Lately, there has been a sharp debate in the United States between cable companies, online distributors and mainstream content providers over the cost of content. This intensified most recently when Fox went so far as to black out New York City from the first game of the National League Championship Series and was threatening to black out the World Series and key NFL games just before a deal was agreed. By blacking out what some consider to be their most valuable content -- sports programs -- Fox used the full weight of its power to force Cablevision's hand. This fight has huge implications which are being poorly covered in the media. Most important to recognize is that fighting about the price of content has disguised the real issue, which is about how much viewers value the content and the resulting effect on advertising prices.
Cable companies make money in two ways -- through subscription fees and through advertising. The networks make their money from advertising and re-transmission fees from cable companies. As the internet, DVR, and the diversity of choices available on cable have eaten into the networks base of eyeballs, it has been more difficult for them to demand the same price point from advertisers. In 2009, advertising revenues for network television were down almost 12% from 2008 for network television. However, their share of advertising revenue in relation to other outlets remained almost flat. The networks hold the line on share by selling more advertising. This further encourages eyeballs to leave to alternatives.
The eyeballs are not fleeing TV programming (yet), they are fleeing the device and the manner in which it is delivered. So they go looking for the programming somewhere else and people are increasingly finding it on the internet.
While it currently holds a small share, the Internet is seen as one of the big threatening alternatives to TV. It disproportionately attracts younger viewers, thus having a long-tail effect, and since illegally obtained content is not counted, it should be assumed that the numbers getting content over the internet are much larger than publicly recognized. Any growth in its share of the market has a double impact on the industry because in the short term it reflects a loss in advertising dollars and in the long term for the cable companies, some percentage of the public do drop their cable bill when they realize what is available online.
As advertising revenue diminishes the networks who do not have the steady income from cable fees, have tried to shift costs over to the re-transmitters (the cable companies). The cable companies though, who are also taking a hit on advertising and seeing customers leave, are not inclined to subsidize the networks. Thus, the use of championship baseball and the NFL as trump cards.
As revenues have steadily declined, the networks have sought to reduce cost and that is one of the reasons we have seen such a huge shift to reality TV in the last 10 years. To demonstrate, let's look a a comparison. Charlie Sheen, star actor of the CBS sitcom, Two and Half Men, is paid $2,000,000 an episode (yes, this is insane if you have ever watched that show), while a 30 second spot commands $206,000. Also, it was just announced that the stars of CBS's Big Bang Theory will be getting $200,000 an episode each, with a 30 second spot commanding $195,000. By comparison, it has been reported that American Idol singers get paid nothing unless they make the top 10 and then they get $1000 an episode and the most recent figures I can find indicate that the judges might make approximately $2,000,000 for the entire season. However, an episode of American Idol can command as much as $500,000 for a 30 second spot.
Reality TV has saved television not just because people love it, but because it is ridiculously cheap. Yet, it has escaped almost no ones attention that the quality of many of the reality shows is diminishing, thus encouraging more people to look somewhere else, so the very thing that is helping save network TV may ultimately kill it.
Given all of this information, it is easy to wonder why the entire industry of content producers and advertisers have not responded more creatively. Rather than adapting their advertising model, the networks and cable still sell ads as if this was the era of Mad Men. However, everyone from the content distributors to the ad creators to the ad buyers are concerned about possible losses if they are forced to change. The new model, largely represented by the internet, presents two problems for those operating in the current system.
First, the current model presumes the viewer doesn't get a say in what ads he/she sees; you watch and in order to watch, you agree to watch the ad. This is outdated. No one is forced to watch anything so the smart thing to do would be to ask an individual viewer what they want to see. This is happening in a limited way on such internet channels as Hulu, but it is not going far enough. As a viewer, my interests are for sale if an advertiser only wants to make me an offer. I'm willing to pay for content but I'm also willing to give you information about myself so that you can show me ads I want. What I think terrifies advertisers about this is the metrics. CMOs can now tell down to the hundredth of a percent how many people are clicking on an ad and what the conversion rate is and this is going to put a lot of bad advertisers out of work.
Second, with the old model ad sellers depend on the sheer size of an audience to provide value to the advertiser. In the new model, where micro-demographic data is available on viewers, content can be tailored by location, race, age or any other number of criteria. This is harder work and it requires more resources be put into production and into the research of ad buys.
The fights we see now are designed to attempt to maintain the networks' predominant position at the top of the pyramid. By demanding big dollars and using their most valuable content (and not inconsequentially, the content least available on the internet) to leverage the fees they want, the networks are being smart. One wonders though how many more times the networks can play this card. For that matter, one wonders how much longer cable companies can hold on. Viewers want choices, not just in content overall but in how it gets delivered and how they pay for it. In a subsequent piece I will suggest some options.