Nexstar Media：广播业最大的豪赌——[Business Breakdowns，EP.221]

All right, Sim, I appreciate you offering to do this. I know broadcasting is an area that is near and dear to you. I think the way we'll set this up is that we'll have 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, given your background, would be to have you take us through how you got interested in the space and your experience as someone who's been on both sides of the table—as someone who participated as an operator and also as an investor. Then we'll dive into the way you're seeing the landscape today and introduce our audience to broadcasters generally.

Thank you for that introduction, Zack. My name is Simeon McMillan, and I'm the host, author, and founder of the Acre'd Interest Substack. Acre'd Interest is a podcast and a newsletter, and I'm on Twitter under Acre'd Interest.

My passion is media investing, primarily because I spent time both as a junior investment banker and as a research analyst. I've done a lot of different jobs in the finance industry, and I've worked on many media transactions over the years. But 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 several television broadcast and cable networks, as well as radio companies. I spent some time at Univision Networks, where I worked across a variety of their properties.

I was also part of a new management team at MediaCo, which was spun off from MS Corporation, and whose primary assets were Hot 97 and WBLS. At MediaCo, I had experience working with radio-side ad sales, primarily supporting the CFO, the COO, and the entire C-suite. I also had experience working with the company's billboard division before they sold it.

So I am 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 and inside the offices of senior executives, I know how theory actually comes into practice for these assets.

Given that the vernacular in these industries is somewhat complicated, you've got MVPDs, OTT, broadcasters, retrans, and affiliates. I can go on forever. For whatever reason, pay TV as an ecosystem loves to get into acronyms, resegmentation, and different ways to describe what 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 TLAs—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 to the pre-Internet days. It was set up back when the limit on how far you could send a video signal was correlated to your local market because the spectrum—the signal coming from the broadcast station—could only go so far.

In the beginning of the industry, you had pretty much the big four TV networks: NBC, CBS, ABC, and later on Fox, which we consider part of the big four. They operated on a bit of a hub-and-spoke model.

Each of the networks had studios, either independently or by buying shows and content from third-party studios. Each network gets shows from its studios and puts them on the air for you to watch. 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.

When you look at the structure of the broadcast network, due to regulations set up many years ago, the FCC established a cap that meant any one broadcast entity could not control broadcast signals reaching 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 ended up happening is that all of the big four networks decided that if they could only own stations reaching 39% of the population, it made sense that they would want to own the stations in the biggest markets.

That's exactly what happened. Most of the broadcast television stations in the top 10 markets are what's known as O&Os—owned-and-operated stations—that are still owned by ABC, CBS, NBC, and so on. To reach the rest of the country that they are contractually not able to reach, they then work with a network of local broadcast-affiliate stations, which are owned by third parties but strike programming agreements to be affiliated with one of the big four networks.

They are basically partner networks. In exchange for a share of the ad revenue, the local affiliate is able to get programming from the big four network that would be too expensive for it to produce on its own. It's also able to get support for news because each of the big four networks has a national news desk that helps with the local news. The affiliates are also able to get sports and other big-ticket programming that they could not afford to pay for themselves.

Over the years, as video has evolved, you've had the introduction of the cable television industry and 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 into about five major owners.

Where we sit today, with the new administration currently in Washington, operators in the television space are trying to get the FCC to lower the current 39% cap to allow the big players that are still there to consolidate the market even more. All the while, we have viewers who are cutting the cord—that's still happening—and 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.

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 or 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, and NBC—and then the affiliates? How does everyone get paid?

I think a helpful way to describe how everyone gets paid is to take a moment and talk about some of the revenue streams for Nexstar, but this is pretty representative of the larger broadcast television companies. A good way to think about this is to describe it as you just did, Zack, by centering the perspective on the customer paying money to their cable provider.

Cable providers, video providers, satellite, Hulu + Live TV—wherever you get your video—any service that bundles a package of channels is known as an MVPD.

That stands for multichannel video programming distributor. You have an offshoot of that: a virtual MVPD, which is an internet-first skinny bundle. Examples include Hulu Live TV, Fubo, and Sling. You, the consumer, get a bill, let's say, for $120 this month from your video provider.

