Deep in the Heart of Texas, Local Roots Rule

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1 March 29, 2004 Deep in the Heart of Texas, Local Roots Rule BY LOUIS CHUNOVIC Call it the Decherd Doctrine. That s the belief that a major media company can do well by doing good journalism, by keeping its focus local, rather than national, and by tapping into shared resources. It s the way business is done at Belo Corp., the Dallas-based Fortune 1000 newspaper and television company headed since the mid 1980s by CEO Robert Decherd. Belo has approximately 7,900 employees and $1.4 billion in annual revenue, about half of which comes from the Belo Television Group, ranked ninth in BROADCASTING & CABLE s list of the Top 25 Station Groups, right between Sinclair Broadcast Group and Cox Television. Belo entered the TV business in 1950 when it acquired WFAA in Dallas, where it also owns the only surviving daily in town, The Dallas Morning News. Today, it owns 19 stations (including six in four of the top 15 markets) and owns or operates 10 local and regional cable news channels that are information powerhouses in Texas and the Northwest. In Texas, particularly, Belo seems to be everywhere. The media company traces its roots in the Lone Star state all the way back to 1842, when the company that would evolve into Belo began publishing The Daily News in Galveston (though Alfred Horatio Belo didn t join the company that would eventually bear his name until 1865). The company bills itself as the oldest continually operating business in Texas. And it uses those roots to its advantage. In the nation s very biggest cities, viewers have lots of diversions. But Belo knows that, in most of America, including the markets it serves, viewers form tight bonds with local stations and personalities. THEN NOW Belo entered the TV business by acquiring WFAA Dallas in 1950 (top). Now led by President and General Manager Kathy Clements, WFAA is a powerful presence in Big D, where Belo also owns The Dallas Morning News.

2 We just are a bigger player, says Belo President, Media Operations, Jack Sander. The news anchors in markets that we re in are some of the highest-, if not the highest-profile people in the community. That, he adds, is not the case in New York. Says Decherd, We have really focused on building these local and regional businesses, particularly where we have a concentration of assets. Its stations reach 13.8% of U.S. TV households. Its biggest market is Dallas (the No. 7 TV market, according to Nielsen); its smallest is Boise, Idaho (No. 123). The company has duopolies in Seattle and Spokane, Wash., and Phoenix and Tucson, Ariz., and a local marketing agreement in San Antonio. Belo spreads its affiliations around: It has five CBS affiliates, four NBC, four ABC, two WB, one UPN, and one Fox. It also owns two independent stations. The company s geographical and network-affiliation diversity protects it to some extent from cyclical ratings downturns at any one network and from economic downturns in any one region. For example, the Television Group currently derives 30% of its revenues from its CBS affiliates, 28% from its ABC affiliates, and 23% from its NBC affiliates, according to company data. Belo s independents bring in 12% of the group s revenues, while its WB, UPN, and Fox stations together account for 7%, according to the company. In last November s sweeps, 13 of its stations ranked No. 1 or No. 2 from sign-on to sign-off. In large part, they do it by having dominant newscasts. Local TV stations have a lot of head winds they must address, says analyst Marc Nabi, managing director and head of the global securities, research, and economics department at Merrill Lynch. Right now, the way they can address it is by having one of the No. 1 news stations in a market. Even as the media world becomes more fragmented and PVRs become a bigger factor, viewers will continue to watch their local news live, instead of time-shifting it. So strong local- news brands become even more of a premium-value proposition for advertisers, says Jonathan Jacoby, vice president and NorthWest Cable News Kate Anderson (l) discusses a story with KING s Lori Matsukawa (c) and Belo Interactive s