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in the securities discussed in this podcast this podcast is for informational purposes only and should not be relied upon as a basis for investment decisions i'm zack fuss and today we are breaking down nextar media group Nextar is a business that may not carry household recognition but controls more local television stations than any other company in the U .S. My guest today is Simeon McMillan, a founder of media -focused research firm Accrued Interest. Simeon brings a unique perspective to this sector.
He's held roles as a banker and executive within prominent television, cable, and radio businesses, including Univision Networks and Mediaco.
In this discussion, we will examine the foundational structure of the broadcast television industry, tracing its evolution from the pre -internet hub -and -spoke model of the major networks, NBC, CBS, ABC, and Fox, to its current state.
Sim will break down the revenue streams that sustain this ecosystem and how subscriber fees from multi -channel video programming distributors, MVPDs like YouTube TV and Comcast Cable, are distributed among the networks and their affiliates.
and then we'll address the impact of cord cutting on subscribers and how those viewership metrics impact pricing power within the television ecosystem.
This is an industry with substantial consolidation, which has reshaped itself over the past decade and ultimately culminated in the emergence of businesses like Nexstar as the preeminent station group of outside of the big four.
We'll scrutinize their financial profile, including their revenue composition and capital allocation, and then cover their strategic investments in content, such as their acquisition of the CW Broadcast Network and their development of News Nation.
We hope that you enjoy this breakdown of the NextAR Media Group.
All right, Sim, appreciate you offering to do this.
I know it's an area that is near and dear to you, broadcasters.
I think the way we'll set this up is we'll do a broad discussion about the industry itself, and then we'll go into the specifics of some of the larger players, Nexstar in particular.
I thought an interesting place to start would be given your background, just taking us through how you got interested in the space, your experience as someone that has been on both sides of the table as someone that participated as an operator and also as an investor.
And then we'll dive into the way you're seeing the landscape today and introduce our audience into broadcasters generally.
Thank you for that introduction, Zach. My name is Simeon McMillan, and I'm the host, author, and founder of the Accrued Interest Substack.
We are a podcast, a newsletter, and I'm on Twitter under Accrued Interest. My passion is for media investing, primarily because I spent time both as a junior investment banker, a research analyst. I've done a lot of different jobs in the finance industry.
I've I've worked on many media transactions over the years.
But then for the second part of my career, for the last 10 years, I've worked as an operator.
I've worked as an executive in the financial FP &A department.
I've done strategic revenue work with ad sales departments.
And I've worked inside of several television broadcasts and cable networks, as well as radio companies.
I spent some time at Univision Networks.
I worked across a variety of their properties.
I also was part of a new management team that worked at Mediaco.
It was a spinoff from MS Corporation and the primary assets were Hot 97 WBLS.
There at Mediaco, I experienced working with the radio side, ad sales, primarily supporting the CFO, the COO and the entire C -suite.
And I also had experience working with the company had a billboard division at a point before they sold it.
So I'm here because I love talking about media.
I love dissecting companies and doing business breakdowns is fun for me because on one hand, I know how the research community can talk about a company, but having been in the boardroom, having been inside the offices of senior executives, I know how theory actually comes into practice for these assets.
Given the vernacular in these industries is somewhat complicated, you've got the MVPDs, you've got OTT, broadcasters, retrans, affiliate.
I can go on forever for whatever reason.
Pay TV as an ecosystem loves to get into acronyms and resegmentation and different ways to describe what it is that the industry is.
At a basic level, can you just take us through how the industry is structured and how that has evolved over time?
When I was in business school at Wharton, we called the acronyms TLA's, three -letter acronyms. I'll try to use as much general vocabulary as I can, but here's how I think you should think about the broadcast television industry.
The original setup of the broadcast affiliate TV model is a bit of a throwback from a time in the pre -internet days.
It was set up back when the limit with how far you can send the video signal was correlated to your local market because the spectrum, the signal coming from the broadcast station could only go but so far.
In the beginning of the industry, you had pretty much the big four TV networks, NBC, CBS, ABC, and later on Fox, but we consider them part of the big four.
And they operated on a bit of a hub and spoke model.
So each of the networks have studios, either independent or they can buy shows and content from third -party studios.
Each of the network gets shows from their studios and they put them on the air for you to watch. And then they make money by selling ad time inside those shows, as well as collecting subscription fees or affiliate fees from the cable providers that host their channels.
You want to look at the structure of the broadcast network.
Due to regulations set up many years ago, the FCC set up a cap that any one broadcast entity could not control a broadcast signal that touches more than 39 % of the U .S. population.
It's known as the 39 % rule.
It was intended to keep any one network or station from controlling what listeners were hearing on the news or their programming all over the country.
What ends up happening is that all of the big four networks decided that if they could only own the stations that covered 39 % of the population, it makes sense that they want to own the stations in the biggest markets.
So that's exactly what happened.
