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July 2, 2013

In the media industry, it's once again important to be big. Tribune Co's $2.73 billion agreement to buy Local TV Holdings LLC's 19 television stations, unveiled Monday, is the biggest in a spate of TV station acquisitions that so far this year totals nearly $9 billion, according to SNL Kagan. These deals, along with signs that cable-TV executives are looking to spark a consolidation wave in that industry, signal a sea change in the media sector. After a decade in which media industry deal-making was heavily concentrated on unwinding mergers struck in the past, executives once again have an appetite for acquisitions.

But unlike the deals of the 1990s, which created vertically integrated media conglomerates, these deals are concentrated on the distribution side, among TV station owners and potentially cable operators. They reflect a recognition that with growth in pay television slowing sharply, economies of scale are vital. "Our investment thesis is simple: scale matters," said Tribune CEO Peter Liguori, during a call with analysts Monday morning. Or as Liberty Media Corp. Chairman John Malone, a pioneer of the cable industry, put it last month, "the whole name of the game in the cable business is scale."

The twist is that both station owners and cable operators are hoping that bulking up will improve their bargaining leverage with each other. Stations in recent years have started charging cable and satellite operators for the right to carry their signal. They hope to use their bigger status to squeeze higher fees out pay-TV operators, and to get lower costs from content syndicators. Cable operators, meanwhile, want scale to retaliate. "The cable guys have got to get bigger to push back on programming costs and the broadcasters have to get bigger to push forward on retransmission consent fees," said Jeffrey Marcus, a Charter Communications Inc. board member and a cable industry veteran. "It's really the same strategy that both industries are having to execute."

The consolidation is being led by a couple of individuals, primarily Mr. Malone on the cable side, who helped drive an earlier wave of cable consolidation in the 1980s and 1990s before selling his company in 1999. Liberty re-entered the U.S. cable industry by buying 27% of Charter Communications in May. Mr. Malone said last month Charter could become a "horizontal acquisition machine," rolling up small operators while looking for big deals. Already Liberty has floated the idea of Charter combining with Time Warner Cable Inc., although Time Warner Cable has shown no interest. Mr. Malone described the cable industry last month as "Snow White and the seven dwarfs," noting the imbalance between Comcast Corp., the largest cable operator with about 22 million video subscribers, and other cable companies, which range from about half Comcast's size to much tinier.

Cable executives say that spending on technology, marketing and broadband network upgrades would also become easier with scale, pointing out that Comcast has been able to leap ahead of others in some technologies because of its size. Some in the industry predict that over time the industry will consolidate down to two big cable operators. On the TV station side, driving the deals has been Sinclair Broadcast Group Inc. CEO David Smith, who more than doubled Sinclair's station portfolio in the last 18 months. A decade ago he predicted the industry would consolidate down to half a dozen broadcaster "supergroups" - and he still expects it. "In the next 18 months, the vast majority of all the scaled assets will be combined with somebody else," Mr. Smith said in an interview. "And rather than have 50 people at the table trying to decide what we're going to do, we'll have five people."

Cable channels, which make up most of the programming on pay TV lineups, went through this consolidation well over a decade ago, when companies such as Time Warner Inc. bought Turner, parent of CNN, TNT and TBS and Viacom Inc. snapped up BET. Most of the cable channels are now owned by the half dozen biggest entertainment firms. Federal ownership rules prevented TV stations from following the same course. But station owners have increasingly come up with ways around the rules, including "local marketing agreements," that allow one broadcaster to operate several stations in a market without actually owning them. Federal Communications Commission ownership rules also discount the audience reach of certain kinds of stations, a policy that broadcasters have used to bulk up. The FCC has no rules limiting the maximum number of subscribers a cable operator can have nationwide.

The increasing pace of broadcast TV consolidation has begun to set off alarms in Washington, including among cable operators. The American Cable Association, the lobbying group for independent cable operators, is worried that the consolidation will allow broadcasters to use their greater leverage to negotiate for higher retransmission fees. "Because our cable operators in those markets have to deal with one entity for more than one signal, the price to consumers goes up," said Matt Polka, CEO of the ACA. The ACA is particularly critical of the use of "local marketing agreements" and other similar sharing agreements, claiming that some of his members have found retransmission fees rise more than 20% in markets where two broadcasters negotiate together through sharing agreements. The ACA has asked the FCC to review its ownership rules.

Dennis Wharton, the spokesman for the National Association of Broadcasters, said "the notion that broadcast retransmission consent fees are responsible for higher cable bills is ludicrous," pointing to SNL Kagan data showing that broadcast retransmission are less than a tenth of basic cable fees. Wall Street Journal; see related Journal article "Tribune Pours Money Into TV"

A potential showdown between Time Warner Cable and CBS over a new distribution deal has been put on hold for now. Although Time Warner Cable's deal to carry CBS-owned TV stations on its systems around the country (including New York and Los Angeles) expired Sunday, the two sides have agreed to a short extension while negotiations continue. That neither side has taken out advertisements criticizing each other or warning consumers of the possible loss of signals, which often happens during talks like these, is seen as a sign that the discussions have not gotten adversarial. With executives already starting to disappear for long weekends surrounding Thursday's Fourth of July holiday, serious negotiations are unlikely to resume until next week. Los Angeles Times

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