Thursday, July 25, 2013

Leaving Las Vegas

Television — with which the average person (of course not you or I) supposedly spends hours per day — is changing much faster than befits such a dominant, time-tested institution. As media use becomes individualised, the little fish plus the Web plus streaming services are ganging up on the big fish.

The latest trend is for big terrestrial networks to threaten to switch to pay-TV distribution only (cable and DBS). So long as pay TV has near-total penetration, and pay-TV-only channels are challenging the major broadcast networks’ ratings, they say, why should we be subjected to the injustices and iniquities of regulation?

It is an obvious bluff. But not because the bluffers won’t carry out their threat if they don’t get what they want. It’s because they will carry it out even if they do. And not a moment earlier either way.

ITV, long the U.K.’s top network with a 31 full-day viewer share in 1992, has plummeted to 16 by last year (its only comparably sized competitor, BBC1, went from 25 to 20 at the end of last decade but since rose back to 23). It operates on limited-time franchises issued by a public authority. It still produces some expensive “quality” drama (although much less than it used to) and a fair bit of national and local news. Having adjudged these to be bad for its business, it started carrying the line that it was seriously thinking about leaving terrestrial distribution unless the relevant regulations were seriously relaxed. The government did not want to deal with this issue and extended ITV’s licenses until 2024.

Would ITV leave the public spectrum? What would happen to it? Its next nearest competitors BBC2 and Channel 4/S4C have shares around 7; Channel 5 has 5. The rest are at 2 or lower. And ITV is quite profitable, with a ~10% net margin last year.

Content may be king — some of that expensive programming that differentiates ITV may also permit it to soar above all but one other channel, as it still does — but it is a constitutional, primus enter pares king: pay-TV-only channels with arguably better programming, which they use against each other, cannot touch ITV, apparently because of its privileged terrestrial position. If it were to leave, it would lose access to the 46% of U.K. households that have no pay-TV, but also its disproportional appeal to those who do — based on its terrestrial distribution, ostensibly irrelevant to them. Perhaps it is the very public-service-obligation programming that it is trying to shirk that confers upon it this special status, although it may not be evident in each programme’s direct ROI. (Such indirect effects are NBC’s argument for paying for the Olympics even when they run at a loss.)

So ITV won’t leave under current conditions (barring the group insanity of its management). But it may well continue to cut programming costs and dumb down their appeal in response to declining ratings; it is the global poster child for this disease (see the previous post). And unless it stops, it may reach a point at which there won’t be much benefit to staying free-to-air.

The latest big bluffer is Fox in the U.S. It is unhappy that Aereo, a startup that streams terrestrial channels from personal antennas, refuses to pay it retransmission fees. These now approach $2.4bln but media rep SNL Kagan projects a rise to $6bln by 2018. U.S. terrestrial TV also takes in around $47bln in advertising. Fox was second this season, usually several times higher than the top pay-TV-only channel. There is no precedent for the switch of a high-cost, high-rating terrestrial network to pay-only distribution. There was, however, a high-profile failure to do what that would almost certainly require: sharply control costs. It was NBC’s replacement of drama (ER) with Jay Leno, and it failed disastrously, with affiliates criticising the network in public and replacements having to be hastily procured midseason. Network TV may be down at heels but not that down.

Aereo, precisely to avoid having to pay for retransmission, offers terrestrial channels only. As such, it supports the small but highly profitable — for terrestrial broadcasters — cohort that does not use pay TV or prefers not to use it. Aereo offers essentially an extension of conventional terrestrial distribution, for which, of course, there are no retransmission fees. The good news for the networks and their affiliates are the huge profits they make, burdened by little or no competition, off those 15% of U.S. households (and a larger percentage of viewers, now that viewing has largely become individual). The day may come when the networks conclude they have nothing to lose by abandoning terrestrial distribution; that day is still very far, and services like Aereo would not be a factor because, far from harming the networks, they restore their glory days of oligopoly — among subscribers. Until then, Fox would be nuts to move to pay TV, but it may be right in considering members of Congress and federal appellate judges daft enough to think that it would.

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