Most of the The broadcast television stations in the top 10 markets are what's known as ONOs, owned and operated stations that are still owned by ABC, CBS, NBC, etc. To reach the rest of the country that they contractually are not able to reach, they then work with a network of local broadcast affiliate stations, which are owned by third parties, but then strike programming agreements to be affiliated with one of the Big Four networks.
They are basically a partner network.
In exchange for a share of the ad revenue, the local affiliate then is able to get programming from the Big Four network that would be too expensive for them to produce on their own.
They're also able to get support for news because each of the Big Four networks have national news desk that helps out with the local news.
And they're also able to get sports and other big -ticket programming items that they could not afford to pay for themselves.
So over the years, as you have evolution in video, you've had the introduction of the cable television industry.
You've had the introduction of streaming television.
During this entire process, the broadcast affiliate model has pretty much stayed intact.
But I think we're about to start seeing cracks in the model.
Because where we are today, the local independent affiliates have come out of about a 15 -year period of consolidation.
We're going to get into what that means going forward. But there used to be hundreds of local market television stations, and they've mostly been consolidated to about five major owners.
So where we sit today with the new administration currently in Washington, operators in the television space are trying to get the FCC to lower their current 39 % cap to allow for the big players that are still there to consolidate the market even more.
All the while, we have viewers who were cutting the cord, that's still happening, and they're finding ways to get video and other entertainment products outside the cable bundle.
I love broadcast television because it brings together four or five different industries, and you can see the market forces work in tandem as the industry evolves.
So if we think about the pie that's being divided up here, I want to make sure that we drive home, how paying subscribers translate into revenue for each of these different parts of the ecosystem.
As an example, as a consumer, I may be a customer of YouTube TV, I may be a customer of Comcast cable, I pay them per month, call it anywhere from 75 to $200.
How does that revenue then work its way downstream to the networks themselves, ABC, CBS, NBC, and then the affiliates?
how does everyone get paid?
I think a helpful way to describe how everyone gets paid is I'm going to take a moment and talk about some of the revenue streams for Nexstar, but this is pretty representative of the larger broadcast TV companies.
A good way to think about this is to describe it as you just did, Zach, by centering the perspective from the customer paying money to their cable provider.
Cable providers, video providers, satellite, Hulu TV, wherever you get your video, any service that bundles a package of channels is known as an MVPD.
That stands for Multi -Channel Video Provider.
You have an offshoot of that, a virtual MVPD, which are internet -first skinny bundles, we used to call them 10 years ago, Hulu, live TV, Fubo, or Sling.
You, the consumer, get a bill, let's say for $120 for this month from your video provider.
What the cable company does is the cable company then has a series of agreements with all the different networks and all the different broadcast stations, all the different publishers that they get video content from get a cut of your bill.
For a long time, the biggest recipients of distribution fees directly from the cable companies were the cable channels.
For years, you had about 100 million U .S. households that were getting a package of 50, 70 or 100 channels.
And based on the bargaining power of the owners of each individual channel, they would then charge Comcast a rate.
they have a very complicated rate card where the networks would charge Comcast a certain dollar amount per subscriber per month to be paid for carrying that station.
What ends up happening over time is that many networks thought it was unfair that when they added up all the payments for all the different TV networks, the majority of the video payments were going to the cable channels.
This angered me in the industry because over many years, the broadcast TV networks, again, we're talking mostly the big fours, the NBC, CBS, Foxes, and ABCs of the world, were still the majority of the actual viewing habits of the consumers.
The split of the cable revenue back to the networks was not perfectly correlated with the viewing.
So as a result, something that that actually Nextar Media was a pioneer in pushing for back in 2005, was that Nextar was the first one to go to the cable companies and say, hey, we're broadcast, we're a local market station, but our content has value.
We have sports, primarily the NFL, they're the biggest draw.
We have local news and many other shows that people want to see.
Over time, the broadcasters started getting affiliate fees, they're called retrans fees in the television industry, they were getting monthly payments for a certain dollar amount for the number of subscribers that they had in their Comcast market or whoever was the provider.
Once the big four networks saw that the local market stations were starting to get compensated monthly subscriber fees for the the content that the broadcast networks were renting out to them, the broadcast networks said, hey, the local market stations are just re -airing content that is largely content that they're purchasing from us.
The local market stations, your local market broadcast station will have originally produced news content and originally produced morning shows and other content like like that.
But the primetime shows that drive majority of the viewership come from the parent network that they have an affiliate agreement to.
So what ended up happening over time is we sit here today where, through the introduction of retransmission fees, through the fact that Nexstar and other broadcasters pushed the cable industry to be paid like the cable companies, I would argue you that the broadcast television industry is now a subset of the cable companies.
After about a decade of tremendous growth in subscription fees, you have the broadcast networks who now have upwards of 50 % of their revenue coming from video subscribers from the cable channels.
Bring it all together, if you go through your video bill, I would probably imagine that the The ABCs, the CBSes, the NBCs of the world are probably getting anywhere between $3 to $4 a sub per month out of your bill to demonstrate to the customers how expensive the retrans fees had become for the cable companies to pay the broadcasters.
