The Future of TV is on the Internet

One of the interesting things about watching the big four networks (ABC, CBS, Fox, and NBC) fall into oblivion is how reminiscent they are of GM, Chrysler, and Ford falling into irrelevance (though to be fair, Ford Motor Company’s new CEO, Allan Mulally, seems to have a clue and has guided Ford Motor to a net profit in Q2 of 2009 and a predicted yearly operating profit in 2011.

Nevertheless, the same errors that Detroit made in the 1970s through the 2000’s, are occurring again in the Broadcast Networks. Detroit offered it’s customers little reliability, bad quality, expensive cars to own and operate, and cars with poor gas mileage. The latter generated a lot of attention, but as the appetite for large SUVs, Trucks, and muscle cars in good times and cheap gas indicated, Detroit’s problem was not primarily the failure to make a Toyota Yari. Rather, it was taking their customers for granted and shoveling out shoddy merchandise on the theory that no one could compete with them globally or locally.

Just as Japan’s automotive companies, particularly Toyota and Honda, hungry for sales, and backed by an aggressive engineering team, took on and largely defeated Detroit, so too will Hollywood’s Broadcast Networks fall, to lean and hungry outsiders. The key to this will be the internet. It won’t be, as Glen Reynolds suggests, an army of Davids, but rather State-sponsored alternatives to Hollywood producing low-cost, more mainstream entertainment, delivered over the internet.

In short, the internet allows players besides broadcast networks to deliver serial entertainment just like the Big Four Networks, to more people, cheaper, and with a broader appeal.


First, it's important to recall what the networks were all about. NBC and CBS were originally founded as radio broadcast networks, providing news, entertainment, sports, and other broadcasts during the late twenties and the Depression. During tough times, the radio broadcasters found advertisers flocked to them, as people could almost always afford listening to the radio, even over the movies. ABC was created in 1943 from the NBC Blue Network. Fox was famously created by Rupert Murdoch's News Corporation in 1986.

But all the networks run on the old radio network model. News, sports, and special programming are the icing on the cake, the real money came from advertisers, who either ran ads nationally or had sponsored "product placement" shows aimed at all sorts of people: men, women, children, and of course, housewives. Situation Comedies (Fibber McGee, Jack Benny), soap operas, and hour long dramas like Gunsmoke. Yes, "Jake and the Fatman" star William Conrad was the original Matt Dillion, not James Arness.

The model was very simple, create entertainment for as cheap as possible, that had a wide a following as possible, and sell ads on the broadcasts for as much as possible.

Or, as the Wall Street Journal reported, in a story about Ben Silverman's departure from NBC:

For decades, broadcast networks spent huge sums to create shows that would be watched by millions of Americans tuning in after dinnertime.

But the advent of cable television and the VCR in the 1980s and the subsequent rise of the Internet, videogames and digital video recorders have fractured the TV audience and undermined the broadcast business.

We'll see shortly how ridiculous that statement really is. But the business model is pretty simple. Create cheap content, that appeals to as many people as possible, and sell ads running at breaks in the content.

The serial nature of course, of first radio and then television, allows more creative stories, more character-driven drama (and comedy), and most importantly for a broadcast, keeps audiences tuning in week after week to see what happens next to characters they love.

This is a simple, though difficult to execute model, that other people can copy. Now that the internet has flattened the capital requirements needed to reach millions of people.

Prior to the internet, creating a network required big bucks and the ability to sustain a decade long billion dollar loss. Which is what Fox sustained from 1986-1996 in it's first ten years. Neither WB nor UPN, in their ten year run, were able to sustain these kinds of losses and both had to be merged into the CW. The huge barriers into serialized content (i.e. broadcast networks, with heavy costs for affiliates, promotions, management, licensing, etc.) kept competitors at bay. Even upstart syndicators like the folks behind "Babylon 5," the PTEN or Prime Time Entertainment Network, could not compete, even with Warner Brothers and Chris-Craft behind them. Independently syndicated shows like Pamela Anderson's "VIP" did little better, often airing at odd hours such as 1 am Monday mornings.

However, time shifting habits created by the VCR and DVR, and helped along by Hulu and networks own streaming videos of shows, have created the ability to bypass these expensive requirements.

Now, anyone with the capital to pay for streaming bandwidth, can have in effect, their own TV network. They need only have content and agreements to sell ads within the content, as Hulu does. Advertisers love online advertising, since they know exactly how many people watch (no more guesstimation by Nielsen) and their geographic location. They also get immediate feedback on any click-through ads. It's also, of course, cheaper.

It's quite likely that some place, either Wellington or Auckland New Zealand, or Sydney Australia, or Vancouver British Columbia, or Toronto Canada, will start to compete with Hollywood. Making hour long drama series significantly cheaper, at least half the cost of the current $3-$4 million per episode cost in the Los Angeles area. At this cost, say $1.5 million per episode, it's far cheaper to put together a three episode "pilot-plus" for say, $4.5 million, less than the cost of most independent films, and sell both ads against a streaming internet feed (for free) and downloads from Itunes, or websites (likely the content creators). The only expense that is major therefore is marketing and publicity. Late night talk shows constantly need guests and content, so much of that marketing can be done for the cost of hotel rooms and air fare for content stars.

