Todd Reublin
May 20, 2015
Features

When Tomorrow Began

Wonder no more about all that streaming content and whether it will ever catch up with traditional television.

Daniel Frankel

Hard to believe, but it's already been several years since media pundits began musing over the impact of the all-you- can-stream subscription services.

As Netflix, Amazon Prime, Hulu and others have grown exponentially in customers and usage, gurus have wondered, when would they actually take a toll on cable and broadcast viewing. Sure, watching TV delivered over the internet was the future, but when would that future finally arrive?

Well, if that new era had an official date of birth, it would be October 31, 2014. That is when high-profile media analyst Todd Juenger of Bernstein Research released a watershed report to investors, directly tying a precipitous 4 percent drop in total-day cable and broadcast viewership over the summer to subscription streaming.

"We don't believe people stopped watching stuff," Juenger wrote. "We believe they are watching it in different ways.

"Viewers like [subscription services like Netflix] because they offer programming on demand, without advertising and offer a pleasing interface and helpful recommendations," he added.

"Hence, we don't think those viewers are coming back. The trend is more likely to accelerate than decline." Just like Columbus — when he broached the idea of a spherical Earth — or Darwin — when he pitched that concept of natural selection — Juenger faced backlash.

"We did receive significant pushback, both from investors and from some of the [major entertainment] companies themselves," he says. "It didn't surprise me, because the implications of that view are so profoundly bad for businesses who rely on TV advertising."

Soon, however, plenty of other research emerged to support Juenger's theory.

In March, for example, research company Nielsen released the next bombshell, revealing that in the fourth quarter of 2014, Americans watched an average of 4 hours and 51 minutes a day of traditional television, down 13 minutes in just 12 months.

Meanwhile, the percentage of U.S. homes with Netflix, Amazon Prime, Hulu or any other subscription video-on-demand (SVOD) service had reached 41 percent, Nielsen found.

The mainstream press jumped on the news, and Juenger's theory was no longer deemed fringe. "Americans are moving faster than ever away from traditional television," said a Washington Post headline.

So is the streaming apocalypse finally here? Yes, says Joel Espelien, senior advisor at the Diffusion Group, a boutique research and analysis firm focused on the migration of TV distribution to the internet,

"I do think it's all downhill from here," he says. "The demographics are just relentless. The linear TV audience is aging, and younger generations simply do not relate to linear TV at all. It has totally lost its cultural relevance, and there is no getting that back."

The proliferation of over-the-top platforms - those that stream video "over" the existing "top" of pay-TV services provided by cable, satellite and wireless companies - has been well documented in publications including emmy magazine.

Eventually, it was assumed, the twain would meet — there are, after all, only so many hours in a day to watch television. Some day, data would signal a sea change in the business, as it did more than a decade ago when cable networks began to seriously erode the audience shares of broadcasters.

Ironically, in this latest transformation of the TV business, the cable networks seem to be taking it most on the chin.

In 2014, total-day viewership for all national cable networks fell 9 percent in the industry's key currency, the C3 rating: viewership of commercials up to three days after initial broadcast by adults 18 to 49. That was triple the decline experienced in 2013.

"It's also a far cry from the halcyon days of the 1 percent and 2 percent drops we saw in 2011 and 2012," notes Michael Nathanson of MoffettNathanson, another media analyst.

General entertainment networks and children's channels got hit the hardest. A&E, for example, saw a 22 percent drop in C3 ratings, while TNT (down 15 percent), FX (11 percent) and USA (9 percent) also experienced big declines in 2014.

On the kids' side, Nickelodeon and Disney XD saw their total-day C3 ratings among the 2-to-11 set drop 15 percent each, The hits have kept right on coming in 2015: in February cable networks were down 11 percent, year over year, in total-day C3 ratings. Broadcasters, meanwhile, have also seen their shares continue to decline, dropping a collective 12 percent of their C3 audience in February,

The most exposed networks have one thing in common — they air a lot of repeats that are also freely available on SVOD platforms, And viewers, particularly younger ones, are choosing to watch the same shows via these on-demand platforms and their nifty interfaces. Beyond the elegant user experience — which includes helpful content recommendations — they don't require the viewer to sit through commercials.

"The growth of time-shifted technologies appears to be dramatically affecting the viewing patterns of general entertainment and kids' cable networks," Nathanson says. "As we have seen already, the decline of repeat content will force cable networks to spend more aggressively on both original content and off-channel marketing."

In early April, Viacom — operator of Comedy Central, MTV, BET and Nickelodeon, among other major networks — took a whopping $785 million charge on its books. Part of that write-off was to cover shows that had no remaining aftermarket for their repeats on linear television. In other words, airing 10-year-old SpongeBob episodes on Nickelodeon is no longer an option.

Programmers who have aggressively syndicated their shows to SVOD platforms are now starting to second-guess themselves. Selling repeats to Netflix "sounded like a good idea at the time," Steve Gigliotti, chief revenue officer for Scripps Networks Interactive, recently reflected to the Wall Street Journal. "Now there are some serious misgivings about it."

