The Myth of Digital Dimes (Part 3 of 3)

 
So far we’ve shown that the digital threat to television is a good deal more distant (Part 1) than ‘experts’ are saying or at least implying. And that threat is very much under Hollywood’s control as they continue to  be firmly in charge of content rights. Whatever dollars-to-dimes problem television’s been having has been with us well before the internet in the form of audience fragmentation (Part 2) across a now ~400-channel universe.

The real story remains how cable (hundreds of channels) stole so much broadcast network share. Big Media long ago accommodated itself to this reality by ensuring at least some ownership of both broadcast and cable content, whether at the studio or channel level, or both. And the proposed Comcast/NBCU deal is simply the latest and largest step in that direction.

Despite their substantial decline, broadcast networks are still kings or at least tarnished princes of audience delivery, with reach rarely matched by even top cable channels.  Michael Wolff put it aptly in a passing remark during the Conan/Leno drama:

“Networks get you the attention of the nation (true, much less attention than they used to get you, but still the most you can get).” 

Oh, and by the way, in the eight-year period before the economic meltdown, weekday primetime broadcast CPMs more than doubled. Boo hoo.

Let’s quickly dispense with where we are today on digital revenues and their impact up or down. It’s complete noise.

Here are two examples – look at the web impact on two shows: CW’s ‘Gossip Girl’, and NBC’s ‘The Office’.
 
‘The Office’ is mainstream, top-tier broadcast fare, ‘Gossip Girl’ a niche hit with buzz disproportionate to its actual ratings though, to be fair, this one really is a hit “in the demo.” For the “web-equivalent” ratings of an episode we did simple arithmetic on the number of minutes viewed and number of unique viewers. For the revenues we guesstimated CPMs based on our ratings chart and some old prices we have for actual shows – so NBC made around $2.5M per broadcast, CW less than a tenth of that.

We don’t even bother displaying estimated web revenues since in both cases, with audiences so tiny, they would be less than a thousand dollars.

How about some numbers showing what digital could look like if it were a lot bigger and could make money? Would it in fact cannibalize linear TV and turn gold into lead? Let’s assume that:

• real “cannibalization” would mean a defection of, say, 25% of the linear audience to digital viewing (20-50x more than today)
• linear erosion is much more likely in lower-to-mid-tier cable fare which has smaller/more fragmented audiences
• such an audience is likely to be more digital-friendly (affinity between geek/”enthusiast” genre shows, for example, and digital viewing).

In this case dollars don’t turn to dimes, but as the audience shifts from linear to web-based viewing, we incur a net loss of about 12% of our revenue mainly due to lower commercial loads and a conservative view of web-based CPMs (optimists see them being ~2x linear at comparable scale due to higher “engagement”, etc. – we ignored this).

But digital doesn’t exist solely as an alternative option to full-episode viewing. Much, possibly most, of the digital viewer activity will be ancillary views of clips, highlights, etc, whether or not there is any actual defection of linear/analog viewing.  So in this example we gain an additional $60K or so.

So the net effect of a massive audience shift even with the CPMs, commercial loads, and incremental clip viewing behavior that prevails today is… a 3% revenue loss.

While we used an underlying model (i.e. the sample segmentation) for looking at audience shifts, at the end of the day this is all  just back-of-the-envelope stuff – we don’t want “3% revenue loss” to falsely imply precision when none exists. The real take-aways are:

• once you deconstruct the numbers, it’s very difficult to create credible alarmist scenarios of the television business imploding. Long-term erosion – yes. But that’s a story for another day.
• As an incremental medium, especially for different viewing behavior digital economics can be a godsend, not a threat. The folks at, say, Discovery, seem to have figured this out a while ago.
• Digital’s unexploited value (much more on this theme to come in future posts) is in keeping viewers and getting new ones for the linear TV we have today.

We’ll leave to the futurists and other specialists in the “Death of…” genre as to when linear TV is going out of business. Suffice it to say that it could easily be 2020 before material shifts in audience behavior – shifts perhaps even big enough to warrant the cliché “disruptive” – make themselves felt.  The economics of the business continue to suggest an incremental, three-way tug of war. Channels and cable systems will keep trying to have their cake and eat it, while digital distribution partnerships (e.g. Hulu, Netflix) walk on egg shells trying to expand their libraries and their customer base, experiment with a mix of pricing and revenue ideas (ads, a la carte, subscription), all the while hoping to build their negotiating leverage as a next-generation content distributor.

In the meantime, it’s probably best not to count on internet competition driving your cable bill down any time soon.

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.