Conference Call Regarding
"The CW"
January 24, 2006
Ruthellyn Musil, SVP/Corporate Relations
Thanks very much and welcome, everyone. We are pleased
that you could join us for this conference call to discuss
the announcement that was made this morning about the new
network. Our speakers on the call this morning will
be Dennis FitzSimons and John Reardon. They are joining
us from our offices at WPIX in New York. And I’m
here in Chicago. Don Grenesko, our CFO, and a few other
folks are with us as well.
I know it is a busy day for everyone, so we are going to
try to keep this call to about a half hour. Dennis
will start with some brief opening remarks, and then we will
get quickly to your questions and answers.
So without further ado, Dennis?
Dennis FitzSimons, Tribune - Chairman, President and CEO
Thanks, Ruthellyn, and good afternoon, everybody. We
just came from the press conference, and let me just give
you some details from that. Warner Bros. and CBS, along
with Tribune as the distribution entity, will launch a new
fifth network in the fall called The CW. The new broadcasting
network will be a 50/50 joint venture between Warner Bros.
and CBS.
Tribune Broadcasting has entered into 10-year affiliation
agreements with the new network for 16 of our 19 WB stations. The
WB and UPN will continue to operate until the fall, then
those networks will cease operations and there will be a
transition to the new network.
The new network will have the best programming, best distribution
and management of each of the former networks. The
daypart footprint on each of the affiliate stations will
be the same. So there will be 13 hours of prime time,
going Monday through Friday and Sunday; Sunday early fringe;
Monday through Friday, 3 to 5 PM for first-run and off-network
programming; and a five-hour Saturday morning block.
Some of the most popular WB shows — Smallville, Gilmore
Girls, Supernatural — and shows from UPN, such as Veronica
Mars, will be on the new network. Reality series such
as America’s Next Top Model and The WB’s Beauty
and the Geek, as well as comedies from both networks — Everybody
Hates Chris and Girlfriends from UPN, and Reba from The WB.
So the network will launch with our 16 major market stations
and 12 CBS-owned former UPN major market affiliates, and
will immediately have 48% coverage of the U.S.
I mentioned the 10-year affiliation agreements, and we think
that the overall national lineup will be stronger, which
will lead to national ratings that are better and will enable
the network to provide, over the long term, better programming.
Now, there were eight instances where Tribune and CBS overlapped
their respective WB and UPN affiliates. Tribune
will have affiliation with the new network in Los Angeles,
Boston, Dallas, Miami and New Orleans of the overlap markets. Our
stations in Philadelphia, Atlanta and Seattle will become
independent stations at this point.
Now, we see lots of advantages to this. As all of
you who have been following the company for a long time know,
we launched The WB 11 years ago with Warner Bros. as a vehicle
to supply ourselves with competitive, first-run prime-time
programming. It has been a very successful strategy
for us.
There have been costs. As an owner, we were given
the immediate competition with UPN and forced to fund start-up
losses. But our programming expenses at the station
went down, our margins went up and this has been a very positive
experience for us.
In the new network, we will not have equity participation. This
will insulate us from all of the network losses and we will
not have to absorb any of the shutdown costs that will be
created by the ending of WB.
So we think this is a great day for us. We wanted
to go through some of the details of the new network and
then really answer any questions that you may have.
Questions and Answers
Frederick Searby, JP Morgan
I had a couple questions. One is the demographic focus
of The WB was very distinct, and I’m just trying to
figure out what you envision. I know you’re kind
of merging in the best of both. But one was more focused
on it seems like minorities, and one was more focused on
the young female demo. So it is there a vision for
where the demographic will go in the new combined entity?
And then secondly, how is this going to affect this year
your TV numbers? I mean, are advertisers now going
to become a little bit gun-shy now that The WB is essentially
a lame duck or defunct? And where do you think that’s
going? And the three independents, you’re going
to build your own content. What are those costs going
to look like?
Dennis FitzSimons
The focus of the new network will still be young. Certainly,
there are a couple of nights with some of the sitcoms that
are more ethnically focused that will be different from The
WB. But shows like Everybody Hates Chris have done
real well for UPN.
So our stations, particularly in the top three, are delighted
to be getting those shows. It will still be 18- to 34-focused,
but there are also some shows like Veronica Mars that really
go well with Gilmore Girls. So we think a good schedule
will come out of this that will immediately benefit our
stations.
