TV is changing right before our eyes, and it seems an irreversible trend. We have repeated these assertions over the past 7 years and not seen them echoed anywhere else, except in whispers. And the recession is just the trigger to accelerate these changes.
Scattered throughout this week’s headlines you can seen evidence of the direction of these changes.
Perhaps the most notably change is the way media this week has come out and declared that the US Upfront negotiations have been pretty much a disaster, with sales down some 15% on previous years. In the past all coverage was positive, no-one in the traditional media accepted or confirmed that US broadcast advertising is a shrinking asset. Not until this recession.
For years the key focus has been on whether the cost per 1,000 viewers negotiated by this national broadcast group or that group, was up or down, and how much money had been sewn up in advance of the new season of TV series. While we have always focused on the idea that the total amount of money changing hands has been repeatedly down for around 4 years, something that has never happened since World War II.
Now all the media are shouting it, but happy to blame it on the recession, and the strength of online video and cable. But it is more fundamental than that and there are multiple power struggles going on right now.
One of the core messages from the Upfront, where usually $9 billion of discounted, early market advertising is sold, is that the broadcast networks are holding onto their advertising, so that when the recession lifts (when is that? Next quarter, next year or next decade?) they will still have plenty of inventory to sell at improved rates.
There is always spin in this market, and the strength of the buyer’s hand is evident, because they are offering low rates, and any money not soaked up now is not likely to go back into TV advertising at higher rates, but instead will be applied to more effective and provable advertising forms, such as the internet. But even some forms of internet advertising are suffering in this recession, and the slower than expected exodus to watching TV on the internet (oh yes it’s happening, but it has been a long time coming), has meant that video based ad formats, while growing fast, make up a tiny percentage of internet advertising.
In the past the investment research houses have blandly swallowed the message that all is well in broadcast advertising, but this year a number of them are citing concern and weakness in the companies that own most of the broadcast advertising.
One such, in Wells Fargo Securities put out a note saying that cable networks will sell about 45-50% of their available inventory versus 55%-60% last year while broadcast networks will sell around 70% this year versus 80%+ last year. It says that if subsequent advertising doesn’t firm up soon, media stocks will fall.
This will hit Disney (ABC), CBS a little and News Corp through Fox and GE through NBC somewhat more, according to Wells Fargo figures on sales and audiences.
But the content companies are in the same situation, with Viacom, one of the US’s most prolific network owners, way down on revenues, despite audiences holding steady or better.
The same is true for the Discovery Channel and even Disney’s ESPN ‘ the sporting mustang of this market.
And a number of quarterly results have underlined this, with the CBS second quarter revenues down $390 million to $3 billion due purely to ‘advertising’ softness and that’s despite acquiring CNET and counting its revenues in there. Operating income more than halved to $242 million from $637 million, and partly due to early retirement of debt and some tax re-shuffling, the company made a loss. If those were taken out of the equation CBS would have made $57 million compared to $330 million last year.
In its TV arm CBS revenues fell 10% and advertising sales for TV fell 13%. The other big arm at CBS is radio, down 23% to just $322 million from $416 million for the same period last year.
The ex-parent of CBS, Viacom, more a content producer than broadcaster showed similar numbers, when it reported in July ‘ revenues off 14% and earnings off 32%, with the damage being done just as much in filmed entertainment as in advertising. It seems that in this recession not everyone is going to the cinema or watching TV.
But we have to remind everyone at this point that all these numbers include considerable advertising revenues from internet adventures and experiments. Two key issues have shaped advertising in each of the Upfronts of the past two years ‘ one was the fact that DVR advertising was initially counted, and then largely discounted, unless watched within a day or two of recording and the other was that internet deals have been cut to sweeten the Upfront, so big chunks of internet advertising owned by the broadcasters were thrown into the mix in order to put a plaster over falling revenues in the past. A sticking plaster is no longer enough to cover up the wounds in broadcast, what is needed, and it has to be soon, is an entire business rethink.
So while we have the TV networks hurting, do we have the same level of hurt among the companies that bring Pay TV services to US and global homes? The answer is a resounding no (unless you happen to alight solely on the figures of Dish Networks).
And this creates a genuine disjoint in the community. If Comcast, Charter, Cox, Cablevision, DirecTV Virgin Media, Sky and UPC are all doing fine around the world, then their suppliers, especially those which are entirely advertising based, are going to cast an increasingly jealous eye at their operator customers.
In each economic cycle the response is the same at broadcasters ‘ who own exploitation rights to much content, and at studios who make content and TV channels. In times of plenty content companies drop the prices charged to operators to carry channels. They do this so they can reach every home possible and drive up advertising. In times of famine, they regret that decision and try to reverse it. So put yourselves in Viacom’s shoes, what’s your plan. Or in CBS’s shoes?
