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October 22, 2006

NBC's Strategic Changes: The Future of Network TV?

I think the money quote from last Thursday's widely discussed article on steep cost cutting at NBC Universal came from Bob Wright: “As we reprioritize ourselves toward digital, we’ve got to be as efficient in our current business as possible.” The reality is that analog is under pressure due to continuing moderate viewership declines, alternative distribution channels like the internet and iPods, and ad-skipping friendly digital video recorders. The big TV networks have long been able to offset sliding ratings with prices increases but recent trends suggest that the additional challenges of digital technologies has finally restored balance to the pricing battle and CPM growth has stalled....

NBC’s response is a massive cost cutting program design t save $750 million against projected 2006 revenue and operating profits of $16.5 billion and $3 billion, respectively. The cost cutting is supposed to be across the board but it appears that primetime programming expenses, particularly in the first hour, and news will bear the brunt.

As far as saving money on programming, NBC wants to have more reality type programming in the opening hour of prime time. The Peacock network trails its rivals at CBS, ABC, and Fox in this regard, so I’d view this partially as a catch-up move and not a groundbreaking announcement. That said, entertainment executives do seem to recognize that the economics of content production breakdown as talent and other production costs soar while pricing power dissipates.

On news, there have been cutbacks for years and rumors of massive changes such as a joint venture between CNN and the news divisions of ABC, CBS, or NBC. The reality is that the internet handles news better than TV except for breaking news on big stories. Maintaining a huge news gathering and content distribution system just doesn’t make sense as consumers increasingly turn to the internet for timely and accurate reporting.

This story is likely to reignite the debate about how TV is headed the way of music, newspapers, and radio. The acquisition of YouTube by Google (GOOG) merely reinforces this view. However, I maintain that TV viewing habits are much more deeply ingrained and that the alternatives are much worse substitutes that is the case for these other traditional media. Consequently, I expect the erosion of TV economics be much more gradual than has been the case for newspapers and radio, especially the recent acceleration in challenges faced by those industries.

Additionally, the TV networks are owned by the same companies that are the content suppliers so unlike radio or newspapers, the transition to new distribution channels opens up a revenue opportunity. I don’t think selling ads on ABC.com of selling shows on iTunes for $1.99 can make up for the loss of pricing power on network TV, but it does provide a growing revenue stream against the slow erosion in network TV economics. You can’t say the same thing for newspapers or radio.

When the YouTube generation ages by 10 or 15 years, the economics of TV might breakdown more rapidly. For now, it will be periodic shifts in sentiment that hurt the stocks. But sentiment swings widely on Wall Street so don’t get overly concerned if the death of TV becomes a big story again for a few months.

Posted by Steve Birenberg at October 22, 2006 05:11 PM in Media