Here at Channel 11 in New York, we can’t tell you
how excited they are, because this gives them a leg up on
a competitor, like Channel 9 (WWOR) here, which has been
doing better. But with the loss of some of these shows
as lead-ins to their 10 o’clock news, our station is
going to be much more strongly positioned. And that
is true across our lineup.
Now as far as the third part of your question, what we
will be doing in Philadelphia, Atlanta and Seattle. Right
now, the NATPE convention is going on. And believe
me, this is generating a lot of buzz out there, and there’s
going to be a lot of interest as time periods have opened
up on a lot of stations around the country, including nine
Fox-owned stations that were former UPN affiliates.
So there is going to be supply created, we feel, for stations
in prime time. We feel, given the scale of our group,
we’ll still be able to effectively program those stations. We’d
rather have a network on those stations, but it should
still be good.
Frederick Searby, JP Morgan
This deal, is it going to affect you in scatter, or is it
going to make advertisers somewhat gun-shy to advertise on
kind of a lame duck station?
Dennis FitzSimons, Tribune - Chairman, President and CEO
No, we don’t think so at all, because we really have
some pluses coming out of this because The WB will be shut
down. There were some episodes that were going to be
saved. So we’re now going to see more first-run
episodes run off by the end of this year that will give us
more to sell to advertisers on a local basis, and also the
network. Not that that is Warner Bros. concern at
this point, because we are not going to have to deal with
the shutdown costs.
But we expect no downturn from advertisers or no loss
of enthusiasm from advertisers, and we think our upfront
presentation that Bill Morningstar of The WB will handle
for the new network is going to be really strong.
John Janedis, Banc of America
A couple more questions related to the independent markets. First,
I just wanted to ask how different do you think the margins
will look here over time relative to the current WB affiliations? What
percentage of your revenue on the TV side did they represent?
And you kind of touched on it, but what kind of programming
are you looking at? It’s only eight months away
or so. What is available out there, and do you think
that actually tightens up the overall programming market
to the extent that it actually increases rates for that
type of programming?
Dennis FitzSimons
Well, first of all, if you remember, we told you that
WB prime time usually represents about 15 to 17% of our
WB affiliate revenue. So let’s just take Atlanta for example. That
station, WATL, gets 15 to 17% of its total revenue from WB
prime time. Now, that will be substituted with programming
that has more local inventory, but there’s going to
be more costs associated with that. It is yet to be
determined what will run in those time periods, whether it’s
talk shows. That will be on a local basis determining
what is best there.
But overall, prime time in those three markets represents
just about 1% of overall Tribune television revenue. So
it is not that significant. And it will be replaced
with revenue, just from a different programming source that
those stations will air in prime time. More costs,
but more revenue, because there are more spots to be sold.
John Janedis, Banc of America
And just in terms of the margin impact, do you think over
time that they can get to the levels where they are currently,
assuming that they’re somewhat close to your current
portfolio?
Dennis FitzSimons
You know, we think so, but it all depends on what programming
we put in those time periods and how well it does. But
again, in terms of the total picture, it’s not going
to be a big drag. We don’t think it’s
going to be a drag at all.
John Janedis, Banc of America
And just related to the 10-year deal, if you will, are
there any kinds of clauses, for example, that if this ends
up not working out for some reason that they could actually
shut it down? Or is there a firm commitment for 10
years?
Dennis FitzSimons
Well, here is what we believe is our insurance policy. CBS
has 12 affiliates of the new network. And they need
to generate programming for that group of affiliates. So
this is what we really like about this deal and we think
it’s also good for Tribune.
So we have Warner Bros. and their program production capabilities. Now
we have added CBS studio production to that. We have
added CBS as the infrastructure partner. So this network
is going to be a lot more efficient. You will have
two networks running off one infrastructure. And
that leaves more money for program production.
So you add the fact that CBS also owns stations and wants
to make sure those stations have good programming, you’ve
got the incentives right. So we are really enthused
about what’s going to happen, both short term, because
we’ll get the best of both networks, and then longer
term, because we will have one of the partners with station
interests of their own.
Paul Ginocchio, Deutsche Bank
Just a couple of quick questions. Can you talk about maybe
what you were funding to The WB in ‘05 and how much
goes away into ‘06?
Second, is there any change in incremental reverse comp
to the network? Maybe you can put a size on that
if there is.
And then finally, just looking at that prime time, I think
that we are calculating that ratings of the new lineup
would be about 20% higher than the current WB ratings with
the new list. Is that right?