The cable company then has a series of agreements with all the different networks and 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, about 100 million U.S. households were getting a package of 50, 70, or 100 channels.

Based on the bargaining power of the owners of each individual channel, they would then charge Comcast a rate. They had a very complicated rate card, where the networks would charge Comcast a certain dollar amount per subscriber per month to carry that station. What ended 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 many in the industry because, over many years, the broadcast TV networks—we're talking mostly the Big Four, the NBCs, CBSs, Foxes, and ABCs of the world—were still the majority of the actual viewing habits of consumers. The split of the cable revenue back to the networks was not perfectly correlated with viewing.

As a result, something that Nexstar Media was a pioneer in pushing for back in 2005 was retransmission fees. Nexstar 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, their 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 based on the number of subscribers that they had in their Comcast market, or whoever the provider was.

Once the Big Four networks saw that the local-market stations were starting to get compensated with monthly subscriber fees for 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 they're purchasing from us.”

The local-market broadcast station will have originally produced news content and originally produced morning shows and other content like that. But the primetime shows that drive the majority of the viewership come from the parent network with which they have an affiliate agreement.

What ended up happening over time is that we sit here today with the introduction of retransmission fees and the fact that Nexstar and other broadcasters pushed the cable industry to pay them like the cable companies. I would argue 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, which now have upwards of 50% of their revenue coming from video subscribers through the cable channels. Bring it all together: if you go through your video bill, I would imagine that the ABCs, the CBSs, and the NBCs of the world are probably getting anywhere between $3 and $4 per subscriber per month out of your bill.

To demonstrate to customers how expensive the retransmission fees had become for the cable companies to pay the broadcasters, if you go to your cable company bill today, you'll probably see the broadcast fee broken out as a separate line item because they want to show everyone 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 that the cable companies have a most-favored-nations clause with the networks. The cable companies have agreements that basically say whenever they strike a new 3- to 5-year deal with a network, the network must give the cable company the lowest rate in the market.

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 friction around the negotiating leverage among the players in the ecosystem. My guess is that 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, 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 at the beginning of this episode, broadcast and cable had existed for decades before streaming came into the picture. There was a long tension over viewer ratings and viewer minutes between broadcast and cable for about 20 or 30 years.

Ever since cable was introduced in the 1970s and became ubiquitous in the 1980s, 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 or 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 and all of the water-cooler shows that people tuned in to see.

The tension over 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 involving these smaller-market, local-market broadcast TV stations that finally wanted the bargaining leverage to get paid like cable channels.

You had these third-party broadcasters that were bulking up. They were also bulking up to compete and fight for a share of the pie from the actual Big Four networks that they were partners with.

As I said before, there was tension between the parent network—the ABC network, for example—and the third-party ABC station. The ABC station believed, “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 giveback. 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 with the cable companies and the video providers, but also to push back on the Big Four networks themselves. Remember, the Big Four networks were being constrained by regulations; they couldn't grow anymore. As the smaller-market stations scaled 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 of 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 station groups, primarily in second- and third-tier markets, to 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 U.S. markets. Their signal reaches about 68% of the population, which technically is more than the 39% cap. I'll explain why in a second.

Nexstar is now the largest broadcast station group outside the Big Four because it got supercharged in its growth in the last 5 or 6 years through 2 major acquisitions that I just want to call out.

First, in 2017, Nexstar merged with Media General for about $4.3 billion in cash and stock. 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 Nexstar into, let's say, the top 4 or 5 local-market station groups.

Their biggest acquisition 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 station 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 lots of technicalities into the regulations that help them work around the 39% cap. I won't get into all the jargon because, as we said, we have enough acronyms.

The local-market stations basically have a form of sidecar agreements. They're called local marketing agreements, or LMAs. They have many different names, but the station groups basically have these arm's-length 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. 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 and away the second-biggest one—I would say 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 probably have one more M&A cycle in this industry. They want to have another bite 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. To give you a sense of scale, I'll rattle off some high-level numbers here. Nexstar has a market cap of a little over $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 net debt-to-EBITDA leverage is usually anywhere between 3.5 and 4 times.

