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Economics

Economics

Even with the economy in the doldrums, the local television business is remarkably and consistently profitable. On average, local television stations earn more than double the return of what newspapers earn, and the newspaper industry is among the most profitable in the country.

Just how profitable is local television? The evidence, much of it based on surveys, suggests that profit margins of around 40 percent is not a bad estimate. For four years, the Project surveyed news directors on newsroom profit targets. Responses to this question were low, but the range of profit targets that news directors reported varied between a little less than 30 percent and a little more than 40 percent.

Privately, however, news directors have told us, and other evidence supports the idea, that in larger cities the profit margins could well be much higher. According to TV Week, for instance, Hearst Argyle, a company with larger-market stations and a reputation for high quality, earned profit margins in 2002 of 51 percent at its NBC affiliates and 42 percent at its ABC affiliates, “even though the ABC Television Network ratings declined 20 percent.”1

The major issue facing local television news in the future is how to maintain these high profit margins when viewership is declining. Without increasing its audience, local television news has only limited ways to sustain profit margins, all of which hurt the franchise: raise advertising rates despite a smaller viewership, shrink the news content to increase the amount of advertisements that can be shown, sell off news content with sponsorship logos and segments, or cut costs.

Local stations, though, still have some things going for them. At most stations, much of the physical plant is already paid for. The licenses to run the stations are free. The only original programming most local stations do anymore is news – and their staffs are relatively small (an average of 31 people, according to surveys of the Radio-Television News Directors Association, or RTNDA). On top of that, most local stations still receive payments from the networks for airing their news and entertainment programs, although these payment structures are beginning to change. In addition, local stations get to use a portion of network programs to sell their own advertising.

Stations are being required to invest heavily in making their signals ready to be broadcast digitally while the compensation they get from their networks is likely to come down. Many local stations also increasingly feel they are at a financial disadvantage compared with cable, which is supported by both advertising and portions of the monthly fees paid by subscribers.

Over the last several years, local television revenue has bumped up and down but remained basically flat, according to BIAfn data.

Average Local TV Station Revenue
Nominal and inflation-adjusted, 1995-2002
Design Your Own Chart
Source: BIAfn MediaAccess Pro
* Only commercial English-language stations broadcasting news programs are included. Inflation adjustment is based on 2002 dollars.

Average Revenue and Revenue Growth for All Stations
Source: BIAfn MediaAccess Pro; Dollar figures are in millions of dollars

Nominal Inflation-Adjusted (in 2002 dollars)
1995 $19.9 $23.5
1996 $21.4 $24.5
% change, 1995-1996 +7% +4%
1997 $22.1 $24.8
% change, 1996-1997 +3% +1%
1998 $23.5 $25.9
% change, 1997-1998 +6% +5%
1999 $23.7 $25.6
% change, 1998-1999 +1% -1%
2000 $25.5 $26.7
% change, 1999-2000 +8% +4%
2001 $22.0 $22.3
% change, 2000-2001 -14% -16%
2002 $24.0 $24.0
% change, 2001-2002 +9% +8%

News Program Advertising as a Percentage of Revenue

Inside local television stations, news is particularly important because it is responsible for a disproportionate amount of a station’s income. According to RTNDA surveys, news accounts for 16 percent of a typical station’s programming each day (slightly more than three hours), but news programs represent roughly 40 percent of station revenue. The evidence suggests that the percentage of revenue from news may not be affected much by hard times. Data from the RTNDA surveys, for instance, show that the share of revenue from news was slightly higher in 2001 than it had been in 1999, even though 2001 was a down year in the economy and 1999 was near the end of the 1990s boom.2

Percentage of TV Station Revenue Produced by News Programs, by Market Size
Average of All Respondents
Source: “RTNDA/Ball State Annual Survey,” survey of local television news directors

1998 1999 2000 2001
All TV 42% 39% 44% 41%
Markets 1-25 (biggest) 37 36 38 28
Markets 26-50 29 30 35 40
Markets 51-100 44 44 47 42
Markets 101-150 42 41 44 47
Markets 151+ (smallest) 46 39 41 43

There are signs, however, that the local television news business is getting harder or maybe that there is getting to be a separation between the winners and losers. Surveys conducted by the Radio Television News Directors Association show that in 1996, 62 percent of news directors reported that their newscasts had made a profit. That percentage began dropping in 1998, and has steadily trended slightly downward since, to 55 percent of news directors in 2001 reporting a profit. Eleven percent reported losing money. The rest were either breaking even or didn’t know. It is difficult to know whether the declining number of news directors reporting profits is due to rising expenses, declining viewership or economic cycles, but likely some mix of all three is at play.

TV News Profitability by Market Size, 2001
Percentage of respondents in each market grouping reporting profit or loss
Design Your Own Chart
Source: “RTNDA/Ball State University Annual Survey”

Market Size And Profitability

Market size makes a difference in local television. The biggest markets – and, thus, the biggest stations – capture the lion’s share of revenue in good times or bad. As the chart below indicates, stations in bigger markets make higher revenue disproportionately to the number of households in their viewing area. Not only do stations in big cities make bigger revenues, but they also make a higher percentage of revenue per household: the 25 biggest markets contain 49 percent of the country’s television households, but they receive 60 percent of local television revenue.

One thing that could make matters even harder for stations in smaller markets is that the cost of converting to digital is nearly as much for a station in the 150th-largest market in the country as it is for the station in the fifth-biggest market-since the equipment is the same.

TV Station Revenue Compared to U.S. Population, 2002
By market size
Design Your Own Chart
Source: BIAfn MediaAccess Pro
* Chart compares percentage of all TV station revenue to percentage of all TV households.

In the end, broadcast stations have been able to keep their revenues healthy despite declining viewership for a simple but significant reason: In a fragmented media market, their audiences are still large and diverse enough to approximate the closest thing TV advertisers can still get to a mass audience. But as indicated above, stations have protected the bottom line through a variety of means-from cutting costs to adding more commercials to creating sponsored segments, putting sponsor logos inside programming on weather maps or sports scores to looking for other revenue opportunities. All of these weaken the product, making it more cluttered, smaller and mixing news and sponsorship. The question is how long television stations can keep up these alternative ways of building revenue amid declining viewership.

Footnotes

1. See Diane Mermigas, “Hearst-Argyle aims for new biz opps,” TV Week, September 15, 2003. Available at: http://www.craini2i.com/em/archive.mv?count=3&story=em516732287025518840.

2. The sources for this information were the “RTNDA/Ball State Annual Survey,” a survey of local television news directors, and the financial data gathered by BIA/fn. A breakdown by market size suggests this was true across the board, but in 2002, different-sized markets seemed to rebound at different paces.