And then maybe the final question—approximately 75%
of your TV revenues are now switching from The WB to CW,
and 10% are going from WB to independents. Is that
roughly correct? Thanks.
Dennis FitzSimons
Just the last question, that sounds about right. It
would be about 15% of total revenue. But remember,
of that 15%, only 15% is prime-time revenue from The WB.
Now, you had so many questions there, Paul, I’m
going to need to ask you to go back to the first one.
Paul Ginocchio, Deutsche Bank
Sure. Could you size the funding that you put into
The WB network last year? Obviously that goes away
now.
Dennis FitzSimons
We have not normally given out specifics on that. But
to give you a sense of how good a deal we feel this is for
us, go back to the beginning, when we wanted to get a source
of prime-time programming and we were willing to pay for
it. Original prime-time programming that would make
our stations competitive in prime. We agreed to pay
reverse comp and also we funded about $140 million of losses
over the 11 years of the network.
We are no longer going to be responsible for that. And
by the way, Time Warner—again, a great partner—funded
somewhere over $600 million in losses. But really,
that was a way to get prime-time programming.
Now we will not be faced with the losses. And we’re
hoping this new network is profitable because if it is profitable,
that means the programming will be better for our stations. So
that’s really the situation if you look at it on
a long-term basis.
We were a payer of reverse comp, a funder of a percentage
of the losses of the network. Now we will continue
to pay reverse comp, slightly less than what we have paid
before, and we think we are going to have a stronger network
with no responsibility for losses.
Paul Ginocchio, Deutsche Bank
Perfect. And then finally, just on the rating, what do
you think the the variation of the prime-time rating now
with this sort of pro forma new lineup? Is it about
20% higher than the current WB rating?
John Reardon, Tribune - President, Tribune Broadcasting
That’s a good estimate right now. With the combination
of the two networks, it’s really going to be very,
very strong. We are very excited.
Lee Westerfield, Harris Nesbitt
Dennis, congratulations on finally putting the questions
of The WB network to rest, and it is exciting news. The
question here—I’ve basically three, and hopefully
straightforward ones.
First, if you can help us understand from here over the
10-year life of the contract how your reverse comp will
look? Will
it be similar to what you’ve been doing recently
with The WB network, or is there some change in that arrangement
with the new CW?
Secondly, The CW is 50/50 from a management standpoint;
therefore, if you can give us your understanding about who
is the final arbiter of management decisions overseeing Dawn
Ostroff?
And then finally, CBS had been doing some joint sales,
and there were some efforts to try to integrate local and
national sales as well. So I wonder if you can give me
some understanding about how The CW network sales activity
will be proceeding from your point of view?
Dennis FitzSimons
On the reverse comp front, we will be paying less to the
network. We will see maximum low-single-digit increases
in that. As you may know, reverse comp is a fairly
small percentage of our total cash programming costs. So
again, we will be paying reverse comp, slightly less.
Management decisions on the network—I think you’ve
probably heard the lineup from the press conference. Dawn
Ostroff will be the president of the network. John
Maatta from The WB will be chief operating officer. And
there is a four-person board, two from each side.
But what was stated at the press conference this morning,
and one of the things that we are very happy about, is
there is a belief that you pick the best programs. And
again, with CBS to some degree hedged, having both network
interest and station interest, we think there will be definitely
an incentive to put the best lineup on as possible.
In terms of joint sales, this will be, as I understand
it, a separate sales operation. Bill Morningstar from The
WB will head The CW sales operation. But it will make
use of the CBS network’s back office. So there
are significant savings there. But you have to have
a separate entity selling; otherwise, you lose aggregate
market share.
Alexia Quadrani, Bear Stearns
With regards to Atlanta, Seattle and Philly, would you consider
a sale of those affiliates at this time?
And my second question is your Fox affiliates—are
they in the same markets where there will be a new CW affiliate
now? And if so, do you think there will be any impact
from the stronger networks to your Fox affiliates in those
markets?
Dennis FitzSimons
First, we have no plans on selling Atlanta, Seattle or
Philadelphia. We
think there’s a lot that’s going to happen in
the market in terms of possible creation of new programming. And
we think those are valuable assets for us and continue
to be. We think, given the size of our group, we can still
do a good job in being able to purchase programming for
those stations.
