This originally ran as a two-part series on TV[R]EV
If you were assigned to design television from scratch probably the last thing you’d do was include a series of local broadcast television stations whose primary delivery mechanism was a mid-20th century technology called “over the air.” You certainly wouldn’t make each one independent and limit the number of stations that could be owned by any given network.
That, however, is the system we have now, a leftover vestige of midcentury America that seemingly has no place in today’s world.
A potent combination of politics and local pride make it unlikely that local broadcast television will go away anytime soon, but it’s worth examining how this curious beast came to be before we look at its future potential.
The Birth of Local TV
Local television stations existed before television networks. They cropped up in the 1940s and early 1950s as televisions capable of receiving VHF (very high frequency) signals became more popular. Much of that very early content was produced by the stations themselves, a tradition that continues to this day, with local news broadcasts.
As TV networks came into being in the early 1950s, they bought up the local broadcasters in major markets in the Northeast, Midwest and California. But in order to maintain media independence and to prevent large companies from dominating the media landscape (and to protect some of the larger station owners) the FCC instituted a rule stating that stations owned by a single group could not collectively reach more than 39 percent of all U.S. TV households.
While this rule limited “O&Os” — network owned and operated stations — to a handful of major markets, it did not prevent the networks from striking affiliate deals with local stations or station groups, which meant that while the stations retained their independence, they agreed to run the network’s programming and national advertising during certain periods, notably prime time, which lasted from 8pm to 11pm on the East and West coasts and 7pm to 10pm in the middle of the country. In addition to the fees they received for carrying the network’s programming, local broadcasters were entitled to around two minutes each hour for local advertising, which, on a popular show like Bonanza or Bewitched, could be quite lucrative.
The advent of cable in the late 1970s changed the equation quite a bit. While, in an echo of today’s doom and gloom headlines, contemporary media of that era kept predicting the imminent death of broadcast television thanks to cable, no such thing happened, and the broadcast networks continued to thrive.
Retrans and Carriage Fees
The biggest change of the cable era was that people stopped watching television over the air. Reception in the U.S. had always been spotty, and even with rooftop antennas and indoor rabbit ears, not every station came in clearly. Cable changed all that, and by 1990, around 80% of the U.S. population had some type of cable TV subscription.
The cable companies paid the various networks for the rights to show their programming. This is what is known as a “carriage fee” for cable networks and a “retrans” or retransmission fee for broadcast networks. Which means that Comcast is essentially paying ABC, and all of ABC’s affiliate stations for the right to retransmit the broadcast signal via cable.
The cable companies negotiate with each affiliate station or station group separately and since, especially in the early days, broadcast TV was the main thing anyone watched on TV, the broadcast networks and their affiliates had the upper hand. Still, business was booming, everyone was making money and so the arrangements (more or less) faded into the background, where they remained until the internet came knocking.
The Dawn Of The Digital Age
Silicon Valley types initially had a limited understanding of how the television industry worked and it’s been said that the one thing that surprised most of them early on was the existence of local broadcasters and their relationship with the broadcast networks.
Tech companies had assumed that they could walk into NBC and negotiate a deal to carry the NBC feed on their new digital TV network and that said deal would work just like the ones they were looking to strike with CNN, Discovery and other cable networks. They were, to put it mildly, quite surprised to learn that there were hundreds of locally-owned broadcast stations, the affiliates, over whom the NBC executives had only minimal control.
It is an urban legend at this point that when Apple finally got the broadcast networks to sit down talk to them, they were told they needed to go out and get all the affiliates to agree to the deal and when they had that tied up, then, and only then, would the networks sit down and talk. Or, to look at it another way, it was the television industry equivalent of being told they needed to go out and slay the dragon before they could ask for the hand of the princess.
What struck the Silicon Valley executives was how incredibly inefficient the local broadcast system was. In an age where media was instantly distributed on an international basis, television seemed stuck in an antiquated system based on local control of distribution. What’s more, the original reason these stations had come into being — to broadcast television signals over the air, was no longer a particularly viable technology and was only used by a very small percentage (10% or less) of the station’s viewership. It was as if the Valleyites had suddenly stumbled on an island where people still relied on 14.4 dial-up modems.
Local Broadcasting Today
Local broadcasters seem to be feeling the brunt of the fallout caused by the TV[R]evolution as they struggle to find a raison d’être in the current digitally-focused television ecosystem. While local newscasters remain celebrities in smaller markets, their ratings are sinking as younger viewers turn to the internet for local news, which frequently comes from local newspapers who are now making greater use of video. In fact many younger viewers are surprised to learn that TV can actually be delivered over the air and that their local CBS station is a separate entity from the network it is allegedly a part of.