James Klockow. Belo stations are the rock stars of local news. Over time, in a fragmented world, they ll be rewarded for it. JONATHAN JACOBY, Banc of America Securities senior radio/tv broadcasting analyst, Banc of America Securities. Belo stations are the rock stars of local news, he says. Over time, in a fragmented world, they ll be rewarded for their strong local news. STAY HOME, MAKE MONEY Belo Television Group revenues were up almost 15% in February, with an 18% increase in local revenues and a 6% increase in national revenues, versus the year-ago period, says Belo CFO Dennis Williamson. He provided firstquarter and full-year guidance to Wall Street analysts at the Bear Stearns Media, Entertainment & Information Conference in Palm Beach, Fla., earlier this month. Belo s biggest-market stations are formidable revenue-producing machines. Its flagship station, ABC affiliate WFAA, remains a Dallas-Ft. Worth powerhouse, despite the fact that ABC is in a weakened state. That means the station lately has had to contend with weak prime time lead-ins to its lucrative late news. Sader predicts WFAA will remains atop the Dallas market when market-research firm BIA Financial Network makes its 2003 revenue data available next month. WFAA led the market in 2002, according to BIA, which pegged its 2002 take at $138.4 mmillion. In Big D, all WFAA s toughest competitors are major-network O&Os: NBC s KXAS is No. 2 with $135.8 million, followed by Fox-owned KDFW with $121.6 million and CBS s KTVT, with $82.4 million. In Houston, the No. 11 market and Belo s second-largest, Belo s KHOU tied ABC-owned KTRK in 2002 revenues, with $78.2 million for each station, according to BIA data. In Seattle-Tacoma, the No. 12 market and Belo s third-largest, its KING, an NBC affiliate, was the 2002 revenue king of the Northwest, adding $93 million to company coffers, far ahead of secondplace KOMO, the locally owned ABC affiliate, which amassed $69 million. In the Pacific Northwest, KING, an NBC affiliate owned by Belo since 1997, dominates its market to a degree unrivaled by any other station in the country, according a sweeps summary in The Seattle Times, KING s hometown newspaper.

3 THE MASTER BUILDER ROBERT DECHERD Transformed the company n a single stroke, Robert Decherd took the Icompany his great-grandfather had built and transformed it into the nation s thirdlargest non-network station group. He did it in 1997 with a $1.8 billion acquisition of Providence Journal Co. and its nine stations. Decherd, who has worked for the company since his 1973 graduation from Harvard (where he was president of The Harvard Crimson) was born to the job. He is the great-grandson of G.B. Dealey, the founder of The Dallas Morning News. Dealey took over the company after the death of its namesake, Alfred Horatio Belo, a Civil War veteran. Today, Decherd is also Belo s largest single stockholder and has refocused his enterprise. Its former emphasis on national advertising has been sidelined in favor of local and regional advertising. And Chairman and CEO Decherd, 52, has become one of the best-known advocates of convergence in the media world. We are a company whose strategy is rooted in journalism. For almost 90 years, we have been a very contemporary communications company, he says, referring to the early days of radio, when Belo, once solely a newspaper owner, began to evolve with the marketplace. We have been early adopters of new technologies and new media. Today, we are a leader in the idea of working across the several platforms that our businesses represent. In addition to sales, Decherd is equally committed to quality journalism. We evolve our print products and our electronic products, he says, but the key is the consistent application of the same operating principles. In a 24/7 news environment, Decherd preaches accuracy. We have inculcated a sense of journalistic responsibility and pride about our accomplishments throughout the company. A self-described family man, Decherd hasn t urged either his son, 26, or his daughter, 17, to join the company. But if they do, he says, they ll be applying for a job at a very different company than the one I joined 30 years ago. One with a whole new set