The Myth of Digital Dimes (Part 2 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.”

In Part 1, we explained why dollars vs. dimes is a false choice and, even today, with “digital” viewing at 1% or less of linear television, an exaggeration of the economic gap.

Here in Part 2, we look at analog dollars in more detail to demonstrate that the starting point, the “dollars at risk” come in manageable but highly fragmented, chunks. So while television's overall value proposition - mass audience reach - remains solidly in place, it's worth looking inside the black box to see what mass reach means. It rarely means a 31 rating of Tuesday's 'Idol'. Those sorts of ratings are neither the industry norm,  nor are they an accurate portrayal of what digital might be “replacing.”

Instead a single-digit primetime ratings average is common (see ‘Audience Tiers’), with the majority of cable channels tailing off fairly quickly into the few hundreds or even tens of thousands of primetime viewers. For purposes of our discussion here, we've divided audience reach into three tiers: half-a-million and under (<0.5 rating), between half a million and one million (>0.5 <1.0), and above one million (1.0+). We’ll use those same tiers and compare them to ad pricing (CPMs) typical for that kind of reach. 

By channel count, the vast majority of the 400-channel universe is in the first tier – half-a-million or below. All three tiers produce analog dollars but clearly you'd like to be in the middle or top tier because your ad rates benefit from the scale you deliver. Multiply that by the substantially greater audience reach at the top two tiers and you see the economic role of scale in analog dollars. He who has the biggest audiences wins. The combination of the two charts also explains, by the way, why you see enormous quantities of “paid programming”/infomercials during undesirable or near-remnant dayparts on low-rated cable channels. Shamwow!

Connecting the audience tiers to the ‘TV Ad Pricing’ chart helps you understand that the vast majority of channels combine modest ratings with CPMs well below the rough broadcast network average of $25. The thin slices on the left of the CPM chart align with the bottom two audience tiers in the chart above it. This matrix is where reality is for most of Hollywood, most shows, and most cable channels. This reality is well within the economic range of complementary digital dollars, not dimes, as we’ll demonstrate in Part 3.

To the extent that analog dollars have been turning into dimes, it’s largely because the particular linear shows or channels have failed, not because of any digital “replacement.” Low-rated broadcast network channels (ahem, NBC) with comparatively high programming costs do not compete profitably with cable channels that have significantly better cost structures, are free from the burden of O&Os, enjoy plenty of carriage fees, and much lower programming cost per minute.

In Part 3, we’ll look at the economics of “digital” with respect to the daily reality of modest audience tiers and CPMs – both to debunk the threat, but more importantly to begin understanding how digital economics have a constructive role to play.