NAB Preview: Policy to Drive Media Reshuffle

What’s New: We acknowledge that most investors today are either searching for the playbook for the trade war end game (there isn’t one) or taking Buffet’s advice and reading  Kipling’s “If.”  But there will continue to be other events that will affect stocks.  As we have discussed many times, while all sectors are impacted by Trump’s policies, the sector we follow most likely to be materially affected by non-tariff, tax, and immigration policies will be broadcast television.  Further, those policies will have collateral consequences for others, including cable and telco multi-channel video program distributors (MVPDs), equipment manufacturers, wireless companies, and others.  Next week, the National Association of Broadcasters (NAB) will hold its annual meeting in Las Vegas.  Traditionally, this is a show where policy makers and industry leaders discuss the policy issues on the table and their impact on the business.  In this note, we discuss ten questions that, if answered, will provide a map for how the policies and affected businesses will interact and drive large changes over the next 24 months.

Background: Decline of Linear Television.  We don’t think we have to demonstrate to readers that linear television (that is, television broadcasters and traditional cable channels) is in decline.  The broadcast model is suffering from losses in the audience share of video viewing (due first to cable channels and now to streaming) and advertising revenues (due to a shift in dollars from broadcasting to digital ads on internet applications), shifts that will likely continue regardless of what policy the FCC adopts. Still, broadcasters are hopeful that policy changes will lead to improved economic performance.

Key Questions that NAB might help answer

Will we get details of the coming changes in broadcast ownership rules?  As we have written many times since the election, Chairman Carr will change the broadcast ownership rules to enable greater consolidation.[1]  What we are looking for are details as to:

Will we see indications of who are buyers, who are sellers, and what are strategies for improved economic performance? Such conversations often occur at NAB but are usually behind closed doors. 

Will we get details on what the FCC will do with ATSC 3.0 upgrade proposals?  We did a long note on the broadcaster agenda for the upgrade for the ATSC standard (LINK).  There will be multiple NAB sessions on the topic, including one featuring FCC Commissioner Simington.  We already know that Carr and Simington favor the mandatory, date certain, upgrade.  But we hope to gain further knowledge of:

Will the 5G broadcast effort affect the ATSC 3.0 initiative?  Since our ASTC note, a new factor entered the policy debate.  The owner of the largest number of low-power television stations filed a petition with the FCC asking that the FCC allow low-power television owners to sunset their obligation to offer over the air video and replace that service with a 5G compatible datacasting signal.  This proposal raises numerous questions that we think will be discussed at NAB, including:

Will Carr’s campaign to put the government thumb on the scale in network/affiliate transactions gain traction?  While there has been significant focus on Chairman Carr’s efforts to force companies, such as Disney, to drop its DEI initiatives, less attention has been paid to Carr’s efforts to convince Disney to be more generous to affiliates in its negotiations with the affiliates.  In December, Carr sent Disney a letter complaining about Disney’s approach to those negotiations.[5]  We will be looking for information related to:

Will we get clarity of the meaning of the public interest standard?  Chairman Carr has talked about enforcing a public interest standard for broadcasters that includes such things as the elimination of DEI, rules on editing content, and potentially other conditions.

Will we obtain clarity on the definition of DEI?  While Carr has talked a lot about DEI, he has not provided a definition of what he defines as DEI.  As broadcasters serve diverse audiences, this raises several questions, including:

Will we obtain clarity on whether the license revocations sought by Trump are off the table?  President Trump has called for NBC and ABC to lose their broadcast licenses in both his first and second term.  While in the first term, then FCC Chair Pai was clear in saying that option was off the table, the current Chair has not done so. (We think any effort to do so will ultimately lose in the courts, but such an effort would have a material market effect.)  This too raises questions:

Will we hear anything about another broadcast incentive auction?  Last June, then Commissioner Carr raised the possibility of another broadcast incentive auction.  Since then, we don’t believe he has talked about it.

What do broadcasters think is the meaning of the incredible rise (and fall) of NMAX stock?  Finally, we note that while it was far from the biggest story in the market this week, it was likely the most bizarre; Newsmax (NMAX), a conservative cable news channel, priced its IPO at $10, within two days it rose to almost $280 and then dropped to the 40’s while rising to $62 on a day when the rest of the market was getting crushed.  At a market cap of nearly $8 billion, it exceeds any of the non-network affiliate groups. 

[1] He will have significant bi-partisan support in Congress for doing so, as evidenced by a recent letter signed by 78 House members (largely Republican but including a number of Democrats) urging him do so, though providing no details on how to do so.

[2] That is, a single entity may own an unlimited number of television stations nationwide provided the combined reach of the stations does not exceed 39% of US television households.  However, stations operating on UHF channels (14 and above) are attributed with only half their audience reach when calculating compliance with the cap.

[3] The multiple ownership rule provides that an entity can own up to two television states in the same Designated Market Area (DMA) if the stations’ service areas do not overlap, or at least one of the stations is not a top four station in the market. The top four rule provides that no entity may own two of the top four stations in a market.

[4] Traditionally, the DOJ Antitrust Division has viewed the local television advertising as a distinct market from cable or streaming.  See the 2019 Department of Justice analysis of the Nexstar and Tribune transaction.

[5] The letter stated “certain of ABC’s affiliate agreements are set to expire at the end of this year, unless ABC and the local broadcast TV stations reach new agreements. The approach that ABC is apparently taking in these negotiations concerns me. My understanding is that ABC is attempting to extract onerous financial and operational concessions from local broadcast TV stations under the threat of terminating long-held affiliations, which could result in blackouts and other harms to local consumers of broadcast news and content. For example, it appears that ABC is attempting to use something commonly called “reverse retrans” fees—where the national programming network takes a percentage of the retransmission consent fees negotiated in good faith by local broadcast TV stations—to siphon more and more money away from local broadcast TV stations for, in ABC’s case it appears, the purpose of underwriting investment in ABC’s direct-to-consumer subscription streaming services. Stepping back from the specifics of ABC’s negotiations for a moment, reporting indicates that reverse retrans fees could, in some cases, exceed 100% of a broadcast TV station’s annual retransmission consent revenue. At the same time, ABC is reportedly pulling the marquee programming, including local sports, from broadcast TV stations in favor of co-owned cable networks or those same subscription streaming services.”

[6] Carr recently said in an interview that as to Disney, “If the evidence does in fact play out and shows that they were engaged in race- and gender-based discrimination, that’s a very serious issue at the FCC, that could fundamentally go to their character qualifications to even hold a license,”

[7] To be honest, we can’t discern the meaning.  Sure, we understand that there are meme stocks and Trump stocks whose market caps defy traditional financial metrics.  But given the losses NMAX continues to suffer and the market’s view of the value of cable channels, we just don’t get it.  Still, the one thing we do understand is the old Talmudic saying that ‘man plans, God laughs’ and we heard that laughter when NMAX rang the opening bell of the NYSE yesterday, celebrating their IPO and kicking off the worst day in the markets since the Covid driven drop.