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Local Television is a Smart Bet
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Local Television is a Smart Bet

By Farshad Family, SVP, Local Product Leadership, Nielsen

The pace of consolidation in local TV is accelerating.

In the last two months alone, three major deals have been announced: Media General is acquiring New Young Broadcasting, Gannett is acquiring Belo and Tribune is acquiring Local TV LLC. Of course, Sinclair and Nexstar have had an appetite for consolidation for the last two years and have been pretty active in their strategic pursuits.

What’s behind the push for this consolidation?

Simply put, the future looks promising for this healthy sector. The major reasons behind the bright outlook of the local television landscape are threefold:

1) It’s fundamentally strong. Advertising in local television has bounced back strongly from the trough experienced during the recession. Looking forward, most industry analysts expect local television advertising to grow at 1% – 3% each year. The big bounce back in local television is highly correlated with a revved-up U.S. auto sector — the top advertising category on local television. In fact, U.S. auto sales are back to a level not seen since 2007, and forecasts are predicting continued growth in this category.

In addition to auto advertising, political advertising has provided a boost to local television. According to the TVB, in 2012 political ad spend on local television was close to $3 billion dollars. With the Supreme Court’s Citizens United ruling easing restrictions on political expenditures, most expect that number to grow over the upcoming election cycles. It’s also likely that issue-based advertising — such as spots advocating for a certain position on gun control or healthcare — will help buoy this sector in between election seasons.

2) It has another way of making money. Local television has been able to establish a stable and growing second revenue stream: retransmission fees from multichannel video program distributors (MVPDs) that carry a television station’s signal. Sure, we’re still in the early days of retransmission revenue, as most of these local television operators have only recently been able to negotiate these fees into their distribution deals with MVPDs. As more deals expire, you can be sure that these local television companies will look to obtain healthy increases in their subscriber fees.

Consider this: Among companies that publicly shared retransmission revenue as a percentage of total revenue in 2012, the numbers ranged from 7% for Scripps to 16% for Nexstar. In Q1 2013, several operators reported significant year-over-year growth in their quarterly retransmission revenue: Fisher had 82% growth, Nexstar 64%, Gannett 59% and Scripps 35%.

Some analysts believe that future retransmission revenue could represent 10% – 20% of the total revenue of a local TV player. In some instances, it might go even higher. The rationale is simple: Local TV stations still deliver programming that is compelling to a large audience — such as prime-time shows and major league sports — and vital to a local community, such as local news.

3) It’s well-positioned to target the multicultural, mobile audience. As discussed previously, the television audience will be increasingly multicultural and mobile, with the rise of tablets as a dominant force. Local television is well-positioned to take advantage of these shifts in the media landscape. A local TV station has both the resources and the connections in a local community to change and adapt as the composition of the audience changes. Local TV operators will experiment and innovate in their programming beyond news to keep up with the demographic trends. In addition, a great deal of content that television stations already have, from local weather to rush-hour traffic updates, is well suited for mobile/tablet platforms.

Across each of these three points, the scale that the local television companies are achieving through consolidation will help them. In terms of advertising revenue, broader scale could help local players compete more vigorously for national advertising spend. Also, a broader footprint can make local television a more appealing option for political entities that need to shift allocations across designated market areas quickly and seamlessly. For retransmission revenue, scale creates more leverage for local television operators at the negotiating table with MVPDs. Finally, for adapting to a multicultural, mobile future, scale helps a local television company pool resources to innovate and experiment with new offerings.

Adaptability and solid increased revenue opportunities have made local television attractive for consolidation, paving the way for a bright future.

This article was originally published on MediaPost.