Sinclair’s high-stakes gamble to reshape television news

Beleaguered conservatives reeling from the turmoil at Fox News have at least a glimmer of hope that a second national conservative news outlet could result from a huge merger announced yesterday.  Sinclair Broadcast Group, owners of 173 terrestrial television stations in 81 markets, will be acquiring Tribune Media, which owns 42 stations reaching 24% of the American public, including outlets in New York, Los Angeles, and Chicago, as well as a cable channel, WGN America.  Combined, the two station groups would reach 70% of the American public, according to Jennifer Saba of the New York Times, unless the FCC requires divestitures.  

Sinclair is generally regarded as conservative in outlook and has won the admiration of many by employing Sharyl Attkisson and giving her a program carried in all its markets.  There is now the hope that Attkisson could soon reach 70% of the public very soon.  But the really intriguing possibilities include launching a second conservative cable news outlet, capitalizing on discontent with Fox News's turmoil and firings, especially of its leading personality, Bill O'Reilly.  The fact that the company will already have a cable channel (WGN America) on most cable systems reduces the most formidable barrier to entry for a cable news network.

Sinclair will have enormous bargaining leverage over 21st Century Fox, the parent of Fox News and the "Big Fox" television station group and broadcast network through its ownership of the largest group of affiliates, including many major markets.

Chart from Bloomberg

If hostility breaks out between the two parent organizations, Sinclair has the means to retaliate by denying carriage to "Big Fox" programming on the affiliates it owns.  This could be very useful if Sinclair decides to challenge Fox News in going for conservative viewers, and FNC goes to the mattresses, attempting to enforce non-compete clauses in talent it had under contract and may continue to pay in order to keep them off the air at a new competitor.  Or Sinclair could simply counter-program FNC with on-air programming.

Regardless of what Sinclair does or doesn't do to start a cable news competitor, it is taking a huge gamble by borrowing billions of dollars to buy a player in a declining industry like broadcast television.  With the proliferation of outlets for video, from Netflix to YouTube, the share of eyeballs for broadcast television is in a long-term decline, and pressures are building on ad rates.  Sinclair does have considerable experience with buying stations while enhancing revenues while cutting costs.

Saba of the Times:

The Baltimore-based media company outlined a host of advantages that it expects Tribune to bring to the table. They include collecting more fees paid by cable and satellite distributors to Sinclair to carry local TV. Yet executives refused to disclose what cost savings they have identified.

To justify the $800 million premium Sinclair is paying, its chief executive, Chris Ripley, needs to trim annual expenses by around $120 million before tax, assuming a 30 percent levy and capitalized on a multiple of 10. At some 8 percent of Tribune's total expenses last year, that ought to be pretty manageable. For example, Gannett — now Tegna — which is famous for wielding the knife, targeted 36 percent of Belo's costs when it bought the TV station group in 2013.

Mr. Ripley's decision to hit the mute button on expenses, though, spooked investors, who at one point wiped almost 5 percent off Sinclair's value, before allowing it to recover some.

As Saba notes, and as the left are sure to fuss over, the acquisition could not have taken place unless the FCC, under chairman Ajit Pai, had reinstated what is called "the UHF discount," which counts UHF viewers at a severe discount in calculating total market share.  This is a remnant of the days when fewer households could receive UHF broadcasts.  But in an era of digital broadcasting, the logic for reapplying the discount seems weak.  Unless one takes the view that in a concentrating industry, allowing further mergers to produce a new major player actually enhances competition.  (This is the logic that allowed antitrust approval of the acquisition of Virgin America Airlines by Alaska Airlines: that the merged carrier would be a more robust competitor to United, American,  Delta, and Southwest.)

Anything that allows Sharyl Attkisson to reach a broader audience is fine with me.  And so is competition for Fox News.  In a nation roughly equally divided, there should be two conservative cable news outlets matching two liberal ones.  David Shine, who was Roger Ailes's right-hand man in building Fox News, is available, having been let go a few days ago.

The pieces are all there in place for Sinclair.  Good news for unhappy Fox folks and former employees, but bad news for the Murdoch children who have wanted to reshape FNC.