Advertising is under pressure too, as better targeting options mean that local advertisers can reach targeted local audiences via addressable digital and MVPD cable TV options.
Large ownership groups like Sinclair are rolling up local broadcasters to the point where the groups are almost the size of an actual network. And the rapid growth of vMVPDs has brought the notion of independence and who gets to decide what viewers can see and record to the fore.
The Future of Local Broadcast Television: The Bad
Try telling anyone under the age of 30 how local stations came into being and why they’re still around, and chances are you’ll get an extremely sympathetic look. For a generation that grew up with 90% cable penetration and Netflix, the idea that TV is still being broadcast from giant antennas and can be received for free over the air using nothing but a small antenna sounds like something out of Harry Potter.
What’s more, few people under 30 get their news from local TV stations anymore — they get it from the internet, and, as both local TV stations and local newspapers migrate online, it gets harder and harder to tell them apart, especially since they both frequently rely heavily on video.
So if all you want to do is go online to find out what the weather is tomorrow and if the local minor league baseball team won their game last night, there really isn’t a whole lot difference.
Retrans Fees
Then there’s the whole retrans thing.
A few years ago, Aereo almost tore the whole model apart by threatening to “lease” antennas (rather than the broadcast signals they carried) for a few dollars a month. Sensing that this might completely screw up their ability to collect (literally) billions of dollars worth of retrans fees if the Supreme Court’s ruling on Aereo went against them, the major broadcast networks all did the math on what things would look like if they pulled out of the broadcast game and went all digital or all cable. (There are numerous reasons, many of them legal, that make that outcome highly unlikely, but just the fact that they thought about it is something.)
Finally there’s the fact that the broadcast networks and their high retrans fees are feeling quite vulnerable given the current changes in the TV landscape. They are already being tarred with the allegation that their viewership consists of people too old or too poor to watch the new OTT services and vMVPDs, senior citizens who still come home and sit in front of the TV for four hours a night in an old school twentieth century version of binge viewing.
And while that may not be true and while network TV shows still bring in audiences multiple times the size of SVOD audiences, there is truth to the fact that many younger viewers no longer view the Big Four as the primary source of their television content or even as “must haves” on their list of networks.
Hence the recent launch of Philo, a sports-free skinny bundle that is also broadcast network free. And while Philo may be counting on its viewers to use an antenna to pull in those broadcast TV networks, the very fact that it didn’t consider those networks to be “must-haves” is very telling.
Measurement and Mergers
Another issue lies in the measurement problems that continue to plague local stations, particularly those in smaller markets. Nielsen’s panels often aren’t large enough to provide what the local broadcasters consider to be accurate measurement, which has lead to frequent battles, as local broadcasters have taken to looping in ComScore and other sourse to improve accuracy. (A few ratings points in the wrong direction can cost them millions of dollars, making their frustration more than justified.) Nielsen recently struck a deal with Comcast however, to include Comcast’s set top box data as a way to improve local measurement. And ACR data from smart TVs, which Nielsen can access via its recent acquisition of Gracenote, should help help make ratings more accurate as well.
Finally there’s the roll up that’s happening as larger station groups keep getting larger. Sinclair, the largest of them all, has been under attack from all sides for its plan to buy Tribune Media, another large station group — though given the DOJ’s recent decision to oppose the AT&T/Time Warner merger, the fate of Sinclair/Tribune is anyone’s guess.
Assuming the deal goes through however, a post-merger Sinclair would own 233 stations, which many claim puts it over the FCC’s 39% limit and, for all intents and purposes, turns it into a fifth network. It would approach Fox in size and reach and could easily turn its flagship station, Chicago’s WGN, into an all-news channel that, if Sinclair’s critics are correct, would sit to the right of Fox News.
The existence of a station with that much reach and pull, regardless of political slant, would severely undercut the notion that local broadcast is serving local communities. Combine that with the FCC’s recent rulings that allow the same company, likely a large outside conglomerate, to own multiple media outlets (radio, TV and newspaper) in a single market, something that was previously verboten, and you undercut that argument even more.
(That said, there’s a counterargument that the line between all three mediums — radio, TV and print — has gotten so blurry as they all move online that keeping them under separate ownership no longer serves the original intent behind the ruling. This may be true, but it doesn’t help the “support local media and allow them to present diverse points of view” argument as it will likely be large outside companies buying up all those local media outlets.)
