Wells Fargo: Bullish on TV, Reserved on Radio

LAS VEGAS -- Wells Fargo analysts Marci Ryvicker, Stephan Bisson and Eric Katz said they spent "several days" in Las Vegas with senior broadcast executives to get a feel for the state of the radio and TV industries.

“While the tone of business on the television side remains stronger than what we heard from radio, the one common element we felt was a significant sense of collaboration among the respective industries,” the team said. The bottom line, they said: “We see several near term positive catalysts ahead for television, but remain on the sidelines for radio-until some of this industry’s hoped-for initiatives start bearing some fruit, i.e. by way of revenue growth.

“The importance of scale transcends retrans and reverse comp. Given the significantly accretive deals signed by Sinclair, Nexstar and to some extent LIN, E.W. Scripps and Media General, a lot of questions revolved around TV mergers and acquisitions. We learned a few things here. 1) Television M&A is likely to come in phases. Phase 1 is what we have seen– i.e. Four Points, Newport, Freedom, Barrington, Cox, etc. – and will likely last another two years. Phase 2 is likely to be more transformational--think a merger of equals, and should follow right behind. 2) With greater scale comes the potential for broadcast stations to create some sort of nation-wide network with partners ranging from wireless players to traditional multichanell video providers--Dish was mentioned here. 3) The large scale radio deals are likely done, with tuck-ins being the main focus.

“To us, News Corp.’s comments highlight the strong bond between networks and stations. During the NAB Show’s opening keynote, News Corp. Chief Operating Officer Chase Carey dropped a bombshell when he provided his solution to a potential Aereo win--not that this is expected to occur. Basically, Carey proposes to move the entire broadcast ecosystem to cable so as to avoid the ’stealing of very expensive content.’ Importantly, Carey is including the affiliate groups in his next-gen broadcast ecosystem. The broadcasters we spoke with support this view. Whether it actually happens or not, we don’t know. But we think his comments confirm 1) the strong relationship between the networks and station groups, and 2) the fact that there are protections to the monetization of local and national content.

“Intel could be a big positive for the broadcast industry. When Intel’s virtual MSO proposition first surfaced, investors seemed concerned with the possibility that the television affiliates might get “shut out” by any potential network-Intel deal. What we learned is that Intel is in discussions with the broadcast groups, Intel is willing to pay for their content, and Intel is focused on preserving the bundle. Bottom line: Intel is likely to be a very profitable partner.

“Television core advertising is trending better than radio. While pacing data was not the focus of our meetings, our sense is that television core advertising ended up low single digits in Q1, while radio was down. When it came to Q2, April sounds better than March virtually across the board.

“Other highlights: 1) There is a lot more interest in Spanish-language television formats. 2) The radio industry is collaborating around digital streaming, the FM chip in smartphones, sports, and record labels. 3) There seems to be a pretty significant culture change when it comes to local news. 4) A potential source of upside could be zone selling/addressable advertising. And 5) There seems to be some desire for certain groups to participate in the spectrum incentive auction.”