C M Y CM MY CY CMY K Analysis by Dom Serafini This decade will be decisive for the future of local TV stations in the U.S. Will they abandon the airwaves for broadband? Meanwhile, what are they going to do with the extra channels? What will their relationship with cable and satellite be like? What will their relationship with the networks be like? Before this decade is over, OTT (overthe-top) will be the most popular form of TV consumption. Companies with the financial and technological strength of Apple will have their OTT STBs (settop boxes) incorporated into TV sets, which will allow streaming of all kinds of TV content. For this, consumers will only need a broadband connection — be it from cable, optical fiber, Wi-Fi (wireless), satellite-based IP delivery, telephone wires (DSL) and, eventually, electrical home wires. As per last year, 65 percent of U.S. TVHH used a wireline broadband service. Close to 70 percent of U.S. Households (HH) have broadband and reports say broadband costs will decrease 50 percent a year. However, in the next few years, the hardware industry has to streamline all the various names of devices associated with screens that display any TV content that has passed through the Internet. It is estimated that by 2015, 80 percent of all TV sets sold worldwide will have built-in broadband (or connected TV) capability. Currently, in the U.S. there are 30 million connected TVHH. For content providers and viewers, OTT will have little effect because it is just an evolution, but for OTA (overthe-air) TV stations, especially in the U.S., it will be a revolution. One could even say that OTT will replace OTA, but not FTA –– just to be in tune with the industry’s new plethora of acronyms. The U.S. TV system is based on the affiliation model. A model that –– with subscription TV reaching up to 88.96 percent of TVHH –– although crumbling, is still holding on by a thread. However, contrary to the “Disruptive Innovation” theory, technology doesn’t necessarily have to overtake an industry. To the contrary, it could help it to grow. Currently, most of the 1,777 local TV stations in the U.S. are affiliated with a commercial network or with a public network. Each of those networks utilizes some 200 local TV stations to cover the U.S. (PBS has 350) and each provides them up to 14 hours a day of content, with the rest of the day-parts filled with syndicated programs and local news. This model, which worked beautifully for over 60 years, has now developed some economic glitches, but there are solutions: • Because of subscription television and broadband, networks no longer need affiliate stations. Currently, only 11 percent of U.S. TVHH receive TV signals through an antenna, and this figure could even be as low as 9.6 percent (subscription TV figures vary). And only up to 10 percent of Americans lack access to broadband. However, this figure is disputed by the National Telecommunications Cooperative Association, which stated that 48 million rural homes have no access to broadband services. • Networks no longer need to pay affiliates to carry their TV shows (with commercials), since they can easily utilize subscription TV and broadband to reach their audience, just like any cable/satellite TV channel (e.g., ESPN, A&E, USA, TNT). To the contrary, networks are looking to be paid (reverse compensation) by their affiliates. • Networks no longer have to share 50 percent of retransmission fees with their local affiliates. This year, “retrans” fees to local TV stations will reach $1.5 billion. • By becoming subscription TV networks, the companies will no longer be under the FCC’s jurisdiction. Plus, the networks will get retrans fees directly from the subscription service to the tune of $0.30 per sub per month (while local TV stations could get up to $0.25 per sub). This is because of the networks’ highly desirable programming. Under the traditional model, advertising accounts for 70 percent of a local station’s revenues, with the rest coming from network compensation and retransmission fees (nine percent). Therefore, using today’s parameters, the future of local TV looks bleak. According to some reports, an eight percent drop of viewership could represent up to a 30 percent loss of ad revenue to a local TV station. However, once local TV stations lose network fare, they can band together to develop original content and/or buy syndicated fare at a discount. This will replicate the model used by their websites, which are managed mainly by two services: Internet Broadcasting System and Worldnow. Plus, some of these extra costs will be offset by subscription services (at perhaps $0.15 per sub, due to the highly valuable local news). Other added revenues will come from renting out spectrums to Wi-Fi providers (since frequencies will no longer be necessary for the station to broadcast) to the tune of $10 million each on average. In addition, local advertising will still constitute a major revenue source from car dealers, retailers and political campaigns, which in 2010 brought some $2.3 billion to local TV. To local TV stations, the digital TV terrestrial standard could become meaningless, since they will not have the resources to program the extra channels. Plus, to extend their reach, TV stations will transmit in IPTV (streaming). However, the stations will not lose their spectrum because they will need the airwave rental income to offset the cost of local services, like news, weather, alerts and political debates. It is important that local TV stations increase and improve their local TV coverage, both to fend off any attempt by the government to auction their airwaves (e.g., The Spectrum Reallocation Bill, now before Congress), and to ensure the steady flow of ad revenues, considering that, on average, 44.7 percent of local TV station income derives from news. The IPTV transmission will also add new forms of revenue: the on-demand, both paid and ad-supported. In 2010, local TV revenues for online services were $1.34 billion. Naturally, in order to save on syndicated programming costs, their coverage will be geo-blocked. As for the TV networks themselves, the change will also concern the way their content is distributed, which will be linear and on-demand and on any screen device. South Korean broadcaster KBS operates K-Player, an Internet platform that allows programs to be watched on any screen. Similarly, Singapore is ready to launch Toggle, an OTT service that delivers content to a device of choice. Broadband will also change the model of subscription TV, which will transition from being mainly a provider of TV signals to broadband delivery. Already video subscriptions are decreasing, while the broadband business is growing. In addition, broadband services generate better margins for providers than video. With growth of broadband delivery, the local TV channels that could still receive a carriage fee will continue to be bundled by the subscription services, while others will aim to reach viewers directly with a mix of ad-supported free services and ondemand pay. Interactivity will also provide an extra revenue source, especially for online shopping. During the remaining eight years before broadband will fully replace broadcast TV, local stations have one more card to play: Their mux (or virtual sub-channels) that the digital standard allows them. Within the allotted bandwidth of 19 Mbps, each TV station can broadcast up to 12 video feeds (like KAXT-CD in San Francisco). The TV stations of Trinity Broadcasting Group broadcast five SDTV (standard) channels each. But even if the TV stations make use of only three digital channels, the potential exists to monetize them before they disappear with the broadband’s IPTV standard. Right now, many TV stations prefer not to use those extra channels because they’re costly to program, can potentially cannibalize their main channel and cable will not readily carry them. One solution would be to partner with European, Asian or Latin American TV broadcasters to create ethnic or specialized channels that, once branded, can remain as standalone broadband channels to serve over 21 million foreign-born American residents and/or the general public. With the TV stations providing the technology, marketing and sales support and the foreign partners providing content. The easiest programming would be Spanish-language content outside Mexico (which, having their own channels in the U.S., don’t sell programs), followed by Chinese, Filipino, Indian, Vietnamese, Korean and Russian, in that order. For the general public, subtitled movies, easy-to-dub animation, voiceover documentaries, and sports like football, cycling and rugby, could be good attractions. But local TV stations must also become multimedia outlets, reaching sales, marketing and editorial agreements with local radio and local newspapers (when available) when acquisitions are not feasible. They will be able to offer print, radio, linear TV, VoD and the Web all at a local level, something that networks cannot do. Interestingly, independent local TV stations in smaller markets could have a better potential than those in bigger markets with existing stations owned by the networks. Currently, federal regulations allow groups to own local TV stations covering a total of 39 percent of the country. This means that the stations in the remaining 61 percent of the U.S. will not be competing unfairly with stations with more resources. V I D E O • A G E DE C E M B E R 2 0 1 2 18 U . S . T V S T A T I O N S ’ F U T U R E Local TV to Cope with Switch from Broadcast to Broadband
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