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Taking Aim at Stations

Cable systems eye $24 billion in broadcast revenue 5/18/2003 08:00:00 PM Eastern

Whether courting the local pizza shop or package-goods giants like Procter & Gamble, cable-system operators make the same pitch: Spot cable gives advertisers more bang on the buck.

Cable Ad Revenue
Year Network (million) Cable System (million) Total (Million)
Source: Veronis Suhler Steveson Communications
1999 $8,593 $3,026 $11,619
2000 $10,259 $3,507 $13,766
2001 $11,249 $3,965 $15,214
2002* $12,852 $4,603 $17,455
2003* $14,912 $5,023 $20,115

This year, though, cable systems' local broadcast rivals are projected to book more than four times as many ad dollars. It's a deficit that frustrates and motivates cable salespeople.

"We're ready to talk turkey with advertisers and show them all the progress in audience, in programming and in the back room," said outgoing Cabletelevision Advertising Bureau President Joe Ostrow.

Cable systems generated about $4 billion in revenue in 2001 from the sale of the two minutes per hour that comes with each of the cable networks they carry, according to media investment firm Veronis Suhler Stevenson. The take is projected to rise to $5.2 billion this year.

Still, TV stations grab far more loot. They booked $22.7 billion in total ad revenue in 2001, $9.8 billion from national accounts, $12.9 billion from local. Their sales are projected to top $24 billion in 2003.

The knock used to be that buying cable spot was just too complicated. Cable systems within a market weren't interconnected, and back-office operations were inefficient, if not incompetent.

But those arguments against cable are less relevant. MSOs have consolidated their hold on markets. Interconnects, such as Los Angeles-based AdLink, have made buying easier. By the end of this year, interconnects will be operating in 75 of the top 100 markets, up from just 10 markets in early 2000, according to National Cable Communications. NCC, which operates interconnects and sells local cable to national advertisers, is jointly owned by Time Warner, Cox Communications and Comcast.

The days of "peddling" a tape from headend to headend are virtually gone. According to NCC, in 144 markets, a cable operator or interconnect can now deliver at least 50% of all cable subscribers with one contract, one tape and one invoice.

What's more, cable viewership is growing. In 2002, ad-supported basic cable surpassed the seven broadcast networks. It grabbed a 48% share of the prime time audience vs. broadcasters' 45%, according to Nielsen Media Research data from the CAB. That trend is continuing this year, with cable outdelivering broadcast in prime for nine straight weeks through May 4.

And just like the cable networks, which rant about getting seconds in the national advertising market, cable systems want ad dollars to follow the eyeballs to cable.

Operators are pushing the attractiveness of their regional footprints and huge subscriber bases. Time Warner Cable, for instance, can offer advertisers the Houston, San Antonio and Austin, Texas, markets. Comcast, with about 22 million subscribers, can deliver most of Chicago and Philadelphia.

Operators point to their medium's ability to drill down into local areas and offer particular demographics through niche networks.

In the Champaign-Springfield, Ill., market, the nation's No. 82 DMA, Insight Communications' interconnect, Insight Media Advertising, took on local system sales for another operator in the market, Mediacom. Now Insight can offer advertisers nearly 88% coverage in a far-flung market that covers 13,000 square miles.

That one-stop shopping appeals to local and national advertisers, said General Manager Tara Gallahue. "We now have more options for advertisers so they can pick and choose markets. We're making it easier for people to buy local television."

A former salesperson for local stations, Gallahue doesn't differentiate between broadcasting and cable: It's all television, she said. Across the country, cable operators and interconnects are preaching the same message.

Clearly, cable operators have a lot riding on increasing advertising revenue. They've spent billions upgrading their systems to accommodate digital services and have built up their advertising arms and interconnects. As subscriber growth slows, local advertising stands out as a growth opportunity. Advertising now accounts for about 10% of operators' revenue, but most want—and need—and more.

