TV Networks Reach a Fork in the Digital Road
Last week, Bloomberg reported that "Walt Disney Co. (DIS), the second-largest U.S. media company, may sell its 10 ABC television stations, fetching as much as $4.8 billion, said David Miller, an analyst at Caris & Co. who has covered the company since 2000."
This was pure speculation on the part of the analyst based on his own research and not an inside tip, according to Miller. Also in the article, A Disney spokesman called the report "purely speculative" and declined to comment further.
This speculation may not be too far fetched, however, as it would continue a pattern of behavior (albeit on the grandest scale), that we've been seeing from the broadcast television networks over the past two years. In July, General Electric's (GE) NBC division announced the sale of its owned and operated TV station WTVJ in Miami to the Post-Newsweek Station group, a division of the Washington Post Company (WPO). NBC began the process of pairing its station group back in 2006 when it announced the sale of 4 other stations to Media General (MEG).
Newscorp's (NWS) Fox Television Station Group has also been shedding smaller market stations, focusing its portfolio on just the largest markets where it can use the benefits of retransmission consent with the cable operators to strengthen its co-owned cable network distribution. Most recently, Fox completed the sale of 8 mid-market stations to Oak Hill Capital Partners backed Local TV, LLC for more than $1.1 billion.
On the surface, these actions and the lower prices that these sellers have been accepting (by recent valuation standards) would seem to indicate a general lack of confidence in the local television station business. However, it probably has much more to do with television networks realigning themselves as pure content companies in the digital age, and eliminating many of the constraints and conflicts that they have with their affiliate groups by being both the provider and largest customer for television content simultaneously.
Networks, owned and operated groups, and the third-party affiliate groups have a long history of disagreement as networks have generally made programming and business decisions based on a bias to support their owned and operated group's needs first. Today, the need for an owned and operated group to provide a core base of distribution just isn't necessary given the combination of alternate distribution channels such as cable and satellite and the abundance of start-up stations that came online in the last great surge in the late 1990's.
While most of these newer stations were lower powered UHF signals with inferior coverage, the final move to digital broadcasting has leveled much of that playing field. Also part of the February 2009 federal mandate to move to digital broadcasting, the addition of HDTV multicast has added vast amounts of over the air digital capacity for stations needing to monetize. The big 4 television networks will simply have no problem finding available local distribution in the digital age, eliminating the need for the proprietary distribution platform secured by the O&O's.
Getting away from proprietary distribution platforms will also allow the networks to optimize time and place shifting strategies taking full advantage of digital devices such as digital video recorders, video on demand and mobile applications without having to worry about cannibalization of their own local distribution business.
According to the Bloomberg article, Miller said, "By selling the stations, Disney would exit the TV distribution business and become the only large, public U.S. media company to be completely focused on content." If it sells the stations, Disney would end up a large public company solely dedicated to content, but it would hardly be alone.
In 2006, Sumner Redstone split his Viacom holdings into two separate companies - Viacom (VIA) and CBS (CBS) - in a strategy that essentially created a public pure-play content company in Viacom, and a television and radio distribution business in CBS. CBS has further gone on to shed some of its terrestrial radio holdings and could be on the path to becoming a pure play content company itself.
This business model has also been espoused by Jeff Bewkes, CEO of Time Warner (TWX), who routinely shares his vision of Time Warner becoming the world's largest pure play content company - a goal rapidly advanced with the announcement of the spin-off that company's cable television systems in May of this year and the reports that AOL is on the block to be sold.
Sony Entertainment is another possible participant as a pure-play content company should parent company Sony Corp (SNE) decide to spin it off in the public markets. Barred by U.S. regulatory constraints due to its foreign ownership, Sony has been unable to outright purchase licensed distribution assets and long focused its efforts on the content side of the business.
These moves by the media & entertainment industry to segregate into content and distribution businesses are hardly innovative. As the days of the media conglomerate are now past us, what we are seeing is nothing more than the unwinding of the failed vertical integration strategies of the 1990's fueled by substantial media deregulation. This segregation of content and distribution should ease the minds of many media watchdogs concerned about over concentration of power and too few "voices" previously found in the vertically integrated media.
With a group of only ten stations in the largest markets, Disney should also have no problem finding a buyer for its assets should it go that route, though they most likely would go out of a conglomerate's hands and into a private equity portfolio where media concentration grows stronger every day.
Interestingly, should the credit markets strengthen and the private equity players begin aggressively deal hunting again, the broadcast sector could be the real winner of this broader segregation into content and distribution pure plays as its high margins and steady cash flows would be very appealing to the private equity community coming off a depressed valuation cycle in the business. It would be a natural for the pure-play content companies to remain in the public arena where their high growth stories would be richly rewarded, while the low growth, cash-flowing distribution assets could be acquired by private equity groups concerned more about lowered risk and fulfilling debt service.
This concept of dividing the broadcasting business into two different businesses to maximize returns is something that I wrote about earlier this year for Seeking Alpha, and I see this happening down the road for the terrestrial radio sector. Should this analyst's speculation about Disney and the ABC O&O stations prove right, it looks like it could actually become a reality on the TV side of the broadcast business though.
Disclosures: None.
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