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Melding media’s future with its past

Jan 13, 2003  •  Post A Comment

If nothing else, 2003 will be a time for reconciling what was and what is in the media business. And it’s not going to be easy.
Some of this reconciliation will happen gradually, as in the case of long-promised broadcasting deregulation.
Despite the current public outcry, a majority of the reforms leading to increased industry consolidation and market ownership concentration are likely to occur. The changes will put even more economic, content and distribution power in the hands of larger players, most of which already are struggling with what they have. Many of the little guys will disappear in a new wave of TV station sales and swaps.
Some of the reconciliation will be painful. AOL Time Warner’s later this month plans to take a $10 billion fourth-quarter write down on the declining value of its America Online business (after taking a $54 billion write-down a year ago). That could be the first of many new blows to the company and to media in general in light of continuing internal strife and regulatory probes of the company’s accounting practices. AOL Time Warner’s plight begs such larger questions as whether convergence is really achievable and what it should look like.
And some of the reconciliation will either sneak up on or forcefully grab hold of even the biggest players, upsetting industry status quo on many important fronts.
For instance, even at this early stage of interactivity, it is prudent for media companies to consider how increased consumer choice and control of their television experiences will change the way programs and advertising are produced, scheduled and sold. The industry often has been too slow to respond in a proactive, well-thought-out manner to such major power shifts.
On the bandwagon
For years, broadcasters decried the cable threat. And then the biggest players-The Walt Disney Co.’s ABC, General Electric’s NBC, Viacom’s CBS and News Corp.’s Fox-jumped on the cable bandwagon with networks built on the backs of their TV stations’ cable retransmission pacts. Today the earnings and ratings power of many of those cable interests often exceed any of their broadcast operations.
A similar situation is now afoot as cable’s sphere of influence continues to grow and as media companies find themselves involuntarily ceding control of content and distribution to new technology-armed consumers.
Slowly but surely they are discovering the self-determining pleasures of VOD, PVR, TiVo and other digital cable options.
With cable now routinely attracting larger audiences and ratings for many of its programs, it moves closer to advertising parity. That’s not because cable networks are succeeding at pricing and selling their ad time on all the long-standing broadcast metrics, but because the entire television industry is due for and moving toward a metric more appropriate for the trends and times.
For instance, in a blunt, insightful report to clients, Morgan Stanley analyst Richard Bilotti makes the case for why in this spring’s 2003-04 upfront negotiations more conservative, price-conscious advertisers will likely refuse to ignore “the absolute ratings erosion” that has them paying more for less. Downward adjustments of any kind would cause huge industrywide ripples.
But Mr. Bilotti doesn’t stop there. In his report entitled “TV Ratings Update: The Emperors Have No Clothes,” he highlights a number of dramatically changed and even bogus broadcasting industry tenets that require adjustments in the way success is measured and advertising time and content are priced.
For instance, while building a single night of prime-time series to boost a broadcast network’s overall audience share and revenue is still the most effective source of operating leverage, the strategy “demands substantial critical mass,” which is being rapidly diffused.
Mr. Bilotti estimates that a mere 0.1 percent increase in adult 18 to 49 prime-time ratings can yield as much as $60 million in broadcast network advertising revenues and as much as $45 million in cable revenues. But those gains require several billion dollars in annual program investments that include millions in marketing and promotion costs.
Mr. Bilotti has modestly forecast a 4 percent to 6 percent increase in total television advertising revenues for broadcast networks, stations and cable networks this year. But that figure could be adversely affected by what for the first 10 weeks of the season was an aggregate 18 to 49 ratings fall-off for the 42 largest broadcast and cable networks.
“It is very significant that the total broadcast and cable network viewing for the combined 42 networks has slightly decreased (by about 2 percent),” Mr. Billet writes. “The conclusion is that prime-time ratings and advertising are a “zero sum” game.”
In a television universe in which the average number of channels received by a typical U.S. household has nearly doubled to 70, stagnant aggregate ratings can partly be attributed to viewer migration to specialty networks on digital cable and satellite.
That is a taste of the television industry’s new reality that needs to be more fully reflected in its economics-from revenue generation and pricing to earnings expectations and content costs.
Mr. Bilotti’s conclusion: The television operations of major entertainment conglomerates are vulnerable and “have far less operating leverage than commonly assumed.” Even without the threats of war or a double-digit recession, revenue growth and higher margins will be limited for many media companies.
Mounting fears
But the need for a more pragmatic reconciliation of television’s old and emerging new reality does not stop there.
Based on top media executives’ remarks at three major Wall Street media conferences in the past month, there is mounting trepidation about how adversely revenues and earnings, audience reach and advertiser pricing will be impacted by the increased penetration of TiVo-like devices and video-on-demand choices.
The trends are clearly entrenched and can only become more urgent factors in future television economics.
But instead of pragmatically addressing the impact, some broadcasting executives are opting, instead, to take exception with specific timeline and penetration projections. It is a futile exercise considering that no one knows for sure how long it will be before such viewing habits reach critical mass. We only know they will.
Specifically, CBS’ veteran research guru David Poltrack has used the occasion of several recent public forums to criticize my reporting of Forrester Research’s controversial personal video recorder and VOD forecast. That same Forrester research has been widely referenced by other top industry executives and analysts, including Mr. Bilotti, as a springboard for constructive, detailed discussion of the critical overriding issues.
That is what the industry needs more of.
While some forecasts appear too Draconian, Mr. Bilotti said that even a more modest estimate of 6 million to 8 million penetration of PVRs in the U.S. by 2004 “may be enough to begin an advertiser backlash.”
“The bottom line: We think TV networks face significant pressure both in the short term, due to ratings declines as fragmentation increases, and in the long term, as technology potentially undermines the business model,” Mr. Bilotti said in his recent report.
If the media industry has learned anything in recent years, it’s that change doesn’t come without a price, and that the price gets higher the more the companies involved look for big returns and fast fixes.
Media companies can use change to their advantage if they take the time to study it.
What is required, first and foremost, is willingness on the part of all media players to redefine every aspect of their business, if need be. That means finally letting go of past practices and expectations, if necessary. And it means finding new and maybe even better ways to grow.