"We've made all this investment in the cable pipe," said Larry Fisher, president of ad sales for Time Warner Cable. "Now the cable business can take advantage of the revenue stream."

He envisions more than just selling 30-second spots. He sees opportunities to sell localized video-on-demand, targeted infomercials and even shopping channels for retailers.

Cable advertising's pitchman Ostrow trumpets cable's ability to eliminate waste and reach specific audiences. "You know exactly who the audience will be on ESPN or Lifetime. You have no clue who the audience is for the newest 'let's-drop-the-net-and-see-who-we-catch' show on NBC or CBS."

But, buyers lament, they really don't
know exactly who is watching. That's because local viewing data is hard to come by.

"Everyone knows people are watching cable, but there is still a lot of confusion over cable ratings," said Mary Barnas, senior vice president and director of local broadcast for media buyer Carat USA. And without better ratings, time buyers find cable can be tough to sell to their clients.

Nielsen Media Research's national rating system reports demographic ratings as well as share of viewership, but local demographic data is not metered. Instead, local demo ratings are extracted from the national data. Buyers can see local household ratings, but they use demographic data to buy time.

Without true local measures, "it assumes audience is identical in different regions," said Kevin Gallagher, senior vice president, director of Starcom Worldwide's local investment group.

The few examples of true local data show that is clearly not the case. One system, Ad Com, measures local cable viewership in Jacksonville, Fla., Dallas-Fort Worth and San Francisco. Its data shows what cable channels and shows pop in individual markets and compares them with the national averages.

In Dallas, during the first week in May, for example, Fox News Channel's The O'Reilly Factor
on and E! Entertainment Television's Anna Nicole Show
ranked among the top 25 shows and performed well above their national averages. In San Francisco, though, O'Reilly
and Anna Nicole
were nowhere to be found. There, TNT's NBA playoffs and Trading Spaces
were among the most popular draws.

Perhaps the most promising new local-measurement system is Nielsen's Local People Meter system, being tested in Boston. It provides both household and demographics ratings on a local level by putting Nielsen meters into the local markets.
Nielsen plans to roll people meters out in the top 10 markets by 2005.

Cable operators stand to benefit from that information. "The top 10 DMAs represent the lion's share of local television advertising," said Ostrow. Indeed, according to Nielsen, $8 billion is spent on local TV advertising in those markets.

Another system, Arbitron's Portable People Meter, currently being tested on radio and television in Philadelphia, could also yield promising data on cable viewership.

It's no surprise that local broadcasters, championed by the Television Bureau of Advertising, denounce cable data—both older methods and developing ones—as unstable. They are trying to safeguard their local and national spot dollars. In nearly every market, save perhaps Los Angeles, there is one dominant MSO, noted TVB President Chris Rohrs. "It's created a monopolistic gatekeeper and enabled cable to become a competitor" in the local advertising market.

But, unlike at the national level, where cable channels offer bargain-basement spots based on cost per thousand viewers (CPMs), local cable is often pricier than broadcast.

The TVB also pushes broadcast's blanket coverage. It reaches everyone in a market with a TV set. In contrast, cable distribution is limited. And, according to TVB, Nielsen viewership data for cable networks includes satellite homes.

Non-Network TV Ad Revenue
Year TV Station* (million) Annual Growth Cable System* (million) Annual Growth
* Includes national and local spot sales
Source: Veronis Suhler Stevenson Communications
1996 $20,747 $1,893
1997 $21,435 3.3% $2,191 15.7%
1998 $22,828 6.5% $2,538 15.8%
1999 $23,180 1.5% $3,026 19.2%
2000 $25,806 11.3% $3,507 15.9%
2001 $22,676 -12.1% $3,965 13.1%
2002** $23,680 4.4% $4,603 16.1%
2003** $24,075 1.7% $5,203 13.0%
2004** $25,588 6.3% $5,873 12.9%
2005** $24,994 1.6% $6,514 10.9%
2006** $27,576 6.1% $7,265 11.5%
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