In terms of trailing revenue, keep in mind that 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 and 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 EBITDA into free cash flow. So, off of about $2 billion in EBITDA, about $1 billion to a little over $1.1 billion or $1.2 billion is going to drop to free cash flow.

In terms of the revenue composition, I said at the beginning that after a decade of demanding local broadcast stations get paid like cable networks, broadcast stations finally got their wish. About 55% of the revenue is distribution fees. These are retransmission fees from cable companies and digital video providers. You then have advertising.

Advertising is about 45% of total revenue. For context, advertising used to be about 75% of revenue about 10 years ago. Its share of the mix has shrunk as distribution revenue has grown more consistently and more quickly. Let's call it half the business: Advertising is about two-thirds, or 70%, local advertising, where they have a local sales force specific to that market that actually goes out and talks to small and medium-sized businesses. Car dealerships are probably the most prominent examples, but tons of local mom-and-pop businesses will advertise on local TV.

The other 25% to 30% of the business is national advertising. What national advertising is, if an advertiser wants to do a national ad buy, is that they combine a number of local markets together to build a patchwork that, if you add up the coverage, equals national coverage. The local-market stations like Nexstar will use third-party companies and services to outsource the selling of national advertising. It's still part of the business, but it's not growing that quickly.

Built into the advertising mix, into the advertising half, you have some digital in there. But I just want to be very careful because digital in broadcast is not like Google or Facebook. Digital in broadcast really means display ads and websites owned by the different local-market stations. All the stations will have their own weather apps or things like that. Digital is about 10% of revenue altogether.

In terms of expenses, the direct costs are programming fees. That's the cost of running the evening news—the reporters, the writers, the engineers, and the cost of running the station. But then you have programming fees paid to the Big 4 networks for affiliation. You have a fee paid to NBC or ABC for the content that they give you. You also have reverse retransmission fees, where 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 upward of 60%. But we'll get more to that in a second.

For the core advertising portion, you pay about a 15% agency fee because a lot of this business comes through media agencies and ad agencies. So you pay a 15% fee to the agencies. In terms of the commissions to the local-market salespeople, those can vary, but they can be anywhere between 5% and 15% of gross revenue. That gets us to a direct cost—a cost of goods sold, let's call it—of about 40% of revenue.

SG&A, all the different people it takes to run the station, adds another 20% to 24% of revenue because, in 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, and you have an EBIT margin in the mid-to-high 20s in some years. In terms of EBITDA margins, we're talking anywhere between the low to high 30s. EBITDA margins anywhere between 32% and 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 retransmission fees 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 an approximately 70% interest in The CW broadcast network from Warner Bros. Discovery. I won't go through the whole history, but for any of those who are familiar with broadcast networks such as The WB and UPN, The CW was a fifth English-language broadcast network. They're a distant laggard behind the Big 4, and they have less viewership than even Univision and Telemundo. But for English purposes, The CW is the fifth major broadcast network. They're all over the country.

When Nexstar got this asset from Warner Bros. Discovery, they basically got it for free because it was underperforming so much. The CW was formed by the merger, as I said, of The WB and UPN in 2005 or 2006, I believe. The network was unprofitable pretty much during its entire existence. Warner Bros., as well as the consortiums of other companies that had a minority stake in this network, sold it to Nexstar for basically nothing. Nexstar just assumed about $100 million in debt.

What Nexstar saw with The CW was this vision: Nexstar is currently the largest owner of CW stations around the country, and Nexstar 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 the back of a slate of teen dramas and superhero shows. Those were very expensive to produce and did not attract enough older viewers who are sticking around to watch broadcast television. So the network always underperformed.

Nexstar 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, and they also have some shoulder programming for sports. Shoulder programming includes things like sports talk shows where they talk about the game and show clips, but not necessarily the game itself. The CW is airing more college football, and they were also airing some golf with LIV Golf. But overall, The CW's ratings are still very poor, and the turnaround is still in the very, very early stages. With the cable bundle shrinking, it remains to be seen how much of a turnaround can even be done this late in the game.

