Broadcasters' woes could spell trouble for free TV

Dec 29, 2009 By ANDREW VANACORE , AP Business Writer
In this advertisement released by Time Warner Cable, a warning that FOX has threatened to pull the plug on Time Warner Cable customers at midnight, New Year's Eve, unless the cable company gives in to demands for massive price increases.(AP Photo/Time Warner Cable)

(AP) -- For more than 60 years, TV stations have broadcast news, sports and entertainment for free and made their money by showing commercials. That might not work much longer.

The business model is unraveling at ABC, CBS, NBC and Fox and the local stations that carry the networks' programming. Cable TV and the Web have fractured the audience for free TV and siphoned its ad dollars. The recession has squeezed advertising further, forcing broadcasters to accelerate their push for new revenue to pay for programming.

That will play out in living rooms across the country. The changes could mean higher cable or satellite TV bills, as the networks and local stations squeeze more fees from pay-TV providers such as Comcast and for the right to show broadcast TV channels in their lineups. The networks might even ditch free broadcast signals in the next few years. Instead, they could operate as cable channels - a move that could spell the end of free TV as Americans have known it since the 1940s.

"Good programing is expensive," , whose News Corp. owns Fox, told a shareholder meeting this fall. "It can no longer be supported solely by advertising revenues."

Fox is pursuing its strategy in public, warning that its broadcasts - including college football bowl games - could go dark Friday for subscribers of Time Warner Cable, unless the pay-TV operator gives Fox higher fees. For its part, is asking customers whether it should "roll over" or "get tough" in negotiations.

The future of free TV also could be altered as the biggest pay-TV provider, Comcast Corp., prepares to take control of NBC. has not signaled plans to end NBC's free broadcasts. But Jeff Zucker, who runs NBC and its sister cable channels such as CNBC and Bravo, told investors this month that "the cable model is just superior to the broadcast model."

The traditional broadcast model works like this: CBS, NBC, ABC and Fox distribute shows through a network of local stations. The networks own a few stations in big markets, but most are "affiliates," owned by separate companies.

Traditionally the networks paid affiliates to broadcast their shows, though those fees have dwindled to near nothing as local stations have seen their audience shrink. What hasn't changed is where the money mainly comes from: advertising.

Cable channels make most of their money by charging pay-TV providers a monthly fee per subscriber for their programing. On average, the pay-TV providers pay about 26 cents for each channel they carry, according to research firm SNL Kagan. A channel as highly rated as ESPN can get close to $4, while some, such as MTV2, go for just a few pennies.

With both advertising and fees, ESPN has seen its revenue grow to $6.3 billion this year from $1.8 billion a decade ago, according to SNL Kagan estimates. It has been able to bid for premium events that networks had traditionally aired, such as football games. Cable channels also have been able to fund high-quality shows, such as AMC's "Mad Men," rather than recycling movies and TV series.

That, plus a growing number of channels, has given cable a bigger share of the ad pie. In 1998, cable channels drew roughly $9.1 billion, or 24 percent of total TV ad spending, according to the Television Bureau of Advertising. By 2008, they were getting $21.6 billion, or 39 percent.

Having two revenue streams - advertising and fees from pay-TV providers - has insulated cable channels from the recession. In contrast, over-the-air stations have been forced to cut staff, and at least two broadcast groups sought bankruptcy protection this year.

Fox illustrates the trend: Its broadcast operations reported a 54 percent drop in operating income for the quarter that ended in September. Its cable channels, which include Fox News and FX, grew their operating income 41 percent.

Analyst Tom Love of ZenithOptimedia said he expects the big networks will end the year with a 9 percent drop in ad revenue, followed by an 8 percent drop in 2010 and zero growth in 2011.

A small chunk of the ad revenue is being recouped online, where the networks sell episodes for a few dollars each or run ads alongside shows on sites such as Hulu. Media economist Jack Myers projects online video advertising will grow into a $2 billion business by 2012, from just $350 million to $400 million this year.

