Nexstar Broadcasting: Mid-Market TV’s Signal is Strong

Humility is Perry Sook’s strong suit. the 49-year-old CEO of Irving’s Nexstar Broadcasting Group has received awards from his home state of Pennsylvania (Broadcaster of the Year), his adopted state (Texas Broadcaster of the Year), and his alma mater, Ohio University (an induction into the college of communication’s hall of fame), and their mention is just enough to put a subdued smile on his face. But even through that grin, he insists that the honors are misdirected.

GOOD RECEPTION: Perry Sook, CEO of Nexstar Broadcasting Group, finds strength in mid-range markets across the country.

“I take these rewards, but this is very much a team sport,” Sook says. “Any speeches that I’ve given, I thank them for honoring our company and our spirit of innovation. At the end of the day, they’re honoring the company, not me.”

Such a modest company line is old hat, though not necessarily in the television world as of late. And certainly not from a company like Nexstar that specializes in local affiliates, the lowest form of life in the wild TV food chain. The industry as a whole has plenty of headache-inducing pitfalls—the proliferation of TiVo and competition from sources like the Internet and Netflix, among them—let alone the struggles, limits, and cycles of localized markets.

All of which makes Sook’s success—okay, fine, the company’s success—all the more impressive. In 1996, Sook saw an opportunity in those worries—the potential of so many undervalued, struggle-laden affiliates. The Southlake resident has delivered the golden word that many never expected from a company obsessed with America’s smaller TV stations, affiliates ranging from WTWO in Terre Haute, Ind., to KSVI in Billings, Mont.: growth.

In all, 49 TV stations currently make up the roster of Nexstar. Thirty-two are officially owned and operated by the company, while the other 17 are run in what Sook calls “virtual duopolies,” stepping around FCC rules to all-but-own a second station in a given city. Three dozen employees work in the corporate office, overseeing a staff of more than 2,400 affiliate employees stretched out over 11 states. It’s a large leap from the outset of the first broadcasting company Sook ran, Superior Communications, in 1991, which consisted of one corporate employee (Sook himself), zero stations, and one dining room table.

“I spent 14 months running around the country on my own dime,” Sook says about the start of Superior. “Not paying myself a nickel. Trying to find properties and trying to access the financing to start the company. Living on credit cards, living on savings, living on IRA redemptions, things like that. The good news is, in the 11th hour, the deal came together. Had it gone three months longer, I would’ve been completely broke and starting over.”

Born in DuBois, Pa., Sook got his start at a radio station in nearby Punxsutawney when he was still in high school. From the sound of it, management at WPME probably gave him the gig just to get the kid, who kept hanging around the studio, off its back. At the small station, on-air talent helped with sales as well, which meant young Sook was hawking ads to local businesses at $1.95 a pop. “Every dime I made in commission went into putting gas into Mom and Dad’s Chrysler New Yorker with the big, 400-cubic-inch engine,” he says. “But it was a great experience.” Years later, Sook completed Ohio University’s College of Communications management sequence while working full-time at the local radio station as a DJ and play-by-play announcer.

With diploma in hand, Sook began his on-air television career path, but after six months as a television sportscaster at West Virginia’s WDTV, he says, “I realized that I probably didn’t have the printer’s ink running through my blood.” (He’s being humble again. His likeably stern demeanor, a relatively dead ringer for Lou Dobbs, might’ve worked out in the long run.) After four years as a sales account executive for northeastern TV companies, he moved to the national sales management position at Dallas’ KTVT-11 in 1985, but his climb in the TV sales ranks wasn’t brisk enough.

“Even when I was here in Dallas on my first tour, working at KTVT, a big TV station in a big market … on the weekends, I would drive out and look at little radio stations in small towns in Texas as buying opportunities. I knew I always wanted to run and own my own business.”

Sook took a step closer to that when he joined Seaway Communications in 1990, serving as president for a year before he made a stand and started working for himself.

The local real estate and banking downturn—bad news for so many—was Sook’s chance. “The banking laws had just changed so that most television station transactions, because of the amount of leverage on those deals, were classified as highly leveraged transactions,” he says. “It was a contrarian view to buy TV stations. But because of the distress in the financing markets, stations could be had for six and seven times cash flow, when the historic levels had been more in the 10 to 12 times range. I saw it as an opportunity.”