If you go to your bill for a cable company today, you'll probably see the broadcast fee broken out as a separate line item because they want to show you just how expensive that is.
So that's a good sense of how the money is split out.
The math is the same for the digital skinny bundles, except because the cable companies have a most favored nations clause with the networks.
The cable companies have agreements that basically whenever they strike a new three to five year deal with a network, the network must give the cable company the lowest rate in the market.
it. Whatever rate ABC, for example, is charging Comcast per subscriber per month, that rate is actually higher on YouTube TV.
It's higher on Sling.
It's higher on these other streamers.
That difference in pricing has been another reason why the broadcast model has survived as long as it has.
As you lay out those dynamics, clearly there's been this friction amongst the negotiating associating leverage within the players in the ecosystem.
And my guess is a lot of that is what drove this wave of consolidation over the last decade or so.
And I think that'll be a nice segue into Nexstar and what the business is and what it represents as the largest player in the space.
Take us through some of the drivers of that consolidation and then introduce us to Nexstar and the business itself.
As I said in the beginning of this episode, broadcast and cable had existed for decades before streaming came into the picture, and there was long attention for viewer ratings, for viewer minutes between broadcast and cable.
For about 20, 30 years, ever since cable was introduced in the 70s and became ubiquitous in and the 80s, more and more TV viewership was going from the broadcast stations to the cable stations.
What ended up happening is that as the broadcast ratings were falling for decades, it was a very slow managed decline, a very slow trickle.
As companies kept adding more and more cable stations to the bundle, the broadcast ratings were falling for 20, 30 years, but broadcast ratings were still the largest piece of the pie.
They still had the sports.
They still had all of the marquee shows, the Seinfelds, all of the water cooler shows that people tuned in to see.
The tension for the distribution of the affiliate fees was what drove the first wave of consolidation in the 2010s.
In the 2010s, you had hundreds of M &A transactions where you had these smaller market, local market broadcast TV stations that finally wanted to get the bargaining leverage to get paid like cable channels.
So you had these third -party broadcasters who were bulking up, they were also bulking up to compete and to fight for a share of the pie from the actual big four networks that they were partners with.
Because I said before, there was a tension between the parent network, the ABC, and the third -party ABC station because the ABC station believes, hey, look, local station, the reason why you're getting paid that monthly fee is because of the high value content that we provide you.
There was a new dynamic where the big four networks introduced what's known as reverse retrans, where the big four networks were asking for a give back.
They were trying to pull back the newly earned subscriber fees that the local market stations had just won from the cable companies.
By combining the local market stations, the theory was that they would now have to scale to better compete versus the cable companies, the video providers, but also to push back on the big four networks themselves, who remember the big four networks were being constrained by regulations.
They can't grow anymore.
As the smaller market stations would scale up together, in theory, they'd be able to push back.
When Nexstar came in, Nexstar was founded in 1996.
They went public in the early 2000s and out the gate, they were doing acquisitions.
The company is still led by its founder, chairman and CEO, Perry Sook.
Perry has been with the company the entire time and he's a legend in the industry for coming up with the whole concept of reverse retrans.
During the 2010s, through a series of mergers and acquisitions, Nexstar Media went from being one of the smaller local market stations groups.
They were primarily in second and third tier markets to a point where they are the number one station group outside the big four by far in the country.
They have about 200 local market stations.
They are in about 116 US markets.
Their signal reaches about 68 % of the population, which technically is more than the 39 % cap, and I'll explain why in a second.
So now Nexstar is the largest broadcast station outside the big four because they got supercharged in their growth in the last five or six years through two major acquisitions that I just want want to call out.
First, in 2017, Nextar merged with Media General for about $4 .3 billion in cash and stock.
And this was, I want to say, their first big acquisition that really pushed them to the forefront of the industry in terms of size.
The Media General acquisition pushed Nextar into, let's say, the top four or five local market station groups.
Their biggest acquisition to to date, and the last one they've done of consequence, came in 2019 when Nexstar merged with Tribune Broadcasting, another one of the bigger local market stations groups.
The reason why Nexstar can reach about 68 % of the U .S. population is because one of the nuances of the regulatory cap from the FCC is that the station groups built into the the regulations, lots of technicalities that help them work around the 39 % cap.
I won't get into all the jargon because we said we have enough acronyms, but the local market stations basically have a form of sidecar agreements.
They're called local market agreements, LMAs.
They have many different names, but the station groups basically have these arm lengths agreements where they can partner with television stations that they do not technically own, and agree to manage the station on behalf of the other owner.
By managing on behalf of the other owner, they can then provide them with editorial content, they can manage their news, they can run it almost as if they own the station themselves.
Broadcast has been using this loophole for decades, and Nexstar has been the most aggressive aggregator to date.
And that's why they sit at about 68 % of the U .S. population, which is far in ahead the second biggest one, which I would say is probably Tegna.