In terms of the Fox affiliates and the competition, there’s
going to be competition, but remember, one station in the
market is not going to have, at least in the short term,
a prime-time lineup. So in our six Fox affiliate
markets one station will get a little bit stronger, but
one station in the short term is going to have to deal
with not having a prime-time schedule.
John Reardon
I think that you’re right, that it will create a
stronger competitor. With American Idol and the sports
franchises, our Fox affiliates are doing well and are well-programmed.
Brian Shipman, UBS
Quick question—how do you plan to account for the
loss of your minority stake in The WB? Should we
expect to see a charge, and if so, when would you book
the charge and what might the size be?
Tom Leach, Tribune - SVP/Development
We currently do not have anything on our balance sheet
in terms of investment in the network itself. That’s
been amortized over the life of the network. As we
have recorded our share of network losses, we ultimately
amortized everything on our balance sheet. We had a
funding cap. So there will not be a charge related to the
network. We’re not responsible for any shutdown
costs.
We do have some intangibles at our stations that are losing
the network affiliation. Going back to acquisition
accounting, where we put a value on the network affiliation,
we are looking at that. There could be a modest charge in
2006 to write off some amounts there. But it would
be modest.
Craig Huber, Lehman Brothers
My first question is real simple. I’m just
curious how many quarters The UPN and WB have been talking
about this behind the scenes?
Dennis FitzSimons
Well, I think probably periodic conversations have happened
on this front over time, given the two networks started
at the same point. There were discussions going way
back because it was so difficult for both new networks
during the startup phase.
But I would say this came about quickly—these negotiations
that included us—I would say over the last two weeks. So
this happened quickly, and it was the right time, made sense,
and as we analyzed it from Tribune’s point of view
and our shareholders’ point of view, this was the
right move for us at the right time.
Craig Huber, Lehman Brothers
Then just as a follow-up, if I could, your 22% stake in
The WB—are you not getting any compensation from
that?
Dennis FitzSimons
In the overall negotiation going forward, there’s
no responsibility on our part for shutdown costs, which
are going to be significant, and again, in terms of getting
this deal done and what it gives to our stations. We
lose the responsibility for losses. But our equity
piece goes with that. And we are comfortable with
that trade.
Craig Huber, Lehman Brothers
I did want to just to sum up your comments—you’re
positive on the revenue outlook from your standpoint, as
well as the margin outlook for Tribune stations? Just
if you could sum up what you’re saying here, please.
Thanks.
Dennis FitzSimons
Okay. So our projection or what we would say about the
margin improvement? First of all, I think starting in September,
we are going to have better prime-time lineups in 16 of the
19 WB markets. We will have additional costs in those
three markets for the 15% of those stations’ revenue
that comes from prime time.
So we are going to have a reduction in margins, not necessarily
that much in revenue, but we are going to have more programming
costs in those three markets, depending on what happens. All
right? Because if Fox decides to do something in
terms of a national service, we may be able to affiliate
with that national service that Fox uses to program its
nine former UPN affiliates.
So it is really difficult to project that because this
is a highly leveraged daypart, and with the the two coming
together, you’re going to see a big shift in revenue.
It will adjust.
So Craig, it’s really hard to answer your question
right now, because we’re not sure what shape the programming
in those markets will take, because there are a lot of unanswered
questions. But what we can tell you is what’s
really at stake is the 15% of revenue of 15% of total Tribune
television revenue. And that is about 1% of overall
Tribune television revenue.
Karl Choi, Merrill Lynch
A quick one here. Just wonder how today’s
announcement will impact your acquisition strategy in the
TV business, both in terms of appetite and the type of
stations that you go after?
Dennis FitzSimons
We will again look at, as we have been, station acquisitions
from a very disciplined financial standpoint. And if
the right market comes available, we will look at it. But
right now, we are concentrating and John Reardon and his
managers are concentrating on improving the performance
of our existing group.
Douglas Arthur, Morgan Stanley
Yes, Dennis, with your stations and CBS’s 12, UPN,
you’ve got 48% of the country. You talked about
potentially seeing 95% of the country. So I guess
the question is how quickly do you think some of the other
major UPN and WB stations will sign on here?
Dennis FitzSimons
I would think pretty quickly. I think this is going
to be an awfully attractive package. And I think that
Warner and the affiliate relations group will get out into
the market quickly, and I think they will have these conversations. And
I think this lineup will take shape pretty quickly.
Douglas Arthur, Morgan Stanley
You’re relatively confident that Fox or News Corp.
will sign on?
