The Myth of Digital Dimes (Part 1 of 3)

"We can't replace analog dollars with digital pennies."

Jeff Zucker, CEO of NBC Universal, summarized the conventional view of the internet’s threat to TV about as succinctly as possible back in 2008. By March 2009, in part thanks to Hulu’s success and NBC’s part in it, he’d amended his remarks, replacing “pennies” with “dimes.”

But the point remained the same: “digital” would shift audiences, and therefore advertising dollars, from a still-profitable medium to a different one of unknown, but likely much lower future profitability. 

In fact, dollars vs. dimes is both a false choice and a bit of a myth about the comparative economics of linear TV vs. digital. It is also an unhelpful distraction from the real ways in which the internet can be used to strengthen today’s linear television industry.

It’s a false choice because commercial TV isn’t like newspapers where something paid for is easily replaced by something identical or better, and free. Internet-delivered commercial TV, while more convenient than linear programming time-shifted with DVRs, is still far from identical or superior to the real thing – Hulu has a growing library but comparatively few shows and notably very, very few in-season, full episodes.

It’s largely a myth because most run-of-the-mill “analog” TV programming isn’t gushing dollars like ‘American Idol.’ And commercial TV’s digital ads sell at very respectable unit prices with every prospect of significant price premiums for superior demographics, sharper targeting, and greater measurability as the digital audience gradually grows and programmers get a better handle on what do.

So, in television today any gap between analog and digital is one of dollars to, in a worst-case scenario, somewhat fewer dollars. Not pennies. This (smaller) gap’s existence is due not to some inherent “Law of Digital Economics” but to a few practical factors and conditions which prevail in the television business:

• It ain’t all ‘American Idol’: Implicit in much of the dollars-to-pennies imagery is a wildly misleading contrast between say, News Corp.’s entire revenue stream from ‘American Idol’ versus the ad revenue from running pre-roll commercials in a YouTube video of dancing cats.   Let’s concede that anything with a double-digit rating (i.e. 10+ million viewers) is a non-starter for today’s digital TV to come even remotely close to. YouTube, Hulu, whatever, simply can’t yet aggregate audiences for a specific program at a remotely comparable scale. But that’s a rarified case combining winning broadcast networks (e.g. CBS, Fox), and/or highest-reach cable channels (e.g. USA, TNT, ESPN), day parts (primetime), and shows (e.g. Idol, NCIS, etc.). Take out the top ten broadcast and top ten cable shows and you have thousands of hours of programming where digital can be competitive and/or complementary, not cannibalizing. 

• Digital is small because it’s, well, small: Most people watch linear TV. On a per capita per month basis, linear beats internet TV by one hundred times, as our Time Spent Viewing chart indicates for even young demographics. That sort of gap will easily take a decade to change materially. But, what digital lacks in scale today, it can partly compensate for in per viewer and/or per minute value. Whoever can increase its scale even modestly will uncover a gold mine. Much of today’s linear TV aggregates audiences at a scale where digital can capture incremental, “linear-averse” audience segments, and make a very material contribution to profitability. 

Television Everywhere, internet TV, whatever you’d like to call “digital”, is a strategic development, just not an economically meaningful one as yet. A still tiny digital audience is not yet capable of inflicting actual economic damage on thousands and thousands of hours of programming spread over a ~400-channel linear television universe.

It may become a strategic threat to today’s TV (largely depending on how Hollywood chooses to handle it), but is still far from turning anyone’s dollars into pennies, and is likely to add dollars to the existing television business in the medium term.

In Part 2, we’ll take a look at how audience tiers and ad revenues line up in the day-to-day (i.e. non-‘American Idol’ ) world of the television business. In Part 3, we’ll look at a digital “case study” and see how analog dollars today, under the worst-case conditions could result in fewer dollars, but why that is in fact unlikely.