NBC Local and Fox announced last week their plan to pool resources to cover local news in certain markets, an encouraging sign that TV stations are beginning to understand the desperate need to rationalize their massive newsgathering costs. Is there too much local TV news? I think yes, and it’s a warning bell I’ve sounded for some time.

Way back when, there were three network affiliates in a market, and each produced one to several local newscasts a day. Those newscasts were typically the most profitable parts of the day for TV stations, as they kept all the revenues. Driven in particular by growth in auto, the largest ad category, all was good in local TV land.

Enter new networks and their affiliates and 24-hour cable network news channels, and you suddenly have a surplus of news. (I am clearly ignoring the proliferation of other local media, as TV is less fungible than most mediums). The local ad dollar started to peak a year or so ago, as auto came under inordinate pressure. Growth in local TV news inventory combined with a leaky bucket of ad dollars is a prescription for trouble.

More after the jump

Local marketing agreements (LMAs), shared service agreements and duopolies have proven to be palatable solutions in some markets. While there are many variations on a theme, two stations can share some programming, ad sales, or other costs that help, in my view, reduce the total cost structure in the market, allowing for a better return. That’s exactly what NBC Local and Fox are planning to do.

While the economics have certainly changed somewhat since I last analyzed the cost structure of TV stations a couple of years ago, the numbers are still instructive. At the time, a typical large-market TV station with $100 million to $150 million in revenues spent about 20% of revenues on newsgathering. Presuming another 30% of revenues were spent on other operating costs, the station produced a 50% cash-flow margin. As ad revenues have been under pressure, declining at a high single-digit rate this year, it has been harder to keep costs under control. There aren’t a lot of costs to get rid of at a station, and an opportunity to reduce newsgathering expenses by half by combining forces with another station can have a meaningful impact on the bottom line.

I think there is considerable risk that some stations won’t be viable if the current ad drought continues.  Too much local TV news is being produced even in a good ad market, as ad dollars are finite. TV stations have opportunities on line, especially as the market is aggressively pursuing video but we don’t think the ad dollars will be great enough any time soon to materially help out any individual station. Local news-sharing arrangements such as the type being rolled out by NBC and Fox are a smarter way to go.

Lauren Rich Fine is ContentNext’s Research Director

Photo Credit: skye820