Introduction
The broadcast and cable industries may be poised for change in the next two or three years, primarily because of four challenges to their revenue. Most of my data is drawn from Standard & Poor's Industry Survey and is followed by my analysis. Some of the analysis is based on interviews with the following, whom I gratefully acknowledge:
- James Hosty, National Sales Manager, Radio One
- William Moll, President, Clear Channel Communications Television Division
- David Shackmann, Regional Sales Manager, Time Warner Cable
- Karyn Hutson, President, Hutson & Hutson Advertising
Challenge 1:
Identifies A Temporary Downturn For Broadcast TV
While the Olympics and elections may help boost television income, the Standard & Poor's outlook for TV broadcasters' revenue growth is a modest 5% through 2004. Advertising expenditures in broadcast TV were 44.8 billion in 2002, dropping to an estimated 42.10 billion in 2001; in comparison, cable TV advertising expenditures were 14.4 billion in 2000, rising to an estimated 15.6 billion in 2001.
Standard & Poor's projects that cable will have an annual revenue increase of 14% or higher through 2004. In contrast with the dependence of broadcast television on advertising for revenue, cable can continue to draw increased income from new broadband services, subscriber growth, rising demand for higher-priced packages (including digital services) in addition to strong advertising demand.
Our Analysis:
The broadcasting industry depends on advertising for revenue. The decline in advertising caused by the recession is accompanied by increasing competition for advertising dollars from cable, which offers a targeted audience.
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"If we distinguish between the effect of the economy on the two media and the economic strengths of each medium, it becomes easier to predict their reactions to the economic downturn."
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The growth in cable's market share from 10% in 1985 to 38% in 2000 also attracts advertisers to cable, but broadcast television still commands the 25-54 year old general market, which is where the consumer purchase power is. Obviously cable's revenue growth is coming from somewhere, which means money is being taken away from broadcast. But since cable's 38% is divided across 125, mostly niche channels, advertisers still tend to prefer either broadcast over cable or a mix of broadcast and a cherry pick of cable to reach large audiences quickly.
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"The rub, however, is that having to resort to belt-tightening precludes investing money to generate more hit programs to attract the top-dollar advertisers"
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If we distinguish between the effect of the economy on the two media and the economic strengths of each medium, it becomes easier to predict their reactions to the economic downturn. Cable will continue to add new channels and programming to build on its strength of targeting audiences and will simultaneously compete for an increasing share of the general market attracted to the quality of programming and general appeal of shows such as sports. Cable will also continue to invest in using media in new ways such as video on demand and interactive TV and in non-traditional services - broadband, digital services - because these bring revenue and draw new subscribers. Broadcast will probably adopt belt-tightening measures. Aside from independents such as WB, broadcast will do nothing to risk its mass reach to the 25-54 general market, which has the buying power. The rub, however, is that having to resort to belt-tightening precludes investing money to generate more hit programs to attract the top-dollar advertisers. Because of the recession, broadcast has lost the revenue of hard-hit advertisers such as the auto industry, which alone traditionally provided 25% of national TV advertising.
The belt-tightening is already being felt: revenue sharing with affiliates is being reduced as contracts are renegotiated. Affiliates are negotiating the price of program renewals and adding local news programs instead of buying syndicated programs to the extent that local news programming now accounts for over 20% of affiliate programming.
As to where will they invest, despite the belt-tightening mode, investments will probably include non-traditional channels such as Internet sites that provide news updates, clips from hit shows, and sites providing community services such as weather updates. Multimedia website development is 1) inexpensive and 2) a source of revenue that does not compete with their television revenue because they run simultaneously. Although their Internet sites currently account for only 2% of revenue, these may become profitable and compete with radio. A recent Neilsen finding is encouraging for television: Internet users watch more television than non-users. In contrast, radio is losing listeners to the Internet.
Challenge 2:
Identifies A Decline In Younger Radio Audiences
Standard & Poor's indicates that 12-24 year-old-audiences are declining in radio listenership, which may be cause for concern since young listeners form media habits and loyalties that can last a lifetime. Reasons for the decline are identified as:
- Dislike of the high frequency of radio ads,
- Preference for media on CDs, and
- Time spent on the Internet for entertainment as well as information.
Half of the Internet listeners in this age group prefer Internet-only sources, while 40% prefer streaming audio from the traditional radio stations. "The industry will probably need to be pro-active in serving [young listeners] in order to retain and cultivate its audience, whether through airwaves or the Internet."