The cable networks will ask for more money from the suddenly impervious cable operators and still growing satellite operators and the burgeoning IPTV players and they will all say ‘No deal.’ Things can get nasty in that kind of environment and colleagues that have worked together for life can suddenly find themselves not speaking.
At the same time the broadcasters must take their content to the internet and use it to get a second helping of advertising revenues, one which isn’t quite so deflated as their traditional markets. So this will accelerate the creation of Hulu and Hulu-like businesses such as CBS’s TV.com. That doesn’t mean that the majors will launch brand new services, but it will mean that internally there are a lot more believers that this is the future, and more investment and more content will be made available.
Broadcasters and broadcast TV, like newspapers before them, are not dead because of the internet and even if you ignore their efforts to harness the internet directly, their own business will continue on into the future ‘ it’s just that it will be a smaller overall business.
But this drift towards greater belief in broadcasting services over the internet, both by the public and by broadcasters, is what is stimulating new ideas like TV Everywhere. If cable and satellite are to be beset on two sides ‘ with more money demanded for carrying programs, at the same time as broadcasting is taking its strongest programming and making it free on the internet ‘ they have to respond in kind. And that’s what TV Everywhere is.
On the one hand it takes away some of that friction between the cable operators and cable networks. There have been instances of cable networks putting their content into internet experiments that might cut the cable operator out of the loop. If that happened on a large scale there would be legal battles, literally for survival in some cases, and their interests would diverge. Then the relative, recession proof, success of pay TV might be threatened.
So why not take the top cable content to the internet, and in the process damage TV.Com and Hulu, but use the process to preserve relations with the cable networks by offering them a piece of the pie either in extended internet advertising sales or in carriage right renegotiations.
But either way, it changes the role of the cable networks forever.
Right now all the pay TV operators are sitting relatively pretty. Look at this quarter’s results.
DirecTV had second quarter revenues up 9% to $5.2 billion, although operating profit was down 12% to $702 million. DirecTV used the occasion to claim global top spot in Pay TV, ousting Comcast from that position, but only doing so by including revenues from its Latin American operations and it now has 24.2 million customers in the U.S., Latin America and Mexico, compared to Comcast’s 23.9 million customers, which is a falling number. You will note that Comcast extracts way more revenue out of its customers.
DirecTV in the US added 224,000 customers last quarter, in its first full quarter of marketing its bundled service with AT&T, which it says contributed to a 17% increase in gross additions. Meanwhile the company cut churn to 1.51%, exceptionally low anyway, and miraculous in a recession. ARPU was also up. Astonishing really.
Over at Dish Network, it managed to add just 26,000 net new subscribers, spending more money in the process, but at least getting the number to be positive, not negative. This pushed net income down 81% to just $63.4 million, while revenue was largely flat at $2.9 billion.
But Dish doesn’t really tell us anything about the change in the TV landscape. It lost out to DirecTV in the auction to get AT&T to sell its services, and so has lost an immensely powerful ally. The Dish Network story is about fumbling the ball at management level rather than falling foul of some industry wide theme. But you have to ask if Dish can survive long term and also ask how long the AT&T alliance with DirecTV can continue, before all those AT&T customers are converted into U-Verse prospects. The fate of DirecTV and Dish seem to us to be inevitably as a single operation, in the same way that Sirius and XM satellite radio were destined to be one.
Dish has of late spent much time talking about a relatively minor victory in its fight with TiVo and this may be the first time that a $12 billion pay TV behemoth is brought to ground because its management spent more time worrying about a single patent misadventure worth $200 million, instead of getting on with business.
Comcast sets the standard for all global cable operators to be measured by. Its strategy has been to try to hold on to the same number of customers that it has year after year, and squeeze more money out of them by getting them to buy more services ‘ broadband, VoD, gaming, VoIP and eventually it will offer mobile voice.
At Comcast revenue grew 4.5% to $8.9 billion, and operating income was up 7.1% to $1.9 billion.
Comcast now counts revenue generating units, breaking out service for each video, high-speed Internet and voice service delivered and said this was 46.2 million, up 3.7% over 2008 which we have highlighted in bold in the table below. The table below gives a clear picture of how it is progressing. (See pdf issue)
It’s fairly clear that Comcast is leaking customers but performing well for shareholders right now. But in the long run a strategy based entirely on this is worrying. It means that Comcast has grown in customers numbers really only through acquisition for the past 7 years, while bitter rival IPTV player AT&T and satellite player DirecTV have grown organically throughout this period.
