THE BLOG
12/01/2014 05:16 pm ET Updated Jan 31, 2015

Reed Hastings Is an Optimist

Netflix CEO Reed Hastings has predicted the death of broadcasting. He pegged it to 2030 -- 16 years from now.

Specifically he said, "The age of broadcast TV will probably last until 2030." That may come as a relief to many of today's broadcast executives who will be well into retirement by then. It's not their problem.

Well, I don't know what Hastings means by "the age of broadcasting," but if he is giving TV stations another 16 years, his outlook is downright rosy.

Broadcast ratings have been in a steep decline for more than a decade. It's so bad that one prominent media executive described the 2013-2014 season as "relatively good," because ratings were only down four percent to five percent. He expects ratings for the current season to return to the declines of past years -- six percent to seven percent.

There are lots of reasons behind this ratings skid -- increased DVR use, more online streaming, ratings systems that don't count viewing on tablets or phones -- but the trends are inescapable and the impact on television stations is severe.

Network ratings declines mean station ratings declines. But networks have options that stations don't, and that's a big part of the problem.

Stations rely on network programming to bring audiences to local programs and newscasts. When you stream The Good Wife, your local CBS station has lost you. You don't see the ads they sell to local business, you don't see promotions for their other shows and you aren't on their channel at 11 p.m. when their news starts.

And it's about to get much worse.

The problem is that in order to maintain their bottom lines, networks do things that aren't in the best interest of their affiliates.

Networks make shows and air them on their system of stations, of course, but audiences are increasingly using streaming services like Netflix and Amazon. They aren't watching broadcast television as much as they used to. As a result, shows don't get the ratings and ad revenues the networks are used to, so they sell those same shows to Netflix or Amazon to offset the drop in ad income. When shows go online so do viewers, further reducing ratings and ad revenue and making networks even more reliant on sales to Netflix and Amazon... and on and on.

Why don't networks end this cycle and stop selling their shows to these streaming upstarts? Simple -- income from Netflix and Amazon has become so large, earnings projections and executive bonuses are based on them.

Even CBS's Les Moonves, one of the most successful broadcast leaders in history, has said he's proud that his company relies less and less on advertising. If revenue isn't coming from ads running on TV stations, where is it coming from? Agreements with cable companies and sales to outlets like Netflix and Amazon.

And soon, from viewers like you and me.

CBS just introduced its own app that lets anyone pay a monthly fee to watch the network online. For the first time, a network can reach viewers directly -- no television station or cable company necessary. CBS is including television stations in their CBS All Access app for now, but involving stations is a business decision, not the physical necessity that it once was. Business decisions can change.

How does this end?

Studios and networks sell shows directly to consumers and to Netflix and Amazon. What's the point of supporting a network of stations when the big money comes from a few sales to these online giants and an app or two?

When does it end? Much sooner than 2030.

As viewers rely less on stations for network programming, stations lose the leverage they wield to extract fees from the cable companies that carry their channels. These fees offset advertising declines for stations, but when stations are no longer essential to the delivery of primetime programming, cable companies will be less likely to pay them. Large revenue declines follow.

And as if the news for stations weren't bad enough, they've been fighting to keep their broadcast spectrum. Their antennas reach fewer and fewer people, so wireless companies have had their eye on that broadcast bandwidth for a while now, and in early 2016 the FCC plans to conduct an auction allowing TV stations to sell some or all of their bandwidth.

A few stations may decide it's just not worth it anymore. They may sell their spectrum and close their doors (and give speculators a nice return on their investment ). Others may decide they can do without the extra audiences their antennas reach, cash in on their spectrum and get by just fine with cable, satellite and online distribution.

But station owners who want to prove Reed Hastings wrong, even to triumph over their current (and coming) hardships, need to start making significant changes to the way they see their business:
  • They must start by thinking of themselves as local media companies, not just vehicles for network programming and local news.
  • They must get online with their own apps and streaming programming so they can follow their audiences online and serve them on the devices they choose.
  • And they must create a robust, local, digital ad business so they can continue to earn the ad dollars that -- increasingly -- are being diverted from television.

Television stations still have enormous promotional muscle, and this more than anything makes it possible for them to launch and build new features that position them for the future. But this promotional reach fades as ratings slide, so the time to act is now.

Yes, there is work to be done, conceptual and contractual. But if station owners don't get moving, Hastings' 15 years will start to look more like five. And since that's well within the retirement horizon of many of today's broadcasters, this is their problem.