But that is not significant enough to make up for the lost ad revenue on the airwaves. Advertisers spent $34 billion on broadcast commercials in 2008, down by $2.4 billion from two years earlier, according to the Television Bureau of Advertising.

So rather than wait for the Internet to become a bigger source of income, the networks and local stations are mimicking what cable channels do: They're charging pay-TV companies a monthly fee per subscriber to carry their programming.

Since 1994, the Federal Communications Commission has let networks and their affiliates seek payments for including their programming in the pay-TV lineup. Not everyone demanded payments at first. Instead they relied on the broader audience that cable and satellite gave them to increase what they could charge advertisers.

The big networks also were content to let their broadcast stations essentially be subsidized by higher fees for the cable channels that fell under the same corporate umbrella. A pay-TV company negotiating with the Walt Disney Co., which owns ABC, is likely paying more for the ABC Family channel than it otherwise would, with the extra assumed to help Disney cover its costs for the ABC network broadcasts.

But over time - such contracts generally run about three years - more networks began demanding payments for the stations they own. And affiliates already receiving the fees have bargained for more money.

Some talks have been tense. In 2007, Sinclair Broadcast Group, which operates 32 network-affiliated stations around the country, pulled its signals for nearly a month from Mediacom Communications Corp., which provides cable TV to about 1.3 million subscribers, mainly in small cities.

The American Cable Association says its members - mainly small cable TV providers - have seen their costs for carrying local TV stations more than triple over the past three years. The group's head, Matt Polka, says those fees have gone "straight to consumers' pocketbooks" in the form of higher cable bills.

Gannett Co., for instance, which operates 23 stations, has taken in $56 million in fees from pay-TV operators this year after negotiating a new batch of agreements, up from $18 million in 2008. Dave Lougee, president of Gannett's broadcast arm, defends the fees, saying "broadcasters were late to the game in really starting to go after the fair market value of their signals."

Analysts estimate CBS managed to get as much as 50 cents per subscriber in its most recent talks with pay-TV providers that carry CBS-owned stations. CBS Corp. chief Leslie Moonves said such fees should add "hundreds of millions of dollars to revenues annually."

That could be just the beginning. CBS and Fox are also asking for a portion of the fees that their affiliates get, arguing that the networks' shows are what give local stations the leverage to ask for fees.

Over time, the networks might be able to get even more money by abandoning the affiliate structure and undoing a key element of free TV.

Here's why: Pay-TV providers are paying the networks only for the stations the networks own. That amounts to a little less than a third of the TV audience, which means local affiliates recoup two-thirds of the fees. If a network operated purely as a cable channel and cut the affiliates out, the network could get the fees for the entire pay-TV audience.

If forced to go independent, affiliates would have to air their own programming, including local news and syndicated shows.

Fitch Ratings analyst Jamie Rizzo predicts that at least one of the four broadcast networks "could explore" becoming a cable channel as early as 2011.

Any shift would take years, as the networks untangle complicated affiliate contracts. At an analyst conference last year, CBS's Moonves called the idea an "a very interesting proposition." But he added that it "would really change the universe that we're in."

Explore further: Studying the speed of multi-hop Bluetooth networks

4.3 /5 (8 votes)
add to favorites email to friend print save as pdf

Related Stories

Time Warner Cable asks help on rising program fees

Nov 25, 2009

(AP) -- Time Warner Cable Inc. is asking the public for help as it tries to curtail increases in the programming fees it has to pay to carry cable channels and broadcast stations on its systems.

Comcast online video trial grows to 23 networks

Jul 14, 2009

(AP) -- CBS Corp. and 17 cable networks said Tuesday they are joining an online video trial by Comcast Corp., a move that tacitly acknowledges advertising isn't enough to support shows streamed over the Internet.