Dennis FitzSimons
No, I would not think so. I don’t know and I
can’t speak for them. But because they are
going to not be involved in this network in New York, L.A.
and Chicago, I would be surprised if they contributed stations
in their other former UPN markets, again, where they own
UPN stations.
But we don’t know—have no idea. And Doug,
as you know, we have multiple relationships with Fox, too. We
have six Fox affiliates. We buy programming from Fox. They
buy advertising for Fox movies on our stations and in our
newspapers. So we have a good relationship with Fox
and look to retain that relationship.
Jim Goss, Barrington Research
A couple of questions. One, I’m wondering how
did the Fox stations’ extrication work? Was it
nearing the end of some of their relationships, or how did
they back out? How are you going to handle the branding
of the new network in this transitional period? And
can I presume that there are no regulatory issues or any
impact on the Superstation from the transition? And
I’ll let it go at that.
Dennis FitzSimons
The Fox agreements—they really had a similar relationship
with UPN that we did with WB. We were, as you know,
on a one-year renewal, which ends in the fall of ‘06. And
my understanding is that Fox affiliation agreement was also
ending in the fall of ‘06.
So when Warner Bros. talked to us about this possibility
and it seemed certainly to be a good idea from our perspective
and we could cover 16 of our 19 stations—again, we’re
not looking to disadvantage anybody, but we are looking to
advantage ourselves. And we were not worried about
anybody except ourselves.
Now as far as regulatory issues, certainly, the two equity
partners in the network are most impacted by those. We
don’t think there are any regulatory issues. And
as far as the Superstation, the Superstation will not be
part of the network, just as the Superstation does not
carry The WB network.
Branding—I would say that we will handle this in the
most efficient way possible. And what we will do is
centrally create graphics packages that will enable each
of our stations to have excellent graphics packages that
also incorporate the new logo. John, I think that
was sort of a stand-in logo we saw today?
John Reardon
Yes, it was a stand-in logo. So there will be lot
of emphasis behind the new branding campaign. It
should be terrific.
Dennis FitzSimons
Yes, and we’ll just put a lot of emphasis to let people
know, come the summer and fall, where these shows from UPN
and how they are going to reside now on a new station. But
ultimately, people—we’ve covered this at the
press conference—people are not watching networks,
they are watching programs. So the stronger the programming
is on this network, that’s the better off our stations
are going to be, the more valuable they are going to be.
Victor Miller, Bear Stearns
A couple of questions. In terms of the dayparts, as
you see the new programming evolving, which dayparts do you
think offer the most upside? Is it prime time, which
now has more programming hours and higher ratings, or some
of these other dayparts where you expect to build out new
programming blocks that didn’t exist?
Secondly, as they build out the new network, does The
WB affiliate in a market in which CBS and Tribune does
not own a station have the upper hand? Or does the UPN affiliate
have the upper hand? Or is that going to be just
thrown into the mix overall?
And lastly, what do you think will happen with pricing now
that we pulled out 7500 to 10,000 units out of the broadcast
prime-time supply of advertising?
Dennis FitzSimons
If I can speculate on the dayparts, I would say I think
that the most upside is in prime time. And again,
combining the best shows of each network immediately will
have the best possibility of better rates.
In terms of the network economy, it’s difficult to
speculate on this. But it would seem if there are
five networks as opposed to six, then this would be a real
positive for the new network sales force.
Just using an analogy from the local station business,
if you’ve got six stations or seven stations in a market,
the last two usually get pitted against each other for advertisers
to lower their cost per thousands. So part of this
depends, though, on what happens—is there another
programming service that comes into the market?
But with the strength of the distribution that this network
is going to have, with the immediate program lineup that’s
going to happen, this is going to be a strong sales vehicle. Also
going to 3 pm-5 pm, we think it’s already a better
daypart than when we had kids in there. As you know,
there’s no kids market—growing adults for our
station has been a positive. We expect that to continue
to be the case.
Victor Miller, Bear Stearns
And what about as you build out—if the market has
no CBS or Tribune affiliate—does the existing WB
affiliate get the first look? Or how does that work, do
you think?
Dennis FitzSimons
Well, that will be handled by the new network and their
affiliation for affiliate relations staff. But there
is no guarantee that either station would be advantaged or
disadvantaged. And it will be a case of the network
looking at the strongest station that is going to add the
most to the lineup.
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