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Last weekend, I wrote about the future of the TV business, which it seems to me may be on the verge of collapse.
I'm not worried that video storytelling will go away--we're watching more video all the time. I'm just concerned about the incumbent TV business. As in, the "network" and "pay TV" industries that have made so many TV industry executives and shareholders so wealthy over the past 7 decades.
The TV industry, it seems to me, is at the same place the newspaper was a decade ago: User habits are changing--we're getting our "shows" and news from other sources than traditional networks and TV distributors--but this change has not yet been felt in the TV business.
The newspaper business held up for almost a decade after the Internet first started eating into it. But then, all at once, it collapsed. I think the TV business may be headed for the same fate.
I got lots of feedback on my article, from wholehearted agreement to dismissive disagreement. Dan Frommer of Splatf, for example, wrote a smart rebuttal here. And a TV equity analyst named Brian Wieser at Pivotal Research Group has now addressed my argument point by point.
Brian has been kind enough to allow me to share his whole report with you. So here goes (I'll weigh in with some counter-point in a future post).
The Death And Life Of TV
by Brian Wieser
Senior Research Analyst
Pivotal Research Group
BOTTOM LINE: The death of TV has been predicted with regular frequency. We’re aware of prophecies of doom which date back at least to the 1970’s when fears of “zipping” (fast-forwarding with a VCR) and “zapping” (changing channels with a remote control device during airings of commercials) suggested the end of the commercial TV model. While future life is never assured for any business, evidence put forward regarding the limits of television (and TV advertising in particular) tend to ignore what we have observed are its key drivers. For our area of focus, advertising, those drivers relate to the sustained presences and continuous emergence of oligopolistic categories of marketers who differentiate themselves from their direct competitors by virtue of the awareness of attributes they generate uniquely via television.
In our universe of coverage, CBS is largely dependent on the prospects of health for the television industry in the United States and around the world. Our view on television advertising is a core underpinning to our BUY recommendation and $37 price target on the CBS stock.
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One of the most detailed pronouncements on what we characterize as the “death of TV” was published last week on Business Insider, Henry Blodget’s online media/technology-focused publication. The depth of the article certainly aroused more than a little attention among some of the investors and industry contacts we interact with. (Article can be found here: http://www.businessinsider.com/tv-business-collapse-2012-6)
While the article is certainly thoughtful and among the most detailed we have read on the topic, we fundamentally disagree with many of the article’s underlying data points and related conjecture. Thus we also disagree with the conclusions. Given the interest and queries which came our way, we thought you would find our critique of the article to be of interest.
Blodget’s article begins with observations of the newspaper business, well-summarized with a chart highlighting the decline of the business on an inflation-adjusted basis from a peak of $60 billion in inflation-adjusted advertising revenues in 2000, and closer to $20 billion by 2011. His narrative is the one part of the article we generally agree with, albeit with some exceptions.
“The digital audience stopped using newspapers as a reference and source for commerce. They browsed on eBay and Craigslist instead of reading classifieds. They got their movie news from movie sites. They got real-estate listings from real-estate sites. They learned about "sales" and other events from email and coupon sites. And so on….newspapers were screwed. It just took a while for changing user behavior to really hammer the business.”
In our view, newspapers were hit by a few items over the time period in question. First, the classified market got whacked by a free alternative, Craigslist, leading to an evaporation of that segment (down from $20 billion to $5 billion between 2000 and 2011 in absolute terms).
Second, the primary segment of marketers that relied on newspapers – small and local brands – increasingly became regional and then national, and thus prioritized national media. Retail advertisers and national advertisers’ traditional newspaper advertising fell from $27 billion to $15 billion over the same period, 2000 to 2011, and their transition away from local advertising contributed a significant share of the decline (advertising in local media fell from 63% of mass media advertising to 50% of mass media advertising during this period).
Third, many other emerging small and medium sized marketers prioritized paid search, limiting the prospects for a rebound in either of the above sources of revenue regardless of changes in consumer trends in any direction.
Thus, we would argue that declining consumption and changing behavior was part of the story, but not the only factor hurting newspapers. Arguably, the same trends which hurt newspapers have benefitted television given its prominence among marketers whose business goals are assessed at a national level.
Blodget’s specific points about television are more debatable, even as they resonate with many of the investors and industry practitioners we interact with.
