To encourage a diversity of “voices,” the FCC will only permit common ownership of two TV stations in the same market if eight full-power stations remain after the merger. The FCC will make exceptions: a “failed station” or “failing” station can be purchased by a same-market operator if no other buyer steps forward.
What an agency. The FCC has thoughtfully provided a soft landing for present and future failures.
Kathryn Harris is a columnist with Bloomberg News.
