NBC bets on Cable: Hollywood's Detroit Rock City

The Wall Street Journal reports that NBC has elevated Jeff Glaspin to chair it's entertainment television business. Glaspin's background is in cable TV, being most noted for running NBC's cable channels including USA and Bravo. Glaspin is associated with "Queer Eye for the Straight Guy" and in the 1990's, "Behind the Music" at VH1. Glaspin's promotion shows how NBC is still focused on reducing costs, as a measure of profitability, and the undue fascination with cable revenue as a "savior" for NBC.

This is a move doomed to failure, and the parallels with Detroit's fixing on the SUV as a "savior" for it's inability to produce reliable profits and the collapse of the Music Industry are downright eerie. NBC's average number of prime-time viewers has fallen 11% in the past two years. It trails ABC, CBS, and Fox in average viewership/ratings. The only bright spot has been NBC cable networks, which have seen operating profits increase. Second Quarter operating profits at NBC Universal cable networks was up 7% from the prior year. But cable networks and operating NBC like a cable network won't save NBC Universal. Anymore than the Chevy Suburban saved GM.


The problem is, that even with Cable revenues, NBC's cash flow has been terrible since 2004:


[Click Image to Enlarge]

NBC's cash from it's networks have declined by nearly a factor of five over the past five years, with 2009 showing a horrific drop-off of nearly 200 million dollars. All the cheap reality and cost-cutting in the world will not save NBC, any more than fat margins on the SUVs were able to save Detroit.

NBC's problem, is that it has accepted and embraced decline. Jeff Zucker, NBC Universal's CEO and Glaspin's boss, is quoted by the WSJ as saying viewer declines at NBC will continue in the next five years. This is acceptance of failure.

Cable revenue growth is capped. There aren't hordes of consumers who lack cable signing up for the service, thus providing new fees (channels like Bravo receive payments from cable and satellite operators for every subscriber who receives the channel as part of a package). Indeed, cable channels face a number of vulnerabilities to operating profits. Chief among them, push-back from cable and satellite operators to reduce payments, or even eliminate them, as cable and satellite operators themselves need to cut costs in a tough consumer environment. Given the make-up of Congress and the White House, it's entirely possible the cable and satellite operators could make a "deal" that is "consumer-friendly" (i.e. lower rates for consumers for cable/satellite) at the expense of cable channels like Bravo and Oxygen (which have few viewers and make most of their money from fees not advertising). Advertising dollars at Bravo or Oxygen can not make up for lost revenue from cable/satellite operators, let alone losses at NBC.

This risk is as entirely foreseeable as new, increased mileage standards targeting SUVs and Trucks in a Democratic Congress and White House, or consumers abandoning low-gas mileage vehicles for more fuel-friendly ones (from Japanese and Korean competitors) during high gas prices. Cable revenues are at best a mature and non-growing source, they certainly are not growing any more than CD sales did in 2004.

NBC reaps increased revenues from cable operations, but not enough obviously to stem the losses at NBC itself. But even these revenues are at risk if Congress and the White House mandate lower or no fees to cable channels, or consumers simply drop cable altogether.

Ford's return to long-term profitability rests on it's ability to sell a broad range of cars and trucks that consumers want at decent profit margins supporting Ford's relatively high fixed costs. Producing vehicles that have high quality (good fit and finish), high reliability (they don't break down), good gas mileage (they are cheap to operate) and competitive pricing (they are competitive in pricing with Japanese and Korean models). This is not particularly complicated, indeed it's simple. But the simplest things are often the hardest to execute well, consistently, year in and out.

NBC plans to run Jay Leno's talk show from Monday through Friday at 10 pm as a cost-cutting measure. Because his show is radically cheaper to produce than even an hour of reality programming. But no amount of cheapness will substitute for hit shows. NBC like Detroit has a high fixed cost, including corporate overhead, an analogue to the dealer network (affiliates) and various regulatory burdens. This is not a problem if either Detroit or NBC operates in high-volume with satisfied customers. For Detroit, that means selling a lot of vehicles, at decent profit margins, that consumers actually want. In Southern California, for example, it's quite common to see Ford Mustangs driven, even though California has relatively fewer US car makes and models sold compared to other parts of the country. Even among a population averse to American cars, Ford has not had problems selling it's most distinct car in Southern California.

NBC (and most of Hollywood, in television and in movie studios) are ignoring the competitive threats. DVD price erosion, at home and abroad, from piracy to the alternative of simply re-watching already purchased DVDs, present large threats to revenues for Hollywood as a whole. Since most movies lose money at the box office, and only recoup it in DVD, pay-per-view, video on demand, TV, and foreign movie rights, piracy or consumers simply not spending money presents a mortal threat to the movie studios, and to TV networks and studios who hope to recoup revenue on even canceled series from DVD box sets. Why spend money for a box set when you can watch it for free on Hulu, or purchase for a fraction of the price from a street vendor making pirated copies?

But the threat is larger than mere piracy. Increasingly, Hollywood seems sliding to the irrelevancy of the music industry.

