Nov 06, 2017 08:05 AM ET Diginets Bloom Into Mega-Businesses E.W. Scripps-Katz deal shows serving cord-cutters can pay off big By Jon Lafayette Broadcasting & Cable
http://www.broadcastingcable.com/news/currency/diginets-bloom-mega-businesses/169869 Why This Matters E.W. Scripps’ $302 million deal for diginet programmer Katz Broadcasting shows the financial might of secondary channels. It’s time to take the multicast channel business seriously. After the digital broadcast transition, a bunch of channels lit up on the secondary signals of TV stations. Some showed “classic” TV shows, some featured weather and some showed traffic reports. A big deal? Not so much. But this year, the E.W. Scripps Co. bought Katz Broadcasting — which runs four of the biggest diginets — for $302 million, making a statement that those digital dimes are adding up. For pioneers in the business, the Scripps-Katz deal plants a flag. “We already knew it was a good business, but it’s nice to see somebody else say the same thing, absolutely,” said John Ford, head of programming for Justice Network. “There’s some real validation there, for sure,” added Ron Garfield, general manager of Buzzr, FremantleMedia’s game-show diginet. “I think it creates a metric,” Garfield said. “They came up with a [revenue] projection for the networks, and I think that really caught a lot of people's attention. Between that number and the price that they paid, all of a sudden for the first time in the seven- or eight-year history of this business, you actually have a metric to go on now.” Multicast channels — or diginets — are getting a boost in an industry buzzing about cord-cutting and cord-nevers as the number of traditional pay TV subscribers erodes. At the same time, more viewers, especially young ones, are going over the top for their entertainment and finding free over-the-air programming in the growing universe of digital broadcast channels. <http://www.broadcastingcable.com/news/programming/tonight-show-cancels-production-after-death-fallon-s-mother/169853> *Room for Growth* In buying the Katz Networks — African-American-focused Bound; Grit, which targets men; Escape, for women; and Laff, a comedy network — E.W. Scripps, which closed on the purchase on Oct. 2, made a bet that the category will continue to grow. Scripps said in a presentation to investors it expects Katz Broadcasting to contribute about $180 million in revenue and $30 million in profit during 2018 and grow at a mid-teen rate over the longer term. After the deal was announced, Wells Fargo media analyst Marci Ryvicker wrote that most investors didn’t really understand the Katz business, but “at the end of the day, we would call this a nice asset to have.” Brian Lawlor, president of local media for Scripps, told *B&C *there are three areas in which Scripps can help Katz Broadcasting grow. “There’s an opportunity to continue to move the advertising base from direct response all the way up to general market,” Lawlor said. Rates for general market advertising are roughly double what networks get for direct response. Bounce has successfully made the transition to general market, but “there’s lot of opportunity ahead for the other three networks,” he said. The second opportunity for Scripps is to expand distribution beyond the 80% to 85% penetration the Katz networks currently have. There are opportunities to get on stations in markets where the networks aren’t yet available. Channels can also seek cable and satellite distribution and improved channel position that would make them easier for viewers to find. “The third opportunity is there’s a lot of room in the space to build out additional channels,” Lawlor said. The Katz networks certainly had reason to be confident about growth, given that Nexstar Media Group was on the verge of agreeing to launch Katz digital multicast networks on 43 new channels on stations it either owns or programs. The companies on Nov. 1 called it the largest launch deal in the history of multicasting. The agreement renews and extends 21 current station agreements for the Katz’s Bounce, Escape, Grit and Laff. It also covers stations acquired when Nexstar bought Media General in January. The digital network space is a lot like the early days of cable, and there are still niches to be claimed. At the same time, Scripps has been aggressive in pursuing compression technology that will enable each station to put three or four networks on secondary channels, as opposed to just one or two. “The opportunity to have more space become available is even a greater opportunity,” Lawlor said. Pioneers in the industry have always seen the opportunity. Katz Broadcasting CEO Jonathan Katz said that in the early days of the digital transition, “you had stations that had real estate and we realized there were consumers who were living in a really different ecosystem.” Those consumers were starting to subscribe to over-the-top services and watching their TV over the air, but the services that were available were very limited. “We knew there was a scale to the over-the-air audience historically. It certainly wasn’t a secret, and we saw the potential for what we’ll call the opportunity to partner and create value for local stations and groups in this space, and at the same time serve consumers,” Katz said. Katz’s strategy was to great networks designed to serve specific consumers. It started