Operating Agreements

By Marc Hand

As SRG member stations explore options for extending their delivery capacity and examine new structures for the relationship they have with their institutional licensees, Local Management or Marketing Agreements (LMAs) offer an important option in the range of structures to consider.

The "LMA"
Local management or marketing agreements (LMAs) first began to appear in commercial radio in the early 1990s. At that time, commercial radio stations were operating under ownership restrictions that limited companies to only one AM and FM in a markets and twelve AM/FM stations nationally. LMAs were developed as a legally viable contractual tool to address what these commercial broadcasters saw as a regulatory environment that blocked them from maximizing profits.

First, station owners entered into LMA agreements with other owners to benefit from the financial efficiencies of operating multiple stations in a single market. The LMA enabled owners to program, sell advertising for, and manage other stations without actually acquiring the license. LMA agreements usually ranged from one year to five or six years—timed to coincide with the owner’s license renewal date.

A second common use of LMA agreements was at the point of entering into a contract to sell a station. The interval between the filing of a sale/license transfer and its final FCC approval (usually four to six months) was a risky operational period for both the buyer and seller. Since the impending sale of a station was public information during this period, advertising sales often dropped, staff sometimes left, and ratings sometimes faltered. Short-term LMAs provided an opportunity for buyers and sellers to enter into short-term management agreements that enabled the buyer to operate the station until the final sale and transfer was approved by the FCC. This type of LMA agreement was generally a year or less in length.

There are few major commercial radio station owners today that have not used LMA agreements. They are less common now that the FCC changed its ownership rules to allow companies up to 8 stations in the top 25 markets.

Commercial station owners are very cautious about entering into agreements that in any way threaten their license or the value of their investments. For years, communications attorneys meticulously structured LMA agreements that met the Federal Communications Commission standards of licensee responsibility. These agreements continue to provide models and insights for broadcasters considering an LMA.

Public Radio Stations Using LMAs
LMAs—sometimes simply called management agreements—are now being used in public radio. SRG member Capital Public Radio in Sacramento, California has a form of an LMA with California State University to operate KXPR, KXJZ, and several other stations. Cincinnati Classical Public Radio has a management agreement to manage WGUC in Cincinnati for the University of Cincinnati. The Corporation for Public Broadcasting’s Future Fund recently awarded some $40,000 to develop an LMA agreement among stations that would result in a North Dakota Public Radio Network. Looking to the future, these kinds agreements of will become even more commonplace.

The Advantages and Disadvantages of LMA Agreements
LMAs offer the advantage of creating a distinct management structure for the operation of a station without either party involved having to acquire or sell the license. From the licensee’s perspective, the university or school board can step away from the day-to-day challenges of running a public radio station, while maintaining control of the license. From the view of the operator, running a successful public radio station is the top priority, and execution of that goal is unencumbered by politics and competing priorities. Budgeting, staffing, and compensation decisions could also be made outside the context of the licensee’s policies.

At all times, however, the licensee is ultimately answerable for compliance with FCC rules and regulations—and for every second of the station’s programming. This is one of the primary disadvantages to the LMA situation. To maintain this control, an LMA must give the licensee the ability to terminate a management agreement, or exert veto power over specific programs if the licensee determines that programming does not meet its standards, or the standards of the community served.

From the operator’s standpoint, these termination and control clauses mean that a successful LMA agreement will be characterized by a strong, ongoing relationship with the licensee—a relationship in which the licensee is informed and aware of major programming changes that the operator may want to implement or other issues that might affect the licensee’s standing with the Federal Communications Commission.

Does an LMA Require FCC Approval?
LMAs need to be filed with the FCC, but do not require FCC approval. Because FCC approval is not required, an LMA is not affected by public notice or comment requirements associated with license transfers or other major changes. The issue of communication with the public can be addressed entirely within the context of community relations.

LMA Costs
In the commercial radio world, operators who entered into LMAs with a licensee usually paid a monthly fee to the licensee. These fees partially offset any continuing operating costs incurred by the licensee and provided some additional compensation. The fees ranged from a few thousand dollars a month in smaller markets to more substantial fees in larger markets.

Nonprofit licensees considering having another entity operate their station under an LMA may have interests beyond financial gain. For example, the institution may be interested in better management of a public asset, promotion of the institution to the community of service, student training or internship programs for students, or even the opportunity to withdraw from operating responsibilities, as well as cash in hand. To date, most management agreements with noncommercial licensees have not been done on a fee basis. As with the sale of noncommercial stations, there are no real market standards for monthly fees for a noncommercial LMA. As more institutions and operators explore LMAs for noncommercial stations a price range based upon market size will begin to emerge.

