Television Networks: Betwixt and Between a World of Change

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The cable era broke the domination of the broadcast networks, ushering choice to consumers and diluting audiences.  In the emerging online era, content creators, advertisers, and viewers are all gaining leverage over the traditional multichannel model, which puts an onus on network owners to establish brand relevance for consumers that are learning to expect access to any program they want at any time on any device.  Although the multichannel economics are favorable to network owners now, strategies aimed at inhibiting the transition to online weaken the long-term viability of network properties, as they open opportunities for new Internet-based rivals.  As content owners, viewers and advertisers shift attention online in an inexorable self-reinforcing cycle, networks will either get up to speed or fall aside.  All of this may play out faster than many expect, making the next 18-24 months crucial in establishing the winners and losers for the next 20 years.

 

25 years ago, the television industry passed from the broadcast era to the cable era, disrupting the existing value chain and creating enormous opportunities.  At first cable was launched to support broadcast TV by assuring clear reception, but it soon morphed into a disintermediating force on existing broadcast networks and their affiliated stations.  Cable-only channels proliferated diluting the audience for broadcast network programming, creating competition for acquiring content, and siphoning advertising dollars.  From a much larger TV pie, broadcast networks now take a much smaller slice and local affiliates struggle for relevancy, while multichannel distributers and cable networks have grown and prospered, circumstances that evolved from unthinkable to inevitable over just 10-15 years.

 

Network owners are under pressure as the industry passes from the cable era to the on-line era, disrupting the existing value chain and creating enormous opportunities.  The analogs are clear, with channelized networks pressured by on-line for both eyeballs and ad dollars and multichannel distributers shunted to the same trajectory as traditional broadcast affiliates.  Advertisers, content owners and viewers will all gain leverage from greater choice and lower switching barriers, placing the onus on network owners to justify their value in the new paradigm. 

 

Audience dilution is devaluing top programs, as network proliferation increases the overall need for new content.  Online exacerbates both problems for network owners.  With the explosion of cable channels, the audience for the most popular programs has begun to fall, reducing willingness to pay up at the high end, while the number of networks shopping to fill out their schedules is raising overall programming costs.  Internet aggregators are commissioning original programming, creating even more competition for content, and likely, further audience dilution.  It may be that expensive content in the future will a have to be distributed across as many platforms as possible to justify its cost.

 

Deep pocketed on-line aggregators are moving aggressively to establish their own on-line video brands.  Internet platform companies – i.e. Apple, Google, Amazon, Microsoft, and Facebook – are becoming trusted curators of online content for their users.  While on-line video audiences are still small, these cash rich players are seeing rapid growth and are investing to offer proprietary content and superior streaming performance.  While access to network controlled programming is extremely valuable today in building an audience, its importance may diminish with time, as aggregators establish their own content and as independent sources, like VEVO, Machinima and Funny or Die prosper.

 

Advertisers are the biggest revenue driver for network owners, and will have motivation to shift spending as the on-line audience grows.  We have written about the changing landscape of advertising, the most important revenue source for network operators.  As audience measurement and advertising effectiveness tools become more widely accepted, we expect on-line to grow rapidly as a percentage of overall ad spending, soon to the detriment of multichannel television.  Since the potential for further gains in subscriber revenue from cable, satellite and telcoTV operators is constrained by already high end user prices and by conflict with affiliates over retransmission, this trend will press networks to follow advertisers online.

 

While a static view suggests that network owners should be cautious, a more dynamic model highlights the hidden costs of inaction.  A common take on the network owner’s dilemma suggests that they are best off in lock step with cable, as the rising tide of rights fees have been the primary source of growth.  However, looking further ahead, and considering the entire value chain changes the equation.  The stunning growth of tablets and a generation of viewers who expect to be able to watch whatever they want to watch whenever they want to watch it are corrosive agents to the multichannel model, as is the $128 average monthly cable bill.  Add to this content owners being seduced by the possibility of a bigger share of the pie online, a growing pool of advertisers willing to pay more online where they know exactly who is watching their ads, and the threat of online aggregators who have the early jump and may supersede network operators in the next era.

 

Winning networks will act boldly and independently to establish their brands online.  Network operators are keen to retain control over their own programming and have largely resisted pressure to favor particular channels.  As such, negotiations with cable operators over TV Everywhere and with Apple and Google over their connected TV initiatives have been contentious.  To date, CBS and NBC have been the most aggressive in embracing the internet, although Comcast’s acquisition of NBC-Universal may change that.  Disney-ABC have been the most conservative in hewing to the multichannel model, a stance that we believe will be counterproductive in the long run.

For the full research note, please visit our published research site.

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