They probably reach about 39 % of the U .S. population.
Nexstar really is a product of M &A.
And part of the reason why I think they're at a critical juncture right now is that they have one more M &A cycle in this industry, probably, that they want to have into the buy at the Apple.
But all the organic growth drivers for the underlying business have either tapped out, stalled out, or are currently in decline.
Nexstar Media is a roll -up machine, but sometimes the roll -up can run out of runway.
So to drive some of those points home from a quantitative perspective, maybe just lay out the financial profile of Nexstar, size, scale, margin, revenue composition, and capital allocation.
So to give you a sense of scale, I'll rattle off some high -level numbers here.
Nextar has a market cap a little over about $5 .2 billion today.
In terms of total enterprise value, we're looking at almost $12 billion.
The company is highly levered as most broadcast stations are.
Their leverage net debt to EBITDA is usually anywhere between three and a half to four times leverage.
leverage. In terms of trailing revenue, keep in mind, broadcast experiences bumps in even -numbered political years and larger bumps in presidential years.
2024 is a little bit higher than 2025, but to give you a sense of scale, Nexstar did about $5 .5 billion of revenue in 2024, 24, about 2 billion in adjusted EBITDA.
So we're looking at an EBITDA margin of about 37%.
Broadcast networks have very low maintenance CapEx. When they're not doing acquisitions, it costs almost nothing to keep the stations running.
Broadcast converts about 50 % to 60 % of the EBITDA into free cash flow.
So off of about 2 billion in just EBITDA, about 1 billion, a little over $1 .1, $1 .2 billion is going to drop to free cash flow.
In terms of the revenue composition, I said in the beginning that after a decade of demanding local broadcast stations get paid like cable networks, broadcast stations finally got their wish.
In terms of the revenue mix, about 55 % of the revenue is distribution fees.
These are retrans fees from cable companies and digital video providers.
You then have advertising, and this is how I want you to think about advertising.
Advertising is about 45 % of total revenue.
For context, advertising used to be about 75 % of revenue about 10 years ago.
It's part of the mix has shrank as distribution revenue has grown more consistently and more quickly.
Let's call it half the business's advertising.
That is about two -thirds or 70 % local advertising where they have a local sales force to that specific market that actually goes out and talks to small and medium businesses.
Car dealerships are probably the most prominent examples, but tons of local mom and pops will advertise on local TV.
And then the other 25 % to 30 % of the business is national business.
What national is, is that if an advertiser wants to do a national ad buy, the way they they do that is they combine a number of local markets together to sort of build a patchwork that if you add up the coverage, it equals to national.
So the local market stations like Nexstar will use third -party companies, third -party services to outsource the selling of the national, but it's still a part of the business, but it's not growing that quickly.
Built into the advertising mix, built into the advertising half, you have some digital in there, but I just want to be very careful because digital and broadcast is not like Google or Facebook.
Digital and broadcast really means display ads, websites that are owned by the different local market stations, and all the stations will have their own weather apps or things like that.
That digital is about 10 % of revenue altogether.
In terms of expenses, the direct costs, these are programming fees.
That's the cost of running the evening news, the reporters, the writers, the engineers, the cost of running the station.
But then you have programming fees paid to the big four networks for affiliation.
You have a fee paid to NBC or ABC for the content that they give you.
And you also have reverse retrans fee, which about 50 % of that monthly subscriber fee that the station is getting from the cable company gets given back to ABC or CBS.
This is trending in the wrong direction.
It's actually pushing to upwards of 60%, but we'll get more to that in a second.
The core advertising portion, you pay about a 15 % agency fee because a lot of this business comes through media agencies, ad agencies.
So you pay a 15 % fee to the agencies.
And then in terms of the commissions to the local market salespeople, those can vary, but those can be anywhere between five to 15 % of gross revenue.
That gets us to a direct cost, a cost of goods sold, let's call it, about 40 % of revenue.
SG &A, all the different bodies that it takes to run the station, that adds another 20 % to 24 % of revenue because the local markets, you need people on the ground to do these things.
A lot of these functions can't be centralized.
Bring it all together, you have an EBIT margin in the mid to high 20s in some years.
And then in terms of EBITDA margins, we're talking anywhere between low to high 30s.
EBITDA margins anywhere between 32 % to 38 % is the margin profile you can expect from a business like this.
Just to try to provide a little bit more color on the assets that they own.
Obviously, when you're talking about regional broadcasters, people think about local news and television, local advertising, and then the retrands that you mentioned.
I know that they're working on producing their own content that may be of higher value.
What are some of the assets that they're investing most heavily in?
Separate from the local market stations, here are some of the avenues for organic growth that Nexstar is trying to improve.
First off, Nexstar acquired from Warner Brothers Discovery approximately 70 % interest in the CW broadcast network.
I won't go through the whole history, but for any of those who are familiar with broadcast stations such as the WB and UPN, end, the CW was a fifth English language broadcast station.