The advantage is even greater if regional or national governments, seeking to promote job base, provide low or no-interest loans, tax breaks and the like to further reduce costs, and critically, alternative centers to Hollywood break both the pilot model and the deficit financing model.

In the pilot model, broadcast networks order up many (expensive) pilots, and typically pick only a small fraction, something on the order of 25%, for production, generally between 9 and 13 episodes. Depending on ratings, a series will be picked up for a full season, of 22 hour long episodes, or canceled. Even pilots that never even make it to the filming process can be quite pricey, costing upwards of a million dollars for scripts, consultants, market research and the like. Pilot costs have been the bane of network TV from the beginning, and so an alternative that quickly and cheaply makes content, say three episodes, and recoups most of the cost by selling advertising on the web and downloads, has a big economic advantage as far as cost, particularly as networks order more and more series from their own in-house production studios.

The deficit financing, of course, refers to the ugly truth that network license fees, even for their own, in-house productions, cover only part of the actual cost of producing a show. Say a show runs only 9 episodes, and costs $4 million per episode. With the network license fees covering only $2 million per episode. That's a net loss of $18 million for the production company. Some of that loss can be recouped by DVD sales, but not much. DVD sales are down, in every segment. In the alternative model, content creators would only create small batches, say three episodes, and depending on response would either abandon the project or move forward with assurance that the project will make money. Currently, content creators (the studios) have to bet that the series will make it to five seasons, the magic 100 episode mark, for syndication in the US and foreign markets, where the real money is (or was). The Syndication market is under stress, as many of the cable outlets run (as noted Hollywood business blogger Furious D observes) their own parent corporation studio outlet, the most famous being the Law and Orderen running all over TNT, USA, Sleuth, etc. Moreover there is a window on that market, you don't see 1980's shows such as Miami Vice or Hunter running in syndication, and even the ubiquitous "Monk" has likely a limited time to run in syndication.

The new model, in short, would not require huge capital to run deficits in the uncertain hope of profits five years later, or require costly pilots most of which are unsuccessful and net drains on income.

But just as important in producing lower cost content, is producing more broadly appealing content. Consumers don't seem to be very willing to pay premiums for entertainment, for example, Video Game sales are expected to decline nearly 20% from last year. HBO famously has only a third of TV households, despite being available for nearly all of them. In order to succeed in serial entertainment (or blockbuster movies for that matter), it's far better to have more viewers than less. Particularly since the number of young (White) people is declining. This is particularly true in a recession/depression. When consumer dollars are tight, and free (i.e. advertiser supported) beats pay. The HBO model of hip-edgy female oriented programming seems doomed in the recession.

The model for the successful Hollywood beating alternative looks something like this:

The alternative produces content that is about half the cost to produce by the Broadcast networks in LA or NYC.
The alternative has far less overhead, and thus no affiliate costs, licensing/regulatory costs, no pricey executive talent. It's Administrative costs are a fraction of the Broadcast networks.
The alternative has far less clueless, "next-job" execs like Ben Silverman, who are looking for their next job and don't care about being #1.
The alternative is open to new ideas as long as the ideas help them capture a lot of viewers of streaming content and a high percentage of those purchasing downloads (or DVDs).
The alternative does not rely on fragile, open to economic vulnerability models such as upscale ad viewers or cable subscriber revenues (as likely, subscribers cancel cable as the recession wears on and expenses are cut to the bone).

Which brings us to the current state of broadcast television. First, ad revenues are down. CBS, Fox, and ABC have done deals of about 3% less for ad rates than a year ago. NBC has done about 6-7% less than a year ago. Commenter on the WSJ story "Jeff Switzer" noted:

It seems to me that the value of an exposure to a viewer would decline faster than the decline in viewers. It seems that advertisers would want enough viewers to generate a "buzz", that is, to have viewers talking with each other about shows and perhaps the ads. As the number of viewers drop the number of these buzz encounters will drop even faster. Because of this effect, as well as the continuing basic decline in the number of viewers, the networks appear to be in a business "death spiral."

Jeff Switzer is correct. The broadcast networks are in a death spiral. Click on the "comments" tab in the link to see his comment. WSJ has the nasty habit of cutting off content after a day or so, trust me on this, the dead tree edition (Marketplace, July 27, 2009, P1) contains these numbers, i.e the declines in ad rates.

Here's (from the Dead Tree WSJ Edition) the commitments that the Big Four Networks got from the "upfronts" in May:


[Click to Enlarge, courtesy of the WSJ]

It takes magnificent incompetence, idiocy, and sheer stupidity to lose viewers during a recession in free, over the air broadcasting, at a time when consumers are pinching every penny and canceling pricey cable service. Yet the broadcast networks continue to show a slide in viewers. That's what comes from having execs who boast, that they don't need to be #1, in terms of viewers.

