CES '09: Delivery Dilemmas

In tricky times for advertisers, execs weigh traditional TV versus Web
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CES '09: Complete Coverage from Broadcasting & Cable

For years, the biggest question facing television executives as they headed into the Consumer Electronics Show was the impact of digital media on their traditional business. Now they face a much more immediate and arguably bigger threat to their core business—an economic meltdown that has already prompted significant layoffs at a number of major media and telecommunications companies.

“Regardless of the economy, 2009 was going to be a hard year for electronic media,” says Mike Vorhaus, president of Magid Advisors at Frank N. Magid Associates. “Consumer behavior is shifting, and that means they have to do business differently, which is hard enough in normal times. But when you add in a deep cyclical economic situation, the result is a deep pain like they've never seen before.”

Much of the pain will be felt in advertising revenues. Retailers are reporting the worst existing-store sales since 1969, the auto industry is seeing the worst sales slump since the 1940s, and economists worry this could be the worst recession since the 1946-1947 downturn, when the nation's economic output fell by nearly 13%. Fitch Ratings is already forecasting that the 2009 ad market will be the weakest since 2001. It predicts that major advertisers could “pull back considerably” and at even higher levels than they did in 2001.

Amid this gloomy picture, one bright spot is digital media and the opportunities that changing consumer use of video might open up for media companies.

In September 2008, more than 125 million Americans viewed a piece of video content online, according to Jack Wakshlag, chief research officer at Turner Broadcasting. “Online video is no longer a specialized niche audience,” Wakshlag says. “It has become a product with mass appeal. There were 8.9 billion videos streamed in September 2008, and the average number of streams per user was 71. So we are talking about something that is widely used.”

But revenues from the rapidly expanding digital platforms remain small—media buying firm Magna predicts that online video advertising will total only $805 million in 2009—and even those relatively small numbers could be hurt by economic conditions. “I don't think you will see a dip in digital [ad revenues] but I don't think it will grow as fast, especially on the video side where there will be pressure on pricing,” predicts Tracey Scheppach, senior VP and video innovations director at Starcom Worldwide.

That will make 2009 a year when the industry will have to build more robust business models for digital media and find better ways of squeezing new revenues out of all the major platforms where video is distributed. “The economic pressures coupled with competitive pressures, particularly the Internet, will be a real driver for innovation in 2009 in the traditional businesses and help sharpen the business models,” says James McQuivey, principal analyst at Forrester Research.

Traditionally, much of the expansion into digital media by programmers has been funded by advertising and subscription revenue from their linear television networks. While many of those investments were motivated by the fear that digital media would eventually usurp their traditional business, the proliferation of digital platforms has in fact been accompanied by steadily growing TV viewership.


In the third quarter of 2008, the average person in the U.S. spent 142 hours and 29 minutes a month watching TV, up 4.1% from a year earlier, continuing a decade-long trend in increased viewing. In the 1997-1998 broadcast year, the average person watched 3 hours and 58 minutes of TV a day; between September 2007 and September 2008, it was 4 hours and 45 minutes a day, a 20% percent increase.

“You hear that people are not watching TV because they are watching more video on the Internet and mobile phones, but that's not true,” says Pat McDonough, senior VP of insights, analysis and policy at The Nielsen Co. “They are certainly doing more video consumption online and on mobile phones, but they are still watching even more TV. And it is increasing for all age groups.”

“We've found the newer platforms to be additive,” adds Rich Battista, president of Fox National Cable Networks at the Fox Networks Group. Battista notes that putting shows like FX's It's Sunny in Philadelphia online at Hulu.com and the recently revamped FXnetworks.com site has helped boost ratings.

While broadcast ratings continue to decline, the ongoing fragmentation of audiences is not yet hurting the major cable networks, Battista and others argue. “We are up across the board this year with our three major national networks [FX, Speed and National Geographic],” he says.

In fact, the average audience of people age 2 and older increased for seven of the top 10 ad-supported networks in 2008, according to Nielsen. Even in the 12-17 demo, which is a large user of alternative media, eight of the top 10 ad-supported cable networks saw their average audiences climb.

“We've seen broadcasting decline as a result of cable television's growth, but we haven't seen cable television flattening as a consequence of people spending more time online with computers or with mobile devices,” says Josh Sapan, president and CEO of Rainbow Media. Ratings for both WE tv and AMC increased in 2008, while “we saw growth in our Websites and dramatic growth in our VOD utilization,” he says.

The economic impact on cable operators and premium-channel providers is less certain. Traditionally, subscriber counts for multichannel providers have held up pretty well during recessions. A recent study by the Consumer Electronics Association found cable or satellite subscriptions to be one of the least likely areas where consumers planned to make dramatic cuts, with only 11% saying they might cut service.

McDonough notes that Nielsen has been tracking the issue carefully but “has yet to see an impact” on sub counts for either multichannel providers or premium channels.


Looking into 2009, some even see the economic troubles as an opportunity for cable operators to boost the penetration of their bundles.

“When consumers start to look at their costs and what they are spending, I think we'll see something of a rush toward bundled services as they realize they can save a lot of money by going to cable operators,” says Howard Horowitz, president of the research firm Horowitz Associates.

Cable operators also plan a wide variety of new video services in 2009 that could strengthen their businesses. Derek Harrar, general manager and senior VP of video services for Comcast, notes that in 2009 the nation's largest cable operator is launching Project Cavalry to transition its customers from analog to digital.

As part of the upgrade, subscribers will get more channels and access to an interactive programming guide and VOD. But the payoff is probably bigger for the operators. “This will allow us to redeploy about half of the analog bandwidth in the markets where we do it,” Harrar says. “We will redeploy this bandwidth for more HD channels, a broader ethnic and international channel selection, as well as higher data speeds with DOCSIS 3.0 and more on-demand content.”

Higher data speeds, the deployment of interactive services, and the MSOs' recent focus on bulking up Comcast Fancast and other online products will also help transform the way subscribers access video. As Harrar puts it: “We have a variety of different things that we are looking at that will begin to tie together the video experience on the television with the high-speed data experience of video online.”