Wall Street is wondering how long the balancing act is sustainable.
This was the first upfront in which the TV networks did more than pay lip service to the Web--in light of the fact that the online video audience is now considered mainstream, with more than 154 million consumers expected to watch video on the Web at least once monthly this year. The TV business is certifiably multi-platform, with more than 80% of Internet users expected to be watching video by next year and more than half the U.S. population watching video on the Web this year, according to eMarketer.
However, the networks' increased focus on digital content and advertising alone will not assure success. Their monolithic brands do not translate to the Web, where consumers seek and share niche content. Younger users' content litmus test is personal relevance and community rather than professional links or quality. Efforts to tap that rich consumer vein can be tricky.
For instance, the CW Network's effort to reverse a 28% decline in its target audience this season by suspending free streaming video of its "Gossip Girl" horribly backfired. That miscalculation underscores a fundamentally flawed notion that persists among all TV networks seeking advanced multi-platform appeals--that television will remain the most important source of entertainment, even as evidence mounts that the Internet is morphing into the primary source for entertainment and information in key demos.
The broadcast network companies secured better-than-expected financial performance in the first quarter, despite the continuing low-to-mid teens decline in live prime-time audiences (adults 18 to 40) every quarter since early 2007. In the first three months of 2008, broadcast network profitability was resilient, double-digit ad scatter market increases prevailed, and operating margins expanded. Much of it came from one-time program expense savings resulting from the WGA strike for original series this past season and in new development for the fall. Some analysts are concerned that the stark disparity between plummeting program ratings and bounding advertising growth cannot be sustained. The air will be sucked out of the TV network balloon before they can build content value and meaningful ad dollars on Internet-connected platforms.
"The upfront should be the first step in truing up the advertising dollars with the new ratings reality," warns Bernstein analyst Michael Nathanson. The strong scatter pricing of the past year "will turn on the broadcast networks in the form of tough comps starting in the third quarter. Given a comparatively more tepid economic environment, the tough scatter comps are particularly concerning," he said.
The only play for offsetting revenues will be the Internet-driven platforms and devices that the network companies regard as additive. In fact, eMarketer senior analyst David Hallerman believes they collectively represent the "new TV audience."
Television's digital conversion next year will hasten consumer demand for smart TVs that converge online access and interactive functionality. Quick to embrace the communications, content and data features of the smart phone, consumers want their devices and everything on them to be interchangeable. The interactive home hub will manage long and short-form video, communications, data and e-transactions. For now, "the bulk of video consumed online today is snackable video, rather than a complete meal of full TV episodes or full-length movies," Hallerman says.
Viewers "treating the Internet like a supercharged digital video recorder" prefer news clips, movie trailers, music videos, TV show clips and other entertainment of five minutes or less. Ideally consumers want the quality of network programming and the brevity, convenience and niche personalization of the Web. Network companies will not be able to generate revenues from new platforms fast enough to replace eroding ones from traditional platforms until they bridge the gap between the content and advertising expectations on television and Web-connected devices.
The networks have a window of opportunity to significantly alter their content strategies, economics and logistic. Their willingness to change will be evident in the way they produce content and sell advertising for their new season schedules. Only some of that emerged at the upfronts.
In fact, the TV broadcast and cable networks and movie studios are in the best position of all to benefit from the boom in online video. Hallerman points out that the Internet-TV convergence will partly depend on deals between professional video content providers and the long tail of video content sites. Much of the more professional content will come from smaller, shorter productions designed just for the Web. There also is critical need to develop effective, advertising-supported search video tools--from electronic guides and search engines to relevant links and video previews in many places.
Despite the recent upfront hoopla, repackaging and playing their existing ad-supported content across multi-plats is only half of the networks' new value equation. Producing original works for niche interests will be critical to creatively and economically sustain them in the future.