Fortunately, the broadcast networks don't lack in people able to produce just such incompetent results:


[Click to enlarge, courtesy of the WSJ]

If you'll notice, the only network to produce an uptick in viewers, prior to last (2007-2008) season was CBS, which had slightly more viewers in the recessionary 2008-2009 season. All other networks posted declines from the prior season. NBC and ABC posted particularly sharp declines, from the baseline of 2005.

This is largely because CBS has decided, "what the hell, they're older viewers, but they count too." CBS famously skews older in viewers age, link here, with DVR 7 days viewing being 53, ABC at 49, NBC at 48, Fox at 43, and the CW netlet at 34 years of age. However, beggars can't be choosers, and with the recession, pinched consumers, much of the wisdom (i.e. male and older viewers don't count) is so much idiocy). Particularly given the paucity of younger Whites, covered ad nauseum on this blog and elsewhere, and the need for advertisers to reach every possible consumer with their advertising dollar, in a likely decades long recession.

To see just how badly the networks perform, against the total (male and female potential audience, consider the data at the Census Bureau here. Taking the White Alone and Black Alone, and adding them together (Nielsen provides the top ten for "everyone" and Blacks, and Hispanics segregated, Blacks and Whites watch basically the same shows, Hispanics watch Spanish Language shows, go ahead, check it yourself) you get the following chart, compiled against the 18-48 viewership above (that is, adding White Alone, both sexes, and Black Alone, both sexes, from 20-49, since the Census Bureau does a four year age-bracket):


[Click to Enlarge]

That is of course, a pathetic performance. Against a total population of 117 million, 18-49, Black and White together with both sexes, the Big Four networks can manage only 12.6% total of the potential audience. Pathetic.

For too long, Broadcast TV execs have justified declining audiences on the VCR, the DVR, cable fragmentation, the internet, and video games. All undoubtedly eroded the dominant position of Broadcast Networks. But to 12.6% aggregate? That stretches the boundary of credibility. More likely, TV became a gay and female ghetto.

For example, GLAAD is out with it's new scorecard on TV networks. A full 42% of all characters on HBO's entertainment shows are gay or lesbian. About ABC, GLAAD had this to say:

Also singled out in the report is ABC's drama "Brothers & Sisters," which features three regular gay characters, as well as the network's "Grey's Anatomy," which has a bisexual woman among the leads.
Overall, "GLAAD analysts found that ABC consistently offers the most fair, accurate and inclusive representations of the five broadcast networks," the survey said.

ABC also boasts two of the most prominent gay characters on a new fall series with comedy "Modern Family."

The CW, as expected, was rated #2 among broadcast networks, Fox increased it's gay characters to 11% with gay characters on "House" and "Bones." CBS (not surprising for an older-viewer friendly network) was the least gay of all the networks.

TV execs, and content creators, were happy to chase GLAAD awards, and upscale, yuppie viewers, sacrificing total number of viewers for wealthier ones. The Brandon Tartikoff strategy again. Which works as long as the economy marches ever upwards, and there is an increasing amount of young, wealthy viewers that advertisers will spend premiums on.

As we can see, that's not the case. Networks were forced to reduce ad rates between 3 and 7 percent this year. Next year might see even further declines. Networks have huge fixed costs and stupidity at the executive level, leading to things like 24% declines at the NBC-Universal second Quarter earnings, excluding one-time items, despite income growth in cable operations. [If the link goes away, it's on Marketplace, July 28, P1] NBC in the article calls itself a cable-broadcaster, but it's cable business is vulnerable to pressed consumers canceling cable service. Therefore, no fees transmitted from consumer to cable operator to cable service.

Not even investment in cable properties like SyFy (rebranded to appeal to women), and USA, Bravo, etc. can save NBC from the need (as Jeff Zucker agreed) for hit shows.

But a big organization like NBC, or even CBS (the least badly managed of the networks) cannot turn around very quickly, it's like steering a container ship. More nimble competitors, probably with tax breaks and even loans from friendly governments looking to stimulate employment and export earnings, can produce entertainment serial content for half the price. The internet allows distribution via streaming, advertiser supported video, for sampling, and perhaps downloads or DVDs or both, with "extras" via payment, likely for less than traditional TV series downloads or DVD box sets.

But likely the biggest advantage is the ability to make content without worrying about how many gay characters each show has, to make GLAAD happy or win an award. [Tru Blood drew 3.7 million viewers, in contrast to it's debut of 1.4 million in it's first season. The highest for any HBO show since the Sopranos (which had it's finale at 11 million), but compared to American Idol with a high of 37 million viewers nothing to shout about.]

Since the new way to profitability in a prolonged recession or depression is not how cool a series is to a few well heeled taste-makers, but how well advertisers can sell the basics: soap, beer, food, and clothes. It's a Wal-Mart, instead of a Neiman-Marcus world.