They're a distant laggard behind the Big Four, and they have less viewership than even Univision and Telemundo.
But for English purposes, the CW is the fifth major broadcast station.
They're all over the country.
When Nexar got this asset from Warner Brothers, they basically got it for free because it was underperforming so much?
The CW was formed by the mergers, as I said, of WB and UPN in 2005, 2006, I believe.
And the network was unprofitable pretty much during its entire existence.
WB, as well as the consortiums of other companies that had a minority stake in this network, they sold it to Nextar for basically nothing.
Nextar just assumed about $100 million in debt.
What Nextar saw with the CW is Nextar had this vision.
Nextar is currently the largest owner of CW stations around the country, and Nextar has been trying to change the programming strategy of the CW to make it profitable for the first time.
The CW was most popular in the 2010s off of a slate of teen dramas and superhero shows.
Those were very expensive to produce and did not attract enough enough older viewers who are sticking around to watch broadcast television.
So the network always underperformed.
Nextar is now doing more unscripted programming on the CW, which is cheaper to produce.
They're also trying to get into some sports programming.
They have some NASCAR races.
They also have some shoulder programming for sports.
Shoulder programming are things like sports talk shows where they talk about the game and so clips, but not necessarily the game itself.
The CW is airing more college football, and they also were airing some golf with the Live Golf Company.
But overall, the CW's ratings are still very poor, and the turnaround is still in the very, very early stages.
And with the cable bundle shrinking, it remains to be seen how much of a turnaround can even be done this late in the the game.
On the cable side, Nextar has a news network called NewsNation.
So NewsNation was a rebrand from a general entertainment cable network called WGN America that was formerly owned by Tribune, whom Nextar bought.
WGN America was operated like a wannabe TBS, like a wannabe TNT.
They wanted to be a superstation with entertainment programming, dramas, as well as sports.
They have a lot of rights to Cubs games.
But the plan didn't work.
And so when Nexstar acquired Tribune, they flipped the format to NewsNation.
And NewsNation tries to brand itself as more of a neutral political voice, sort of along the lines of a Newsmax, where they're trying to carve a niche for people who want to get cable news outside of Fox News, CNN, or MSNBC.
News Nation is also a very, very, very small channel.
And News Nation and the CW do not have earnings that are material to Nexstar quite yet.
Nexstar also has a whole list that I'm not even going to go through of these small DigiNets.
DigiNets are these broadcast networks that are operated on the sub -channel of some of the HD signals.
These are very small networks, again, that have viewership that is tiny.
But the hope was with the cable bundle breaking, with more people watching television over the air, the hope 10 years ago was that these DigiNets could build an audience, but that hasn't panned out as well.
And lastly, Nexstar owns some digital assets.
They own The Hill, which is a smaller version of Politico, which is a political news website.
The Hill also is not a meaningful contributor to earnings.
Nexstar has one asset that they brought over from the Tribune merger that is non -core, but keeps paying them a nice little dividend.
And that is they own 31 % of the Food Network, which is really random.
But because Nexstar doesn't have to put any money into the Food Network, they're happy to keep receiving that distribution, but that's not something they can grow organically.
This is still very much a broadcast company whose fate is tied to the cable bundle.
All these attempts to break outside of the cable bundle have not worked to date.
So it's not controversial to suggest that the cable bundle and pay TV as it exists is shrinking, meaning there are less subs paying for linear cable.
Effectively, every sequential quarter for the last several years.
What does that mean for the composition and makeup of this business as it tries to drive organic growth?
I want to share with the listeners some numbers on the extent to which cord cutting has accelerated, I think more than maybe some might have realized, particularly over COVID.
Let's just look over the last 10 years.
10 years years ago, let's call it 2014, the paid TV industry had an addressable market of about 100 million households.
If you were a basic cable channel or any channel that was what was considered back then fully distributed, that meant that you were in 100 million households.
Over the next 10 years, the total paid TV ecosystem number of households has shrunk by about 30%.
You went from about 100 million paid TV households to about 60 and a half, 70 million today.
In terms of traditional cable, so excluding the new skinny bundles, the decline has been even worse.
The decline has been even more than 50%.
We have about 50 million households today which are paying for what you would consider to be traditional cable bundles.
So in just one decade, half of the addressable subscriber base is gone.
What that means for this industry is that broadcasters are no longer able to make up for the loss in subscribers by charging or demanding higher subscriber fees from the cable providers.
Before in the slow pay TV decline, if you lost a sub, you were able to raise your subscriber fees enough to recoup the loss.
With the industry smaller, that is no longer the case.
At the same time, the declines in the viewership have been even more extreme than declines in the subscriber base.
Something I want to share with the listeners, and I've talked about this extensively, I'm I'm still talking about it on my Substack.
Accrued Interest is my newsletter on Substack.
Netflix, but actually YouTube, has been the number one disruptor over the last five years in pulling viewers out of the entire pay TV bundle.