Gigliotti's lament was also a central component of Juenger's thesis: content owners had shot themselves in the foot, Juenger maintained, by too freely licensing their shows to SVOD platforms. Now, he says, they face a catch-22.

"They can stop licensing to SVOD, or face years of declining audiences" on linear television, he wrote last fall. But if they were to suddenly relinquish the income they receive from Netflix et al, programmers would face an immediate — and unacceptable — drop in earnings.

Unfortunately, the ratings conundrum is hitting at a particularly hard time, with a soft TV ad market conspiring to deliver a double-whammy.

The major cable programming conglomerates — Viacom, Turner and Disney — saw their collective advertising revenue drop 1.3 percent in the fourth quarter of last year.

For the year, both broadcast and cable networks notched their weakest ad sales growth since the height of the Great Recession, as brands pulled back their dollars from TV in favor of the internet, According to Nathanson, that decline would have been a lot worse for cable networks if they hadn't responded to the crisis by loading more commercials into every show,

It was hard to tell just how many more commercials were being packed in - Nathanson's initial estimates were flawed by bad data from TiVo.

Ultimately, he concluded that ad loads were indeed way up and that the networks hurting most in the ratings were doing the most loading. Viacom, for example, down 15 percent in total-day C3 ratings, was running 8 percent more spots per show in the fourth quarter, Nathanson concludes.

"While selling more commercial inventory is logically a good thing — and common industry practice during times of ratings stress — in the long run, as the U.S. radio industry found out a decade ago, adding too many minutes of commercials ultimately ruins the consumer experience and destroys brand value," the analyst says.

Meanwhile, the pressure wrought by reduced ad revenue is affecting the traditional TV business model in other ways. To offset the impact of those losses on their bottom lines, both cable and broadcast networks have gotten more aggressive in licensing negotiations with pay-TV operators, driving up cable and satellite bills at a time when lots of consumers are already thinking about cutting the cord.

Not everyone in the TV industry is ready to write off SVOD services as destructive forces. Notable is CBS research chief David Poltrack, who presented the industry's most counterintuitive case yet at the UBS Global Media and Investment Conference last December in New York.

While acknowledging that services like Netflix are mainly responsible for the decline in viewership being measured by Nielsen, Poltrack urged the TV business to "look at the big picture. Yes, Netflix is a formidable competitor. But they're a valuable partner, as well."

To Poltrack's thinking, platforms like Netflix and Amazon are highly effective syndication outlets for programmers like CBS, building an audience base for shows like Hawaii Five-0 and Criminal Minds without competing for ad dollars.

Among adults, he estimates that original shows like House of Cards and Orange Is the New Black account for only about 6.6 percent of Netflix's overall viewing. Discounting the big chunk that is kids' viewing and movies, Poltrack believes the Netflix audience base is built on the repeats of the major broadcast and cable providers.

"Netflix is a player in the original content business, but they do not appear to have found a magic formula for success in that business," he said, noting that it had been nearly two years since the SVOD service launched its last major original hit, Orange.

But in playing devil's advocate, Poltrack identified a key issue, Yes, programmers are recouping syndication dollars and other benefits from platforms like Netflix and Amazon. But other outlets on the internet — YouTube, for example — remain unmeasurable and can't be monetized

As NBCUniversal CEO Stephen Burke noted recently, 70 percent of viewing for The Tonight Show Starring Jimmy Fallon slips into this unmeasurable ether, "What we don't know is what programs are being streamed and from where they're being streamed," Poltrack said.

With the future of the TV ad business in flux — and audiences favoring online subscription services that do not provide viewer data — virtually all of the major programming conglomerates are launching their own SVOD services. CBS Corporation kicked off this trend in October with CBS All Access. At $5.99 per month, it is the network's answer to Hulu, which is owned by rivals Disney/ABC, Fox and NBCU.

In March, Viacom — looking to recapture some of those fleeing kid viewers — recast its Noggin brand as a stand-alone SVOD service, also available for $5.99 without a cable subscription.

NBCU also announced in March that it's developing a subscription streaming service for comedy assets like The Tonight Show and Saturday Night Live. And 21st Century Fox confirmed that it has SVOD plans, as well, without going into detail.

All of these services will attempt to capture viewers the way the major SVOD platforms do, limiting — or eliminating — commercials, while providing algorithmic-based interfaces to help sift through all the choices. Programmers, meanwhile, will create a steady stream of subscription dollars and will be able to better measure who — and how many — are watching their shows online.

Of course, this á la carte future will likely cannibalize the pay- TV bundle, leaving out the smaller networks that rely on their bigger brethren to get sold to cable operators. And network audiences will be distilled to the avid group of viewers who subscribe directly to a service, reducing reach for advertisers and further degrading the TV ad model.

"I think future profitability will be less evenly distributed than it was under the pay-TV paradigm," Espelien predicts. "The days of everyone getting fat at the same trough are over."

Of course, nothing is certain about the future of television. But based on the dire metrics now available, it's a future that has finally arrived.

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