Commentary

Upfront Could Underscore Cable Network Gains

With consumers watching more television content on cable and Internet-connected devices, media conglomerates have the financial impetus to reinvent their malfunctioning broadcast network models before ad revenues sizably migrate to other platforms.

The pending upfront could signal an about-face by advertisers, confronted by the broadcast networks' rising prices and falling ratings. The $9 billion upfront ad commitments (and $17 billion overall) the broadcast networks point to as a sign of their long unchallenged national brand reach is showing some serious cracks.

Advertisers are pressured in this economic recession to more carefully spend where they can get more bang, investing in target consumers they know are potential buyers rather than a pricey pitch to a mass audience. Consequently, cable networks and streaming online video are posting big gains.

As expected, ad-supported cable networks were major beneficiaries of the writers' strike, gaining 8% traction with viewers ages 18 to 49 in the first quarter against the Big 4 broadcast networks' 17% decline in live prime time (and 15% decline in live+ 7 days measurement).

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The time is ripe for the new Comcast and Time Warner-led Canoe national ad platform, leveraging detailed user information from the set-top box for targeted ads to aggressively grow cable's $28 billion share of $75 billion in total TV ad spending, according to Morgan Stanley. Discovery is among the cable networks that are offering to produce tailor-made commercials.

In an extensive analysis of all dayparts, JP Morgan and Bernstein analysts identified cable networks with a clearly defined niche and target audience on TV and online as excelling in the first quarter. Reliable sports junkies pushed ESPN 23% and TNT 33% on the strength of NBA basketball. CNN, MSNBC and CNBC gained while broadcast network news continued to lose share--making a stronger case for 24/7 news and information or nothing. Viacom and Disney's popular niche cable channels logged single-digit gains.

While the broadcast networks wait to see how much of the strike-induced viewing behavior is permanent, the broader long-term trends prevail: Some cable networks are out-rating some broadcast networks; the highest-rated cable shows overlap the lowest-rated broadcast shows. General cable networks are succeeding where the mass audience broadcast networks are failing--theatrical films, live sports and quality dramatic series--staples of broadcasters in their heyday. They also enjoy the supplementary revenue streams of consumer subscriptions and affiliate license fees--making cable networks leading contributors to corporate coffers.

With digital conversion bearing down hard, and with many of their traditional fundamentals broken, the broadcast networks must fully embrace some daring survival tactics. Think entire nights devoted to niche programming, paired with original online extensions, supported by specialty advertisers.

The wild card in all this is Internet-connected video.

Nearly 10% of all TV programs are viewed on the Web--although it generates only about 2% of TV-related ad spending, or $1.4 billion, which will grow to 8% or $6.4 billion by 2011, according to Convergence Consulting Group. Online viewing of complete episodes of broadcast and cable programs will grow from 14% this year to 23% in 2010, while online viewing of video clips will remain strong, with 75% emanating from all TV networks and studios.

YouTube now accounts for nearly three-quarters of all video site visits, according to Hitwise and Nielsen Media March numbers, not including TV network branded sites like CBS.com or NBC.com. The explosive growth of Web video has made content a commodity, challenging broadcast networks' wholesale online transfer of TV programming complete with commercials.

A more viral, synergistic relationship being bred between proprietary niche branded cable networks and their corresponding sites cannot be underestimated. A Lehman Brothers analysis found that an estimated $5 billion premium price for the Weather Channel--which is a 39-time earnings multiple and a $53-per-subscriber value compared with a historical 23-times-earnings multiple and $27-per-subscriber value for cable networks--is being driven by the network's growing Web site. Weather.com alone could be $2 billion of the price tag, according to analyst Anthony DiClemente.

Consumers seeking content to meet their specific needs are less likely to look on general interest networks or appointment television--even with TiVo, DVRs and Hulu.com. That suggests the need for massive structural change for broadcast networks and their local affiliates--whose business model is a linear, ad-supported audience flow with consumers, whose engagement, numbers and profile cannot be precisely measured to satisfy major advertisers. Broadcast networks' failure to produce hit shows that deliver mass audience to local affiliates' late newscast is more than a strike-driven aberration.

To be fair, neither broadcast or cable networks can move fast enough in a digital era. The Filter.com, which goes public next week, represents a next-level personalized search engine for video, movies and music based on tracking users' online choices and recommendations from social-networking groups. Such customized search is a lifeline to targeted consumers and advertisers that will further upend all TV programming.

At the National Association of Broadcasters' meeting in Las Vegas this week, Microsoft and Motorola are among the hardware and software giants touting Web interfaces to make digital TV a more social e-commerce experience. That means the leading edge that cable now enjoys and that broadcasters need could evaporate in cyberspace by this time next year.

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