Nielsen has a monthly report where they show what percentage of TV viewing of the big screen TV, this is not mobile, this is traditional TV, What percentage is attributed to each of the major viewing services?
And for the fifth month in a row, YouTube was at a new all -time high in video share.
YouTube in April 2025 accounted for about 12 .5 % of TV viewing on big screen TVs in this country.
That is not including YouTube TV, which is more like a mini cable provider.
What we're seeing is that subscribers are leaving the pay TV ecosystem.
And since they're not coming back, since they're going over the top to YouTube and Netflix, the broadcasters, the networks, everyone has less bargaining power to demand higher affiliate rates in the future.
So you're seeing lower growth in the distribution revenue line going forward. You might even see some declines in distribution revenue as the big four networks are clawing back some of those distribution fees that they don't believe the local market stations truly deserve.
And you're having the ratings declines fall even more as people are going to the streamers and not coming back.
Another thing that I think listeners need to keep in mind is that the ad load, the amount of advertising units that a company can monetize per hour is significantly lower for streaming video.
You have a situation where pretty much all the metrics, the subscriber metrics, the viewer metrics, the pricing power, everything is weakening for the TV ecosystem.
At the same time, when the cable companies are not interested in having these fights over subscriber fees anymore, because the cable companies want to focus on selling internet packages and they also want to focus increasingly on selling mobile cellular business.
They don't care about the video product.
So all these trends are working against broadcasts.
And just to be clear, over -the -top television or streaming direct to the consumer itself, who is demanding local programming?
I struggle to appreciate it.
If I'm buying YouTube TV, do I care that I don't have access to my local ABC News?
Is this something that is segmented by age or demo?
Because I'm trying to understand where the negotiating leverage sits with the local broadcasters as opposed to the networks themselves.
If your listeners take away only one thing from this talk on Nexstar and the broadcast industry, I just want to say by far the asset that the local television stations have that gives them the most bargaining leverage versus the cable companies is that your local broadcast station is still by far the overwhelming way most Americans watch NFL games.
The leverage is mostly in the live sports on the Big Four networks that, for the most part, the networks, in order to stem the rating decline, are actually putting more and more sports on their broadcast package to defend their Big Four networks.
So you have negotiating leverage for NFL that they can't miss their games.
You have it for the other sports leagues to a lesser extent.
In terms of the demos that are still watching the local news, it's primarily an older demo that probably shouldn't be that big a surprise.
The type of demos that watch local station news that probably say 25 to 54 is the main demo, but skewing over 50, you have some turnover in the generations as older TV viewers as they die off.
but we're finding is that new, younger TV viewers are not coming to the ecosystem like they would in the past. In the past, it was sort of a rite of passage that when you moved out of your parents' house and formed a quote -unquote household, you would join the pay -to -be package, but a lot of younger viewers are just skipping that altogether.
The average viewer of broadcast television is definitely over 50 and probably screwing a little bit older.
They overweight weight on the morning shows, the major newscasts, and they overweight on sports.
The other bargaining point that broadcast stations have is that they have a bit of a bully pulpit in that they can run these scary but effective ads, basically lobbying their viewer base, lobbying their subscribers.
You've probably seen them wherever you are in this country.
You've probably lived in a market where there was a dispute between a cable company and a local market broadcaster, and you probably saw an advertisement that said, make sure you call Comcast and tell them that you want to see the Oscars on ABC, or make sure you call CBS and demand that you get Monday Night Football.
Those are very powerful marketing tools, and all those are still the main areas of leverage that local stations have. But all the points I mentioned are getting weaker.
All those bargaining positions are getting weaker every cycle because the big big four networks are pulling more and more of their sports onto streaming.
I guess the only thing we didn't talk about from an opportunity perspective that I know anyone that's interested in the broadcasters likes to bring up is the Spectrum opportunity on ATSC.
I think we're on 3 .0 now.
What is that opportunity for them?
What exactly is it?
Many of the remaining bulls of the TV broadcast industry have been very optimistic.
I think a little too much, quite frankly, when it comes to this advanced broadcasting technology known as ATSC 3 .0.
The way I would describe the technology is it's an advanced broadcasting standard that in some ways enhances the quality of the broadcast and the amount of data that can be sent along with the video signal.
But quite simply, over the last decade, there has not been enough development technologically from either the content creators or, quite frankly, from the viewing audience to demand a better over -the -air signal technology.
ATSC 3 .0 is often referred to as next generation TV.
The idea was this is a special signal that can be transmitted over the air, sort of a ultra extra high definition version of the current signal that is encrypted.
And because it's encrypted, it's able to send and receive more data about the household hold and the viewership.
And the theory was with this better signal, with this next generation broadcasting, you would be able to compete more for digital ad dollars because ad buyers want to have more information all the time.
So the idea was that broadcasters can avoid cord cutting, They can transmit their signal over the air and they could sell new services and give more KPIs and more data to ad buyers.
They can tell ad buyers more about their customer base using ATSC 3 .0.
