Gray Media, Inc. (GTN) Earnings Call Transcript & Summary

So with the dispute, there's been a line of rhetoric that maybe distributors now are -- the leverage is tilting their way on negotiating for these types of deals going forward, distribution deals going forward? Do you feel that that's the case, that there's some tilting back to the distributors on pricing power or whatever metric you'd like to put it in? And I ask that because you've had 40% of your subs up this year, you've got another 60% up next year. So as you enter those negotiations, is the dynamic changing?

Absolutely not. Our retrans renewals that we have done this year included one of the two satellite companies and two of the largest cable companies. The conversations are never easy. They're not fun. We're not out for a game of golf with these guys, but they know us. They've negotiated with my colleague who's been doing retrans with me since 1997 at a law firm before we came to Gray. We have good relations. We have our talking points. They talk about exclusivity. We talk about reach. We talk about ratings. They talk about exclusivity. We talk about how many people will instantly drop them if they don't have our local talent in their markets. They talk about exclusivity, and we get a deal done. We've achieved the next incremental round of price increases that we expected going into those negotiations and that we expect to continue to get going forward. There are talking points. We don't make threats in our negotiations. I think you've seen in Gray's retrans history, several -- 400 or 500 negotiations every 3 years. We've had 1 block out 9 years ago with Cox, the last 4 days and 3 DMAs, and we renewed with them 2 of now 3 times since. We can get it done. And not to put other folks on spotlight at all, but I'm not seeing a change in the distributor leverage. I think that's -- I think that dialogue or that narrative is coming from people who have never actually done a retrans negotiation or they're coming from the talking points of the MVPDs.

Okay. So one last question around Disney-Charter, and that has to do with whether this new template now makes it possible or easier for distributors and their subscribers to access network content, including nationally televised sports and especially the NFL, even if there is a dispute going on with the local affiliate. The obvious implications being a distributor may not feel as compelled or feel the pressure to meet your asking price if there's a way to get around you in essence. So I'm just curious if you can talk about that. What are your exclusivity protections? And has that changed at all recently?

