Trump and Sinclair’s Art of the Deal

Donald Trump is actually a boon for many media outlets. Consider, for instance, the case of Sinclair’s TV and radio stations that supported him throughout his presidential campaign. 

 

 

Donald Trump. Photo by Gage Skidmore, via Flickr [CC BY-SA 2.0], via Wikimedia Commons

Starting with the last months of Donald Trump’s presidential campaign and continuing through his first four months on the job, the terms “fake news” and “war on the media” have been at the center of the national conversation in the U.S.

 

But how much of the discussion regarding “fake news” and the “war on the media” is itself “fake news”? Is it possible that the relationship between Trump and the media is different, and much more complicated than how this adversity is commonly portrayed?

 

Some people have already suggested as much. Economists Hunt Allcott and Matthew Gentzkow showed that the extent and influence of “fake news” were probably much smaller than they were perceived to be. In their paper “Social Media and Fake News in the 2016 Election,” they conclude that, in the months before the election, the average adult saw and remembered 1.14 fake stories. They then estimate that if one fake news article was about as persuasive as one TV campaign ad, the fake news in their database “would have changed vote shares by an amount on the order of hundredths of a percentage point. This is much smaller than Trump’s margin of victory in the pivotal states on which the outcome depended.”

 

Journalists who cover the media business have themselves raised the possibility that Trump might not really be such an adversary to the industry, and that most media outlets are actually benefiting financially (or experiencing a “Trump Bump,” as some outlets call it) thanks to the narrative that the new president has declared war on the press. As CBS Chairman Les Moonves famously said last year, Trump “may not be good for America, but it’s damn good for CBS.”

 

When it comes to television, Trump has been a boon to the industry and specifically to cable news networks. There is nothing partisan about this phenomenon: CNN, MSNBC, and Fox News have all enjoyed dramatic increases in viewership and revenues in the last year thanks to the celebrity status of the new president.1)Between April 2016 and April 2017, the number of primetime viewers aged 25-54 grew from 344,000 to 488,000.

 

Also, the apparent animosity between the White House and the press may be just a façade. In the latest issue of Politico Magazine, Ben Schreckinger and Hadas Gold claim that Trump’s attacks on the media are “a big show” and that “inside the White House, it’s a different story.”

 

Schreckinger and Gold write:

 

“When he is not fulminating on stage or on Twitter, the president himself has mustered a number of cordial interactions with reporters since taking office, often showing them more courtesy than he grants his own staff. When White House chief strategist Steve Bannon is not labeling the media ‘the opposition party,’ he can be found sending crush notes to journalists to let them know they’ve nailed a story. And when Spicer is not popping off from his podium, he is often busy maintaining old relationships with journalists and building new ones.”

 

The sense of urgency and the headlines about the “war on the media” also benefited traditional liberal media: In terms of revenues from digital subscriptions, the New York Times just reported one of its best quarters ever.

 

What is the real relationship between Trump and the media? In the last 20 years, economics scholars developed a lot of interest in the political economy of media, with most of their work focused on control and use of media by governments and media slant.

 

In the U.S., a 2007 study found that biased media (in this case, Fox News) had a significant impact on voting. In Italy, one study found a new channel for influencing government in Berlusconi’s Italy: firms shifting spending toward his media conglomerate; and another found that a €75,000 increase in a company’s ads is associated with eight more articles about that company. In Argentina, a 2011 paper by Rafael Di Tella and Ignacio Franceschelli found that government advertising is negatively correlated with front page coverage of government corruption in the country’s four main newspapers.

 

The academic work also yielded new models: A 2005 paper included a model that implies that even in the absence of censorship, governments can influence news by maintaining a “cozy” relationship with the media. A 2008 paper presented a formal model of government control of the media that implies that media freedom—particularly in less democratic countries—depends critically on the mobilizing character of the government and the size of the advertising market. University of Chicago Booth School of Business Professor Luigi Zingales [one of the editors of this blog], who in 2008 co-authored a well-known paper on “Media versus Special Interests,” showed here last year how media can potentially be biased by special interests—Italian banks.

 

While it’s easier to monitor corrupt relationships between government, big business, and media in developing economies, the channels of influence in advanced economies like the U.S. are more intricate. The role of competition and regulation is a less-studied area of the relationship between media and politics.

