Do the Math: Broadcast, Cable Network Parity Play

The mass audience reached by the Big 4 broadcast networks will be eroded by general entertainment cable networks in less than five years, when rivals seize more of their triple advertising dollar, pricing and viewer edge. That isn't a guess, according to Bernstein Research--it's a mathematical certainty.

The outcome will be dramatic. Agencies and advertisers will rebuff pricey bottom-rung television programs as they continue to shift more of their spending to cable, the Internet and wireless mobile platforms. Protracted economic weakness will complicate this shift and weaken overall ad spending.

At the same time, domestic broadcast TV producers and syndicators will find it more difficult to secure traditional prices for their programs. Major cable networks will continue to wrestle with the high cost of original production that has long dogged broadcast networks --and they all will need to resort to cost-cutting to maintain profits.

One thing is clear: Major cable networks are on the upswing, while broadcast networks ABC, CBS, NBC and Fox collectively are on a certain decline. The trend will have the most dire consequences for CBS Corp., which generates more than 30% of its revenue from national broadcast advertising and has minimal cable exposure. Ultimately, that makes a pure-play like CBS an acquisition target for a larger content company that absorbs that risk while mining its assets.



It is a bitter irony that the biggest beneficiaries of this scenario are Time Warner and CBS' former corporate parent, Viacom. It raises the question of whether dual chairman and majority shareholder Sumner Redstone will seek to salvage his CBS investment by returning it to the fold.

The bottom line is that the imminent tipping point of parity between broadcast and cable networks' viewers and advertising dollars must be addressed by broadcasters. Even as the broadcast networks retain a majority of the $9.1 billion in upfront ad commitments for the new season, and $22 billion overall this season, it will become more risky for them to sustain a pricing advantage, according to a new analysis from Bernstein Research.

Add to that the adverse impact of a volatile economy on advertisers and consumer spending, coupled with the rapid emergence of digital options and competition, and it is clear that the broadcast networks face radical financial change. A new business model that eliminates legacy costs and integrates interactivity at every turn is in order. Merely cutting costs in an old static ad model layered with ancillary cable, online and other new media revenues is not a long-term solution.

The Big 4 broadcast networks continue to lose 5% to 6% per year in viewers, while the five highest-reaching cable networks (TBS, TNT, USA, ESPN and Spike) are growing viewers by the same 5% and 6%. That will narrow the audience reach gap between broadcast and cable networks to 1.5 times by the 2012-2013 television season from 2.6 times currently and 5 times in 2003, according to Bernstein analyst Michael Nathanson.

That said, broadcast network prime-time adult 25-54 CPM (cost-per-thousand pricing) remains materially higher at an average $30 last season compared to an $11 cable average, Nathanson said. The broadcast networks can still command that premium because of their unique "mass reach," despite sizeable ratings declines. In any given week, the Big 4 broadcast networks reach between 29% and 34% of U.S. television households, compared with 9% to 15% for cable networks.

But that scarcity leverage will fade as cable nears parity, Nathanson argues. Broadcasters' prime-time ratings last season continued to fall about 8%, while major cable network ratings rose double-digits. If the broadcast networks continue to lose 6% of viewers and cable networks continue to grow viewers by 6% annually, their audience gap will be marginal within four years.

That would give the Big 4 broadcast networks an average 24% of the audience and cable networks 16% of TV household viewing. Even more dramatic, ad dollars will continue to follow viewers away from broadcast television. "Agencies and their clients will have a harder time justifying premium CPMs for lowly rated broadcast network programs," Nathanson observes.

As broadcast ratings for the all-important adult 18-49 viewers have recently collapsed an average 9% per quarter, the Big 4 have stopped reporting their quarterly advertising growth. "A sign of their troubles," Nathanson insists. In fact, a majority of the 25 largest broadcast advertisers are in the process of shifting money to cable TV.

And there are other warning signs: The $95 average cost per ratings point for syndication deals done in 2008 (12% less than 2005 and 23% less than 2003) reflects the impact of lower-rated broadcast network programs and more selective cable networks buyers. It indicates substantial jeopardy to the additive revenues generated by syndication--another place where broadcast networks and their conglomerate TV studios are getting whacked.

Little wonder that the Big 4 broadcast networks have devoted only 58% of their prime-time hours to expensive, riskier scripted comedies and dramas, compared with 67% of original production on ad-supported cable networks. The remaining 30% of broadcast network prime-time schedules are devoted to lower-cost reality, game and news magazine programs. They have reduced the number of expensive movie hours and increased their reliance on reruns and live sports. The number of original scripted prime-time broadcast network series is expected to continue to decline.

It was no accident at this week's Emmys that AMC's "Mad Men" became the first cable series to win best drama and Glenn Close snared cable's first best actress in a drama series. In fact, spending by the leading cable networks at Time Warner, News Corp., Walt Disney and Viacom increased 9% to $22 billion in the past year, compared with a 2.5% increase to $18 billion in their broadcast program divisions. The major cable networks now face the dilemma their broadcast counterparts know too well: What price glory?

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