It's been a decade of waiting.
It hasn't come to fruition and likely is not going to come to fruition.
I first became familiar with this technology almost 10 years ago.
I was at Univision and I was working in the office of the CEO on special projects.
And I actually helped the auction team.
I was a substitute bidder in the Spectrum auction.
And back then in the 2010s, during the wave of consolidation, a lot of broadcast stations were selling their Spectrum because the thought was that new technology could be better used for the Spectrum that television companies could monetize if they did not want to broadcast this way.
I won't get into the history of spectrum auctions.
They typically have under -delivered in proceeds to the TV industry.
There have been very few winners and a lot of disappointed parties.
But 10 years ago, there was hope that with 5G, ATSC 3 .0 would help broadcast compete with digital.
And very quickly, the reason why the technology never developed over the last 10 years was for several reasons, but one of the big reasons is that the industry never fully committed to changing the broadcast standard in the same way they did when the industry switched from standard definition to high definition television, when the broadcast industry switched to HDTV, it was a monumental shift that the entire industry was on board, and they had a set date when the old signal would stop being transmitted and the new signal would start.
Well, with ATSC 3 .0, that never happened.
For a decade, if you wanted to do this first as a broadcaster, you would have to maintain two signals, which was expensive and not practical.
On top of that, because broadcasters were not broadcasting in this new format because it was cumbersome, the different television manufacturers who for over a decade were trying to drive down the prices of a flat screen television set to save money, they weren't adding the necessary components into their sets to receive the encrypted signal.
And then thirdly, from a user adoption standpoint, a lot of the tech savvy first adopters who in theory should have picked up ATSC 3 .0 by now, from a viewer's perspective, the technology was lacking because when you encrypt the TV signal, it stops you from using it more freely in terms of DVRs.
You can't record the signal.
You can't cast it to other devices because now every device needs to have a chip that can read this next -gen TV.
It was lack of cooperation from all the different parties in the TV ecosystem that I think has caused this next -gen TV to be a little more of a pipe dream.
And you're going to see it mentioned in a lot of investor decks and a lot of bulls who need something to justify going long, this space will point to this standard as a potential source of future digital revenue.
But I can tell you from experience, the technology hasn't panned out.
And now that everyone's already onto 5G and already getting all the entertainment through their phone, I think it's not likely ever to be a meaningful contributor of revenue.
As you kind of laid out the financial profile of the business, appreciate that growth is somewhat muted here, but margins are healthy.
free cash flow generation is copious, which means that management is responsible for redeploying that cash into the opportunity set at hand.
I know they have a buyback and a dividend, but it seems like they're capped from an M &A front.
How do you think about the capital allocation policies of the business here?
And broadly, what you should consider when evaluating a company that is limited in its growth prospects, but is as free cash flow generative as the businesses like the broadcasters are today.
A lesson that I've learned in watching the media landscape change over the last 10 years, and especially spending a lot of time in local television and local radio, I've seen a lot of these companies trade like value stocks.
They have all the characteristics value investors look for that you just mentioned, high margins, strong free cashflow conversion, low -maintenance CapEx. The issue that I had to learn the hard way is that if you're operating an industry that is a melting ice cube, that is clearly shrinking, it's not enough to just do more buybacks.
It's not enough to return more capital in order to turn the stock around.
Capital allocation, in my opinion, is not a strategy.
Capital allocation is what you do to enhance the strategy that you already have in place.
Strategy, to me, in television means what steps are the broadcast operators doing to grow the future earnings potential of their business?
this? In broadcast, many of the distribution avenues, primarily the cable bundles, are out of their control.
I can understand why some capital has been spent in some of these digital sites and in propping up some of these subpar networks like the CW.
I can understand the thought process to use the excess free cash flow to reinvest in the business.
What I would propose today, having seen many investors lose out, is that I believe that if you were investing in a declining industry with strong free cash flow, I think you need to preserve cash.
And I think you need to look to exit the business.
I did a look back on my notes 12 years ago for the television industry, about 12 years ago in 2013, when I was still in grad school, doing my MBA at Columbia.
Through a blind submission, I sent in a stock pitch, pitching Tribune Broadcasting as a long to the Iris Zone Ideas Competition.
And I ended up winning it, got on stage in Lincoln Center, and I pitched my stock to the hedge fund industry and on CNBC the next morning.
And I was the biggest bull you could find for Tribune Broadcasting.
I pitched the stock at $55 a share back in 2013.
During the short term, a couple of years later, I think the stock ran to a little over $100 a share because again, the 2010s, there was a long string of consolidation M &A.
But Nexstar ends up buying Tribune almost a decade later.
They actually closed the Tribune deal in 2019.
So six years later, after I pitched Tribune at Irisone, at $55 a share, the stock had a total return that strongly trailed S &P 500.
In 2019, the last trading price of the stock was in the high 40s.
You might have broken even if you added back a couple of special dividends along the way, but for the most part, if you're in a declining industry, sometimes the best answer is to get out.
