WHY BIG 3 NEED TO CHANGE
December 29, 1998
Electronic Media via NewsEdge Corporation : NBC's recent suggestions that its broadcast network might one day be reduced to a smattering of profitable pay cable services, or that revenues from electronic commerce could rival the Big 3's splintered advertising base, aren't so outrageous.
You need only to understand what a hybrid of new and old media will look like in the next several years.
Those bold predictions from NBC President Bob Wright came on the heels of another unsettling observation he made at the Western Cable Show about the virtual death of free TV. New media economics dictate that entertainment, information and communications delivered by television or computer are bound for paid passage, he said.
The challenge for broadcasters is cultivating deep enough brand loyalty so that consumers eventually will pay for the kinds of programming and services they largely have been getting for free.
Fee-based content is the only way the broadcast networks-as content producers and distributors-can financially stay afloat in a sea of mounting Internet, broadcast and cable TV competition.
The Big 3 must maintain their free over-the-air mass audience existence while honing subsidized niche services on cable and the Web.
NBC and ABC have already had a running start down that path.
CBS, which came late to the cable game, soon is expected to unveil an ambitious Internet plan for a more integrated and sprawling online presence, sources say.
Clearly, the Big 3 don't have much choice.
Driven by ever-fragmented audiences and revenues that cannot be restored, owners of the Big 3 broadcast networks are desperate to create a new business model that pays for itself. And they want to do it before they are squeezed out of their longtime domain: U.S. TV households.
''More competitors battling for a smaller market share has 'potential bloodbath' written all over it,'' declares Prudential Securities analyst James Marsh. ''Increased Internet use has corresponded with a decline in network television ratings.''
A recent AC Nielsen study found that Internet homes watch 15 percent less overall television than unwired homes. An International Data Corp. report indicates 49 percent of Internet users surf the Web at home instead of flipping through TV program channels.
Lehman Bros. analysts predict that, by the year 2002, the consumer online market will generate $26 billion in revenue, more than triple this year's $7 billion, and that the world's 70 million Internet users will swell to more than 300 million.
Prudential Securities analyst Nicholas Heymann says that, in a few years, electronic commerce could generate $200 million annually for NBC, more than offsetting lost network profits.
''Scale on the Internet has gone way beyond what anyone expected in the near term,'' Mr. Wright told me.
That is why NBC is likely to publicly spin off its Internet holdings so that it can use the new stock as deal currency to become a bigger Internet player.
The Walt Disney Co. could do the same next year with its emerging GO network portal, a product of its 43 percent stake in InfoSeek. GO.com is an online aggregator of all of the branded content, services and distribution outlets of Disney, ABC and other subsidiaries.
Salomon Smith Barney analysts Lanny Baker and Spencer Grimes say the Internet will yield the new media equivalent to the broadcast networks: a broadband- delivered America Online. AOL will wind up paying cable operators for the high- speed access that will boost its advertising and e-commerce revenues well beyond its current subscriber fees.
As a result, the Salomon Smith Barney analysts predict that by 2002, AOL's sprawling broadband base could be worth up to $750 million in gross profits by merely adopting the cable television network model.
It's not that the $2 billion spent this year on online advertising, out of $187 billion in overall media spending, is so threatening. But, like cable, online services are whittling away at conventional media's once stalwart base.
By the year 2000, analysts expect the three broadcast networks' audience share will slip below that of overall basic cable, forcing the Big 3 to find ways of surviving in a smaller, fragmented universe.
But, ironically, cable and the Internet can be the Big 3's salvation.
Wrestling with spiraling program and talent costs and the reluctance of affiliates and advertisers to help shoulder the burden, the broadcast networks must more aggressively forge new revenue streams.
Cable's need to fill its digital spectrum, affiliates' need to create multiplex platforms and the Internet's voracious appetite make them all potential paying customers for repackaged and revitalized network fare.
Clearly, as Mr. Wright points out, a downside to all of this is the creation of a new user demographic; a caste system of electronic haves and have nots.
Content providers and distributors will pay for access to homes provided by cable system operators who control the broadband pipeline. They also will charge for packaging content for which there will be high demand.
Increasingly, consumers will pay to access a high-speed digital spectrum of interactive services, information and entertainment.
Companies marketing goods and services will pay yet another fee to complete their transactions right on the spot.
Those multiple revenue streams will underwrite the cost of doing business in ways that free, over-the-air broadcasting cannot support itself.
In an interview with me last week, Mr. Wright explained that while he's not about to convert the NBC Television Network to a basic or pay cable service, the day may come when cable and broadcast network audience and advertising shares near parity enough to economically justify more of a wholesale leap to cable.
There's already mounting evidence.
As the NBC TV Network's profits decline off last year's $650 million a year high, alternative cable services already are breaking its fall.
Within several years, the profits generated by CNBC, NBC's 24-hour basic cable business news outlet, could outpace those of the general NBC TV Network. CNBC's contribution to NBC's kitty will grow when NBC begins offering it to cable operators next year as a multiplex digital tier.
ABC and its corporate parent, Disney, likewise will launch an array of branded multiplex services for broadcast and for cable from its current stable of entertainment and news programming. The cultivation of online services, already in high gear, is no less important.
Although in their diminished state the Big 3 remain the most efficient way to reach a mass audience, it's no longer enough to be the dominant broadcast network.
''We are nearing a time when the whole is greater than any one of our parts, including the broadcast network,'' Mr. Wright concedes.
That groan you hear isn't viewer response to a slate of new season series. It's the broadcast networks struggling to reinvent themselves.
[Copyright 1998, Crain Communications] |