Since Seaway’s board of directors didn’t see the situation in the same light, the dining table became his new office, where Sook formed Superior Communications in 1991. Five years later, he sold off Superior’s TV stations, found new investment partners, and began his next company. The time between the end of Superior and the start of Nexstar was three days. No rest for the weary?

“I took the weekend off,” Sook says.

By the mid-’90s, couch potatoes weren’t hurting for options. Cable companies were becoming as common as color TVs, and their ever-growing number of stations kept more folks in their living rooms. Good news for everybody in the TV biz, right? Not if you were an affiliate network station barred from the lucrative, growing world of retransmission money.

Retransmission revenue is made up of the per-subscriber fees that paid-TV providers—your Time Warners, your DirecTVs—pass along to a TV station. From the outset of the cable industry, national channels like MTV and ESPN have enjoyed (and relied upon) such revenue, but for decades, over-the-air local stations didn’t get a penny of it.

From a basic standpoint, the old way of doing things made sense. Who’s going to pay to watch free, bunny-ears channels? And representatives from Nexstar concede that those bunny-ear stations derived benefit at first: “Way back when cable first started, we were happy to do that,” says Paul Greeley, Nexstar vice president of marketing and promotions. “We wanted more people to see our signal, see it better than we could provide.”

But as competition grew, particularly from cable companies, the FCC ruled in 1992 that broadcasters could negotiate for consideration. Still, this only solved disputes at the national level. Affiliate stations remained unpaid by cable companies.

“We’re not big enough to start a national cable network,” Sook says. “There’s another option here. It’s called cash. We just want the cash.”

By the end of 2003, Nexstar had completed its IPO and absorbed 16 stations (11 officially, five as virtual duopolies) from the purchase of Quorum Broadcast Holdings, LLC, nearly doubling Nexstar’s size. Indeed, such growth was the reason Sook closed shop at Superior in 1996. Only days after selling that two-station company for $63 million (the stations were originally valued at $23 million), Sook teamed up with ABRY Partners, LLC, a majority investor that could make his vision of mega-acquisitions a reality in the form of Nexstar.

When that reality came to fruition, Sook’s head wasn’t in the clouds. It was bumping against the ceiling. As the number of stations rose, Sook projected a linear, downward path that spelled disaster.

“I gathered the management team three years ago and said, ‘Business as usual is not an option,’” he says. The issue of retransmission consent figured largely into his plans of securing dependable, annual revenue, and in 2003, he laid the groundwork for a standoff by reducing the length of his agreements with providers in four Nexstar cities.

Over the next two years, negotiations proved futile. On December 31, 2004, four Nexstar stations pulled their signals from their respective cities’ cable systems. In Joplin, Mo., and Shreveport, La., the blackout lasted 11 and a half months.

“[The national networks] were silent at first, but I think they supported us by not attempting to distribute their programming into those markets via other means,” Sook says. “None of the networks said, ‘We’ll put the ABC or Fox programming on a cable channel,’ even though they were blacked out in those markets just as our local programming was blacked out. They supported us by not attempting to end-run our affiliation agreement. They all saw and see the long-term value of the moves that we made.”

Confident in his stance that “cable companies had built their business on our backs,” Sook survived the blackout by using his enemy’s enemy to his advantage. As it turns out, Sook’s target cities had significant satellite TV penetration, and satellite carriers had already worked out retransmission deals with Nexstar’s stations years earlier. To compete in the four markets against satellite, the cable providers eventually had to cave.

The four-station feather in Nexstar’s cap was enough to turn a temporary loss into a reliable, linear annuity. The victory put each of Nexstar’s stations in the dominant negotiating position, and further agreements with cable carriers bolstered Nexstar’s retransmission revenue from $2.9 million in 2005 to a whopping $13.7 million in 2006. That number is growing, already 27 percent higher in 2007’s first half than in 2006’s, but that portion is still a small percentage of Nexstar’s total revenue—and an even smaller percentage of Sook’s concerns.