Our Analysis:
Since radio is losing total listening time to cassettes, CDs, and the Internet, the need for creative programming is evident. But radio broadcasters are unlikely to significantly change their on-air formats or advertising frequency to woo 12-24 year olds, and for persuasive business reasons:
- The decline of 12-17 year olds by 11% (from 1993 to 2000) is unlikely to affect revenue because this age group generates little advertising income
- In contrast, 18-24 year olds do generate advertising dollars, and their 14% drop (in 2000 from 1993) is of greater concern. But radio broadcasters are drawing them in through non-traditional means, mainly Internet streaming audio from radio stations and sponsored concerts. The consolidation of stations within single marketplaces allows broadcasters to bring in concerts that attract young crowds, produce gate and concession revenue, and generate income from spots aimed at the young crowds.
- Tastes change as young people mature. The 18-year-old who listens exclusively to CDs or music-only stations is apt to prefer a mix at age 25 of music and talk shows, news, local weather and traffic. CDs may be as accessible as radio but cannot offer this mix.
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"Perhaps the greatest opportunity to be pro-active is through the Internet."
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Certainly radio cannot compete with television as the preferred advertising medium, because it lacks the impact and reach of cable or broadcast TV. Yet revenue for both broadcast radio and television is expected to rise in the next five years due to deregulation and consolidation; Standard & Poor's predicts that radio may even "exhibit the stronger growth of the two media." Perhaps the greatest opportunity to be pro-active is through the Internet. The Internet is where radio:
- Can afford to take risks without offending advertisers and shareholders in order to retain and cultivate an audience of all ages,
- And can make long-term investments in generating revenue against competition from television and Internet-only sources.
Challenge 3:
Commercial Vs. Satellite Radio
Another challenge to commercial radio identified by Standard & Poor's comes from the launch of satellite radio, offering coast-to-coast programming that is commercial-free. Two companies - Sirius and XM Satellite Radio - each will provide up to 100 channels of music, news and talk radio for a subscriber fee of approximately $13 a month plus home installation of the satellite receiver needed for the service. Their success will depend both on consumer demand and the willingness of car companies to install the satellite receivers. The new companies are predicting several million subscribers by the end of 2004.
Our Analysis:
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"It is likely that satellite's appeal will be limited primarily to the long-distance driver."
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Only XM has launched so far and has barely 30,000 subscribers, but satellite radio may eventually erode broadcast radio's already diminishing total listening time. That would mean reduced advertising impact and would threaten radio's advertising revenue. It is likely, however, that satellite's appeal will be limited primarily to the long-distance driver, who is more apt to value hours of commercial-free listening time and not having to spin the dial driving in and out of broadcast markets. In contrast, local travelers with shorter travel times may resist paying a monthly fee because they are more apt to feel satisfied with their current options of radio, cassettes, and CDs.
One advantage of radio over the satellite competition is that broadcast radio is local. When listeners want to hear the local sports, news, weather or traffic, their option is the local radio station. Comforted by these assumptions, and aware that technologies will change by the time satellite radio is out of its infancy, radio broadcasters will probably take a wait-and-see attitude rather than launch an initiative against satellite radio.
Challenge 4:
Cable vs. Satellite TV
Cable is challenged by direct broadcast satellite (DBS) as the preferred method for distributing TV programs and high-speed Internet access. According to Standard & Poor's, cable is losing customers, who want the digital services, many channels, and interactive services that DBS provides. The cable companies need time and money to upgrade the cable networks that reach their large and widely dispersed customer base. For its part, subscription to DBS remains more expensive than subscription to cable services and reception is sometimes poor in inclement weather. Standard & Poor's estimates that satellite may become particularly effective in less densely populated areas where cable is slow to upgrade service offerings.
Our Analysis:
As Time Warner Cable's Dave Schackmann puts it, "vicious" is the word to describe the competition between cable and satellite. Both are adding channels, digital music services, high-speed Internet access, interactive television services including banking, video games and online shopping, while simultaneously offering substantial discounts to win customers. We predict that DSB may pull back in the next year or two as mergers between major satellite players occasion regulatory reviews, company integration, purchase of equipment for combined services, and possibly even a hike in customer fees to pay for the price of merging. But it would be a mistake for cable to become complacent. In the long term, satellite will threaten cable not only with more and more distribution services, but easier access to new markets here and abroad by virtue of its satellite technology, and television content. The satellite company is on the horizon that offers:
- Local broadcast,
- Regional and national sports,
- A mass appeal network such as a new Fox network, and
- Can equal or surpass cable distribution services and markets.
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