in 2011 with Bounce, the first African-American-targeted broadcast network. “Our research showed that two-thirds of African-Americans don’t feel they saw enough of themselves on TV and 25% of African-Americans didn’t subscribe to broadcast or cable,” he said. Bounce filled that gap, built an audience and now provides original programming. “In some of our markets, Detroit, Baltimore and others, over time it wasn’t unusual for our Bounce primetime to be the second- or third-rated primetime in the market, even beating the big broadcast networks,” Lawlor said. Katz got into the diginet business essentially as a startup, but he notes that other channels are backed by powerful outfits, including Sinclair Broadcast Group (Comet), Tribune Media (Antenna TV, This TV), MGM (Me TV), Sony (Get TV) and The Walt Disney Co.’s ABC (Live Well). “If you think about it that way, it’s impressive that against what you might consider originally far bigger companies, we’ve truly thrived as an independent.” John Ford said his multicast programmer, Justice Network, started with the realization that well-done crime programming works. He’d seen Court TV attract an audience when it aired crime programming and then watched as Investigation Discovery took off on cable. “We took those two models and said we think it can work in this multicast space,” Ford said. With the support of Tegna stations, Justice Network launched in 2015. “One of the things we looked at was the growth of the over-the-air audience, the people who are not connected to cable or satellite. That was growing fairly rapidly and still is,” Ford said. “We knew there was a significant and growing audience and they you’d look at their choices over the air. “You might have 35 or as many as 40 meaningful choices of what to watch. That’s a small number compared to the world of cable and satellite, where it’s 500 channels to choose from.” Justice Network now reaches more than 70 million subscribers, Ford said. It averages between 100,000 and 125,000 adults watching over the course of the day — enough viewers for the network to make a profit off advertising. Justice Network has thought about doing original programming, but that’s still a few years off, according to Ford. The network is involved in providing some money for co-productions in which someone else has international rights and Justice Network gets the exclusive digital multicast rights in the U.S. Is there room to start additional networks? “I think there is room for additional networks,” Ford said. “We’ll have to postpone that conversation till later.” Buzzr’s Garfield noted that diginets have create new business for program syndicators who had content that had been sitting on the shelf for year. As part of Fremantle, Buzzr owns a library of 40,000 game shows, “so we’re in a very, very unique position,” Garfield said. Viewership has jumped recently with the network’s internal numbers indicating 40% growth since the spring. That growth was building before Buzzr made a deal for carriage on Dish Network, Garfield said. “Our audience is so loyal. Our average household stays with us over two hours a day.” he says. And they’re paying attention. “If we run *Match Game ’73 *and we run shows out of sequence, I can guarantee you that within 30 minutes our Facebook threads would be lit up by viewers who recognize that.” Buzzr co-produced a history of the television game show that was hosted by Alex Trebek. It not only premiered on Buzzr, but some of the Fox owned-and-operated stations that carry Buzzr agreed to air the documentary on their primary channels. “All of a sudden you’ve got a little channel who’s got a big voice for a premiere piece of content that we’re going to have that we think is going to be really, really well-received,” Garfield said. “What a great show to be able to go to an advertiser with. And it illuminates the space. You take a look at the space and advertisers are now going, ‘wow, this is another great option for us,’ and diginets in general are really being accepted by advertisers more and more all the time.” Garfield, like others in the space, is optimistic about the future of diginets. *Discovering a Free Alternative* Justice Network’s Ford finds an irony that a generation that grew up watching pay TV is discovering how to get TV for free. “The more word spread about this ‘hack’ that enables you to get free TV programming legally, that’s great.” In fact, it might be a good idea for the diginets to promote antennas because the only time consumers are encouraged to get them is when there’s a retransmission dispute. “Unfortunately that’s the only time we see pushes for antennas, but we think in general it’s a good idea because it gives people another option for viewing,” Ford said. People will want more options as they turn to skinnier bundles, Scripps’ Lawlor noted. Technology is changing and will make it easier for viewers to move from channels coming in via broadband, over-the-top and over the air. “As we look out with the development of the over the top space now and, the ability for gateway devices to capture over the air and seamlessly just bring all these channels together into one consumer experience … is clearly where we see technology moving and part of the reason why we think there’s such an opportunity for discovery for these networks,” he said.
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