Comcast to debut cable shows online by year's end

Oct 20, 2009

(AP) -- You'll be able to watch popular cable television series such as HBO's "Entourage" and AMC's "Mad Men" on your computers by the end of the year without paying extra - as long as you're a Comcast Corp. ...

Comcast to sell advertising for Verizon FiOS TV

Jun 24, 2009

(AP) -- Setting aside their rivalry in the interests of business, Comcast Corp. said Wednesday it will sell advertising for Verizon Communications Inc.'s FiOS television service in 10 markets where they both compete.

DirecTV, TBS, TNT to put shows online

Aug 27, 2009

(AP) -- DirecTV Group Inc. is in talks with the TBS and TNT cable networks to offer their shows online, according to two people familiar with the discussions.

Recommended for you

End to end 5G for super, superfast mobile

Nov 24, 2014

A collaboration between NEC Electronics Samsung and several academic centres in China and Iran, is investigating how software-defined cellular networking might be used to give smart phone users the next generation of super-superfast ...

German study supports free "Super WiFi"

Nov 24, 2014

The need for the wireless transfer of data will increase significantly in the coming years. Scientists at the Karlsruhe Institute of Technology (KIT) therefore propose to turn some of the TV frequencies that ...

User comments : 16

Adjust slider to filter visible comments by rank

Display comments: newest first

bentrider1957
1.9 / 5 (9) Dec 29, 2009
Listen, Rupert: Your business model is an epic fail. While Faux News claims to be "#1", it might be interesting to note that no one except blue-haired ladies in Kansas even watch your trash disguised as "news". In fact, the same goes for Clean-Cut Brian Williams of NBC. No one with an internet watches the "Nightly News" because in 3 seconds we can get the news FREE on the internet. Ok, it's not really "free" but it is INSTANT, something TV just can't do well. Top this off with the advent of DVR, we just skip commercials all together or tune into Hulu and watch very small commercials, which we turn off the sound, btw. Oh, Directv is also a dinosaur that fails to see the horizon of On-demand TV. Sure, they TRY, but they are failing miserably in the "instant generation" It's time Americans got off their fat behinds anyway.
arki
5 / 5 (4) Dec 29, 2009
TV News lost me because of their favorite trick of dangling story hooks early in the program for some news they'll deliver at the end of the program...if I stay tuned. I usually fall asleep before then, so I've learned to just turn off the TV and search the Internet.
NeptuneAD
4.5 / 5 (2) Dec 29, 2009
It is about time the networks realised ad based tv is heading the way of the dinosaur, yes it is going to mean less money for shows, but eventually the shows will learn to live on less money as they realise that is the way it is.
x646d63
5 / 5 (2) Dec 29, 2009
This doesn't have to be dramatic. It's the evolution of entertainment. As we develop the technology for on-demand use, pre-programmed TV stations will die out anyway.
weewilly
3 / 5 (2) Dec 29, 2009
I don't even watch TV anymore. I'm sick of it and all the commercials that are cranked up in the sound levels department that annoy the heck out of people. So I do everything on the internet anyway. TV's are only good for playing DVD's of exceptional movies, sometimes. Other than for that purpose when they break down they get thrown out without being replaced.

winthrom
3 / 5 (2) Dec 29, 2009
Here's a thought: Smart people see that cable news [are you listening Ruppert?]is mostly propaganda that isn't regulated, and tune out. Cable companies will pay [via lobbiests and PACs] Congress to kill Public broadcasting. Poor people will have no more free entertainment so they will read books for fun from the library and get smart (and not so poor when the find better jobs). Newspapers will find that poor people can buy papers to get the news and local advertisements or else listen to the "all-news-all-the-time" radio. The FCC [via lobbiest and PAC pressure] will try to sell the soon-to-be unused television airwaves (as usual) to some private telephone companies. Life will go on.
mysticfree
3 / 5 (2) Dec 29, 2009
With all of the infomercials that are on satellite and cable channels, how are they not making money?
Bob_B
1 / 5 (1) Dec 29, 2009
For me, it is a sign of the end of any hope of an educated rural population. Those people are all ready barely out of high school, and now they won't get any broadcasting, only slime-casting, or such tightly focused opinions with zero balance or true understanding of topics, will exist in these peoples' world and we will continue to read about rural farmers that still need proof antibiotics are causing drug-resistant bacteria, and the list goes on from there.
croghan26
1 / 5 (1) Dec 30, 2009
Something here is missing me ....

