Laura Martin and Dan Medina of Needham & Company, a branch of an investment banking and asset management firm have issued an analysis on the Future of TV. There has been a lot of other reporting about this report, most of which zeroed in on the fact that ESPN would need to charge $30 in an a la carte environment. I’ve written several other blogs about the a la carte issue and instead want to highlight some of the interesting facts from the report.
They say that TV is a bargain and that the average family spends 30 cents per hour to watch TV. This is based upon an average cost of $75 for a cable subscription and a family watching TV eight hours per day. I think they miss two points with this. The price of cable has grown much faster than inflation and there are now more and more homes who feel they can’t afford the cost of the subscription. If cable rates keep climbing 6% per year, in only five years this same subscription is going to cost over $100 per month. Also, there are many households who do not watch TV eight hours per day. It is these two groups that are leaving the cable system, the first reluctantly and the second because it no longer feels like a bargain.
TV content is expensive to produce. The four main broadcast networks (ABC, CBS, FOX and NBC) spend an average of $2.5 million to create a prime time hour of programming. To contrast, all of the other 130 or so cable networks spend an average of about $100,000 per hour. But there are new rivals now producing programming. There are a number of companies now producing content for the web and this is expected to grow rapidly. For example, YouTube is spending about $100 million, NetFlix $200 million, Hulu $500 million. And both AOL and Yahoo have created web ‘channels’.
They say that about 80% of content never pays for itself. The TV world is driven by hits since they draw the bulk of the advertising revenue. But hits are ephemeral and unpredictable. The broadcast networks have been geared for decades to product hits and it’s obvious that even with the money that they spend that it’s very hard to do. But the top shows garner the lion’s share of ad revenues. To show the power of hits, the top 1% of movie hits account for 18% of movie rentals / views.
They recognize that TV viewing is shifting in a digital age. They cite the following statistics:
- 72% of viewers watch content only on a TV set.
- 11% watch content only on some digital medium such as computer, pad or smartphone.
- 17% of viewers watch some content in both ways.
- 61% of TV watchers now use the Internet while watching TV and 10 – 25% of those viewers go to the website of the show being watched (depends upon the network being watched).
- 29% of the viewers who use the web while watching TV are on Facebook.
The report estimates that over 1 million jobs are dependent upon the TV sector. These are mostly middle class jobs and include cable TV installers, customer service reps, people who work in various roles at the networks. Comcast alone has 126,000 employees. By contrast the new companies trying to make money from web content have very few employees. Hulu has 420 employees, YouTube has 650 and NetFlix has 2,348. The report thinks that most of the traditional cable TV jobs are at risk if we move to an a la carte system.
The public companies in the TV sector have about $400 billion in market cap (investable securities). The report estimates that at least half of that market cap would disappear under a la carte programming. They warn that even having the government looking at a la carte programming puts these investments at risk.
These are just a few of the many facts cited in the report, which is why I have included link to the full report for anybody who wants to read more. Oh, and at the end of the report they recommend buying CBS and AOL stock. If you buy them and it doesn’t work out, you didn’t hear it here.