As a distribution vehicle, broadcast television is the least flexible, the least efficient and probably in the worst position to exploit convergence in the digital age, analysts said last week at the PricewaterhouseCoopers communications conference in New York.
"Broadcasters are a one-way anachronistic system using about 30% to 40% of the bandwidth that's most capable of allowing billions of palm pilots and lap phones to talk to each other," said Tom Wolzien, media and entertainment analyst at Wall Street brokerage house Sanford Bernstein.
In effect, he said, broadcasters are a back-haul system-to 80% of their customers-for cable operators. "Only 20% of the households in the country are actually using that spectrum. Therefore, I think they will come under tremendous pressure unless they can differentiate themselves by content."
By contrast, said Wolzien, "cable for the foreseeable future has the largest amount of bandwidth, has the most flexibility and therefore the most potential of winning" the distribution battle for the single wire into the home. "Cable is in the best position."
Richard Klugman, a telecommunications analyst with Donaldson, Lufkin and Jenrette (DLJ), agreed. "I just don't see how that broadcasting model can exist," he said. That's particularly true in the growing world of broadband narrow casting. "That's a huge phenomenon that we've just started to get a taste of. But when everyone can pluck the information that they want, whether it's a TV show or something else, how does the whole advertising model that the traditional networks have used continue? It seems almost irrelevant."
Complicating matters further for the broadcasters, said Klugman, is a new generation of commercial-zapping personal video recorders like TiVo and Replay. "TiVo is kind of a sign of things to come. Today you have to download it effectively on a hard drive. But what happens when it's just as easy to access it off somebody else's TiVo or, in the case of Napster [the Internet clearinghouse for downloading free music that was recently found to be in violation of copyright laws], 20 million other equivalent TiVos, many of whom have copies of Casablanca, and you can pick the one you want?"
PaineWebber entertainment analyst Chris Dixon countered that the real value delivered by broadcasters is in the local programming and information they air. "So the question really becomes, how quickly does much of that local information migrate over the Internet?"
Dixon cited USA Inc.'s efforts to link its CitySearch online service to its co-owned broadcast stations. "This whole notion of cross media and how do you use this mature broadcasting system" needs to be sorted out, he said. "Yes, in the next 10 to 15 years, broadcasters will come under enormous pressure."
Dixon predicted that some broadcasters may sell out, reaping a windfall for their spectrum that then may be re-deployed for other uses. Nevertheless, he said, broadcasting will remain an "important local franchise," though one that will have to align with other media, such as newspapers or the Internet.
The analysts also weighed in on the proposed AOL-Time Warner merger. Both Dixon and Wolzien said the deal has huge marketing benefits for the merged entity. A year ago, AOL spent $1 billion to acquire 5 million new subscribers, said Dixon. "All of a sudden, you align yourself with Time Warner, you put AOL 6.0 on the newest Madonna CD, you package it through Sears, and you drive down your acquisition costs significantly, and the entire business model improves significantly."
Wolzien added that a merged AOL Time Warner is designed in part to "break the back" of the high-speed online distributors, "which they are in the process of doing." Time Warner's original content provides a huge new advertising foundation for AOL as well, he said.
But Wolzien questioned the need for an AOL-Time Warner combination to retain Time Warner's cable-system operations. "Once you have AOL distribution in place and long-term distribution deals with cable operators, you don't need it. And your returns on invested capital will skyrocket if you can get rid of it."
As for AT & T, DLJ's Klugman said the jury is still out on whether the company's big move into cable was the right move. "AT & T has a lot of problems in the other 70% [non-cable part] of their business. The rest of the company is kind of falling off the cliff faster than they would have liked. The core business has more problems than they're having success on cable."
Dixon said he would like to see AT & T divest its stake in Liberty Media. At the same time, he said, AT & T could fold its 25% stake in Time Warner Entertainment into Liberty and thereby unlock unrealized value in both content assets.