On the cable side, Nexstar has a news network called NewsNation. NewsNation was a rebrand of a general entertainment cable network called WGN America, which was formerly owned by Tribune, which Nexstar 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 had a lot of rights to Cubs games, but the plan didn't work.

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 Newsmax. They're trying to carve out a niche for people who want to get cable news outside of Fox News, CNN, or MSNBC. NewsNation is also a very, very small channel, and NewsNation and The CW do not have earnings that are material to Nexstar quite yet.

Nexstar also has a whole list of small diginets that I'm not going to go through. Diginets are broadcast networks that are operated on the subchannels of some of the HD signals. These are very small networks, again, with viewership that is tiny. But the hope was that, with the cable bundle breaking and more people watching television over the air, these diginets could build an audience. That was the hope 10 years ago, but it hasn't panned out as well.

Lastly, Nexstar owns some digital assets. They own The Hill, which is a smaller version of Politico, 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 noncore but keeps paying them a nice little dividend: 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. 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, are shrinking. Meaning, there are fewer subscribers 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. Let’s just look over the last 10 years. Ten years ago, let’s call it 2014, the pay-TV industry had an addressable market of about 100 million households. If you were a basic cable channel or any channel that was considered fully distributed back then, that meant that you were in 100 million households.

Over the next 10 years, the total pay-TV ecosystem number of households has shrunk by about 30%. You went from about 100 million pay-TV households to about 70 million today. In terms of traditional cable, excluding the new skinny bundles, the decline has been even worse—more than 50%. We have about 50 million households today that are paying for what you would consider to be the traditional cable bundle. So, in just 1 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 the 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 viewership have been even more extreme than the declines in the subscriber base.

Something I want to share with the listeners (I’ve talked about this extensively, and I’m still talking about it on my Substack. Accrued Interest is my newsletter on Substack) is that Netflix—but actually YouTube—has been the number 1 disruptor over the last 5 years in pulling viewers out of the entire pay-TV bundle. Nielsen has a monthly report where they show what percentage of TV viewing on the big-screen TV—this is not mobile; this is traditional TV—is attributed to each of the major viewing services.

For the 5th month in a row, YouTube was at a new all-time high in video share. YouTube, in April 2025, accounted for about 12% 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.

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.

You’re having the ratings decline 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—are weakening for the TV ecosystem.

At the same time, the cable companies are not interested in having these fights over subscriber fees anymore because they 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 broadcast.

And just to be clear: over-the-top television, or streaming direct to the consumer itself—who’s 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 1 thing from this talk on Nexstar and the broadcast industry, I just want to say that, 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. 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 the NFL because 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, which probably shouldn’t be that big a surprise. The main demo for local-station news is probably 25 to 54, but it skews over 50. You have some turnover in the generations as older TV viewers die off. But what we’re finding is that new, younger TV viewers are not coming to the ecosystem like they would have 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-TV package. But a lot of younger viewers are just skipping that altogether. The average viewer of broadcast television is definitely over 50 and probably skewing a little older. They over-index on the morning shows, the major newscasts, and 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.

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 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, which I know anyone who’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—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 that 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 technological development 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 that this is a special signal that can be transmitted over the air, sort of an ultra-high-definition version of the current signal, that is encrypted.

Because it’s encrypted, it’s able to send and receive more data about the household and the viewership. The theory was that 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 could avoid cord-cutting. They could transmit their signal over the air, and they could sell new services and give more KPIs and more data to ad buyers.

They could 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 it’s 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. I actually helped the auction team. I was a substitute bidder in the spectrum auction.

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 whole history of spectrum auctions. They typically have underdelivered 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. One of the big reasons the technology never developed over the last 10 years was 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. 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. With ATSC 3.0, that never happened. For a decade, if you wanted to do this as a broadcaster, you would have to maintain 2 signals, which was expensive and not practical.