"... the big networks will end the year with a 9 percent drop in ad revenue, followed by an 8 percent drop in 2010 and zero growth in 2011."

Are they talking about absolute figures here - or in percentage growth figures? If there is zero growth - perhaps the marketplace is about exhausted - and as winthrom says - people are moving to other venues.
CarolinaScotsman
3 / 5 (2) Dec 30, 2009
If commercial broadcast TV upgraded their programming, they just might regain viewers and advertisers. "Reality" TV shows are junk; most episodic shows are stuck in a rut that was first dug in the fifties; news shows seem to specialize in pontification. I watch one or two commercial programs (and local news) and the rest is PBS. To save money, the networks go to cheaper (to produce,which are lower quality) shows which have fewer viewers and bring less revenue so they go to even cheaper shows and so on. Network TV has been hoisted by its own petard.
croghan26
3 / 5 (2) Dec 30, 2009
GEEZE CaolinaScot - don't be so hard on what is called drama on TV. If nothing else it provides the technical people a chance to learn and perfect their craft.

Look the the Elizabethian playrights - there was a lot of drek there - but some, notably Bacon and Shalespear managed to come to the fore .... the same with the pamphleteer during the restoration - there were thousands of them, quite like the 'blogs' of today --- and they produced some immortal works: Swift and Dryden, Johnson and Haslett only to begin.

Perhaps someday some hard working undergrads will be studying be studying Law & Order or some CSI.

I much prefer reality TV myself - but I define that as baseball and football.
Arkaleus
3 / 5 (2) Dec 30, 2009
Evolve the mind network of the future, stop polluting your psyche with the generated illusions of TV. Instead, focus your awareness on the reality of reality, and strengthen your neighbors' awareness of the real.

One of the most harmful things to come out of the 20th century was mass market TV. It will take generations to fully recover the damage done to our species' mental faculties. It's a slave-generation machine, substituting a natural mind for one made of fallacies and lies. Without this diabolic device, the incursion of robber-kings would be much more difficult because the people would be fully armed with working brains.
stealthc
5 / 5 (2) Dec 30, 2009
Stop paying for cable, download what you want to watch. Shut the damn tv off, save the trees and stop buying news papers. These guys only tell you what you want to hear, at least with the internet you get to have a choice. The united states doesn't like you to have a choice, that's why internet naming is no longer under the control of the US, and that's also why obama wants a button to shut everything down with on demand. You are all being fed brainwashing ads and propaganda, and at 60hz or multiples of 60hz, the tv throws your brain into a delta-wave stupour. Mix this in with ads and it'll make anyone a spend-a-holic. The rich used tv's to get everyone spending so much that they'd hang themselves into debt, and permanent involuntary servitude to them.
tk1
5 / 5 (1) Dec 30, 2009
I thought the advent of digital broadcast was suppose to be a boon to offair broadcast. It was suppose to allow a broadcaster to offer multiple channels in the same bandwidth.
RAL
5 / 5 (2) Dec 31, 2009
Whatever. Just keep the government's hands off it as much as possible. No bailouts. No takeovers.
Nartoon
1 / 5 (1) Jan 01, 2010
If the cable/satellite company's drop 'free tv', whose going to blink first? The cable companies have lots of other channels, what do the TV networks have? Simple solution is for TV shows to stop paying actors hundreds of thousands for their work, and the rest of the gravy train. TV has to live within its limits, like you and me, if they can't make it, too bad. If the actors balk there's always jobs at the car wash.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.