Cable’s Popularity Contest
Have ratings topped out for the big networks?
By John M. Higgins -- Broadcasting & Cable, 10/16/2005 8:00:00 PM
Cable programmers are in a good mood. They triumphed with a 60% share of prime time audience over the summer, when they spend heavily since broadcast networks largely sleep. And even in the face of broadcasters’ fall promotion onslaught, cable networks are doing better than they did last season.
But there are cracks in the levee that should concern major cable networks—and perhaps investors. Some analysts worry that the growth of big programmers such as TBS, USA and A&E faces the same kind of erosion that broadcast networks have suffered over the past 20 years. Smaller channels like Food Network and Comedy Central threaten the big cable programmers the way older cable networks chewed up the Big Three broadcast networks.
The problem is, much of cable’s audience growth has been fueled by big gains in distribution—and that game seems to be coming to an end. Programmers have benefited from the launch of direct-broadcast satellite (DBS) services, adding 25 million homes over the past decade that weren’t receiving any “cable” programming before. But the overall growth in cable and DBS homes is expected to slow, with the two rivals largely trading subscribers back and forth.
Sanford Bernstein & Co. media analyst Michael Nathanson calls the problem “immediate and serious” for big cable networks because “the rapidly approaching end to distribution growth will mark an end to the easy growth of viewers.”
Less-established networks like 50 million-subscriber-plus National Geographic and Oxygen can generate audience gains by securing more subscribers. But fully distributed channels like ESPN or Nickelodeon will have to fight it out the expensive way: by spending even more on programming and marketing—which threatens profit margins.
STUCK IN THE MIDDLE TIER
Researchers for ad buyer MagnaGlobal have come to a similar conclusion. “Just as more channels and more choice have caused broadcast ratings to erode, they have also caused cable ratings to splinter,” the firm says in a recent analysis of cable’s prime time audience. “With a new network joining here and there, the higher-rated cable networks among households have basically been unchanged over the past five years. Improved performance by cable networks has resulted in more joining the middle tier but not the top-tier networks.”
Call it Three Blind Mice syndrome. Ken Auletta spent five years studying the broadcast networks that dominated TV while writing Three Blind Mice: How the TV Networks Lost Their Way, his research beginning in 1986, when ABC, NBC and CBS abruptly changed hands. The buyers realized that the networks weren’t as invincible as media executives had deluded themselves into believing.
At the time, Nielsen Media shows that broadcast networks commanded 75% of the prime time television audience. That has shrunk dramatically. But cable executives counter that their situation is different. “Three Blind Mice was about the networks’ not knowing what hit them, not realizing that a tidal wave was about to overtake them,” says Tim Brooks, Lifetime executive VP, research.
Executives at cable networks aren’t naïve; they see how they chisel away at broadcasters every week. Also, cable networks are largely silos of entertainment giants that also own broadcast networks and have watched their prime properties get eaten away by smaller rivals. NBC Universal’s Bob Wright and Disney’s Bob Iger are not blind.
Sanford Bernstein’s Nathanson and his former colleague Tom Wolzien (now a consultant to the firm) have conducted compelling analysis by crunching data to assess a network’s “popularity.” Take a network’s Nielsen ratings growth since 2000, then subtract the number of new homes added over the same period. It’s the equivalent of same-store sales for a retail chain. Growth by building new stores is fine, but how are Wal-Mart’s sales in its existing stores? A large, positive popularity index is a good sign, because it shows that a network is making headway among all viewers. A negative score signals that the network could be in trouble once the easy distribution gains end.
SIGNS OF TROUBLE
Bernstein isolated household ratings during each April, a month less distorted by broadcast sweeps, between 2000 and 2005. Cable’s biggest networks don’t fare very well. Take the 10 networks with the biggest distribution in 2000. Their average combined prime time audience has increased a healthy 11%, but their distribution increased 15%. To Nathanson, that means the big networks’ popularity dropped 4%.
Some big cable networks do very well. Spike (formerly known as TNN) has seen its ratings surge four times more than its distribution gains, increasing its popularity by 47%. That’s driven almost entirely by reruns of broadcast TV’s top show, CSI, and wrestling. ESPN’s ratings grew at more than double the rate of its distribution growth, increasing its popularity 20%.
But Nathanson sees signs of trouble at other big cable networks. USA Network’s ratings shrank 10% while distribution increased 15%, for a 25% drop. Discovery Channel’s ratings dropped 27% while its household reach increased 15%—leaving a 42% decrease in popularity.
“Basically, it’s going to encourage deeper investment in content,” Nathanson says, pointing to TNT’s successful reentry into the original-series business with such programs as The Closer. “But it’s going to hurt their margins. It has to be done if they want growth.”
This isn’t a new issue. I first looked at the threat to big cable networks for a B&C cover story titled “Five Blind Mice” back in 2001. That cited five general-entertainment networks—TNT, TBS, USA Network, Spike (then TNN) and FX—that were facing the same kind of erosion. So how have those five fared? Three have steered around the threat, according to Nathanson’s index (which covers a slightly different time period). TNT’s popularity has jumped 20%, while FX and Spike surged 47%. Two have not: USA’s popularity is off by 25% and TBS’ by 28%.
Turner Broadcasting System research chief Jack Wakshlag looks at things in a different way. Since 2001, other cable networks’ share of the TV audience has jumped 10 percentage points, from 27% to 37%. The five mice’s share increased from 8% to just 10%.
“These guys have had some coasting,” says Wakshlag. “Most of them have changed their programming. They are doing the investment required in the face of competition.”
That should cheer viewers, who will get better programming out of the equation. But it may worry investors who are more concerned about profit growth.
E-mail comments tojhiggins@reedbusiness.com
| Measuring Network Popularity | |||
|---|---|---|---|
| Cable channels adding both subscribers and audience have a high “popularity” score. But Sanford Bernstein’s Michael Nathanson finds that some are growing distribution yet losing viewers. | |||
| Top 10 In subscribers | Subscriber Growth | Ratings Change | Prime time Popularity |
| Sanford Bernstein calculates a network’s “popularity” for a period by subtracting new subscribers from its Nielsen ratings growth. A positive index shows a network making headway among all viewers; a negative, that it could be in trouble once easy distribution gains end. Source: Sanford Bernstein and Wolzien LLC analysis of Nielsen Media data |
|||
| Network | |||
| Spike (TNN) | 16% | 63% | 47% |
| CNN | 15% | 46% | 31% |
| TNT | 15% | 35% | 20% |
| ESPN | 16% | 35% | 19% |
| Nick/Nick at Nite | 15% | 3% | -12% |
| The Weather Channel | 18% | 0% | -18% |
| USA Network | 15% | -10% | -25% |
| TBS Superstation | 13% | -15% | -28% |
| A&E | 16% | -17% | -33% |
| Discovery | 15% | -27% | -42% |
| Average | 15% | 11% | -4% |
| Gaining | |||
| Hallmark/Odyssey | 155% | 572% | 417% |
| Fox News | 84% | 308% | 224% |
| Court TV | 109% | 194% | 85% |
| Food Network | 87% | 155% | 68% |
| Bravo | 80% | 137% | 57% |
| Losing | |||
| E! | 42% | 3% | -39% |
| Discovery | 15% | -27% | -42% |
| CNBC | 22% | -38% | -60% |
| WGN Superstation | 37% | -26% | -63% |
| TV Guide Channel | 43% | -25% | -68% |
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