TV Stations: What’s the Big Deal?

In the race to become bigger in a media world being disrupted by changes in technology and viewer preferences, it looks like TV station groups, Sinclair Broadcast and Tribune Media, will be searching for new suitors, starting tomorrow.  August 8^th is the deadline for the parties to walk away from their $3.9 billion merger, something that, after the FCC’s July 26^th decision to refer its public interest review of the merger to an administrative law judge, became more likely they would do.

TV Groups say they need greater scale to use as leverage with advertisers and multichannel video programming distributors(MVPDs) as advertisers have more outlets to choose from putting downward pressure on ad prices and MVPDs, through consolidation, are bigger and have more heft in negotiating retransmission agreements that work best for them.

But, how much scale is necessary? As separate entities, Sinclair and Tribune have 184 and 40 major network affiliate stations in 89 and 33 markets, respectively.  Sinclair is in 37 percent of US households, while Tribune is in 44 percent.  I imagine they already have strong bargaining positions with small businesses looking to place ads on local TV channels.  I imagine they already have mutually dependent relationships with broadcasters, ones that neither party at the negotiating table wants to risk upsetting.  I imagine they don’t need much national scale to produce local news. 

	Network Affiliates
Affiliation	Tribune	Sinclair
ABC	3	30
CBS	6	25
CW	12	37
FOX	14	43
MY Network	3	31
NBC	2	18
Total Major Network Affiliates	40	184

  Source: 10K Reports

Size (and dominance) can easily become inefficient and harmful to consumers in the form of higher prices, fewer choices, and less innovation.  It may also add to the temptation and ease of cooperating with the few remaining firms in the industry on shared interests such as higher advertising prices (as is being investigated allegedly by the DOJ.)  It raises the question of whether these station group mergers (another one is the $3.65 billion Gray and Raycom deal) are ploys to convert local markets into national ones to spread costs across more units or spread agendas. 

Sidebar:

Television programming, aggregated by broadcast and cable networks is provided via broadcast or multichannel subscription services.  If a household only wants to watch broadcast network programming, the over-the-air signals can be picked-up for free by using an antenna and a tuner that transmit the Very High Frequency (VHF) and Ultra High Frequency (UHF) signals.  Broadcast spectrum is licensed by the FCC on an 8-year renewable term to individual and group owners to serve the public interest of communities within designated metropolitan areas (DMAs).  In 2015, there were 210 DMAs, of which 183 had three or more full-power commercial television stations assigned to them.  In many of the largest DMAs, the top broadcast networks (ABC, CBS, NBC, and FOX) own and operate their own stations.  Programming on local television stations comes from the broadcast networks, purchases of syndicated television shows, and production of original content, such as local newscasts and coverage of local and regional events. 

Broadcast TV stations transmit over two alternative broadcast bands – very high frequency (VHF) or ultra high frequency (UHF).  Nationwide, the maximum percentage of U.S. households that a television group can serve is 39 percent. The cap discounts the audience reach by 50% if UHF technology was used prior to 2009, because it historically had weaker over-the-air signals compared to VHF.   In 2016, the FCC grandfathered the UHF rule stating that it was outdated given the conversion to digital broadcasting in 2009.  However, in April of 2017, the FCC restored the practice of discounting and the rule change was upheld in Court on appeal.

While ad-supported local broadcast TV stations provide their programming free over the air, 86 percent of households receive these stations through the paid subscriptions of MVPD providers (cable, direct broadcast satellite (DBS), and telecom firms) who bundle broadcast and cable networks into program tiers.   Local broadcasters are given the option of either demanding carriage on their local MVPD systems (Must-Carry or Carry One, Carry All) or negotiating with those systems for compensation for carriage (Retransmission Consent).  If the broadcaster elects Must-Carry status, then they are generally guaranteed carriage and no compensation is involved.  The arrangement is negotiated every three years and typically smaller stations choose Must-Carry status.  Larger broadcasters prefer Retransmission Consent because they receive cash or in-kind compensation from cable operators that find it necessary to carry the major networks to attract and retain subscribers.  On average, nearly a quarter of broadcast station’s revenues comes from fees paid by MVPDs.  TV stations typically share a portion of the retransmission consent fees with their broadcast network affiliate.