On top of that, because broadcasters were not broadcasting in this new format—it was cumbersome—the different television manufacturers, who for over a decade were trying to drive down the prices of flat-screen television sets, weren’t adding the necessary components to 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 were lacking the technology from a viewer’s perspective. 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 NextGen TV.

It was the lack of cooperation from all the different parties in the TV ecosystem that I think has caused this NextGen TV to be a little more of a pipe dream. 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. Now that everyone’s already on to 5G and already getting all their entertainment through their phone, I don’t think it’s ever likely to be a meaningful contributor of revenue.

As you kind of laid out the financial profile of the business, I appreciate that growth is somewhat muted here, but margins are healthy and free cash flow generation is copious. That means 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 should you consider when evaluating a company that is limited in its growth prospects but is as free-cash-flow-generative as 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, is that 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-cash-flow conversion, and low maintenance capex. The issue that I had to learn the hard way is that if you’re operating in 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 the broadcast operators are taking to grow the future earnings potential of their business. In broadcasting, many of their distribution avenues, primarily the cable bundles, are out of their control. I can understand why some capital has been spent on some of these digital sites and on propping up some of these subpar networks like The CW. I could understand the thought process of using the excess free cash flow to reinvest in the business.

What I would propose today, having seen many investors lose out, is that if you were investing in a declining industry with strong free cash flow, you need to preserve cash and you need to look to exit the business.

I took a look back at my notes from 12 years ago on the broadcast television industry. About 12 years ago, in 2013, when I was still in grad school doing my MBA at Columbia, I sent in a stock pitch through a blind submission, pitching Tribune Broadcasting as a long to the Ira Sohn Investment Idea Contest, and I ended up winning it. I got on stage at Lincoln Center and pitched my stock to the hedge fund industry and on CNBC the next morning. I was the biggest bull you could find for Tribune Media. I pitched the stock at $55 a share back in 2013.

A couple of years later, I think the stock ran to over $100 a share because, again, in the 2010s there was a long string of consolidation and M&A. But Nexstar ended up buying Tribune almost a decade later. They actually closed the Tribune deal in 2019, 6 years after I pitched Tribune at Ira Sohn at $55 a share.

So 6 years later, after I pitched Tribune, the stock had a total return that strongly trailed the 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 for investors to 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 Jonathan Knee, who is also an investment banker with Evercore. He basically argues that, with few exceptions, most media companies underperform in the equity markets, and they destroy shareholder value too often with too many 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 it no longer wanted to deal with the headache of Warner Bros. Discovery and jettisoned that business, guess what stock has outperformed since then? It’s been AT&T. It hasn’t been Warner Bros. Discovery.

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 than they could get today. Where we sit with Nexstar, 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 Nexstar will probably be able to buy some more stations. But you can’t just keep buying declining assets with leverage, firing people, and hoping that’s the strategy.

I’m not expecting an imminent collapse, but when you are the biggest player, Nexstar cannot be acquired by anyone else because it’s so big. I think the best thing that they should have done for shareholders was sell years ago. Right now, if you’re a broadcast investor, the best thing you could probably do is find a way to sell your assets to Nexstar because they’re going to be a buyer.

Just to bring it all home, our customer question is kind of lessons learned. You have 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.

Bring 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 its advertising revenue for more cable subscriber revenue. I like to think of Nexstar 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 and game-plan strategy. But a lot of these businesses have legacy agreements with the cable companies. The cable carriage deals are shorter now; they last between 3 to 5 years rather than 5 to 7 years. 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 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 that 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 these contractual agreements were giving them sort of golden handcuffs.

I would also say another lesson learned is to understand how much flexibility you have to operate in the industry in which you currently find 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 by the board. You never see what bad acquisition the board 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, loved the medium, and saw the purpose in the product that they were selling to 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 3 to 5 years.

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.

I think management, while very important—bad management can absolutely destroy a business—for the most part, 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. 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 4 or 5, 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 announced, you’re going to have some spin-offs because of 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, Zack. Thanks for having me, and I look forward to connecting with your listeners.