The Good: Next Gen TV (ATSC 3.0)
Local broadcasters have pinned a whole lot of hope on the advent of something alternately called Next Gen TV or ATSC 3.0. (The former is its consumer friendly name, the latter the official one.)
Next Gen TV (NGTV, for simplicity’s sake) is a very well-thought out, well-designed broadcast transmission technology that promises to bring over the air broadcasting into the twenty-first century. It’s got all sorts of bells and whistles: it’s partly delivered over IP, so it can be viewed on smartphones and tablets, it supports 4K and high-quality audio, it can handle addressable advertising (video and audio are sent over the air, ads via digital), it gives broadcasters the option to put out more than one stream, it provides full, accurate, and above all, instant measurement, it slices and dices and juliennes.
Only it’s not backwards compatible.
That means that in order to be able to receive NGTV (which was approved by the FCC this week) you’ll need to buy a brand new TV. Which, given that Americans change their TV sets around once every seven years, means that it will likely be quite some time before NGTV reaches any sort of critical mass.
While it’s possible that someone may come out with a Roku-esque dongle capable of receiving NGTV on older TVs (perhaps even Roku themselves) it’s unclear how much demand there will be for such a device, particularly on its own — in the Venn diagram of “people who watch a lot of network TV” and “TV tech early adopters” there isn’t a whole lot of overlap. OTOH, if Roku were to introduce a cord cutter package with NGTV plus the ability to stream Netflix, Hulu, Amazon et al, it might see some more takers. Our fear though, is that without CNN, ESPN and other popular cable networks, that combo still won’t have a whole lot of traction.
But there is still hope.
It seems that the FCC, in its infinite wisdom, decided that while MPVDs don’t need to include NGTV in their interfaces (and trust us, none of them will) there was no reason to put anything in writing to preclude local broadcasters from bringing it up during retrans negotiations and, you know, maybe even making it a prerequisite for those retrans deals to get signed.
While this may not be much of a problem with family owned stations in small markets, if a large group like Sinclair decides to make it an issue, we could see much faster adoption.
Not to mention a whole raft of lawsuits.
Advertising Potential
While MVPDs talk a lot about their addressable capabilities (and while TV[R]EV believes that addressable is indeed the wave of the future) the MVPDs still make the bulk of their revenue from selling non-addressable ads during the two to three minutes per hour they get from the cable networks. National advertisers are able to turn these local buys into national (or almost national) buys via companies like NCC (National Cable Communications.) Thus they maintain a frenemy position with local broadcasters, as they are both frequently chasing after the same customers. As consolidation continues, we’re seeing big groups like Sinclair, Tribune, Nextstar and Tegna teaming up to create their own version of NCC (this one’s called TIP or TV Interface Practices) and, combined with NGTV’s addressable capabilities, this can help local broadcasters to more than hold their own. Which is yet another reason the MVPDs are not keen on NGTV and why so many of them were unhappy with the FCC’s decision.
The Next Ten Years
As we noted earlier, the existence of local broadcast stations makes no logical sense. It would be far more effective for the Big Four broadcast networks to operate like cable networks, with all the efficiency that offers.
That’s not going to happen though and it won’t be the first time political capital and previously invested capital trumped logic. There’s just too much of both invested in local stations, not to mention civic pride, and so we don’t see local broadcast disappearing anytime between now and 2030. (That’s as far as we’re going to take it, because who knows what technology will look like by then.)
What happens to local TV over the next five to ten years is going to hinge on two things: the speed of NGTV adoption and the degree to which the DOJ allows Sinclair in particular, and large network groups in general, to take over smaller independent stations.
NGTV, and the ability to introduce addressable TV advertising will allow local broadcasters to remain viable against the MVPDs and their cable networks. We’re still not overly optimistic that NGTV will take off, for all the reasons outlined above, but never underestimate the power of a cheap dongle and free content, so we’re not completely comfortable writing it off.
The merger mania is more troublesome. If it seems that local broadcasting is being taken over by large national corporations, especially large national corporations with strong political agendas (looking at you Sinclair) all those arguments about local pride and independence go out the window. Local becomes just another network, and that may be what it takes for the Big Four to decide they have the political capital in hand to try and abandon the affiliates and O&Os and move their content to cable and OTT distribution platforms, from which they can also easily push out their own local news and weather broadcasts.
With everything going on at the FCC this week (including the dismantling of net neutrality) developments in this area will continue to be interesting, to put it mildly, over the next few years.
And in the immortal words of Martha Stewart, that’s a good thing. (For TV[R]EV, anyway.)
Stay tuned.
