• by Diane Mermigas , October 26, 2007

A writers' guild strike--threatened or real--will be a reality check on a system of television economics that has never made sense. A protracted walkout will erode the new digital revenues as well as the strained profits of broadcast networks, whose core content would be at risk. It's a financial hit that TV broadcasters appear willing to sustain to hold the line on new digital revenues they have to share with writers. Some say it is a foolish crapshoot, given that writers are essential to creating original content for new platforms and devices.

Media conglomerates are exceeding their initial new revenue targets with News Corp., Disney and NBC Universal each expecting to generate $1 billion-plus in digital income this year across all media properties. While numbers are relatively small in these nascent digital businesses, they will explode over the next five years of a new union contract.

However, the new digital pipeline will be disrupted if there is a slowdown or absence of original scripted content from networks' on air schedules that is recycled as streaming video on the Web or as downloads for digital portable devices--often with the original advertising intact.

With so much original TV content struggling to muster maximum prime-time audiences, any decline in ratings for substitute programming would translate into costly makegoods to advertisers, whose spending on the traditional medium is growing at low single digits. CBS is one of the broadcast networks already expected to be compensating advertisers for ratings shortfalls. Any way you cut it, overall broadcast network viewing is down this season.

That will only be compounded if the networks are unable to monetize their new content on their Web sites or Apple's iTunes, where the nets are squeezing Apple for rising revenue shares. eMarketer estimates they will be threatening their share of a projected 63% rise in online streaming revenues, to $3 billion in 2010.

While the media conglomerates dig in to protect their outdated financial rules of play for TV and film in the pending writers' strike, they will forfeit the time they must invest in a digital marketplace. In a strike, consumers and advertisers can only become more comfortable with digital media's new metrics, where interactive connections between targeted consumers and advertisers are ultimately worth more, especially if content can be tailored around them. It is the flip side of broadcast network television.

The benefits of such efficient investments will become an easier sell if advertisers have less attractive material to buy on TV. Those congregating at the most popular online sites to indulge in user-generated content (50 million for Facebook, 110 million for MySpace and 200 million-plus for Yahoo) are competitive with whatever portion of the 110 million U.S. TV households the broadcast networks can muster in prime time. Plus, they're more qualitative because of their personalized interactive demographics. A major break by consumers and advertisers from what is left of television's challenged value proposition could force the broadcast networks into emergency surgery.

Ultimately, a strike of any length will raise the most salient issue: What constitutes value in both content and advertising anywhere on the media spectrum?

Multi-source digital income, primarily from revenue sharing and advertising that is offsetting declining traditional revenue streams, will suffer in a strike. As a result, a prolonged WGA strike could cost the entertainment community twice the estimated $500 million lost during a 22-week union writers strike in 1988. Twenty years ago, the broadcast networks never recovered from a 10% decline in their ratings. This time around, the hit to their ratings could be staggering in light of intensified competition from digital outlets and devices that were not factors in the last writers' strike.

If media conglomerates were smart, they would use this time as an opportunity to build new lines of interactive content from scratch, and embrace more of the research and development mode that serves Silicon Valley players so well. Depending on the outcome, a strike could force producers and distributors of TV programs to construct a risk-reward cost formula that makes more sense than the status quo. Surely the numbers are being crunched everywhere across the industry, but not enough change has been made. The Big 4 underwrite too many pricey comedy and drama series for too little return; the major payoff is profitable long-running syndication for a handful.

A strike could be just the catalyst needed for online original content--from user-generated to something more professionally done--to gain more traction with mainstream audiences. Advertisers intrigued by interactive gateways to transacting with target consumers would follow.

Analysts say CBS and Walt Disney are most vulnerable to the ensuing disruption. The television network is the centerpiece of CBS' asset portfolio. Disney could be hurt by its decision to ramp up television production as it scaled back film production. Reducing the overall broadcast network schedule from the existing 22 hours each week could have a dramatic impact on many things: the quality of programs, the availability of programs to recycle out of prime time, opening the door to rival entertainment sources, and shifting more ad dollars to other media platforms.

But even with such alternative measures, traditional television cannot afford to be off its game, given the rivals' bidding for consumers' attention and advertisers' dollars. The long-term issues over which a strike would be waged--properly compensating writers for their work in new digital spaces--are critical to the well-being of the entertainment industry. The food chain must take care of its own to ensure a quality product. That may be difficult when key players such as the broadcast networks have not created their own new business models and formulas that are viable in a digital marketplace.

The guild argues that the entertainment-related operating income of the media conglomerates has grown at a compounded annual rate of 12% to $18 billion from 2000 to 2006. The writers say they just want the media companies to share the wealth. The West Coast Writers Guild of America says it collected nearly $265 million in residuals for its members in 2006. The Screen Actors Guild will be leveraging off of whatever WGA can accomplish to use as a base for its own negotiations of a contract that expires in 2008.

Producers and distributors have resisted increasing residual payments to writers for videocassettes, DVD and electronic downloads. They oppose guild demands for residuals on TV and movies distributed on the Internet, mobile phones and other new media platforms on which new factors, such as streaming, storage and access costs, must be considered.

Some industry observers accuse some media executives of welcoming a strike to disrupt what has been a dismal new fall TV season. That is flawed thinking. Ignoring the rapidly changing competitive, economic and creative dynamics that have resulted in a lackluster TV season will do nothing to resolve the WGA negotiations or television's serious long-term problems.