Beleaguered conservatives reeling from the turmoil at Fox News have at least a glimmer of hope that a second national conservative news outlet could result from a huge merger announced yesterday.  Sinclair Broadcast Group, owners of 173 terrestrial television stations in 81 markets, will be acquiring Tribune Media, which owns 42 stations reaching 24% of the American public, including outlets in New York, Los Angeles, and Chicago, as well as a cable channel, WGN America.  Combined, the two station groups would reach 70% of the American public, according to Jennifer Saba of the New York Times, unless the FCC requires divestitures.  

Sinclair is generally regarded as conservative in outlook and has won the admiration of many by employing Sharyl Attkisson and giving her a program carried in all its markets.  There is now the hope that Attkisson could soon reach 70% of the public very soon.  But the really intriguing possibilities include launching a second conservative cable news outlet, capitalizing on discontent with Fox News's turmoil and firings, especially of its leading personality, Bill O'Reilly.  The fact that the company will already have a cable channel (WGN America) on most cable systems reduces the most formidable barrier to entry for a cable news network.

Sinclair will have enormous bargaining leverage over 21st Century Fox, the parent of Fox News and the "Big Fox" television station group and broadcast network through its ownership of the largest group of affiliates, including many major markets.

Chart from Bloomberg

If hostility breaks out between the two parent organizations, Sinclair has the means to retaliate by denying carriage to "Big Fox" programming on the affiliates it owns.  This could be very useful if Sinclair decides to challenge Fox News in going for conservative viewers, and FNC goes to the mattresses, attempting to enforce non-compete clauses in talent it had under contract and may continue to pay in order to keep them off the air at a new competitor.  Or Sinclair could simply counter-program FNC with on-air programming.

Regardless of what Sinclair does or doesn't do to start a cable news competitor, it is taking a huge gamble by borrowing billions of dollars to buy a player in a declining industry like broadcast television.  With the proliferation of outlets for video, from Netflix to YouTube, the share of eyeballs for broadcast television is in a long-term decline, and pressures are building on ad rates.  Sinclair does have considerable experience with buying stations while enhancing revenues while cutting costs.

Saba of the Times:

The Baltimore-based media company outlined a host of advantages that it expects Tribune to bring to the table. They include collecting more fees paid by cable and satellite distributors to Sinclair to carry local TV. Yet executives refused to disclose what cost savings they have identified.

To justify the $800 million premium Sinclair is paying, its chief executive, Chris Ripley, needs to trim annual expenses by around $120 million before tax, assuming a 30 percent levy and capitalized on a multiple of 10. At some 8 percent of Tribune's total expenses last year, that ought to be pretty manageable. For example, Gannett — now Tegna — which is famous for wielding the knife, targeted 36 percent of Belo's costs when it bought the TV station group in 2013.

Mr. Ripley's decision to hit the mute button on expenses, though, spooked investors, who at one point wiped almost 5 percent off Sinclair's value, before allowing it to recover some.

As Saba notes, and as the left are sure to fuss over, the acquisition could not have taken place unless the FCC, under chairman Ajit Pai, had reinstated what is called "the UHF discount," which counts UHF viewers at a severe discount in calculating total market share.  This is a remnant of the days when fewer households could receive UHF broadcasts.  But in an era of digital broadcasting, the logic for reapplying the discount seems weak.  Unless one takes the view that in a concentrating industry, allowing further mergers to produce a new major player actually enhances competition.  (This is the logic that allowed antitrust approval of the acquisition of Virgin America Airlines by Alaska Airlines: that the merged carrier would be a more robust competitor to United, American,  Delta, and Southwest.)

Anything that allows Sharyl Attkisson to reach a broader audience is fine with me.  And so is competition for Fox News.  In a nation roughly equally divided, there should be two conservative cable news outlets matching two liberal ones.  David Shine, who was Roger Ailes's right-hand man in building Fox News, is available, having been let go a few days ago.

The pieces are all there in place for Sinclair.  Good news for unhappy Fox folks and former employees, but bad news for the Murdoch children who have wanted to reshape FNC.

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