“We almost never watch television shows when they are broadcast anymore (with the very notable exception of live sports)”
This assertion is not representative of the broader population. Across the entire universe of DVR-using households, Nielsen’s monitored panel establishes estimates that approximately 17% of TV viewing occurs on the DVR; thus 83% of viewing occurs on a live-basis in those homes. Across the entire population, as only slightly more than 40% of the population has a DVR, approximately 93% of total viewing is live, and we can be virtually assured that almost everyone watches some live TV over the course of a month.
Some extrapolation from these and other data points highlights a more important truth: live viewing is cumulatively up over the past decade. In other words, what was once the most dominant medium remains dominant, and by a significant margin.
To illustrate, the average person watched 29 hours of programming per week in the 1999-00 season and 34 hours during the 2010-11 season. Across the entire population of 295 million adults, this equates to 10 billion person hours of annual TV consumption in 2010 vs. 7 billion person hours in 1999-2000 given a population base of closer to 246 million. In other words, total TV consumption has grown by approximately 40% with only 7% of it eroded by DVRs. Even in homes with DVRs, assuming the average consumption levels are similar in homes with and without DVRs, more live consumption occurs today than did a decade ago.
“We rarely watch shows with ads, even on a DVR”
We would argue most people don’t notice when they are exposed to most ads. The reality is that most TV is consumed in a passive manner, and often TV is a secondary activity, with consumers focused on other endeavors. That doesn’t mean the ads consumers are exposed to under such circumstances are ineffective (if a consumer can hear a commercial or sees it muted, there is still some impact). Notably, the percentage of ads viewed while DVRs are in playback mode has risen over time as the hard-core ad skippers account for a smaller and smaller share of the DVR-owning universe.
“We watch a lot of TV and movie content, but always on demand and almost never with ads (We're now so used to watching shows via Netflix or iTunes or HBO that ads now seem like bizarre intrusions).
Traditional TV content still dwarfs consumption on other platforms; ad-supported content is still the dominant form of traditional TV content (PBS and premium cable account for a very small share of total viewing)
“We get our news from the Internet, article by article, clip by clip. The only time we watch TV news live is when there's a crisis or huge event happening somewhere. (You still can't beat TV for that, but soon, news networks will also be streamed).”
TV news still drives audiences at a local level. It certainly drives political advertising. At a national level, Fox, CNN and MSNBC remain large and usually growing businesses.
”The user behavior that supported the traditional all-in-one TV "packages"--networks and cable/satellite distributors--has changed.”
Empirically, this would not appear to be correct. Until recently, Nielsen published data indicating that most consumers would view around 20 channels in the course of a month, and the number of channels tended to rise with time (and fragmentation, which resulted in more choices appealing to divergent audience niches).
Further, assertions regarding preferences around a la carte programming tend to presume that pricing for television channels would be pro rata their current costs. This would clearly not happen. Programmers would incur new marketing costs (which they would seek to make up) as they chase subscribers; further, an entire paradigm of advertising would change in an a la carte world such that advertisers would shift budgets to free-to-air broadcasting (or other similarly broad-reaching programming). This means that most of the most popular programming on today’s cable programming could only survive with per channel pricing that is multiples higher than many consumers would anticipate.
“…Our type of household may still be in the minority, but we won't be for long. And our type of household is the type of household that many advertisers and TV networks want to reach. We're still in "the demo" (24-55), and we're still buying a lot of stuff.”
This isn’t necessarily the case. As DVRs penetrated broader audiences, consumption of recorded programming fell largely because marginal adopters of DVRs tend to be marginal users. Those who have the most aggressive/in-control viewing behaviors were early adopters. Further, there is no reason to assume that DVRs or on-demand access to content becomes as pervasive as conventional, traditional television (at least in an investable time horizon). The United States is a country whose income disparities are widening. We suspect lower income populations will be less likely to pay $13.95 per month for DVR service than those with higher incomes.
To that point, advertisers seeking higher income, heavy purchasing populations do use television for their marketing activities, but marketers who choose to use television as their primary marketing vehicles tend to need to reach everyone (or virtually everyone). To that end, lower income consumers matter, as a low income household could potentially spend almost the same amount of money on toothpaste as a higher income one. A low income household may be just as likely to see a certain movie as a higher income household.