of challenges. L.C. The stations are strikingly independent of their networks when it comes to revenue-generation. Sander says more than 40% of station-group revenue derives from the stations own newscasts and another 30% of the revenue comes from advertising in syndicated fare. Last year, Belo s TV stations maintained an average audience share of 15.1%, while their share of market revenue was 24%, according to the company s 2003 earnings report. THE BOTTOM LINE By comparison with 2002, an election and Olympics year, last year was tough for Belo, as it was for many other broadcast groups. Television Group revenues decreased 7.8% in the fourth quarter, with an 8.5% decrease in spot. Local revenues were stronger than national, increasing 10.6% while national revenues fell 3.2%. In full year 2003, Belo s revenue was flat at $1.4 billion; total income likewise, at $129 million. The Television Group s $647 million in revenue was down from $658 million and $225.3 million in operating earnings were off from $234.4 million a year earlier. One of the main reasons for the 2003 decreases was the absence of political advertising in the political off-year. Political revenues at the Television Group were just $10.3 million, compared with $48.7 million in Expectations are that 2004, with its presidential-election and Summer Olympicsrelated advertising windfalls, will be a good year for Belo s Television Group. But there is a problem: George W. Bush is from Texas. The races that would logically produce really significant political revenues for our television stations aren t being run this year, Decherd says The presidential race [in] Texas will not generate the kind of dollars it would have if the president were not from Texas and didn t have the kind of following he has here. And, he adds, there are no major statewide races in Texas. In the company s other key markets, the expectation is that we will have good political experience, he says, but it s not as broad or widespread or consistent across the entire company as was the case four years ago and two years ago even. JACK SANDER with WFAA anchor John McCaa and Executive VP Dunia Shive EYE ON THE PRESENT ack Sander doesn t think about his legacy. He s Jtoo rooted in the present. The work is never done, it never will be done, and that s a good, healthy thing, says the 30-year broadcast vet and Belo s president, media operations. If there s anything I have to do with legacy, it s to make sure our next generation of managers are successful, well-equipped, and ready to succeed. The TV business may change, but Sander thinks local stations will remain, even in the digital age. Quality local stations will be here for decades and decades, he insists. He has oversight responsibility for all Belo operating companies, including TV, newspaper, and online. But Belo also believes in delegating authority. For example, the company organizes its assets into clusters, with one corporate-level senior VP responsible for assets in a given geographical area. Sanders spends at least two days each month with each of his four senior VPs. What s his current goal? Sander wants to add duopoly stations in the Portland, Ore.; Houston; St. Louis; San Antonio; Louisville, Ky.; or Charlotte, N.C., market. To him, getting that duopoly station in a key market is almost more important to us than getting five more stations that range from the 30th market to the 75th market to boost the group to an 18%-20% national penetration level. Like many other hard-charging media execs, Sander doesn t need a hobby. He doesn t hunt or fish. I played golf over the weekend, he says wryly, and I m convinced I don t play golf either. L.C.

