Broadcast Networks: Survival Means Mastering Multi-Rev Streams
Betting on eyeballs, advertising and content at a specific place and time just doesn't carry the same cache when the value of video is incessantly controlled by a slew of unlikely competitors and empowered consumers.
It's a potent reminder that networks' futures must increasingly depend on fee-based revenues enjoyed by cable and other dramatic changes to their business model.
A new Morgan Stanley report provides a compelling overview of the multiple revenue stream and screen options broadcast networks must master to survive, even as ABC, NBC, CBS and FOX engage Madison Avenue in their tireless upfront ritual.
Broadband-delivered video has created a boom in on-demand viewing, which represents a key economic shift that will upset the linear ecosystem -- from first-run ad-supported broadcast to international licensing, domestic syndication to TV home video -- that drives 75% of broadcast network prime-time TV revenue.
The growing ubiquity of the high-speed Internet and its interface with the traditionally passive television will rapidly render a new generation of "Me-too TV" streaming video entrants with an edge: They will repackage exiting on-demand and linear content, and pair it with search and discovery tools and lower price points.
With Netflix demonstrating how quickly this new phenomenon can take hold, the broadcast networks could quickly go into a tailspin trying to keep up with the new rules of play for a TV ecosystem turned inside out.
By decade's end, they will be glorified content aggregators competing with emerging rivals, such as Netflix, Google's YouTube, Apple's iTunes and Amazon, to produce, buy and distribute video across all screens and devices. These new entrants will drive up the ultimate cost of content (think Netflix paying $1 million per episode for "Mad Men" episodes) which will be passed along to cable and satellite operators. Those operators will be forced to maximize "TV everywhere and anywhere" options, just to broaden their revenue base - en route, muting all the fuss over cord-cutting.
The broadcast networks will become less viable for their general branded scheduled platforms and more for their TV studios, which will function as content factories for competing players with deeper pockets and more agile mechanics. That new dynamic could ultimately give the broadcast network companies an edge over their cable network counterparts as major suppliers to on-demand viewing that reaches beyond cable and satellite to more pervasive Internet and cloud distribution. That's when things get really interesting.
Here are some of Morgan Stanley media analyst Benjamin Swinburne's more intriguing scenarios and assumptions:
*By allowing viewers to increasingly watch what they want, whenever and wherever, technology better aligns audience/value to revenue. The trend favors broadcast networks and their TV studio businesses, while threatening the margins of cable networks with "low barrier-to-entry" programming.
*Broadcast TV programming is gaining a greater share of the digital video pie by reaching beyond conventional ad revenues to generate incremental dollars from retrans fees and new payments from "an explosion of new broadband video aggregators or "networks," such as Netflix. Even more lucrative is the live sports content the broadcast TV networks exclusively provide to passionate audiences, commanding premium subscriber fees and advertiser rates.
*The growing adoption of Internet video will increase time-shifted viewing, which will reduce TV ad inventory, Swinburne contents. By 2015, roughly half of TV revenue will be generated by reoccurring subscription fees and syndication sales taking share from advertising, he estimates. So much for the notion of "free TV."
*Even as retrans fees and the growing syndicated fees "help the broadcast model power through this trend," ad-supported cable networks that lack sufficient audience reach could face some revenue pressures. For instance, direct-response advertisers that can comprise 15% of total ad spend on a network generally favor ROI and frequency (rather than reach and content), which is effectively delivered by on-demand video options.
*Because the broadcast networks "under-monetize their audiences," while controlling costs and reaping profits from the content produced by their TV studios, they potentially have more to gain from these changing industry dynamics as long -- as they are willing to substantially alter their business model. Their TV studios will benefit so long as they "price their content appropriately by forgetting about traditional time-based windows" -- namely their celebrated prime-time schedules. *In an ironic twist, some cable networks will become threatened by the rising cost of original program production and acquisition, which was once a demon of broadcast networks. Swinburne estimates that incremental earnings margins for U.S. cable networks will decline, falling below last decade's average due largely to rising program costs.
*The report essentially glosses over the most problematic obstacle to television's brave new world: the nagging absence of accurate, one-to-one audience measurement as a way to realign the broadcasters' value proposition and set the standard for all broadband video. Nielsen's complex iterations for TV viewing on extra days and time-shifted platforms have little to do with online consumption. They are based on estimates in a digital world in which refined technology defies guesses.
Why no company or individual has been able to more adeptly crack the measurement code is disturbing and mindboggling. The video future Swinburne describes, as well as the reinvention of the broadcast TV networks, depends on it.
In a year when cable TV networks are collectively expected to match their broadcast TV network counterparts in upfront ad commitments, the Big 4 are acutely aware of the need to rewrite their playbook, even as they defend their diminished critical mass. One thing is certain: Straddling the old and the new worlds will not be an option for much longer.