Doing business unusual.

Granite Broadcasting did some fancy footwork to land the NBC affiliate in the fifth market

Don Cornwell, CEO of Granite Broadcasting (No. 11 on this year's BE INDUSTRIAL/SERVICE 100 list with $182.3 million in sales for 1999) realized that turning the tables on the way affiliates and networks do business was going to be his trump card. Many affiliate station owners can't understand why Cornwell offered to pay NBC a total of $362 million over the next 10 years for his San Jose-based KNTV to become an NBC affiliate. It's usually the other way around: networks pay the affiliate.

To Cornwell, the move makes perfect sense. Understanding the benefits of long-term over short-term gratification, Cornwell sees his company gaining more advertising revenue and increasing its visibility over the long run.

"Expenses are going up in anticipation of the change to NBC. But when we become their affiliate, the size of our market will change from south Bay to the full Bay-area (the fifth largest market), and we will have a lot more viewers," says Cornwell. "We'll have the Olympics and all the other popular programming that NBC carries, like Frasier, Friends, Eli, and with that comes more audience and more advertising, so our revenue will go up."

As the former San Jose area ABC affiliate, Granite's KNTV, now independent, is projected to have revenues of $20 million, and an operating profit of less than $1 million this year. "The current [Bay area] NBC affiliate will generate $160 million in revenue this year. We expect to generate more than $85 million [as the Bay area NBC affiliate] in 2002, and more than $50 million in operating profit," says Cornwell. "We're not expecting to do as much as the incumbent has, but we'll do a lot more than we have historically."

The relationship between ABC and KNTV expired in July 2000, which made room for KNTV to take advantage of this unique situation. NBC had been affiliated with KRON for 40 years, but after Young Broadcasting outbid NBC for the purchase of KRON earlier this year, there has been bad blood between KRON and NBC.

"KRON sold for $823 million primarily because it was the NBC affiliate. The way I see it, we sneaked in the back door and for a little more than $300 million, we get to do the same thing [Young Broadcasting did," says Cornwell. "I think we got a bargain."

The agreement includes free affiliation extensions for Granite's other NBC outlets; joint sales agreements with some PAX-TV stations; a strategic alliance for using the digital spectrum; joint purchasing of programming and equipment; and a prospective new San Francisco cable service combining KNTV's local news with programming from NBC news channels CNBC and MSNBC.

"There are some minority station owners like Cornwell and Cathy Hughes who have done well on Wall Street, but she and Cornwell are the exception," says Maureen Lewis, executive director of the Minority Telecommunications Development Program of the National Telecommunications Information Administration (NTIA).

Granite and Hughes' Radio One are both publicly traded broadcast companies, and Lewis says that consequently makes them better capitalized in a challenging industry for minorities.

According to the NTIA's 1998 report, only 26 of 1,209 commercial television stations nationwide were owned by African Americans. And, although Cornwell owns nine of those 26 stations, he still felt inclined to pay for affiliate programming while more established majority-owned stations receive payment for such an arrangement.

Reportedly, NBC asked Young Broadcasting to begin paying $10 million a year to renew the contract, but Young declined because the concept was outlandish.

Cornwell concedes that Granite is also taking a "fair amount" of punishment for the deal on Wall Street. In the first four days after the deal was announced in February, the company's stock fell from $12.75 to $7.25, a 43% drop. But, Cornwell points out that the average price of around $10 was inflated based on rumors before the deal was announced.

"Who's to say at this point whether it was a good or bad decision?" Lewis asks. "Mr. Cornwell is a very savvy businessman. I'm sure he did his due diligence and concluded that this was a deal that would benefit his company. He should be applauded for his willingness to use an innovative approach to gain the advantage for the company."