Political Ad Bonanza Another Unknown Headed into Incentive Auction

Moody’s estimated the local TV industry will claim up to $2.8 billion from the 2012 election cycle (CD Sept 14 p15). Stations that collect that revenue will probably use it to pay down debt and “to position themselves to operate more comfortably in 2013, when political advertising virtually disappears,” Moody’s said in a report on political ad sales. Some station groups, however, may be earmarking some political ad money to fund further acquisitions, Moody’s said. “We believe more M&A activity will follow,” it said.

"A number of unknown variables could affect the success of the incentive auctions, including the economy as a whole,” said an FCC official. “If broadcasters feel as though their lot in life is improving then they may be less likely to want to relinquish spectrum. Conversely, if their short to mid-term prospects look dimmer, they may be more willing to relinquish spectrum."

"An argument can be made that some broadcasters, which are benefiting to varying degrees from healthy revenue streams produced by robust political advertising and retransmission consent fees, may not be optimally incentivized to return spectrum to the FCC,” said Jeff Silva, analyst at Medley Global Advisors. “It’s possible that smaller, financially wobbly TV broadcasters in large markets, where wireless carriers most need additional capacity, could be ideal candidates for incentive auctions, however."

"I think it’s hard to say,” said a wireless carrier executive. “We're hoping that there will be a lot of stations that want to sell, but there are a lot of variables … that could come into play.” “Recent increases in ad revenue are just another in the myriad of excuses that broadcasters will use to forestall relocation,” said a small carrier executive. “The bottom line is that the ‘incentive’ part of the potential auctions is likely to be undermined completely by the ‘voluntary’ part."

Two former FCC officials told us they remain hopeful that many broadcasters will be willing to sell, even if they are seeing rising revenue from political ads. “I've sort of heard the opposite, which is that law firms are getting inundated with calls from people who are trying to buy broadcast stations in order to sell them in the auction,” one former official said.

"There is no doubt that in the near-term, a big winner from the Citizens United case is advertising platforms like broadcasting,” said a second former FCC official. “In that sense, as a matter of math, the value of the stations goes up. But the sales of the iPhone 5 tell you that the value of spectrum is also going up. Also, what is true for stations in Ohio may not be true for stations in New York or California, where the need is greatest. Further, a lot of money is being spent on non-broadcast platforms, a trend that is growing. So if you can figure out where the supply and demand curves are going to meet in a few years when the auction occurs, then you are a better man than I."

The uptick in advertising revenue probably won’t affect TV station licensees’ decisions about whether to participate in the auction, said station brokers and appraisers. For one, those assessing value of a station are already looking beyond 2012 to 2013 revenue, when political ad sales will largely evaporate. “Anybody who was going to buy or be influenced by the upsurge in the current political cycle -- that’s kind of water under the bridge,” said David Schutz, of Hoffman Schutz Media Capital. “From a TV station’s perspective, the 2012 political season is more or less over,” because most of the ad commitments have already been made, he said.

Political ad buyers also tend to avoid the types of station considered to be the most likely to participate in the incentive spectrum auction -- large-market stations that aren’t affiliated with major broadcast networks and have little-to-no local news programming. “The overwhelming majority of political advertising is going to go to big-four network affiliates,” said Robert Heymann, broker in the Chicago office of Media Services Group. “I don’t think it will have any impact [on the auction] whatsoever."

Successful network affiliates, with strong local news operations and ratings, probably aren’t interested in entertaining bids in the auction anyway, Schutz said. Those stations “are going to realize their most profitable future operation is probably to retain their over-the-air license,” he said. “In contrast, if you've been a spectrum speculator, you're sitting on a station that in general is trying to minimize its programming costs while retaining positive or break even cash flow,” he said. That probably means no local news, the segment of broadcast programming most sought after by political advertisers, he said: “Ergo, the political cycle means relatively little to them."

Another reason this year’s political ad windfall probably won’t affect the incentive auction results is geography. Political ad spending is not evenly distributed across the country. Rather, it is concentrated in areas with closely contested races. Among the top 10 markets, few are in so-called “swing states” where political ad spending reaches its heights, Heymann said.

"A decision to sell is based on long-term fundamental valuations, and there can be no assurance that the political spending this year will turn into a permanent change in the business,” said communications lawyer Andrew Schwartzman. “More importantly, the stations most likely to participate in the auction are the ones that get the least political money in the first place. If you are doing home shopping and infomercials 12 hours a day, no one is buying political ads on your station.”