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April 14, 2010

U.S. TV Viewers Remain Couch Potatoes

This column originally appeared on SNL Kagan on March 23rd.

With all the headlines about over-the-top video, retransmission fees, and the iPad, one would think the business of TV is about to massively change for the worse. Add in the continued growth of DVR households and it seems like TV as we know it is doomed. One thing overlooked in all these articles is that in the U.S. viewers continue to consume more TV than ever.

According to the latest Three Screen Report from Nielsen Company, in the fourth quarter of 2009, U.S. viewers watched an extra hour of TV per month compared to the same period in 2008. U.S. viewers spend over 153 hours a month watching TV! TV viewing is rising even as internet video watching grew over 16% to 3 hours and 22 minutes each month.

A portion of the increased TV viewing comes from continued penetration and use of DVRs. DVRs are now in about 36 million households, up more than 1 million on a sequential basis in the fourth quarter, representing about 33% of U.S. households. SNL Kagan estimates that penetration of the most valuable digital TV subscribers is even higher at 43%. Nielsen notes that DVR viewing, or time-shifted viewing continues to grow and has recently reached more than 8 hours per month. The growth in overall TV viewing includes time shifted-viewing, which does raise issues surrounding advertising skipping.

The most important takeaway from the latest Three Screen Report is once again that U.S. viewers continue to watch more and more TV. Despite the ongoing concern that viewers will cut the cord and watch only the shows they can find online, the reality remains that traditional viewing habits are largely unchanged.

One reason for this is that despite steady and rapid use of DVRs and internet video remains a modest portion of TV total TV viewing. DVR and internet viewing combined is still under 10% of total monthly viewing. Furthermore, TV networks and advertisers are operating under a Live + 3 system for advertising sales, limiting the impact of time-shifted viewing on the TV business model. Another factor is that digital penetration continues to deepen, offering viewers more channels and content from which to choose. Even the upgrade cycle to HDTV helps as viewers like to watch the great picture on their new investment on an increasing array of HD content.

If DVRs are excluded, the over-the top video threat seems minor with just 3 hours monthly, or 2% of traditional monthly TV viewing. In addition, Nielsen reports that for anywhere from 4 minutes to 35 minutes a month, depending on viewer age, there is simultaneous use of a TV and the internet. It is likely that at least a small portion of this is simultaneous use of internet video and TV.

I do not mean to minimize the challenges facing the TV business by parsing the viewing data in a favorable light. However, I continue to think the challenges to the TV model are playing out more slowly than perceived. TV networks and multichannel distributors are fighting back with Live + 3 ratings, TV Everywhere, continued penetration digital packages, and more HD content. But most importantly, U.S. viewers remain couch potatoes.

One of my adages as an investor is to stay focused on the big picture. For TV, the big picture is whether viewers are watching. For now, they are. And they are overwhelmingly watching as they always have.

Disclosure: Virgin Media is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Virgin Media common stock and convertible bonds are long positions in the Entermedia Funds. At the time this column was written, City Telecom is a short position in the Entermedia Funds. Steve Birenberg is co-manager of the Entermedia Funds, owns a portion of the Funds' investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at April 14, 2010 01:22 PM in Media