A distributor in a traditional MVPD talking about retrans with us can say, if I drop you, I'll just tell everybody to go get your signals from your simulcast. It's being offered on a streaming service. And that conversation started in late 2014 when Gray put every one of its CBS affiliates up on CBS All Access to join CBS and all of its O&Os. Every single station that we have bought, we've put up on CBS All Access usually the day of closing. CBS All Access is -- has a couple of million subscribers. CBS All Access costs money. Obviously, it's now called Paramount Global. All of our signals are there as are, I believe, every single CBS affiliate in the country. My point is that since late 2014, every single retrans conversation, which is several hundred for us every 3 years, CBS All Access/Paramount Global has been -- or Paramount Plus has been sitting in the room with us as an elephant. And in 2014, our average retrans rate was $1.40 per Big 4 subscriber. And today, it's somewhere around $5. So if that elephant in the room has been hurting our negotiations, should we be at $10 now? Or is it really irrelevant? Again, I get the talking point, but our signal being available on other platforms for an additional charge has had and will have no impact. We're talking about our distribution in a linear package. We are providing just Gray the broadcast. There's a tremendous amount of value, 365 days a year, 24/7 obviously, not just during an NFL game. And with Monday Night Football, the constant example we hear is it's already an ESPN and it's been living on ESPN exclusively for essentially about 6 years now. So it's not impacting negotiations. Our signal has been available on Peacock for a year. Every one of our NBC affiliates has been available on Peacock. So how were we and Hearst and Tegna and the little broadcasters and little markets been able to renew all of these retrans contracts this year? There were probably 1,000 renewed already this year. If all -- every NBC affiliate is available on Peacock, why didn't every cable operator say, we know -- we'll just tell people, if you can't get the NBC station log out of your linear channel and go to the apps. And then click on the app, wait for Peacock to load, then scroll to NBC and click on that tile, and then watch at the NBC channel. And then when you want to change channels and watch something else because there's a commercial one, just log out of the Peacock piece, go back over to Linear, scroll back and go through the channel guide on of where you want to go. God forbid, as my colleague says, he doesn't watch a sport, he watches sports. So -- and his team -- he is watching [ Commander ], so I assume they lose a lot. He changed the channel a lot. When there's a bad play, he changes the channel. When the game's more than 15 points, he changes the channel. When there's a commercial, he changes the channel. If don't like hearing because we saw commercials. He can't do that if he's trying to hop between Peacock and Paramount and Fox on the Comcast bundle. It's not a great user experience. We're selling something in a different distribution platform that has real value for the consumer and real value for the traditional operator. In the same way, if I want to get from my house to the airport in D.C., I can take 66 and it'll take me, at rush hour, about an hour in 25 minutes. Or for the low, low price of anywhere from $7 to $43, I can get in the HOT lane and go real fast and pass all the traffic up. I can drive for free or I can pay money for a different experience. It's the exact same road at the exact same time. And maybe I need to call for a better analogy here, but we're talking about the same product at the same time, but there's different prices based on how you're going to consume it. And there are a whole bunch of people in D.C. who somehow pay $40 every day each way to commute from Reston, Virginia, to D.C. because they don't want to sit in traffic. There's other people that will pay it one time because they really need to get home and get the dog from daycare or from dog care or whatever. People will pay prices for different experiences. And that's the -- it's a little the same way what we're doing here. We're selling a broadcast in a linear stream. It's part of a package of channels that people can easily navigate to. And they have their viewing patterns, and they can easily navigate around it. That's what we're selling. Our channels are distributed on Peacock, on Hulu, on YouTube, on U-verse, what's left of it, on DIRECTV stream. We were on Sony View the whole time Sony View was operational. And our signals without -- our content are available on a couple of hundred websites, 500-plus fast channels. You want to watch our Arizona, Phoenix [ A Z3 ] channel here in Phoenix today, you can watch it on hundreds of platforms including all the connected TV devices, all the connected TV manufacturers, your phone, your tablet, even if it's an Android. We even support Android. And you can watch our station here when you're in Hawaii, if you don't want to watch our Hawaii station, or if you're in Maine, if you don't want to watch one of our Maine stations. Our content is out there. The network content is obviously limited. But we are putting our content out on in hundreds of different platforms and some of them get monetized in different ways. And when we're on Comcast or we're on Direct or we're on U-verse or we're on Dish Network, there's different value propositions to the consumer. There's different value propositions to intermediate company. And there's different propositions to us. And we get compensated every way: sometimes through ads, sometimes through fees, and mostly through both. What we're going to pursue is our -- this company, I think all my peers are going to continue to pursue every possible distribution method where we can monetize our content the best way we can. Is that a long-winded way of answering your question?

It is, and it's helpful. But just one follow-up on that. But to the extent -- so it doesn't sound like it is a concern at the moment that consumer or subscriber can watch your content, and that's going to be true even if you're in a dispute with a distributor.

