• by Diane Mermigas , November 21, 2008

This is no country for old business models.

There was a lot of tense talk on Capitol Hill this week about how the Big 3 automakers should radically restructure in Chapter 11 bankruptcy, rather than receive more government bailout funds to perpetuate their broken business models. The same can be said for the broadcast networks and their local affiliate television system.

The strain on their dysfunctional paradigm is emanating from a devastating recession and the ongoing digital revolution. Both are permanently altering the rules of play for the networks. A case can be made for at least one of the Big 4 broadcast networks emerging as a glorified general entertainment cable network within the next several years. The economic advantages: more steady ad revenues and consistent subscriber fees as content is distributed cross-platform.

It would be a bold move that a free-spirited company such as News Corp. might already be contemplating for its Fox Broadcast TV Network, or NBC Universal for its peacock network. Industry analysts increasingly wonder how an independent CBS can prattle on under the crumbling old rules. In a world of exploding access and choices, the prime-time ratings (even with Live plus 3 configurations) spell diminishing returns. For Disney, ABC's general entertainment status is on par with ESPN in sports; the new multi-platform model is in place except for formally moving the ABC TV Network to the cable side of the ledger.

As for the TV affiliate part of the equation, its business model has been transforming for a decade against the backdrop of February's mandated broadcast-to-digital conversion. Network paid compensation has given way to affiliates paying to carry programs, and in turn, being paid by cable and other distributors for their signals. Exclusivity has given way to ubiquity. So the only unique commodity is stations' generally underestimated, under-monetized digital value of local news, content, community and advertising.

Local TV stations will ultimately have to make it on their own as markets support only the best and most diverse (as in Hispanic and Indian stations), working in tandem with newspapers and cable operators. The recent decision by NBC and Fox to pool local news resources in select markets is indicative of more changing TV station business models that will permanently reduce and reset the cost base.

The most compelling argument for the Big 4 surviving as cable networks is economic.

Digital distribution is a long way from yielding the financial returns needed to offset the dilution of old-line mainstream revenues. The vulnerability of the broadcast networks' $9 billion in upfront ad revenues will be starkly evident next spring amid the protracted recession. Major ad categories--such as autos, financials, real estate and retail--will be markedly altered in their spending as well as structure. The Big 3 U.S. automakers account for 6% of the Big 3 broadcast networks' ad revenues (9% for Fox) and 2.5% of cable networks' overall advertising (7% for ESPN).

On the cost side, less than 30% of core expenses can be eliminated from program production budgets and legacy operations, which means that the entire broadcast network dynamic must be reengineered. Despite all the complications, the easiest, most efficient business model conversion would be to reset broadcast networks as general entertainment cable networks.

The dual revenue-supported cable networks are one of the few asset groups in media conglomerate stables that are profitable in a depressed economy. Cable is the only reliable growth component to the 25% of $285 billion in total U.S. ad revenues still filtering to television. The best cable networks have become more adeptly dependent on original content, with costs similar to their broadcast network brethren, and similarly monetized across platforms and devices. It is the new syndication model, and it's still a long way from paying the bills.

While the most competitive cable networks have closed the ratings gaps with broadcast networks, they still fail to command similar ad unit prices. Prices have failed to reflect changed value propositions; that dilemma will be resolved in a digital marketplace. Bottom line: the alignment of broadcast and cable networks is already in place. Cable's niche appeal, parallel to the Internet's special interest "long tail," will continue to nudge advertisers, consumers and content providers toward a more fully monetized online business model.

The irony is that this painful economic downturn is a well-timed catalyst for progressive, pragmatic change in media business models, which normally are dragged kicking and screaming into conversions to DVD, download, video sharing, streaming and other new supply-and-demand options. While the Big 4 are more rapidly embracing video streaming and downloads on their own Web sites and other outlets (from Hulu to YouTube to iTunes), it is access without substantial payback. Eventually, everything will be 20% to 100% monetizable, but not without reset metrics, valuations and consumer propositions.

One of the sure ways to get from here to there is the massive restructuring and creation of new business paradigms that media, automotives and so many other industries require to survive. Better to take the medicine, however bitter, than have someone pull the plug.