A growing and troubling schism-between short-term and long-term agendas and new and old media businesses-was evident in the remarks and presentations made by leading industry powerbrokers during Citigroup Smith Barney’s annual media conference.
If this schism persists, it could prevent media and entertainment companies from moving forward faster in a digital interactive marketplace where consumers are taking off without them.
For instance, there was a clear recognition by Brian Roberts, CEO of Comcast Corp., and Richard Parsons, CEO of Time Warner, that video-on-demand and digital video recorders are changing the way people watch and use television. The impact already is felt by advertisers, program producers, distributors, equipment manufacturers and other key players in the food chain.
“We think we can build a whole new business allowing consumers to get what they want, when they want it,” Mr. Roberts said. “It will change the way people watch and use television.”
And then there was Viacom CEO Sumner Redstone, whose company has aggressive cable and broadcast networks and whose international pursuits made it reasonable for him to vigorously defend conventional television in the face of eroding ratings and audience shares-and threatened ad dollars.
“Viacom and its rivals continue to grapple with the grumbles and gripes of the television gripers,” Mr. Redstone said at the Arizona conference Jan. 5 to 7. He refuted what he called three “patently absurd” assumptions by naysayers-that advertisers are leaving and not returning, that new technology will usurp TV’s home dominance and that distribution giants will squeeze TV programmers’ margins. “New distribution technologies [en]sure television’s tenure and the craving for content,” he said.
Last week, Morgan Stanley’s media analysts published a report asserting that ongoing audience and advertiser erosion in broadcast television, especially, will continue, calling last year’s robust upfront ad market as well as an estimated $2.5 billion in political and Olympics ad spending in 2004 aberrations. Morgan Stanley’s best-case forecast calls for an overall 6 percent rise in advertising revenues in 2004 (hinged on political spending) that drops back to 3.9 percent in 2005.
Richard Bilotti, Morgan Stanley’s veteran media analyst, said the first “major crack in the armor of the entertainment companies” will become evident in the 2004-05 upfront negotiations beginning this May.
“Investors are overanticipating the length and magnitude of the advertising recovery,” he said.
He estimates this year’s upfront will be virtually flat, as the 8 percent decline in prime-time audience and ratings at the broadcast networks so far this season offsets what he says was a more accurate 9 percent (instead of the reported 15 percent) spending gain in last year’s upfront. An estimated $2 billion in ad spending that shifted from a then-overpriced scatter and spot market to the national upfront market.
As the broadcast networks are forced to lower their audience guarantees for next season, revenue per spot will be flat to up 5 percent, Mr. Bilotti said. Even now, Fox, The WB, NBC and other broadcast networks are providing advertiser make-goods to compensate for this season’s missed guarantees and the dramatic decline in male viewers age 18 to 49, who fled not only to cable TV but to video games, the Internet and other competing high-tech pastimes. All of that will cut into media earnings and stock prices.
These shifting dynamics are part of a deteriorating vortex that is transforming the media and entertainment businesses right out from under executives in charge, regardless of how or if they deal with the changes.
Television may still constitute the best form of mass media there is in a rapidly fragmenting universe, but the broadcast TV networks especially have only diminishing returns to show for it. In what may have been the most honest admission of the conference, Mr. Redstone conceded, “People talk about the broadcast networks losing to cable networks like MTV. So what? We dominate in both.”
But the battles being waged no longer are limited to broadcast vs. cable television, or content supplier vs. distributor. It is about digital interactive technology being widely available to and embraced by eager consumers who like being empowered-even at a price.
Clearly PVR technology is on a fast track to critical mass. Time Warner and Comcast-the two largest cable operators in the United States-will have PVR-like devices available to all of their subscribers this year. News Corp. has declared it will use PVR-equipped set-top boxes to lure more than 1 million new subscribers annually from cable and satellite rivals for its dominant domestic satellite provider DirecTV.
With Comcast rolling out its free VOD service nationally, having experienced 60-percent-plus adoption rates by subscribers so far, it won’t be long before the company extends the on-demand business model to create other new revenue streams. Comcast already is hotly pursuing what Ms. Roberts calls a $26 billion local TV ad revenue opportunity with an aggressive countrywide interconnect system that siphons TV stations’ life blood and an eye to making a pitch for dollars in this spring’s upfront.
“We are trying to get as many people onto the broadband as possible. Whether you charge extra for each service or whether you continue to create more value for your base price is a marketing judgment for now. We’re even looking at creating a higher-priced service that includes more features, more addresses, wireless interconnections in the home,” Mr. Roberts said.
As a result of taking a controlling stake in DirecTV, News Corp. and its Fox subsidiary are now strictly regulated in how or if they can tie together license fees and terms for their own and others’ cable and broadcast outlets, and film content, on their own and others’ distribution systems. The Murdoch media empire clearly is the first in which so many moving parts are so inextricably integrated. It is the shape of things to come as continued consolidation in search of scale economics drive the big to get bigger.
Everyone will react to Fox’s rewriting the playbook on multichannel marketing, promotion, program license fees and distribution arrangements. That means more action and less talk. That means money is spent, lost and invested in new ways. That means changes in financial forecasts and bottom lines.
Anything Comcast and News Corp. do while waging their competitive interactive wars by the new rules will make a profound and lasting industrywide difference, since they reach more than half of U.S. TV homes.
Although audience erosion in the past has not always translated into advertising weakness for the broadcast networks, the rapid adoption of new technology and other factors has created “a seminal event,” Mr. Bilotti said. “We think the audience erosion has become too big for the buyers to ignore.
“There is a significant risk that growth in penetration of PVR and VOD technologies will cause greater audience erosion and weaker advertising pricing than we currently forecast and cause the broadcast network advertising marketplace to stagnate, causing an additional $1 billion downside [of 7 percent to 8 percent] to our annual forecasts.”
It won’t take long for advertisers to realize their costly commercial 30-second spots, when they don’t run day and date, lose a massive amount of their value, Mr. Bilotti said.
“The massive surge in DVD penetration, which should reach 55 percent this year, and the fact that people bought $1 billion of nonmovie-related DVDs this year, explains a lot of the erosion that will only get worse,” he said. “Advertisers are not going to wait for that tidal wave to crash down on their heads.”
But you’d never know that listening to a cross-section of conference exchanges. Too many media companies and executives are content with simply acknowledging or dismissing the threat and challenge of VOD, PVR, intellectual property piracy, commercial ad skipping and anything else that smacks of a ne
w competitive landscape that further fragments and even alienates viewers and advertisers.