Right. So our -- if -- I'll go back to when I -- the very first retrans deal I did was to put the Cox ABC station in Atlanta on Dish Network. And I can't disclose the confidence, but you can assume that fee was less than $0.05. At the time, Comcast and Charter then Time Warner and Anna, we're paying 0 for broadcasters. And they got paid $0.05 because they were offering something different. And that changed the world for us because if Cox didn't get the deal done with -- the next deal done with Comcast, they could say, go get our channel from Dish Network. And there's going to be some transaction costs and people have to pay for Dish Network to transition. Then DIRECTV got into the local game. And now, we have Hulu and we have YouTube, and we have All Access. We have -- as an industry, we just keep adding distributors in different ways to get our signals. So I am no more concerned when we're in a negotiation with a cable company that someone can get our signal from CBS All Access than they can get our signal from YouTube TV or get our signal from Dish Network. It's actually good for us. I like having alternatives. What I don't see is people going out there saying, "Hey, cable companies dropped Gray's TV station. You can go get them on CBS All Access. It'll cos -- or Paramount Global. It'll cost you [ $9.99 ] a month for one channel. Or go get Peacock for $9.99 a month to get the NBC channel or sign up for Hulu." People aren't really doing that anymore, but we're there. So we have -- we do have exclusivity provisions as broadcasters with all the networks. They vary by network, they vary by type of program, they vary by types of days, holdbacks, et cetera. They're absolutely not with the broadcast -- not the idea that we would like to have. It's not what the networks would like to have. But remember, too, the networks are as invested in this ecosystem as we are. And they're getting -- each network is pulling in, ballpark, $2 billion a year in affiliate fees from us. Their ad revenue is also dependent on us. Remember, half their revenue roughly comes from selling national ads. National ads are sold on eyeballs. If you have Gray's television station and we're #1 in a market, you're going to get more eyeballs that are seeing your commercial. You can monetize it better than if you're on another station in the market that doesn't get as many ratings. But if you're not in the market, you get no money. So if Gray hypothetically said we're not going to continue an affiliation with the network and we distribute 17% of that network's households, the network's going to scramble to find other affiliates to take their place. And I highly doubt any real broadcaster is going to take an affiliation from Gray. We couldn't afford, they can't afford it. So much more likely that if we don't affiliate with the network because they're charging too much and are undercutting us and our exclusivity by giving the deals they're striking with distributors and we say, "You know what, enough is enough, we're not going to affiliate with you," they not just lose our retrans revenue, they're going to lose the reach into our markets. So that's not great from a talent negotiation standpoint. It's not great from calling yourself a network if you can't be in 17% of the homes in America. But it also means you can't monetize those ads. Gray at least, we over-deliver on ads. But even if we didn't, what if we were just an average broadcaster for each network and we took 17% of their ad revenue out? That's real money. So I get is really [indiscernible] to talk about networks versus affiliates. And we have some really difficult conversations like everyone does. But at the end of the day, we are also aligned. The 4 networks, 5 networks if we include CW, need their affiliates to succeed in the retrans marketplace because they need us for the reach to monetize their advertising and they need our affiliate fees. And we're not at a point yet where the networks are prepared to say we're going to give up about our $4 billion a year each by having -- from having affiliates, and we want to become TNT. I've never heard a broadcast network, say, "Gee, I'm really jealous of TNT. They don't have to worry about their local affiliates." Not a single one time, and I've been doing this for a long time. There's a value in being a broadcast network, it's the retrans fees they get from their O&Os, it's the retrans fees they get from us. It's the advertising they get from their O&Os and it's the much bigger reach from the affiliates. Remember that every network's reach 62% for 3 of the networks and 78% of ABC's audience reach comes from their affiliates. So if they want us -- if they want to cut us out of the picture and put their content on DTC apps or become TNT or become a channel on Disney+, they can do that, but they're losing billions of dollars of revenue that supports all of their programming efforts and their entire image and reason for being as a broadcast network. So at the end of the day, we are going to have disagreements about what the whole bad period should be on a soap opera and whether there should be live simulcast of award show. But the reality is that we are all aligned in maximizing retrans revenue, maximizing their audience. And we're not succeeding as well as we all wish we were, but our interest are aligned with the networks in that area. And I know it's not really a happy thought because people like the division. But the reality is they need us to succeed and we need them to succeed. And I think that we are doing a good job and we can do better and we're, as affiliates, working to do better. But we need the system to survive, and they need the system to survive. So I don't see CBS becoming TNT any more than I see CBS becoming a direct-to-consumer product tomorrow.

Okay. Now that's great perspective. So much to talk about, so little time. I do want to ask you a question about the other half of the business, the advertising side. It's been a sluggish year plus for advertising, most notably on the national side. I think most of the peer group has reported core flat to down in 2Q. Gray reported 2Q core up 3.5% and guided 3Q core flat to up low single digits. Why are you able to outperform there? And has there been any material change to that outlook since the time you reported 2Q?

