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New York Times  Mar 26  Comment 
The broadcast and publishing company Hearst launched a second takeover attempt for Hearst-Argyle Television on Wednesday, saying it will offer stockholders $4 per share for the stake it doesn't already own. Hearst said the offer will come...
MarketWatch  Mar 25  Comment 
Hearst Corp. said Wednesday it is offering to buy the remaining shares of Hearst-Argyle Television Inc. it does not already own. Hearst Corp. will offer $4 a share beginning in mid-April. Hearst Corp. already owns about 67% of Hearst-Argyle's...




 
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Hearst-Argyle Television (HTV) owns or manages 29 television stations which collectively reach over 18% of American households with televisions. Although independent Hearst is not owned by any network, the majority of its stations are affiliated with ABC, NBC, or CBS.[1]

The company generated nearly 90% of its revenue from advertising in 2006. Pressures on television advertising include indirect effects from the troubled American automotive industry, which is one of the biggest ad spending industries, as well as direct threats from the flight of advertising dollars to the Internet. And while Web-driven online video may be in its nascent stages, the increased adoption of such substitution technologies pose a serious threat to poaching audiences in the future.

Even numbered years such as 2008 typically provide a boost to the overall television industry, as advertising spending rises because of cyclical events such as the 2008 Presidential election and the Beijing Olympic games.

Business Financials

The majority of Hearst's revenue comes from advertising--89% in 2006--with the rest derived from digital media revenue, fees paid by networks for placing their content on Hearst’s broadcasts, and commissions from cable companies for the right to retransmit content broadcast by Hearst.

Image:HTV1.jpg[2]

Because of the cyclical nature of the advertising business, Hearst’s revenues are quite volatile, typically rising in even-numbered years due to increases in political and Olympics-related advertisements, and falling in odd numbered years. This trend is pronounced in Hearst’s revenues over the last five years; operating income is even more volatile, rising and falling as much as 30% from year to year. [3] In 2006, record revenues from political advertisements, a successful acquisition of a television station and the negotiation of agreements for cable companies to retransmit Hearst’s broadcasts all contributed to an 11% growth in revenues. However, a continuing weakness in automotive advertising weakened operating results. [4]

Image:HTV2.jpg [5]

Hearst is among the leading companies in number of U.S. households with televisions reached by its stations. While larger networks such as CBS and NBC reach much higher percentages of households, Hearst is the leader among independent broadcasting companies in number of households reached.

Image:HTV_TV_Stations_US.png

Key Trends, Risks, and Forces

Advertising

  • Impact of an Economic Slowdown on Advertising Spending: Spending on advertising is highly correlated with general economic growth, which makes such macro factors as oil prices and the U.S. housing market key concerns for Hearst-Argyle. Advertising spend in 2007 grew less than 1% over the previous year due to weakness in the housing market and growing fears of a recession. With the effects of the subprime crisis continuing to spread, 2008 may be another weak year. [6]
  • Shift of Advertising Dollars from Traditional Channels: The share of total U.S. advertising spending devoted to Internet advertising has increased rapidly over the past few years, growing at a rate of 18% annually from 2001-2006. Advertising on cable television grew only 10% annually in the same period. [7] The internet offers advertisers a high level of flexibility in presenting their message to the consumer at a lower cost than traditional 30 second TV spots.[8]
  • Cyclicality of Automotive Advertising: The U.S. automotive industry has been posting weak results throughout the past several years, a trend that is likely to continue. Consequently, ad spending by companies such as General Motors (GM) and Ford Motor Company (F) has been decreasing. Hearst derives almost a quarter of its revenue (22% in 2006) from automotive advertising, leaving the company’s profitability vulnerable to the troubles of this industry.[9]
  • Heavily Contested Presidential Race: As described above, advertising is highly cyclical due to the effect of personal or issue-based ads run by candidates for office and their supporters. During recent years, an increasing percentage of Hearst’s advertising has become politically-oriented, increasing this category's impact on total revenues. In 2006, 11% of total revenues were derived from political advertising.[10] The wide array of viable candidates running in the 2008 Presidential elections should have a positive impact on the company's revenues, as it invites more competition and, consequently, more advertising dollars spent on campaign ads.

