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DEREG LEADS SMALL FISH TO NETS

As the odds shorten on passage of a deregulatory telecommunications bill in coming months, TV station owners are preparing themselves for a dizzying period of upheaval.

Station execs predict a shake-up in the TV station market on a scale similar to that which transformed the ownership patterns in cable over the past two years, when the top half-dozen cablers gobbled up a mass of smaller players.

The scope of the restructuring will depend on how far deregulation goes. At the very least, assuming the Senate version of the bill becomes law, relaxation of station ownership limits will prompt a rash of buying by networks and independent station groups, execs say.

New World order

In addition, more small station groups are expected to partner with networks in alignments similar to those set up last year between New World Communications Group and Fox, Young Broadcasting and Cap Cities/ABC, and Group W and CBS.

Among the station groups looking for alliances are aggressive and small young companies like Granite Broadcasting and Young Broadcasting. Despite its existing link with Cap Cities, Young CFO Jim Morgan says it is open to doing deals with other networks.

And the networks are also believed to be open to looking at other deals, according to one ABC exec. That’s not surprising, as these alliances not only cement the networks’ relations with affiliates but give the networks some indirect equity in smaller-market stations. For the station groups, having a network as a partner means they have more money to spend buying stations.

And whether the buyer is the network or its partner, both will have more strategic incentive to bid for stations – which will make it harder for other potential buyers to compete in a market where prices are rising.

House wants more

Even more dramatic changes would flow if wider deregulation as proposed by the House of Representatives’ version of the bill becomes law. In that case, the industry would be presented with a “real opportunity to have structural change,” says Renaissance Communications chairman Michael Finkelstein.

The House bill would, for instance, do away with the duopoly rule which prevents operators owning more than one station per market. Finkelstein predicted passage of this bill would cause a wave of station swaps and corporate mergers to consolidate ownership of stations in a small group of bigger companies.

“All the rules will be thrown out the window. Everyone will have to rethink strategy and it’s hard to predict what will happen,” says Cox Broadcasting chief Nick Trigony, who says that Cox would like to buy more stations.

Bigger is better

Bishop Cheen, an analyst with Paul Kagan Associates, says elimination of the duopoly restrictions is at the top of broadcasters’ wish lists. “If they’re in a market that they like, they want to be bigger in that market,” he said.

By owning more than one station in a market, operators will have more control over the advertising inventory, which will enable them to raise rates. In addition, operators will be able to slash fixed costs 15%-20%, Cheen estimates. “One traffic department, one engineering department,” he said.

Not everyone is happy over the prospect of such revolutionary changes. Some operators, particularly those owned by big newspaper chains, worry about big operators buying up multiple stations in the one market.

“We are concerned about duopoly, concentration of media,” said Ken Elkins, president/CEO of Pulitzer Broadcasting, which owns 10 stations as well as several newspapers.

Another newspaper-broadcaster voiced similar worries. “We remain concerned about caps and duopoly; if they go away, people will do business to be protective of their own companies” instead of functioning in what’s left of the public interest.

Cheen says this reaction is instinctive for hybrid newspaper-broadcast companies, which have longer-established roots in newspapers and take the view, “let’s not let our electronic competitors get too big for their britches.”

The response is also understandable given the way aggressive station groups are targeting newspaper advertising for much of their revenue growth. Granite president Stuart Beck predicts local newspaper advertising will increasingly go to local TV stations, a result of aggressive tactics by ad salespeople for the broadcasters.

The pure broadcasters have little sympathy for the worries of their newspaper-broadcast colleagues. Renaissance’s Michael Finkelstein says “they’re going to have to decide what business they want to be in.” It “won’t make sense” to own just a few stations in the future “because you won’t be able to participate to shape your own future,” he said.

“People that don’t operate efficiently, who are not getting the kinds of margins that the industry can return, are going to be forced out,” says Young’s Jim Morgan.

Former CBS Broadcast Group president Gene Jankowski, now an investment banker with Veronis, Suhler and Associates, disagrees. He says that programming will remain the key and as long as a station has the right schedule, it will continue to do well.

But Jankowski conceded small broadcasters could be put at a “competitive disadvantage” if the duopoly rule disappears and bigger companies buy up more than one station in the market.

Kagan’s Bishop Cheen said if both the ownership audience limits are relaxed and the duopoly restriction removed, “you will create an environment for consolidation” where as well as the networks, some large billion-dollar TV station groups emerge.

“It’s consume or be consumed,” he said.

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