We went into this year as contrarian, saying we expect that core would probably grow this year. I think everyone on the street told us that we were foolish because a recession was just 6 months away. Happy to say that they were all wrong, happy to say that Jim was right with the guidance on core. National is a very small part of our business with 20% or less of all our advertising revenue. We have not seen National particularly strong in quite a while. I think it's stronger, at least for us, than we had expected because auto is doing actually pretty well. Again, the strikes have had no impact on us. If anything, the 3 with strikes have -- are saving a little bit of money and has inventory building up. And their competitors are looking to expand their market share. So auto is doing well for us. National overall has been doing -- it's not falling off a cliff. It's -- our advertising is pretty stable this year. As I said, we expect it to grow a little bit this year. I can't speak to our peers' performance. What I'd say for us is that we tend to have leading TV stations. They tend to have higher rates than peers. If there is a slowdown, we have seen in the past that the advertisers tend to reallocate dollars before they cut them, meaning they'll cut out some platforms, maybe cut out some TV stations, maybe not advertise and do some outdoor, maybe cut back on radio or something else. Before they start cutting the budget, they'll just reallocate. And as the #1 station in the market, they typically see the impact less. And as the economy gets stronger and confidence increases at a local level, the #1 station tends to bounce back more quickly as well. So we have a good portfolio. And certainly without the actual long-promised recession, they've done pretty well this year.

Okay. Any early thoughts on political next year? And one thing we've talked about last cycle, we saw shifting from -- shifting spending from traditionally competitive markets to more solidly blue or solidly red markets. Do you expect to see that again in the coming election, this one being a presidential election? And what -- again, what are your expectations for...

Last year, we had a -- two weird things happened. We had a bunch of candidates who won primaries in July and August and then promptly stop spending, went dark on the air. And we have never ever seen a major candidate in the competitive race go dark after primary. Typically, you spend a lot of money when the primary and the day after you now introduce yourself as a moderate or at least somewhat more moderate to attract people to your campaign, including the people who voted against you in the primary. And instead, we had a bunch of high-profile races where they just literally went off the air for all of August and a good part of September. We kept comparing that we're coming back in 2 weeks, coming back in 2 weeks. Super PACs pull back, and those races certainly hurt us. When the money generally came back in October, as what you were saying, we saw money moving in places that made no political sense. If you think you know something about politics -- and I've lived in D.C. for a couple of decades so I kind of think I do -- Washington State is not a place where Patty Murray is going to lose her fifth election for U.S. Senate no matter what a crazy couple of polls say. It's just not going to happen. And yet there was a poll or two that said that she might be in danger and money moved to Washington State in pretty significant amount. And money moved to Oregon, which was also pretty blue. And money moved to Oklahoma to a governor's race, which is about as red state as you can find. The beneficiaries of this money moving around were primarily in New York, Philadelphia, L.A., San Francisco, Seattle, places where Gray has zero presence at all. Portland, our Portland station, actually did shockingly well because of that, but that's the only station we have in Oregon. And the markets that we're particularly competitive had money sort of drained out of them. So I think as -- when we went through the collective [indiscernible], went through an analysis after the election of what the heck happened because those supposedly competitive races that broke in October that got a bunch of money to move turned out to be completely -- rolled out exactly as you would have predicted in the polls that we had in place in June and July. It appears there were a couple of real outlier polls that came out in basically August, September, and a lot of political money follow those. The polls may or may not have been done in the way that traditional polls are done. It may have potentially been funded by candidates who are trying to get some headlines and then absolutely work. And therefore, if you look -- your poll start turning in our direction, the money starts flowing from donors and from PACs and super PACs. So some of that seemed to have been a little bit of playing the game last year, and we were hurt Vivint-based again, our geography of being in more politically competitive places and not deeply blue and deeply red. I don't really see that happening again. Polls are very tricky business as Hillary Clinton. They haven't gotten any better. A lot -- fewer people use landlines now than they did in 2016. So it's really, really a hard business, and I don't mean to suggest any way. I understand how polling is done or should be done. But I know that there is some accepted polls out there and there are some that are not so accepted. And I think the dollars next year are going to follow the polls that follow more accepted methods and procedures.

Kevin, I wish we had more time, but we are out of time. Thank you very much for being here, it's helpful.

Appreciate, Aaron.