Tough customers Robert La Franco. Forbes. New York: Jun 1, 1998.Vol.161, Iss. 11; pg. 78, 2 pgs David Smith, chief executive of Sinclair Broadcasting Group, controls the largest collection of stations in the US. All 57 stations are second-tier markets, where bidding for such shows as Seinfeld reruns is less intense. Operating in secondary markets may not bring in the big bucks, but neither does it involve heavy programming costs. Last year, Sinclair spend just 11% of revenues on programming. Similar station groups spent 17%. Revenues, at $516 million last year, are up from just $76 million in 1993. Operating margins rose ten points, to 24%. Heavy acquiring has left Sinclair debt-heavy at $2.1 billion, but new equity offerings have kept the equity ratio at a fairly comfortable 39.7%. Full Text (783 words) Copyright Forbes Jun 1, 1998 [Headnote] In a big-spending business, Sinclair Broadcast Group has the reputation of knowing how to shave Lincoln off a penny. NEW YORK CITY'S WNYW recently shelled out a reported $400,000 per episode for Seinfeld reruns. That's almost double what WPLX paid two years ago. The programs won't air on WNYW until 2001, three years after the justconcluded "last episode" hype at NBC. Let the competition knock itself out with that kind of bidding. David Smith, 47, will have no part of it. As chief executive of Baltimore-based Sinclair Broadcast Group, he controls the largest collection of stations in the country. All 57 of his stations are in second-tier markets, where the bidding is less intense. Look back to 1996, when Sinclair wanted the hit show Friends from Warner Bros. for its stations. They forced Warner to sell it for $10,000 an episode in many markets, a third of what the studio planned on getting. Operating in secondary markets may not bring in the big bucks that bigger markets produce, but neither does it involve heavy programming costs. Sinclair is in none of the top 15 markets, preferring metro areas like Memphis, St. Louis, San Antonio and New Orleans. In the past two years it has spent $3 billion buying additional stations-and plans to reach 100 stations by the year 2000. But be sure of this: None of them will be in places like New York, Chicago or Los Angeles. Last year Sinclair spent just 11% of revenues on programming. Similar station groups spent 17%. Smith's bunch "can shave Lincoln off a penny," as Richard Robertson, head of television distribution for Warner Bros., puts it. The payoff has been big. Revenues, at $516 million last year, are up from just $76 million in 1993. Operating margins rose ten points, to 24%. Bear, Stearns media analyst Victor Miller figures Sinclair's margins run about five to ten points higher than the industry's. All that acquiring has left Sinclair debt-heavy at $2.1 billion, but new equity offerings have kept the equity ratio at a fairly comfortable 39.7%. Smith, who took over the business from his father, is a high-stakes golfer, and enjoys speeding through the desert on a motorcycle in his spare time. His tough-bargaining company is swift at exploiting the Telecommunications Act of 1996. That law allows station owners an unlimited number of stations only as long as their combined reach covers less than 35% of the country, but the FCC grandfathered a loophole called a local marketing agreement. This permits two stations in the same market to share most management functions, as long as they are separately owned. Smith first saw the magic of this loophole in Pittsburgh in 1991. Sinclair's station, WPTT, was bleeding at the hands of the local Fox affiliate, which was outbidding it on every show. Sinclair bought the local station from Fox and-since owning two stations in one market ran afoul of restrictions- sold it to former Sinclair executive Edward Edwards. Sinclair retained programming rights and advertising sales, effectively dominating the independent end of the market and helping to keep costs down. [Photograph] Sinclair's David Smith and Barry Baker Gaming the regs, getting an edge. Sinclair now has 20 such agreements, 8 of those pending, and most are with Edwards' 19-station Glencairn Communications. Other stations with Sinclair marketing agreements are owned by Smith family members and company executives. This little trick allows Sinclair's market reach to remain a comfortable 22 points below the FCC's limit of 35% of the country. FCC regulators are aware of Sinclair's aggressive use of marketing agreements, but the Justice Department has decided not to challenge Sinclair on antitrust grounds. For the future, Smith and partner Barry Baker-who joined when Sinclair bought his River City Broadcasting L.P. in 1996-plan to take the digital broadcast spectrum and turn it into a smorgasbord of channels for Sinclair's markets. For those who buy high-definition Tv he plans to offer Internet data on one channel, a high-definition picture on another and maybe a collection of the mostwatched pay-TV networks, all for far less than cable charges. Meanwhile, what's the use of aiming for 100 stations if you can't throw some weight around? God help those who try to get the better end of a deal with Sinclair. Every season, syndicators of new programs are forced to pay Sinclair for airtime when most buyers agree to simply split the ad time. Sinclair's national ad dealer earns just a 4% commission, whereas most TV stations pay 7%. Given this tightfistedness, the content providers don't exactly love Sinclair. "They will always extract their pound of flesh," says Greg Meidel, chief executive of Studios USA. "You just have to respect that that is how they do business."