LMA Agreements—The Time Period
In commercial transactions, LMAs are tied to a station’s license seven year renewal cycle. In public radio and specifically for the Station Resource Group, the focus is to have an effective public service in place—not maximizing profit. For Local management agreements to be effective in public radio, it may be important to consider agreements that would extend over as much as ten or twenty years.

A Hypothetical Case Study
Most of the SRG membership is familiar with the sale of WDCU in Washington, D.C. last year. WDCU was licensed to the University of the District of Columbia. The station was supported by the Corporation for Public Broadcasting. Crushing financial pressures led the university to consider the sale of WDCU, both to reduce the operating costs associated with the station, and to generate financial resources to apply to the university’s academic programs. Ultimately, WDCU was sold to C-Span for $13 million. We can use this situation as an example of the LMA, positing a different outcome than was actually the case had the University of the District of Columbia Trustees been presented with a serious LMA offer before making the decision to sell WDCU. Let’s suppose that WAMU and WETA, both of which offer full service to Washington, D.C. decide to pool their resources and submit an LMA offer competitive with outright purchase offers. Since the operating costs for a combined operation would be less than a stand-alone station, they can elect to pursue formats that are less viable from a revenue perspective, or consider a format that has a higher level of revenue, and therefore more potential for generating excess operating revenues. They can take advantage of their own operations to realize operating efficiencies for another station service.

The first step is for WAMU and WETA to formalize this plan. They set up a new corporation—let’s call it DC Public Radio—a corporation jointly controlled by WETA and WAMU. It is DC Public Radio that makes an offer to the University of the District of Columbia (UDC) to operate WDCU under a Local Management Agreement.

The issue of money and programming commitments are cautiously considered by WAMU and WETA in the process. With an LMA in place, WAMU and WETA, through DC Public Radio, could begin daily operational management of the station. DC Public Radio could transfer current WDCU staff to their payroll or hire new staff. WAMU and WETA could elect to move the studios into WETA or WAMU, or to pay the University of the District of Columbia for studio space. Programming changes could be made slowly to strengthen what had been an underperforming public radio station, or major changes could be made immediately. All operating costs for WDCU end for UDC the day the LMA is signed.

Since UDC’s main purpose in selling WDCU is to generate cash, DC Public Radio proposes to pay UDC an annual fee of $250,000 and begin immediate operational management of the station. Perhaps part of the initial LMA offer includes a commitment to continue with the jazz format since the loss of this programming for the DC market generated a fair amount of negative press for UDC.

Discussion concerning DC Public Radio’s Local Management Agreement ultimately involves serious negotiation on three points—a demand by UDC for a large up-front payment in addition to monthly payments; UDC’s interest in an ongoing college-level media program for its students; and, unexpectedly, DC Public Radio’s hiring policies for station employees. Much to the surprise of WAMU and WETA, continuing the jazz format is not a major issue for UDC. UDC sluffs off the short-term fall-out of the bad press on this issue. Negotiations are intense and fast-paced. Interested buyers up their offers and lobby with DC politicians for a quick and dirty sale.

At this point, communications attorneys are key to insuring that any agreement reached between UDC and DC Public Radio complies with FCC requirements as well as incorporating institutional agendas. While the LMA does not have to be approved by the FCC, meeting the requirements and standards of licensee control are critical.

So in this scenario, who wins—the "buy" proposal or the LMA proposal? Let’s just say that DC Public Radio is a serious contender. Outright buyers offer immediate cash. DC Public Radio offers far less immediate cash, but a long-term cash-flow arrangement and, very importantly, UDC retains ownership of the asset. As painted, the scenario points out the importance of continually ascertaining the interests of the licensee/owner in order to make the most competitive possible LMA offer. Often, the licensee has a different set of priorities than might appear to be the case for the potential operator.

Most important, though, is the ability of an interested party or parties to act fast. The WDCU sale was a done deal in less than three months. The financial plight of the University of the District of Columbia had been clear for some time prior to the decision to sell WDCU. If the LMA offer had been made at an earlier time, the issue of a sale might never have surfaced, although it’s impossible to say this with certainty. Clearly there are significant advantages to being pro-active in these situations.

Summary
We will begin to see more of these agreements among public radio stations, particularly within institutional licensees. The LMA offers an opportunity to leverage better public radio service in many situations nationwide. The challenge is how best to use the LMA in the larger context of a public radio service strategy.

Marc Hand is Managing Director of Public Radio Capital, a nonprofit organization that helps public media organizations acquire and protect delivery channels.

Public Radio Capital was created by SRG and launched as an independent organization in 2001.