Station Revenue Status: Spot OK, Retransmission Crucial

[Commentary] There is a new way of looking at spot that strips out the up-down effect of political advertising that makes broadcasting look to casual investors as volatile as a penny stock for a South American mining company.

Mark Fratrik, the chief economist at BIA/Kelsey, continuously averages spot growth (or decline) over four years. By doing so, he explained, "the impact of two election years (one presidential) and two non-election years are incorporated" in any review or forecast.

So, what did Fratrik's arithmetic reveal? Basically, that spot is growing at a 3% or 4% clip and will continue at that pace for at least the next several years. If Fratrik is correct, spot revenue is bumping along at about the same rate as real GDP plus inflation. That's not terrible, but that's not great either. That's certainly not the kind of growth that broadcasters expected in the good old days and it's not the kind of growth that will attract outside investors or cause a spike in station values. According to SNL Kagan, the TV station trading multiple has been stuck between 7 and 8 for the past few years now.

SNL Kagan’s spot forecast is even stingier than Fratrik's, mostly because it does not see much growth in local spot. Between 2014 and 2018, it says, local will grow just 6.5%. With the slow-motion collapse of newspaper publishing, most broadcasters think local will grow much faster than that. But broadcasting is no longer dependent on the single revenue stream. Over the past decade or so, it has been able to develop two other important streams -- retransmission consent fees and digital media. Retrans is more than a mere stream now. According to SNL Kagan, it has grown from $200 million in 2006 to $3.3 billion in 2013. In 2014, according to the research firm's forecasters, it will jump 30% to $4.3 billion and from there another 76% to $7.6 billion in 2019.

Digital is a trickle by comparison. Even in 2018, Fratrik says, it will still constitute only 5% of the industry revenue, although broadcasters more attuned to exploiting new media will do much better than that average. But what digital lacks in share of revenue, it makes up with in growth. Fratrik says that it will grow 10% to 12% a year for the next four or five years. In a perfect world, I would note, that would be the growth rate of spot.