4 BETTING ON DUOPOLIES Belo wants to increase its duopolies in its largest markets, and its local-news focus is one reason the duopolies are attractive. The second station not only adds a demographically distinct news audience to the aggregate local-news numbers but also lets Belo to spread newsgathering costs. However, Belo executives are disciplined enough that they will walk away from a duopoly opportunity if the price isn t right, says analyst Nabi. There s supposedly a Houston station that s for sale, but Jack [Sander] and Robert [Decherd] will not pay up for that opportunity because it doesn t make sense. They re asking for a very high price. What makes Belo unique, says analyst Jacoby, is that it prefers one component of its duopolies be an independent station. That is different than everybody I cover, he says. Belo likes independents because they can program them and get much more of the revenue than they would with a network affiliate. Beyond adding duopolies in its largest markets, Belo s senior executives say the company is looking neither to take over nor be taken over by another group owner. It is an attractive target, and some analysts say Gannett in particular would be interested in Belo if the price was right. So would Hearst- Argyle, which largely mimics Belo s news-first strategy. While Decherd owns only about 6% of the stock, he does control about 23% of the voting power, Jacoby notes. Belo has no interest in being some bigger media company s latest conquest. Belo s not up for sale and never will be, not in the near term, he says. That s held the stock back. But, he adds, Decherd s a young guy, and he likes being a media player. STATION LINEUP Ranked by market size (in parentheses). Duopolies are marked with asterisk. DALLAS/FORT WORTH (7) WFAA-TV 8, ABC Young St. Dallas, TX TOP EXECUTIVE: Kathy Clements HOUSTON (11) KHOU-TV 11, CBS Allen Pkwy. Houston, TX TOP EXECUTIVE: Peter Diaz SEATTLE/TACOMA (12) KING-TV 5, NBC* Dexter Ave. North Seattle, WA TOP EXECUTIVE: Dave Lougee KONG-TV 16, Ind.* Dexter Ave. North Seattle, WA TOP EXECUTIVE: Dave Lougee PHOENIX (15) KTVK-TV 3, Ind.* N. 7th Av. Phoenix, AZ TOP EXECUTIVE: Donald F. (Skip) Cass Jr. KASW-TV 61, The WB* N. 7th Ave. Phoenix, AZ TOP EXECUTIVE: Mark Higgins ST. LOUIS (21) KMOV-TV 4, CBS One Memorial Dr. St. Louis, MO TOP EXECUTIVE: Allan Cohen PORTLAND, ORE. (24) KGW-TV 8, NBC SW Jefferson St. Portland, OR TOP EXECUTIVE: Paul Fry CHARLOTTE, N.C. (28) WCNC-TV 36, NBC Wood Ridge Center Dr. Charlotte, NC TOP EXECUTIVE: Stuart Powell SAN ANTONIO (37) KENS-TV 5, CBS Fredericksburg Rd. San Antonio, TX TOP EXECUTIVE: Bob McGann HAMPTON/NORFOLK, VA. (41) WVEC-TV 13, ABC Woodis Ave. Norfolk, VA TOP EXECUTIVE: Mario Hewitt NEW ORLEANS (42) WWL-TV 4, CBS N. Rampart St. New Orleans, LA TOP EXECUTIVE: Jimmie Phillips LOUISVILLE, KY. (50) WHAS-TV 11, ABC W. Chestnut St. Louisville, KY TOP EXECUTIVE: Robert Klingle AUSTIN, TEXAS (54) KVUE-TV 24, ABC Steck Ave. Austin, TX TOP EXECUTIVE: Patti Smith TUCSON, ARIZ. (71) KMSB-TV 11, Fox* N. Sixth Ave. Tucson, AZ TOP EXECUTIVE: Diane Frisch KTTU-TV 18, UPN N. Sixth Ave. Tucson, AZ TOP EXECUTIVE: Diane Frisch SPOKANE, WASH. (80) KREM-TV 2, CBS* S. Regal St. Spokane, WA TOP EXECUTIVE: Bud Brown KSKN-TV 22, The WB* S. Regal St. Spokane, WA TOP EXECUTIVE: Bud Brown BOISE, IDAHO (123) KTVB-TV 7, NBC Fairview Ave. Boise, ID TOP EXECUTIVE: Doug Armstrong

5 In Big D, It s Huge Even with ABC, WFAA is used to being on top You can t judge a station by a single book. That s the message from Belo about its much-honored and influential flagship station WFAA s unusual fall to third place in the crucial late news race in Dallas-Ft. Worth. During the February sweeps, the ABC affiliate s 10 p.m. newscast was edged out of second place by CBS s KTVT by two-tenths of a point (200,200 homes to 195,800 homes). That marked the first time since the 1970s that once-dominant Channel 8 failed to place first or second at 10 p.m. in one of the TV season s three major sweeps, says Ed Bark, the television critic at The Dallas Morning News, the local paper also owned by Belo. The result, according to the critic, is a decidedly new look for the local-news ratings picture. The late-news leader in Belo s home market, however, continued to be NBC s KXAS, which won its seventh straight late-news sweeps in February. (According to Nielsen s seven-day average, among viewers KXAS was still first, but WFAA was second.) The reason for the WFAA late-news drop is simple, says Kathy Clements, WFAA s president and general manager since 1997: ABC is It s one newscast, it s one book. I wish we had the numbers in ABC prime that CBS prime had. So the sky s not falling. KATHY CLEMENTS, WFAA Synergies Shine in Arizona Phoenix, Tucson