Confronted by a wave of forecasts suggesting a major upset is in the making, TV and advertising executives admit a heightened concern about how personal video recorders and other consumer-empowering technology threatens their economic status quo.
Within just a few years, media company revenues and earnings are going to take a hit, and we’re only now seeing initial efforts to qualify how hard a hit.
For starters, a Forrester Research report estimates that in five years, on-demand TV technology will cut traditional ad viewing by 19 percent, shaving $7 billion off the $85 billion expected to be spent on commercial broadcast and cable television advertising at that time. That compares with an unthreatened $56 billion in TV ad spending in 2001.
Looked at it another way, consumers will be paying an estimated $6 billion for on-demand TV content in five years, when video-on-demand programming will carry new forms of advertising expected to generate $4.5 billion in new revenues. Combined, these new revenue sources aptly counter the projected loss of conventional TV ad spending that advertisers say will likely end up in magazines, radio and other less volatile targeted media.
“The true magnitude of the threat” is the estimated 19 percent decline in traditional television ad viewing, substantiated by data uploaded from TiVo boxes currently in use, said Josh Bernoff, a chief analyst with Forrester Research. With TiVo and PVR technology being built into cable and satellite set-top boxes, that’s mushrooming into a fair-size database.
Forrester recently set out to explore the impact such forecasts would have on advertiser spending by surveying members of the Association of National Advertisers, the findings of which are due out this week. Of the more than 100 respondents who participated, 75 percent said they would reduce their TV spending within five years. Three-quarters of those respondents said they would reduce their TV ad spending by 20 percent or more in the event that at least 30 million of the 115 million television households in the United States were equipped with PVRs and other devices that skipped past or “killed” commercials.
Little wonder, then, that Turner Broadcasting and WB Chairman Jamie Kellner recently accused the perpetrators of such practices of “theft.” Broadcasters such as Mr. Kellner suggest consumers can just add $250 to their cable bill every month to make up for the part of television production and maintenance that advertisers support with their commercial spending.
While there may eventually be some regulation governing some of this new technology, the Pandora’s Box has been opened, and interactive consumers-once they get a taste of choosing what they want to watch, when they want and the way they want-are not going back.
The advertising that is the life’s blood of national and local broadcasters and a significant part of the mix for cable, has begun what will be a gradual but sure, long-term financial, creative and strategic transformation, and it is going to be painful-that much is clear.
At this early juncture, estimates and their criteria can and are being disputed. Noted advertising expert Jack Myers is on record questioning the validity of Forrester’s numbers. Versonis Suhler Stevenson, in its annual communications industry forecast, estimates that spending on interactive television advertising and promotions could easily hit $1 billion in 2006, when VOD should be generating at least $726 million and subscription PVR services should be worth $1.3 billion. And on it goes.
The bottom line is that as the mass market embraces new technology that alters television viewing, then television advertising and overall economics will also be altered. That, in turn, will impact the balance sheets of the media conglomerates, which own the ad-supported broadcast and cable outlets.
The impact of music and film downloading, which has vexed these media giants so far, indicates that the value of content is being redefined by technology.
In a new report, Sanford Bernstein analyst Tom Wolzien took a first pass at the issue of major digital video disc piracy and determined that at today’s levels it threatens as much as 15 percent of a media company’s annual earnings, as in the case of Disney, which heavily relies on home video revenues generated by its film library.
Viacom, especially with its Blockbuster business wrapped in, and AOL Time Warner each could see their cash flows whacked by at least 5 percent, Mr. Wolzien said.
Risking 15 percent of what could be $6.4 billion in earnings before interest, taxes, depreciation and amortization, as in Disney’s case, in an environment where each of its core broadcast, cable, film, consumer products, theme park and resorts businesses are under siege would adversely impact what even a media giant can afford to do and buy.
Add to that the fact that advertising revenues constitute nearly half of Viacom’s overall revenue base, and more than 20 percent of the revenue base of Disney, and you’ve got the potential for a decent-size financial tremor.
Why should music or film DVD piracy and the like matter to television? Because it’s all part of the same consolidated media pie these days. Disney’s theme parks and films were supposed to bolster its broadcast network operations during a rebuilding process that could take at least several more years. When that doesn’t happen, Disney overall is looking at steadily lowered financial expectations and overall delivery that hurts its ability to reinvest and flourish.
Media companies bulked up during the past decade to make money from synergistic sales of advertising and distribution of content across multiple platforms. They also figure that one of their mammoth businesses would support one of their other mammoth businesses during a down cycle. Few considered that economic, technological and competitive forces would alter or even diminish the supporting revenue streams of nearly all their core businesses at the same time. But that is where the media industry is headed: a kind of perfect storm of challenge and opportunity, but there will be most certainly change.
With all the consternation about film piracy and music downloading (which has contributed to the overall reductions of revenues by one-fourth, according to some analysts), it has been easy to gloss over how these same principal factors stand to change television economics.
With an estimated half of all television viewers armed with some kind of PVR or video-on-demand service in five years, an estimated 28 percent of TV viewing by then won’t even occur during broadcast or cable networks’ regularly scheduled times, Forrester predicts. If that proves true, then there may yet be virtue in repurposing network programs on various platforms and selling a cumulative targeted audience reach, which represents a whole new set of industry dynamics and economics that we’ve only just started to explore.
While this report already has heightened a heated debate over just how much damage TV advertising will incur, it underscores a sea change that arguably will have a profound change on not only the overall dollars advertising spent in broadcasting and cable television, but also the way in which its increasingly fragmented audiences and targeted content are priced and sold.
Given the way things are trending, Mr. Bernoff tells me this could begin to be a major issue by the 2004 upfront market in less than two years. By then, product placement, advertiser sponsorship and other new forms and units of advertising may be prevalent and firmly priced. By then, advertisers may have broken out of the habit of paying higher CPMs for lower program ratings and audience shares. By then, targeted premiums may be more firmly established.
A little trim
If it is even a mildly influential factor by then, the impact of on-demand technology along with an increasingly fragmented TV marketplace and the health of the general economy can result in profound change in what advertisers spend and where, what programming can be financially supported
, and whether networks and their corporate parents take a revenue and earnings haircut.
Many industry analysts say they have only begun to consider the serious economic impact of advertising-altering technology on media company revenues and earnings as they project out over the next five years. While it may be difficult to forecast and quantify, it is getting easier to see.
But the usefulness of trying to fast-forward all of this is not to create panic so much as to initiate serious dialogue about certain change. As Forrester Research Director Charlene Li has said, on-demand TV technology will shift, not destroy, television economics. Drilling down into what that means to everyone and every business will be a tedious task indeed. Thankfully, in more ways than noted here, it already has begun.