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How The Sidecar Business Model Works

by: Phil Verveer, Senior Counselor to Chairman Wheeler

March 6, 2014 - 03:25 PM

The sidecar business model involves a dominant and weaker (or, to put it another way, an independent and a dependent) broadcaster in the same market.  The broker exercises operational and financial influence over the brokered station and performs the basic functions of station operation.  The model is used primarily in markets where one entity would not be allowed to hold more than one television license.  Part of the model’s utility thus involves overcoming a rule that is designed to promote competition, diversity, and localism.   The other part of its utility involves increasing the joint profits of the two (or more) broadcasters involved.

The typical sidecar business model has three principal components:  (1) a joint sales agreement (JSA); (2) shared services agreements (SSAs); and (3) special financial arrangements.

The JSA is the element that addresses advertising revenue.  Basically, the independent broadcaster takes over the ad sales for the dependent broadcaster.  In normal economic theory, if two ostensibly independent entities in the same market engage in coordinated selling, the expectation is that they will be able to raise the average per unit price they receive.  If this holds in the sidecar markets, advertisers buying local ads are paying more than they otherwise would.

The SSAs largely address the cost side of the broadcasting business.  The sharing of talent, other human resources, and hard assets presents an opportunity for efficiencies.  Everything else being equal, it is less expensive to hire three news reporters than four, one news director than two, and to maintain one studio rather than two, etc.

Setting aside the financial component for the moment, it appears evident that the sidecar arrangements lead to higher revenues and to lower costs for the stations involved.  Economically, such results may be desirable. However, it also is evident that the sidecar arrangements undermine the values of competition (whether measured in terms of advertising prices, independence of programming, or rivalry for viewers) and diversity (because the two stations operate as one entity rather than two, thus raising barriers to entry to broadcast ownership for independent and , potentially  underrepresented groups).

Turning to the third component, the special financial arrangements integral to the sidecar model typically demonstrate beyond any doubt the dependence of the weaker station on the dominant station .  The financial arrangements are designed to avoid triggering the Commission’s attribution rules.  They typically involve loan guarantees or options that strongly favor the interests of the dominant station.  This transfers all or most of the financial risk/reward aspects of the controlled enterprise to the controlling enterprise.  Operating in conjunction with other agreements, these financial interests deprive the licensee of its economic incentive to control programming. 

That the nominal owners and managers of the dependent stations in sidecar arrangements have little economic interest or practical ability to control what the stations do is evident from examination of the Securities and Exchange Commission filings made by public companies that use the sidecar model.  A cursory review of those filings discloses such things as (1) consolidation of the dependent stations’ financials in the financial statements of the controlling entity; (2)“going concern” qualifications based on the dependent broadcaster’s relationship with the independent broadcaster; (3) the contingent arrangements enabling acquisition of the dependent broadcaster on very favorable terms; (4) an implausibly small number of employees overseeing the operation of the dependent stations; and (5) low levels of compensation for broadcast group executives relative to peers managing multiple station groups.

The financial component is very important for another reason.  Sidecar markets are not found in nature.  They are created by acquisition.  The sidecar model, as noted, has financial advantages that are solely a function of the ability to work around local market ownership limitations.  That means that when TV stations come on the market, sidecar model broadcasters have an advantage in bidding against others for those stations.  They can bid more for the selling station because they are able to extract more from the operations of two broadcasters in the market.  And when a sidecar broadcaster outbids an independent operator, the resulting financial arrangements are designed to assure the dependence of the weaker station.  This is an integral part of the model, designed as it is, to enable the dominant broadcaster to acquire the weaker one, should the FCC rules eventually permit it. 

Updated: March 6, 2014 - 02:52 PM
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