stations use tech to carve local niche Wherever Belo goes, more Belo seems to follow. And by all accounts, Belo s Arizona experiment in convergence and high-tech newsgathering is succeeding. Since the middle of last year, KTVK, the hard-charging Belo independent in Phoenix, has produced the late newscast for sister stations KMSB and KTTU, both in Tucson, 110 miles down the road. In Phoenix, Belo also owns WB affiliate KASW, and the stations there share a building and technical infrastructure, as well as staff. Belo s two Tucson stations also share a building, infrastructure, and staff. When acquired in 1997, Fox affiliate KMSB had no news presence of its own. Belo, with its laser focus on local news, overcame that liability with technology. Now KMSB airs an hour a night on weeknights. And the technological fix is the model for the station group s other duopolies. KTVK is headed by Skip Cass, who calls himself the poster child for new opportunities at Belo. In addition to being the station s president and general manager, Cass, who has both a broadcast-journalism and a law degree, is also a Belo corporate senior vice president, overseeing the company s Southwestern cluster, which comprises all the Arizona and California television stations, cable news operations, and newspapers. horrible in prime time, and CBS has come on like gangbusters. It s one newscast, it s one book, says Clements of the February sweeps. I wish we had the numbers in ABC prime that CBS prime had. So the sky s not falling. KTVT, of course, attributes its success to the quality of its own newscast and the strengths of its own anchor lineup, partly wooed way from WFAA, rather than on the boost from an improved network prime. In fact, Clements claims that, in February, the WFAA late news increased its prime time lead-in, while both the KTVT and KXAS newscasts lost viewers from their prime time lead-ins. But WFAA s underlying strength is still apparent in what the Morning News called the station s unprecedented 17- year winning streak for its 5 and 6 p.m. newscasts. Coming out of the sweeps, yet another annual test looms on the horizon for the Dallas-Ft. Worth station: the spring severe-weather season, when viewers look to local TV for speed and reliability in what can be life-and-death updates on sudden storms and weather dangers. Whenever there s severe weather, our ratings spike, Clements says. It s kind of our Super Bowl. L.C. Last year, Cass threw the switch on a two-way high-speed fiber-optic connection linking the Tucson and Phoenix stations. That connection enables KTVK to produce the KMSB newscast remotely, using the Phoenix station s technical facilities, studio set, and anchor talent. Tucson stories are photographed and reported by a small local staff; they are either shipped back to Phoenix or reported live. The 9 p.m. KMSB newscast gets played again at 11 on KTTU, a UPN affiliate. Three live trucks also are always based in Tucson, and two of them also have editing gear on board. That said, Cass points out, our executive producer for the show sits in Phoenix in our newsroom here at KTVK. KTVK calls itself the first independent station in the country to win all four major ratings sweeps in one year in households sign-on to sign-off. But in the February sweeps, the late news in Phoenix was once again dominated by KPNX, the Gannett-owned NBC affiliate, which calls itself the most-watched station in the state. Belo, though, has the most stations there. Adding the newscasts to the two Tucson stations boosts corporate coffers by $10 million to $12 million more a year and provides 32 hours of news a week that Tucson viewers didn t have before. That s synergy under the sun. L.C. Reprinted from Broadcasting & Cable, March 29, 2004, by RSiCopyright. Copyright Reed Business Information, a division of Reed Elsevier, Inc. All rights reserved. For reorders call RSiCopyright For subscription information call

6 Belo Corp. P.O. Box Dallas, Texas

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Investr Overview Key Investment Highlights One f the largest pure-play televisin bradcasters in the natin Statins lcated in high-grwth markets with diverse netwrk and gegraphic expsure Strng cmpetitive