Follow the Money

Fatty_watching_himself_on_TVI saw an article in Business Insider that provided some statistics on the decline of TV advertising. The article reports that advertising is down sharply from 2013 is several categories. First, spending on ‘upfront’ deals with cable networks to grab prime spots is down from $10.2 billion to $9.6 billion. The upfront represents the prime selling season for TV because this is when advertisers grab time in the upcoming fall programming season. Advertising is also down for the broadcast networks and it’s been reported that advertising for the primetime schedule in ABC, NBC, CBS and Fox fell from $8.6 billion to $8.17 billion.

This is not to say that TV advertising is still not huge, and in 2014 it’s expected to make up 38.1% of all ad spends. But advertising on the Internet is now up to 28.2% of total advertising and growing rapidly.

The lowering of TV ad revenues are interesting for several reasons. This is the first time in years that ad revenues have fallen this significantly. In the past any falls in advertising were attributable more to a general economic slowdown. But it seems like the drop now is being driven by other factors. The main factor driving this shift is that many large companies are now spending a lot of their advertising dollars on the web.

If this trend continues it certainly is going to have major repercussions in an industry already under strain. For example, the average age of viewers of network TV continues to climb. In an article that just came out today in the Huffington Post was a report that the average age of a viewer on CBS is 55 years old, on ABC is 51 years old, on CBS is 52 and on Fox is 35. But even the lower Fox numbers are skewed because of the heavy viewing of their Sunday night animation lineup by younger viewers.

This is a problem because advertisers tend to go after younger viewers. That is where large companies want to create brand loyalty. The age of TV viewers has been increasing steadily over the last few decades. For example, the average age of viewers of NCIS, the current number one rated TV series is 57 and a few decades ago the average age of number one shows like Home Improvement or Cosby was around 30.

So it looks like advertising dollars are beginning to finally catch up with the demographics of who watches TV. It seems inevitable that TV advertising must fall as advertising online continues to rise. What is interesting is that it took it until this year to manifest as negative growth in TV advertising revenues.

For networks, advertising is still king and is still their major source of revenue. But they have been chasing an alternate revenue source for a decade in the form of local retransmission fees. Ten years ago almost no cable system paid to show local TV networks. They just put up an antenna, took the signal off the air and put it on their cable systems. But the local network affiliates have been charging for local retransmission fees and it’s estimated that this has grown to become about $2 per local network channel. That means that a cable system that is carrying all four major networks is probably paying around $8 per customer per month in these fees.

The retransmission fees are not insignificant and one has to figure that each major network is now collecting over $2 billion per year in these fees. It’s also been reported that almost all of that money goes back to the network and that the networks have been raising the rates to affiliates for programming every year to essentially rake back the retransmission fees to the corporate coffers. Local network affiliates are not getting rich off of these increased fees.

Meanwhile, cable networks have been raising rates at an average rate of 7% per year for well over a decade. And recently we’ve seen some of these increases come in even higher, such as in recent renewals with Viacom.

One can only expect that a drop in advertising revenues is going to result in even more demands for increased programming fees from all of the networks. This feels like an industry in desperation. I think everybody in the industry understands that increased cable TV fees are really starting to strain the American pocketbook. While the cord cutter phenomenon is still relatively small, the dissatisfaction with what people pay for cable is really high. One has to think the day will come when the avalanche of people dropping cable becomes drastic.

But the programmers are all major corporations and are driven by quarterly earnings, and so no network wants to be the one to blink. Nobody wants to say, enough is enough and stop raising rates at 3 – 4 times inflation. Instead, we are looking at an industry where the average household will be paying over $100 per month for cable in a few years and over $200 in fifteen years if we can’t break the cycle of rate increases. One only has to follow the money to see that this is an industry in denial and headed for an eventual cliff.

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