Some of the best case studies in the media industry investors can study are the operators that knew when to sell.
One of my favorite books that I recommend everyone read is Curse of the Mogul by Columbia Business School professor, but he's also is an investment banker with Evercore, Jonathan Nee.
And he basically argues that with few exceptions, most media companies underperform in the equity markets and they they destroy shareholder value too often with two main mergers.
The smartest TV operators were the ones who sold.
When Rupert Murdoch dismantled his TV empire and sold it for a hefty price to Disney, that was a brilliant move.
When AT &T decided that they no longer wanted to deal with the headache of Warner Brothers Discovery and they jettisoned that business, guess what stock has outperformed since then.
It's been AT &T. It hasn't been Warner Brothers.
The smart TV operators over the last 10 years were the ones who participated in the consolidation wave because they were able to sell their companies at higher multiples that they could not get today.
And where we sit with Nexstar is the problem with M &A as a strategy is that eventually you run out of targets to buy.
I think eventually, I don't know when, I don't know how, we'll get some regulatory change and Nextar will probably be able to buy some more stations.
But you can't just keep buying declining assets with leverage and firing people and hoping that's the strategy.
veggie. I'm not expecting an imminent collapse, but when you are the biggest player, Nextar cannot be acquired by anyone else because they're so big.
I think the best thing that they should have done for shareholders was to sell years ago.
And I think right now, if you're a broadcast investor, the best thing you could probably do is find a way to sell your assets to Nextar because they're going to be a buyer.
Just to bring it all home, our custom American question is kind of lessons lessons learned.
You are the privilege of being an executive in the space as well as now an investor and consultant as it relates to media.
What is it that you take away from this story?
I think you alluded to a handful of those points in the prior question, but just tie a bow on it.
Bringing it all together, here are some key lessons that I would take away from working in the television and radio industry.
I mentioned before that Nexstar decided to make a bargain to substitute their advertising revenue for more cable subscriber revenue.
I like to think of Nextar as a BOTB, a beneficiary of the bundle.
I learned in supporting many senior executives who are excellent at their jobs that it's very easy to sit outside side and game plan strategy, but a lot of these businesses, because they have legacy agreements with the cable companies, the cable carriage deals, they're shorter now.
They last between three to five years before they're five to seven years.
There were limits in terms of, in exchange for that high margin, sticky cable subscriber revenue, there were limits in terms of what programming you were not allowed to put online.
There were limits in terms of what what things you could do with your streaming service or what types of skinny bundles or streaming bundles you could offer to the public.
There were limits on pricing.
I mentioned before the cable companies mandated that they have the lowest rates.
The broadcast companies couldn't innovate the way they wanted to.
They couldn't disrupt themselves because of these contractual agreements that were giving them sort of golden handcuffs.
I would also say another of the lesson learned is to understand how much flexibility you have to operate in the industry in which you're currently finding yourself.
I think sometimes we probably give management a little bit too much credit, but also a little bit too much blame.
A lot of the decisions that management implements are dictated, one, from the board who you never see what bad acquisition they they pushed the management team to do.
You never see or hear what good idea a management team had that died in committee or died before it even got off the page, but the CEO or the management team will take the fall for not being nimble.
When I worked with executives, I was very surprised at how everyone in TV that I worked with, for the most part, enjoyed their industry, that they loved of the medium and they saw the purpose in the product that they're selling to the consumers.
But because of all the contracts tied to these long -term deals, your business model is maybe 80 % set in stone for the next three to five years.
So overall, I think I've learned that you need to have a strong understanding of the fundamental drivers of your business.
You need to understand the competitive dynamics as well as the different margin structures that are put into place and don't have much flexibility for change because 80 % of the performance of a business is going to be driven by the underlying fundamentals.
fundamentals and I think management, while very important, bad management can absolutely destroy a business.
For the most part, management is operating with more constraints than you might realize.
I rely less on management forecasts when doing my estimates because I find that they tend to be too optimistic.
And I also find that when you're dealing with industries with high leverage, it's just harder for them to change.
Because when you have four or five or even more turns of debt, you don't want to do anything that can disrupt your cash flow stream.
I think that once we have some M &A deals that are announced, you're going to have some spinoffs because the regulatory framework, anytime there's television M &A, one party usually has to divest some sort of asset.
There are different trades you can set up, but for the most part, the industry's course is on cruise control.
And so I have a lot more respect for industry fundamentals having been an operator.
Sim, you packed in the rich history of a complicated industry in 60 minutes.
We appreciate you jumping on and look forward to sharing this one with our audience.
Thank you very much, Zach. Thanks for having me and look forward to connecting with your listeners.
You can find me online at Accrued Interest. I'm on Substack.
You can also find me on Twitter under Accrued Interest. And you can also go to my YouTube page.
I love talking about media.
I'm covering television and cable companies during earnings season.
And I'm also giving thoughts on other digital advertising stocks throughout the year.
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