Broadcast Nets Should Program Digital Risks

A case can be made just a month into the new TV season that the Big 4 networks are not taking enough strategic risk to ameliorate the continuing erosion of ad revenues, audiences and content economics.

One of the few calculated risks worth noting is NBC's move of Jay Leno from late-night to weeknights at 10 pm EST, which is the most pilloried maneuver this fall. Although it has cost the NBC TV network and many of its affiliated stations double the steep ratings losses of its rivals in that pivotal time slot (a decline of about 33%), it is a risk that could have financial upside regardless of the talk-show's continuing performance.

The full year of "Leno" that NBC has committed to will cost less to produce and market than the original hour-long drama it replaces. Already a proven commodity, "Leno" is likely to generate higher advertising revenues and profit over time, regardless of early missed ratings guarantees, although the show will be useless as a syndication option.

The bigger gamble for NBC owned and affiliated TV stations -- which depend on a strong "Leno" lead-in to their late local news -- is probably worth taking. All TV broadcasters are overdue in rethinking local news production and economics in an era of 24/7 digital news. NBC has the opportunity to recapture some of the viewers abandoning its last hour of prime time -- and generally not fleeing to rival broadcast networks, according to Bernstein Research -- by aggressively innovating online with interaction between Leno and his fans.



Indeed, all four broadcast networks are missing a major economic opportunity to experiment more online and in wireless mobile with creative and financial models that will define their future.

The $2 billion less in upfront advertiser spending (nearly one-quarter of the broadcast networks' prior year's take) was not only a byproduct of the recession. It also signals the steady shift of dollars to digital and advertisers' reluctance to automatically invest it all in broadcast TV.

Broadcast network revenues and the ratings estimates have become so anemic that the risk of trying something different can only bring improvement. It is a counterproductive ritual: Three weeks into the new season, Big 4 have declined another 4% in key 18-to-49 viewers (NBC and ABC each are down about 10%, Fox is down 6% and CBS is down 1%). Better than 90% of new programs will fail. Clearly, prime time's diminishing returns suggest it is no longer a gamble to change the broadcast business model.

Consumers' increased willingness to watch television programs and advertising on Web-connected devices means that giving it away for free, with weak returns, doesn't make much sense.

A recent survey conducted by Bernstein indicates that many consumers are willing to pay $1 per television show and $5 per movie viewing online and on their connected devices. The broadcast networks have the capacity to do more with a pay-for-play business model -- not unlike what has worked for them on Apple's iTunes -- using their online platform.

As Bernstein analysts point out in an insightful new report "Web TV: Friend or Foe?" a selective paid access option on Hulu would be formidable competition to cable and to Google's YouTube (leading online video with 1 billion daily views). Hulu should leverage its position as a dominant online ad-supported aggregator with an exclusive lock on long-form content for three of the four broadcast networks.

It would establish new forms of interactive content and paid access. Plus, it would move advertising from a static pitch to a fluid interactive marketing and commerce relationship with target consumers on various platforms.

NBC, ABC, CBS and Fox cannot get there from where they are today -- touting the rise and fall of their diminishing prime-time foothold. Whether they think online options cannibalize their deteriorating broadcast audiences, ancillary library values or local station monetization doesn't matter; they are all declining businesses.

For instance, Fox's "Simpsons" provides a perfect opportunity to test new forms of online marketing geared to its broad global following. Analysts like Bernstein compare broadcast advertising revenues (an estimated 54 cents per viewer per episode) with ad revenues generated on Hulu (an estimated 18 cents per viewer per episode) and assume that increasing the online ad load will deliver revenue parity. A better alternative is to create entirely new forms of advertising and marketing better suited for interactive consumers, and therefore, more likely to command a premium price.

That's a way for Fox and other broadcasters to buy into the online advertising growth that is powering Google's record earnings. Here are other strategic risks the broadcast networks should take:

*Create interactive connections between select advertisers and their target consumers. Broadcasters can charge a facilitation fee, rather than slapping TV commercials online.

*Selectively charge consumers to download popular TV episodes from Hulu.

*Build social-networking elements into Hulu using Twitter and Facebook.

*Launch other new low-cost, innovative content in prime time. "American Idol" works thanks to real intrigue around real people.

*Use prime-time TV as a creative platform to introduce and develop new content that can morph into paid shows online.

*Work with major cable operators to minimize the damage their TV Everywhere experiment in usage-based pricing is likely to have on broadcasters' free lunch video economics and consumer expectations.

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