Does this mean that cable as a technology becomes MORE relevant to less and less people over time? Well perhaps not. With the arrival of DOCSIS 3.0 Comcast and other cable operators can temporarily claim the high ground in broadband speeds, and focus on services which come over an IP pipe, so we will see a resurgence in ‘other’ services. Also once Comcast and its mobile partners at Clearwire and Sprint begin to pick up speed, we will see quadruple play bundles secure even more services for those same customers.
That will not be an easy act to follow around the rest of the world and many other cable players (with the exception of perhaps Rogers in Canada) will have to follow Virgin Media’s example and launch an MVNO in order to provide the potential long term buy in associated with a quadruple play.
Liberty Global, in a sense part of the same business grouping as DirecTV, which is owned by sister company Liberty Media, is purely a cable company and on its own gives us a good feel for how European and Japanese pay TV markets are progressing. Its quarterly figures showed revenue up 4%, cash flow up 8% 206,000 additions in revenue generating units and it switched 1.5 million of its customers from analog to digital services and began selling DOCSIS 3.0 100 Mbps plus broadband in many of its territories for the first time, particularly Austria, Hungary and the Netherlands. It reckons its has $3.1 billion in the bank, some of which it can make available to its parent Liberty Media.
In the UK Virgin Media had the same kind of performance with revenue down a fraction but with ARPU up 3.8% and more fixed telephony sales and DOCSIS 3.0 broadband coming online and customer additions of 159,500. That’s less than last year, but momentum in Virgin’s favor and it seems to have turned the corner recession wise.
Broadband adds were only 5,100 though so it’s not all plain sailing, but the aggregate headline speed of a broadband line at Virgin is now up to 26 Mbps and that will soon show in sales.
This all lead to a net loss of £47.6 million, which is massively improved over previous years losses which were £444.5 million a year ago.
So cable is in rude health but with declining customers bases almost everywhere we look, and we have to ask where are the initiatives in both mobile and in internet content among cable operators outside of the US.
To harp back to another major issue of the week, that of advertising, we have Microsoft finally divesting itself of Razorfish to Publicis Groupe SA, the owner of the Saatchi & Saatchi, for $530 million in cash and stock.
The deal has triggered another general trend that we have gone on about for years. If Microsoft ever begins to falter or have its core revenue slow down, it will need to appease shareholders by selling off its less profitable or less coherent ‘experiments’ into other businesses. So while pundits were quick to say that this may lead to other ‘advertising’ based businesses being sold off ‘ such as its in-game advertising operation Massive, we think its just as likely that ANY unprofitable Microsoft operation might go.
Put yourself in Steve Ballmer’s shoes? Would you keep spending $billions on gaming, when the Xbox had never made a profit? Would you keep Mediaroom alive, when it has almost no new customers for the past three years? Would you continue to keep MSN in the mix when it gets a smaller and smaller share of the internet advertising market? Would you kill Zune? Would you launch a mobile platform to take on Google’s Android?
All these things were rock solid for as long as Microsoft profits continued to grow, but they just stopped growing, so they come into question once again. And the sale of Razorfish is just one more ounce of proof that senior executives at Microsoft understand this and are becoming more critical of holding large, less profitable divisions.
But it also raises the entire issue of the advertising vision that Microsoft has when going up against Google. The idea of its Adcenter technologies was that it would lead to a situation where advertisers could buy whatever ad reach they wanted ‘ specifying demographic, the type of experience that the consumer is currently going through (watching a film, playing a game or messaging a friend), his or her location, the time of day, and their previous spending habits. Adverts could just as easily be delivered online, on a handset, through Xbox Live, or inside a game.
That vision has never looked close to getting to completion for either Google or Microsoft, and right now continuing to invest in the technology for such a vision is probably the least interesting thing that either of them could do. So this is another direction which TV is taking, the future of addressable advertising is pretty much on hold, at the very least until this recession is over but perhaps for far longer. It turns out to be a much more difficult thing to achieve after all.
That bodes badly for everyone putting TV and programming onto the internet, because that needs high value addressable advertising, which brings us full circle to a shift of broadcasting to the internet, and yet not much chance of it making enough money in the short term.
The entire $6 billion acquisition of aQuantive by Microsoft is therefore also brought into question.
Finally in India and China pay TV is currently captured by cable, which is disjointed, analog and in huge need of investment. Now it is rapidly being annexed by both IPTV, but more importantly satellite direct to home. India has added 10 million customers in DTH this year alone, while China has completely failed to get its home grown satellite based terrestrial TV off the ground (unlike its mobile TV effort). Multiple satellite efforts are also taking off in Latin America.
So while the shape of the established pay TV markets is shifting slowly, dogged by the recession, depleting broadcasting and heading towards a chaotic life on the internet, the new world TV markets are rapidly heading towards large footprint satellite delivery, devoid of all the triple play upside that cable and IPTV operators bring.