 

Consider the case of Sinclair Broadcast, which announced a $3.9 billion deal to acquire Tribune Media on Monday. Arguably, Sinclair was leaning toward the right before Trump even considered running for president, but judging by the evolution of its stock price, it seems its investors deemed such a strategy a superior one.

 

The Sinclair-Tribune deal, once completed, would create the biggest operator of TV stations in the U.S. Following the transaction, Sinclair will cover more than 70 percent of households in the U.S.—much more than its closest competitor, 21st Century Fox, whose stations cover over 37 percent of homes with televisions in America.

 

There is a reason why Fox stopped at 37 percent and didn’t go further: According to a current FCC rule, the maximum coverage allowed for a single owner is 39 percent of the national television audience. And there is a reason why Sinclair is comfortable striking a deal that would significantly pass that threshold: The FCC, now headed by the Trump-appointed Ajit Pai, intends to eliminate the 39 percent rule.

 

Sinclair was not the only potential buyer for Tribune Media. Fox and private equity giant Blackstone were in talks to make a competing bid, and Nexstar Media Group, another big player in the TV market, was also a part of the tender. But Sinclair’s 26 percent premium over Tribune Media’s market cap allowed it to win the deal.

 

The deal’s roots can be traced back to the last months of 2016, when the presidential campaign was in full swing. On December 16 of last year, according to a Politico report by Gold and Josh Dawsey, Trump’s son-in-law Jared Kushner (now a senior adviser to the president) met with a few business executives in Manhattan and told them that during the campaign he secured a deal with Sinclair, whereby Sinclair stations would get better access to Trump in exchange for broadcasting their Trump interviews across the country without commentary. The result, Kushner reportedly said during the meeting, would be better media coverage. The deal was especially attractive to Trump since Sinclair has a significant presence in two major swing states—Ohio and Florida. Both Kushner and Sinclair denied such a deal was struck.

 

Sinclair made good on its promise: A Washington Post review of Sinclair’s reporting and internal documents revealed “a strong tilt” toward Trump. It also reported that the company’s stations gave “a disproportionate amount” of neutral or favorable coverage to Trump during the campaign, while often portraying his Democratic opponent Hillary Clinton in an unfavorable light. Just recently, Sinclair hired a former Trump spokesperson, Boris Epshteyn, as “chief political analyst,” a role that involves appearing across the TV stations Sinclair owns.

 

An analysis of Sinclair’s stock performance seems to support the notion that this was a superior strategy. Between Election Day on November 8 and market close this Monday, Sinclair’s shares rose from $26.20 to $36.13—a 38 percent rise in six months. The return on Sinclair’s shares was much higher than the market: During the same period, the S&P 500 index added about 12 percent. Sinclair’s return was also higher than Nexstar’s, at 24 percent (Tribune Media’s shares rose the same as Sinclair, but they reflect the price Sinclair is willing to pay for the company). The reason that Nexstar’s shares also rose—even though it would be harmed by the Sinclair-Tribune Media deal—is probably due to the fact that it too might gain from the elimination of the FCC’s 39 percent rule and from what looks to be a much more lenient FCC under Trump.

 

 

There are at least two ways to calculate how much richer Sinclair’s shareholders are now. One would be based on the company’s stock’s excess return over the S&P 500—about 26 percent. In that case, Sinclair’s shareholders gained about $715 million. The other would be based on the company’s excess return over its direct competitor, Nexstar—about 12 percent. In that case, Sinclair’s shareholders gained about $330 million.

 

 

Sinclair’s stock (SBGI), compared to Nexstar’s and the S&P 500. Source: Google Finance

 

Trump’s campaign eventually received the favorable coverage it wanted and Sinclair stands to gain from FCC’s elimination of the 39 percent rule, allowing it to acquire the top position in its market. Its shareholders are already richer—its competitors too. While shareholders are sure to be happy, at least for now, the value for the industry and the public at large is less clear. Sinclair’s acquisition will increase concentration in a market that is already concentrated, and can have potential negative effects not only for viewers and advertisers, but also for the market of ideas.

 

Whether it’s under a Republican or Democratic administration, the combination of a concentrated market and closeness to politicians does not usually bode well for democracy. The Sinclair-Tribune deal, its closeness to one of President Trump’s closest and most trusted advisors, and the expectation of favorable coverage, all suggest that “real news” can be just as big of a problem, if not bigger, than fake ones.

 

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy. 

References   [ + ]

1. Between April 2016 and April 2017, the number of primetime viewers aged 25-54 grew from 344,000 to 488,000.

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