Technological Advances

  • Transition from Analog to Digital Signal: The FCC, which heavily regulates television broadcasting, has required all television stations in America to provide digital television service by February 17, 2009, eliminating their analog signal.[11] While Hearst has already complied with this requirement, the company may still be negatively impacted by the transition. Approximately 19% of US households rely on analog transmissions; once these signals are cut off in 2009, they will need to purchase new television sets or analog-to-digital converters to continue to receive broadcasts. It is possible that many of these households will choose not to purchase any new television products, or purchase alternatives to broadcast TV such as cable or satellite television service, substantially lowering Hearst’s viewer base.[12] Additionally, television stations can often gain a competitive advantage through the channel number they are assigned, which affects their signal strength within a given geographic area. Almost all of Hearst’s stations are in the favorable VHF broadcast band (channels 2-13), which has better signal coverage and thus reaches more viewers than the UHF band of channels above 13. Once the transition to digital is complete, however, HTV will broadcast on new digital channels, and this advantage will be eliminated.[13]
  • Development of WebTV: WebTV, or broadcast television on the Internet, is an area with much potential, as attested by the popularity of online video sites such as YouTube. The increasing popularity of WebTV is likely to have a negative impact on Hearst. First, the company’s stations could lose viewers to new Internet-based stations, which translates into a loss of advertising dollars. Second, WebTV gives networks, which provide much of the content broadcast on Hearst’s stations, a new platform to distribute this content, decreasing their reliance on affiliates. Even if networks do not actually pull content from Hearst’s television stations, the company will be at a disadvantage in future negotiations with networks.[14] Hearst has attempted to soften this potential negative impact by investing in WebTV through an investment in Internet Broadcasting, a company that operates a network of WebTV sites reaching 65% of American households.[15] Hearst has also entered into a revenue and content-sharing agreement with YouTube.[16]

Competition

Companies in the television industry compete for audience, programming, and advertisers, which makes for intense competition during times of weak growth in advertising spending and the migration of viewers to other entertainment media. Competition is somewhat limited by the requirement that each television station obtain a license from the FCC, which keeps the number of licenses granted in each geographic area low.[17]Hearst's competitors include major networks such as Walt Disney Company (DIS)'s ABC, General Electric Company (GE)/NBC Universal, CBS, and UNIVISION COMMUNICATIONS (UVN), all of which own television stations across the country. It is important to note that while these national networks are competitors, most of Hearst's stations are affiliate with one of these major networks.

More direct competitors consist of smaller independent broadcasting companies, including the following:

  • Young Broadcasting (YBTVA): Young owns 10 stations, including KRON-TV, the #1 station in San Francisco, the nation's fifth biggest TV market. The company is known for acquiring and turning around unprofitable stations, and enjoys some of the highest margins of profitability in the business.[18]
  • LIN TV (TVL): Lin owns 29 stations, all of which are affiliated with national networks. The company pursues a multichannel strategy, offering multiple stations in the same market. For this reason, Lin stations reach only 9% of US television households. [19]
  • Nexstar Broadcasting Group (NXST): Nexstar owns or manages 50 television stations, but reaches only 8.9% of US television households. Its operations are concentrated in the Northeast, Midwest, and Southwest.[20]
  • Gray Television (GTN): Of Gray's 36 television stations nationwide, most affiliated with the national networks. 23 of its stations are ranked #1 in overall audience in their respective markets. [21]

Hearst's primary competitive advantage is its ability to reach some of the most desirable U.S. television markets (as determined by Nielsen Media Research) and do so with lower operating costs due to a smaller number of stations.[22] The company also competes through technological innovation - its partnership with YouTube to broadcast on 26 YouTube channels is the first such alliance in the industry.





Footnotes

  1. HTV 2006 10-K Item 1 Business p.4
  2. HTV 2006 10-K Item 7 Management’s Discussion and Analysis p.37
  3. HTV 2006 10-K Item 6 Selected Financial Data p.30
  4. HTV 2006 10-K Item 7 Management’s Discussion and Analysis p.33
  5. Company Annual reports www.sec.gov
  6. Joshua Chaffin. "US advertising faces 'another poor year'." Financial Times (FT.Com) December 4, 2007.
  7. Impact of Internet Advertising http://www.wikinvest.com/concept/Impact_of_Internet_Advertising
  8. Kate Bulkley. "The digital persuaders." The Guardian 24 September 2007
  9. HTV 2006 10-K Item 1 Business p.12
  10. HTV 2006 10-K Item 1 Business p.18
  11. Miriam Hill. "From analog to digital, by 2009: Be prepared to say so long to the rabbit ears and tinfoil." The Philadelphia Inquirer. 29 April 2007
  12. US Government Accountability Office http://www.gao.gov
  13. HTV 2006 10-K Item 1 Business p.12
  14. HTV 2006 10-K Item 1 Business p.18
  15. Internet Broadcasting Corporate Website http://www.ibsys.com
  16. "Hearst-Argyle Reaches Content Agreement with Google's YouTube." StreetInsider
  17. Gray Television 2006 10-K Item 1 Business p. 5
  18. Young Corporate Website - Company Profile
  19. Lin Corporate Website - Company Profile
  20. Nexstar Corporate Website - Company Profile
  21. Gray Television 2006 10-K Item 1 Business p. 5
  22. HTV 2006 10-K Item 1 Business p.11
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