To some degree, Nexstar’s stations are at the mercy of the national networks’ decisions; if Lost starts to tank, KMID in Odessa, Texas, can’t pull the plug. Distance and quantity factors also limit Nexstar’s ability to truly make the most of so many stations. But when Sook earlier claimed that TV journalism doesn’t run in his veins, he was being a bit sly.

“The real driver of our business is local news,” Sook asserts, and for Nexstar’s markets, the concentration just makes sense. Ranging from the middle to the bottom of the Nielsen ratings world, Nexstar’s cities are by and large America’s small, locally obsessed communities. Sook claims his stations’ news coverage has jumped in percentage by “almost a third over what we inherited,” a fact that drives what he calls the most advertiser-friendly content in each of his cities.

The middle-market range is a clearly deliberate choice on Nexstar’s part, with benefits like a lower cost of entry and lower level of competition. But in cherry-picking stations across the country that are primed for growth, Sook finds himself in a decentralized position that he admits is not his comfort zone.

“I don’t know the name of every department head and certainly of every employee anymore. I used to know that at one point. To force myself to peel back, allow others to manage, to not be a bottleneck for growth … I didn’t want written on my tombstone, ‘He couldn’t manage what he built.’”

That, to Sook, makes recruitment his highest priority, particularly in Nexstar’s highly transient markets—people who work in Abilene aren’t likely to turn down job offers in Houston, so he is constantly seeking new, local staff members across the nation. And while corporate vice presidents oversee the family of stations as best as they can, Sook sounds highly anti-corporate in his Nexstar credo: “I don’t need a consultant to tell me what the needs are of Little Rock, Ark., or San Angelo, Texas. Our salespeople and our newspeople that are out in the community every day, as well as everyone that works at the station, should have a better pulse on that than some outside consultant.”

Perhaps the only people more knowledgeable in those cities are the viewers, a fact that drives the company’s very recent push into upgrading its station Web sites. Though it seems ridiculously late to finally pay attention to the online realm, the delay has given Sook perspective on his stations’ role in the ever-expanding Internet.

“The key thing we can do is do it hyperlocally,” he says. “Yahoo, Google, YouTube, they don’t have local reporters. We do. Our focus is to be hyperlocal and to superserve these communities.” This understanding is important, for while Nexstar’s sites are currently a messy hodgepodge of other popular sites’ standard features—classifieds, on-demand video, event calendars—they are held together by the stations’ stress on local news content. And in luring the average Terre Haute, Ind., TV viewer to the Web—often the type who is only now signing up for high-speed Internet services—Nexstar may very well develop a national, online advertising platform and demographic unlike any other.

The phrase of the day is “pioneering innovations.” Every source of revenue and every business tactic, from the virtual duopoly system (“It’s like running two newspapers off of a single printing press”) to the online strategies, from local news coverage to retransmission consent agreements, comes equipped with this catchphrase. But Sook’s not a slogan guy, no matter how hard he tries.

Sook is the man who hopped on planes and drove down farm roads for 22 separate transactions in the past decade, complete with “a lot of spending the night in Holiday Inns in towns that many people have never heard of.” He’s the CEO who made it his top priority to travel to every station every quarter, back before such a feat became unmanageable. And he’s the guy who turned his back on a steady climb in the sales and management world to risk it all and fulfill his entrepreneurial dreams.

Sook’s risks have actually been incredibly tempered. He knew just what bounty was hidden within the undervalued stations he began acquiring in 1992. He knew that the odds were in his favor when he picked four small cities to wage a retransmission battle in 2005.

And while all media endeavors are inherently risky, Nexstar thankfully is still at the beginning of the retransmission revenue wave. Indeed, other media owners around the nation are already copying Sook’s bargaining deals—and not losing 11 and a half months’ ad revenue in the process, of course. Since more Nexstar deals are set to expire in 2008, requiring renegotiation, he doesn’t see the 2005 struggle as a bum deal. “In 2005, we were trying to push an elephant from underneath by ourselves,” Sook says. “In 2008, we’ll be able to draft along with a lot of other cars on the track. It will be better for all of us as a result.”