Local television broadcasters wanting to track down improved cash flow think they've found it in a grand central station.

A television station, that is.

Following a practice that has become common among companies that own multiple radio stations, television station operators are starting to move engineering and back-office functions out of the different stations that they own and into one central location that feeds video to several cities at once.

Cost savings from the consolidation strategy could improve operating cash flow margins about five percentage points above industry averages, according to Ackerley Group a company that has embraced the broadcasting hub approach. But with investors waiting to see whether the promised savings really drop to the bottom line, station groups' market valuations don't yet appear to reflect centralized broadcasting's economic potential.

And the centralization, which Ackerley dubs Digital CentralCasting and which others refer to by various names such as clustering or hubbing, does reflect real potential. "It's significant enough that just about every major television station group in the country is moving in that direction," says Keith Fawcett, an analyst at Merrill Lynch.

The Others

Along with Ackerley, other groups at various distances down the path to centralization are the stations owned and operated by the NBC unit of General Electric ( GE), Sinclair Broadcast Group ( SBGI), Media General and Hearst-Argyle Television .

The basic idea behind centralization is to take certain station operations -- most significantly, the master control system that feeds commercials, promotional segments and the full-length programs into a station's broadcast signal -- and move them to a location where one set of engineers oversees the broadcasts for several stations simultaneously. Earlier this month, Ackerley says it completed the construction of its centralized systems, linking 16 local stations in three groups -- one in New York, another in California and the third in Oregon.

The cost savings from centralization seem to be highly variable, depending on such factors as the head count and pay scale at each station in a cluster as well as the price to build and operate fiber-optic links between the control-center hub and the stations in the cluster. But savings can be quantified, says Chris Ackerley, Ackerley's co-president. Instead of the 162 people that the company needed to handle back-office functions at the seven stations in its New York cluster, the company now needs only 55.

Thanks to centralization and other measures, including a new system that cuts the number of technical personnel necessary to produce a news broadcast, Ackerley says the company expects to improve its operating cash flow margin from a 2001 forecast of 22% to a 2002 goal of 30%.

The prospect of improved station economics -- one of many variables including macroeconomic conditions and local ratings that affect the attractiveness of TV broadcasting as an investment -- doesn't appear to have affected valuations. "It has not been reflected in our stock price," says Ackerley. Stock in the company, which enjoyed a big run-up in January, the same month it announced a sale of its Seattle SuperSonics franchise, has traded between $7.88 and $15.06 over the past year. The company, which also operates in radio and outdoor advertising, closed Friday off four cents at $11.96.

Flowing

Jim Boyle, media analyst at First Union Securities, says the centralization economics aren't likely to be factored into valuations until they're implemented and flowing through broadcasters' income statements.

To be sure, the centralization strategy isn't without its challenges. The hardest part about establishing the setup is the last-mile issue, says Ackerley -- that is, setting up fiber-optic connections between the different stations and main fiber routes. Setting that up took longer than anticipated, Ackerley says.

Putting the system together, and reaping rewards from it, takes time. "It's not an overnight process," says Ackerley. "It takes time, just as it takes time to develop a local news product." Hearst-Argyle, as judged by executives' comments at a recent Banc of America Securities media conference, is proceeding with cautious optimism: The company is testing the clustering concept by linking a station it operates in New York with one that it operates in Vermont. It's also assessing the viability of linking a Boston station with one in New Hampshire, as well as joining two stations in California.

Nor is this process without limitations or risks. Ackerley says that for his company, centralization won't work with a cluster larger than eight to 10 stations. As for risks, it's more the "generic execution risk," says Boyle. "They're doing something that hasn't been done before."

Of course, the broadcasters think that's a good thing. The "very important innovation" of centralization illustrates that broadcasters aren't afraid of shifting paradigms, says Ackerley. It's an approach companies can take, he says, to thrive, "as opposed to merely surviving."