A recent New York Times article on the deathwatch of the Music Industry shows just how quickly an industry can collapse. According to the RIAA, music sales since their peak in 1999, have collapsed by half in inflation adjusted dollars. According to the study by the NPD Group, teens purchased fewer CDs, fewer online downloads, fewer Peer-to-Peer downloads (pirating), and borrowed fewer copies of music, in 2008 compared to 2007. Teens cited (this was before the global recession) overall cutbacks in entertainment spending, but lack of excitement over current music was also a factor (given the declines of 6% in Peer to Peer downloads and "borrowing" music by 28%). A full 23% of teens purchasing less music cited an already established collection of music that satisfied them, and 32% of teens purchasing less music expressed dissatisfaction over current offerings. This among the most disposable income, entertainment oriented group, before the recession.

Among key factors in the change of behavior was the growth in online and satellite radio, and free music from MySpace Music, Pandora, imeem, and other sites, making music nearly always accessible, and with social networking built in (recommendations, etc. based on music listeners like). Even pirates cannot beat "free."

A similar study of British teens found streaming music replacing file-sharing. The reason? Both are "free" but streaming music, by offering recommendations and novelty (the social networking component) is more attractive than searching around for pirated content on the internet.

Or, as the New York Times article put it:

This is part of a much broader shift in media consumption by young people. They’re moving from an acquisition model to an access model.

This applies to video as well as music.

A study last year conducted by members of PRS for Music, a nonprofit royalty collection agency, found that of the 13 million songs for sale online last year, 10 million never got a single buyer and 80 percent of all revenue came from about 52,000 songs. That’s less than one percent of the songs.

Again, this applies to video as well as music.

Even more revealing is the New York Times graphic (link here) reproduced below:


[Click Image to Enlarge]

CD sales revenue have not been replaced by digital downloads, either albums or singles or "mobile" (i.e. ringtones). Fat profit margins, with consumers forced to pay full CD prices to get the few songs they wanted, are gone. The same is happening to Video, for both Hollywood movie studios, and for TV networks. Old models are eroding, consumers are adopting online "free" content (such as Hulu.com or SouthparkStudios.com) that is advertiser supported. Note the comment at TV By The Numbers that Hulu has problems selling most of it's inventory, i.e. old obscure shows such as "New Dragnet" (an obscure 1989 version of the classic "Dragnet" with Jack Webb, different from "LA Dragnet" with Ed O'Neill and Ethan Embry). "The Long Tail" is fairly useless if you can't make money on it, and the trend seen in music sales, with 80% of revenue coming from less than 1% of songs, is the same at Hulu. Hulu lists their most all-time popular TV shows as variously, "Burn Notice," "Bones," "House," and "Family Guy" among others. All shows with sizeable audiences, unlike say those recalling "the New Dragnet."

It's clear that in music, and online, the ability as in years past to milk the "Brandon Tartikoff model" and charge advertisers premium prices for ever-declining amounts of "desirable" demographics is not sustainable. Not only are young (White) people a declining group, due to the birth dearth, but their behavior is changing as well, moving to streaming content that is "free" and has social-networking "extras." Young people are shifting towards it even over piracy or "borrowing." [Hispanic youth watch and listen to, of course, Spanish-language media.]

It's also clear that five years of declining revenues at NBC, before the recession, show this shift taking place to the point where there is nearly $300 million less operating revenue than in 2004, mirrored eerily by declines at GM, Ford, and Chrysler, and the music industry. Specialization won't help, since it leaves producers at the mercy of regulatory or consumer shifts.

Instead, what NBC needs, is not cable-specialization, or more "Queer Eye for the Straight Guy" shows, but rather broadly accessible and popular shows. Shows that appeal to men and women alike, along with young and old. Shows that can draw viewers back to NBC, and be streamed on sites like Hulu with full sales of "inventory" (i.e. ad spots on the streaming video).

This won't be easy. Men have largely abandoned TV, and need persuading to come back. Broadcast TV is of course the "ultimate" in streaming video, and free, over the air broadcasts beat the cost of even cable or satellite. Storylines, characters, actors, and the like need at a minimum to be "friendly" to men, and dump the various elitist and politically correct moralizing that characterizes much of TV. Which includes male-bashing. Attracting men of course must be done in ways that do not alienate female viewers, with characters that appeal to women but don't offend men being part of the creative solution. In other words, independent and intelligent leading ladies, but no "Twilight" derived male fantasy figures or junior "Sex and the City" "Mr. Big" knock-offs as leading men. Older audiences too, must be part of the mix, which means care not to needlessly offend those who hold traditional values at a minimum and stopping the tired trope of relying on shock in place of well thought out plots.

All of these creative efforts will require years not months to accomplish, and public communication to viewers, creative people, advertisers, and the public as to what the network wants to accomplish, how it intends to do it, and progress along the way. This requires patience and the ability to sustain losses as the network battles its (rightfully so) perception that NBC is hostile to male viewers.

But the alternative is simply to collapse into a GM or Music publishing slump, from which there is little escape (even with government bailouts). Clearly the views of pundits galore that "de-massification" of culture would proceed indefinitely has been proven wrong. Technology, with the ability to stream "free" content (likely to migrate to video phones soon) has helped make this change.