Quick Thoughts: Television in 3Q – A Step on the Long Road to Nowhere


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–          Weak ad spending, growing on-line audience and aggressive U-verse expansion are negatives for cable and TV businesses heading into 2013 – cord cutting will be a later stage development.

–          3Q non-Olympic ad revenue was disappointing despite big political spending.  Networks cited lower ratings, perhaps indicative of viewership losses to on-line alternatives, like Netflix.

–          AT&T’s re-commitment to U-verse points to further cable sub losses and greater competition in broadband, particularly if Verizon responds in kind.  LTE remains a big long term threat.

–          TV ad weakness and on-line video growth are likely to accelerate in 2013, pressuring networks to push harder for fee increases and/or pursue on-line more vigorously.


After spending nearly week almost entirely off of the grid with four kids camping on the floor of my sister’s apartment, I was surprised at my family’s reaction to the restoration of electricity.  The sigh of relief from the younger generation was for the return of internet access and the mad scramble was not for control of the TV remote, but rather the iPad and my old laptop.  The experience was a vivid argument for an on-line video future.

Meanwhile, Sandy or no Sandy, earnings season marched on, revealing a bit of status quo for media and cable companies.  Comcast put up a big number driven by the Olympics and their halo effect for the rest of the NBC schedule.   Other than that, industry results have been tepid at best.  Ad revenues have been fairly weak despite torrid political spending, a phenomenon tied to the declining audiences being delivered during prime time, which cannot be entirely explained away by Olympic competition.  We have noted that network audiences have been shrinking for some time now, the product of the growth of online video viewership and the expansion of quality viewing options across the cable dial itself.  The diffusion of audience attention erodes advertisers’ ability to grab a big, predictable slug of consumers, all at the same time, with a single buy.  This is the single biggest advantage of network TV advertising, and something that live televised events, like NBC’s Olympics coverage, can deliver in spades, but that weekly series broadcasts are increasingly failing to achieve.

Both CBS and Disney (ABC) show gross advertising revenues slightly down year to date, vs. industry projections that expected their full year ad sales up 1-2% for calendar 2012 (Exhibit 1).  This weakness now portends even worse for 2013, when political advertising will be blessedly quiet and Olympians will be back to training.  Rising fees paid by cable, satellite and telecom distributors  still a clear minority of network revenues, have partially offset soft advertising, but the limits of US consumers to shoulder a rising monthly cable bill are being tested in the face of declining annual household income and more pressing demands on the budget from healthcare, higher education, and transportation.  In this context, the trajectory of sluggish advertising and growing fees seems entirely unsustainable.

Yet media executives continue to brush aside the threat of on line video, either keeping a stiff upper lip or blissfully ignoring the growing audience spending time watching Netflix or YouTube when they could be tuning in to network TV.  Online video viewership is up nearly 40% in the US YTD, with the hours of streaming video advertising up almost 85% in the same time.  Total online video viewing is now touching 10% of all video viewing in the US, including TV and likely tops 5% of total video ad spending (Exhibit 2).  Web video purveyors like Netflix, Google, Amazon, Yahoo and AOL are plowing hundreds of millions of dollars into creating original content.  Some of these programs will be hits, and the longer media companies turn their backs, the more likely these online networks will establish themselves as viable and fierce competitors to the current programming development and distribution oligopoly.

At the same time, the détente between cable operators and telephone companies is starting to show cracks.  Just three months ago, the FCC approved Verizon’s deal for spectrum licenses that had been held by a consortium of cable operators, seemingly ushering in an era of unprecedented cooperation.  Verizon and AT&T had halted their own TV/broadband fiber build-outs the previous year, and the spectrum deal appeared to signal a tacit agreement to stay out of the other guy’s sandbox, with Verizon’s transaction including an agreement with cable to cross-market each other’s services.  Well, apparently, AT&T didn’t get the memo – it recently announced plans to pump $6B in new CAPEX toward re-energizing its U-verse fiber build-out, along with another $8B to accelerate its wireless LTE plans.  Given this and the clear potential for LTE to challenge fixed broadband service just a few years down the road, the ability of the status quo to choke off on-line video at the pipe should be seriously in question.

2013 looks like a real crossroads for channelized video.  TV advertising will likely disappoint – turning down rather than up on economic sluggishness and the surge of online video.  Fee negotiations may turn even uglier, as networks grope for revenue growth and operators forestall pushing rate increases onto their already disgruntled customer base.  Meanwhile, the original programming from the online crowd may hit its stride, with audience numbers that break through resistance from a second wave of more conservative advertisers.  Against scenarios in this vein, media companies will either move more aggressively to monetize their own brands online, or will double down on the “prevent defense” that they have been playing with their cable subscription linked TV Everywhere initiatives.  I expect at least some of the players on the field will choose the former.

For our full research notes, please visit our published research site.

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