TV Network Valuations Will Not Be Destroyed by Free Content Distribution

Jack Myers consults with media companies marketers and agencies on revenue generation and economic modelsWith AOL and Time Warner unbundling their misguided mergeracquisition Disney39s DIS decision to join News Corp NWS and NBC as an investor in Hulu and with several senior media company executives sounding off recently about the need to move content behind subscription and micropayment firewalls investors are beginning to pay attention to the value of professional video content Laura Martin Entertainment Cable and Internet Analyst for Media MetricsSoleil Securities expresses concern quotabout the slippery slope of professional content CBS DisneyABC NBC Fox Viacom etc moving from the TV to the PCquot Martin calculates that quotup to 300B of market cap across the entire television value chain is at riskquotMost cable networks restricted by their affiliate agreements with cable satellite and telcowireless distributors have thus far resisted the move to online content distribution but are actively exploring online distribution options Jeff Bewkes CEO of Time Warner TWX has been gaining traction for his quotTV Everywherequot model that enables those who pay for content through one platform to receive it on multiple platforms The economics of this model are troubled at best Micropayments offer a more feasible model but are unlikely to become an industry standard There is growing concern that the fundamental economics of video content distribution will be destroyed in the next several years resulting in value destruction of the broadcast and cable TV content companies How will video content distribution models evolve in the next several months and years and should investors and advertisers be concernedI agree with the concern but I fundamentally disagree with the conclusion that subscriber fees will disappear resulting in value destruction of TV networks Analyst Martin lauramartinmediametricscom reminds us that quotmusic economics were destroyed through unbundling Consumers used to purchase 10 songs in album form bundle vs online they buy only hits Hulu and other online distribution sites unbundle Newspaper economics were destroyed in part by the newspapers giving away for free their premium content that subscribers had been paying for undermining the consumer39s perception of product value and the pricevalue relationshipquotPrimary sources for potential value destruction of television content companies Martin suggests are unbundling reduced online ad revenues competitive pressures driving down bundled TV subscription packages and higher program development costs due to risk transference As Martin points out since May 2006 the SampampP 500 fell 34 while Warner Music WMG fell 85 and EMI Music suffered a similar fate Looking at the newspaper industry between March 2004 and April 2009 the SampampP 500 declined 22 while Gannett was down 95 and McClatchy was down 99 in value Similar economics are impacting TV station groups and the radio industry How can TV network companies prevent a similar free fall Those with a vested interest in the continued viability of network television must be concernedFirst and foremost both newspaper and premium magazine companies point out their greatest economic woes are caused by declines in advertising amp8211 not subscription amp8211 revenues The music industry was devastated by freeforall file sharing a fate the longform professional video community will not suffer Although piracy is an issue and file sharing a reality rampant piracy of long form video distribution is more limited than music distribution and will continue to be limited into the foreseeable future Plus the investment in online video websites that partner with content producers rather than ripping them off has responded to consumer demand No such model was in place for the music industry and that industry responded with illadvised legal action rather than empowering consumersPaid content revenues can be expected to decline by 20 to 30 over the next seven years due more to competitive pressures among cable satellite and phone companies Specialty cable networks and those that offer little compelling original content could lose as much as 60 to 70 of their subscriber revenues while high demand content such as professional sports could increase fees A similar threat to the industry will be a la carte regulations being considered by Congress and the FCC although these appear to be on the back burner in the Obama administration While a small percentage of consumers will unhook their cable or satellite subscriptions and depend on online mobile and DVD for their content it39s unlikely this will represent a meaningful loss of revenues for content developersIn the next several months networks and producers will explore multiple windowing strategies that will ultimately result in a slow but steady renewal of subscriber revenue growth NBC and Fox have already begun removing hit programs from Hulu after a short availability window and they are withholding some programming from online distribution Disney has followed the same model with its fullepisode player and iPhone relationship Cable networks will need to enter into relationships with distribution partners that allow them to make content available online in a variety of windows Online distribution has proven so valuable as a program promotion tool that broadcast networks will resist moving all their content behind paid firewalls and cable networks will be required to advance expanded availability models to remain competitive Certain distribution windows will include embedded commercials and will disable skip and fast forward features Pay windows will eliminate commercials altogether or at least limit them Both broadcast and cable networks as well as studios and independent producers will develop ondemand offerings that deliver incremental revenues both to them and their distribution partners These models will be enhanced and driven by free distributionWindowing enables a combination of subscription fees for aggregated programming and technology packages primarily cable and satellite with growing phone company involvement payperview mobile and high profile events ondemand subscription packages and free mobile and online content Content ultimately wants to be free amp8211 it wants to be available to the widest possible audiences and to enable audiences to discover it High profile hit series can command payments from those audiences that demand it during the first window or the window that is most opportune and advantageous for them The DVD business will be far more impacted than TV networks as media distribution technologies advanceThe single most oppressive issue for content providers is not how to maintain amp8211 or generate amp8211 subscriber revenues It is the issue of how to maintain ad revenues Except for lowcost mass reach networks continued dependence on traditional ad revenues is a path to certain value destruction Ultimately content producers must join the bandwagon I have been on for more than two decades specifically for some of their content producers and networks must embrace a program sponsorship model that enables them to capitalize on the equity they have with audiences and attract promotion event cause related public relations trade allowance and other nonadvertising buckets within marketers39 communications39 budgets They must continue to invest in addressable and behavioral targeting capabilities and move away from traditional reach and frequency based ad selling metrics

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TV Network Valuations Will Not Be Destroyed by Free Content Distribution

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Jack Myers

AARP and the Ad Council Encourage People in Their “Pretirement” Years to Take Key Steps Toward Saving - Ad Council InSites

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