“"Networks" are completely meaningless. We don't know or care which network owns the rights to a show or where it was broadcast. The only question that's relevant is whether it's available on Netflix, Hulu, Amazon, or iTunes. This means that one of the key traditional "businesses" of TV--the network--is obsolete.”
We would argue that networks as brands are not meaningless. We agree that consumers will be loyal to specific programs (such as the programs which tend to appear on broadcast networks and which increasingly appear on cable) but they are also loyal to genres of programming, and the networks which are synonymous with those genres. So much of the consumption of cable programming in particular can be a function of consumer association with a cable network’s brand.
“The vast majority of money TV advertisers spend to reach our household (~$750 a year, ~$60/month) is wasted, because we rarely watch TV content with ads, and, when we do, we rarely watch the ads.”
Short of an ethnographic and econometric study of the media and purchasing patterns found in groups of households, it’s difficult to assert with certainty what money spent on advertising is wasted and what advertising is not. Companies such as TRA have established methodologies to triangulate between viewing data and purchasing data and would be able to provide a broader statement of whether or not households fitting a certain profile directly purchased goods. More importantly, television is not now and is unlikely to become any time soon a “one-to-one” medium. The delivery of television is most efficiently provided on a “one-to-many” basis. This means that there will inevitably be some advertising which is wasted under any circumstance. The question will always be whether or not a marketer had a better alternative available to accomplish the goal they were seeking.
“The vast majority of money we pay our cable company for live TV (~$1,200 a year / ~$100/month) is wasted, because we almost never watch live TV and we can get most of what we want to watch from iTunes, Netflix, Hulu, and Amazon.”
The vast majority of households do watch live television. Network TV in particular can still reach virtually the entire population over the course of a given month. This underpins its appeal when marketers establish their plans. No other medium can come close to this level of reach, and none approaches it for frequency either. These are the two primary metrics marketers use to establish their media budgets.
“The traditional "network" model is likely to break down and be replaced with far larger "libraries" of content and far more efficient content production, acquisition, and distribution.”
The network model will persist in large part as a function of retransmission consent rules which will ensure that it is possible for a grouping of local radio-frequency licensees to oblige MVPD (cable, satellite and telco providers) to carry certain programming. With the associated economies of scale, these groupings (what we’re calling broadcast networks) will be able to continue to afford to produce the broadest reaching and most broadly appealing content. If retransmission consent rules change, the model may change too.
“The cost of traditional pay TV will have to drop--users will have to get more for less, or they'll stop paying for much at all. I might value the TV content we get through our cable company at $20 a month--about 1/5th of what we pay for it. Eventually, as soon as I can figure out ways to get the few sports I watch another way, we'll stop paying the $100.”
The value of traditional pay TV will not have to drop at least for as long as consumers continue to exhibit a preference to take today’s multichannel video services as they exist today and for as long as a la carte programming access rules are not mandated. Most importantly, expenditure-sensitive consumers will continue to access basic broadcast signals (because MVPDs are obliged to carry them) and then certain broad reaching networks will be those which are next packaged together for consumers. These will be the networks that advertisers will continue to concentrate their budgets on.
“Cable TV ratings over the past year have dropped sharply”
Ratings for collections of individual networks may have fallen but consumption of the medium has not fallen in a statistically significant way. Ratings (important for short-term monetization at a specific network) and consumption (important for the meidum’s long-term health) are not necessarily the same thing.
A recent survey from Nielsen, meanwhile, included some startling statistics, including the following:
-The percent of people worldwide who watch TV at least once a month dropped from 90% to 83% over the past year.
-The percentage of people who watch video on a computer once a month--84%--is now higher than the percentage who watch TV.
Self-reported data such as that described above (according to the underlying source of the Nielsen survey) should never be relied upon, as it is inherently a flawed way to measure media consumption. Socially preferable answers are inevitably provided under the best of circumstances and are reflected in the disparities between measurements of self-reported consumption vs. passively measured consumption which are widely known by the media research community.
It’s also worth noting that the underlying survey this data references is both a global survey and one which only surveyed online consumers. These flaws collectively render the data as functionally useless.
We think the debate around these issues provides a useful forum to better understand the industry and its evolution. To that end, we welcome your comments and questions about these or other related topics.
SEE ALSO: Don't Mean To Be Alarmist, But The TV Business May Be Starting To Collapse
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