Networks' Move To On-demand World Could Wreak Havoc On Aftermarket

TV networks have finally put on their out-of-the-box thinking caps--moving from advertising-only businesses into a cable-like, subscription fee model. It will not be an easy transition--especially for its traditional aftermarket businesses.

CBS and NBC made separate deals yesterday with Comcast Corp and DirecTV respectively to charge 99 cents for an episode of their prime-time shows--shows that can be accessed right after their initial network run. Comcast will offer this via its Video-On-Demand service; DirecTV will provide prime-time episodes through its new digital video recorder.

Of immediate concern is what effect this move will this have on already sinking overall network ratings. Analysts speculate that in the short term very little will be harmed because the subscriber base of VOD and DVR users is small. But down the road, ratings are sure to drop--as well as their value in the aftermarket selling of those shows.



All of this makes it harder on businesses such as syndication to thrive. What would be the value, for instance, of NBC's half-hour "The Office" in a couple of years, now that customers can buy shows via DirecTV the next day, or as a DVD box set some time down the road? The show's traditional syndication value is sure to drop.

This gives TV stations and cable networks a lot less programming to buy in the syndication market, programming that traditionally had been the highest-rated off-network shows. Both venues will continue to become more dependent on original production. Advertising issues are also at the heart of these moves. NBC's take from last year's upfront was some $800 million less than the year before. CBS hasn't taken as great a cut--but considering all the unpredictability of TV shows, its turn could be coming. Networks have been hearing noisy complaints from advertisers for years about lower overall ratings and ever-increasing cost-per-thousand-viewer (CPM) costs.

Networks have long envied cable networks and now look to get their own dual stream of revenue, from advertisers and directly from its customers.

This isn't the first time CBS has made cable-like noise. Les Moonves, chairman of the future CBS Corp., has talked about retransmission fees for CBS stations. That is, getting a subscriber fee for its programming just like any other established cable programming network. In the wake of CBS' divorce from its Viacom cable network brothers, last week CBS announced a deal to buy College Sports Television, a budding sports cable service.

Broadcasting networks have finally succumbed to the lure of this arena. But it's not as if they have been sitting idly by. Many areas of their businesses have been monetized for some time--the selling of DVDs and other merchandising to consumers, and branded entertainment and Internet messaging to advertisers, to name a few.

Networks have finally sent the aftermarkets a message--not that they don't matter anymore, but that consumers want to control them. TV stations and cable networks will need to adjust to this fact of life.

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