DVRs become the wire hangers of the industry
At a time when the business of television is undergoing accelerated and sometimes desperate change, uncertainty over new technology is leaving many broadcasters wary of the future, while technology companies wonder how to address the unpredictable broadcast market.
Networks, faced with a rapidly declining audience, are ripping apart traditional programming patterns and seeking ways to deal with the most explosive technology to emerge in years: The TiVo-bred digital video recorder (DVR).
Cable and DBS are also chomping away at network audiences. During the 2002-2003 season, broadcast television stations collectively held an average 49 primetime share of U.S. television households, compared to an average 74 share ten years earlier.
Pay television providers, also experiencing a shrinking number of traditional viewers, are banking on new digital technology to generate additional revenue. The lure of video-on-demand and VoIP telephony is attracting cable subscribers to broadband. At the end of 2003, there were more than 14.6 million cable modem subscribers. Some predict that number will reach more than 26 million within three years.
"Today's teens are growing up in a world where (conventional) television is less vital as a form of entertainment," said Tim Spengler, executive vice president, national broadcast, at Initiative Media, a global media management firm. "How we deal with that is a big concern."
A&E Network used focus groups to study the loss of young viewers.
"For most [adults], interactive television is a contradiction in terms," said William Corbin, A&E's vice president for interactive production. "We just want to sit down and watch passively. But when we looked at the younger age group-and it's a scary thought-we found out that television is a thing behind them. Their focus is on the computer. They don't understand how their parents can be so boring as to watch only one thing at a time. They want instant message windows open, they want to be burning DVDs, and to be watching content-all at the same time."
Rick Mandler, vice president of Walt Disney Company's Internet Group and ABC's Enhanced TV, agrees that generational change is having a huge impact on TV viewership.
"Do I feel overwhelmed (by technology)? Yes, sometimes. Does my college-aged nephew feel overwhelmed? Never," the 40ish Mandler noted. "At the end the day, the technology you grow up with is the technology that you're receptive to adopting later on. Those 34 and older may never break down. They get locked into the media patterns they consume and don't really have the mental bandwidth to break themselves out of that pattern."
David F. Poltrack, executive vice president of research and planning at the CBS Network, notes that the television networks have transitioned from distributors to the leading producers of broadcast content. He is still bullish on the network television business and sees opportunity in the DVR.
OUR FRIEND, THE DVR
"We look at all of our television programs as brands," he said. "Once a television program establishes itself as a successful brand, we are looking at all kinds of different ways to exploit that programming and bring it to the consumer in all different forms."
That means, Poltrack said, selling DVDs directly to viewers, archiving and distributing shows in VOD and pay-per-view, and even creating traveling live staged productions based on popular shows.
"We have been tracking DVR use among people for two years," Poltrack said. "Yes, DVR users skip commercials. Yes, they do watch a substantial amount of their television in the record versus live mode. But what are they recording? They are recording the top ten shows on network television."
Taking a positive view of the technology, Poltrack said DVRs allow people to rearrange their schedules and sample more new shows than ever. He doubts DVRs will damage the television business or high-quality advertising, which, he contends people like.
THERE AT BITTER CREEK
That view is shared by Jeff DeJoseph, vice chairman of Doremus, a leading branding agency.
"One of the reasons that entertainment branding is a hot topic is because people are scared of TiVo," DeJoseph said. "People are still going to watch commercials because they have always loved great commercials. They will use TiVo to eliminate most of the bad commercials."
That said, use of DVRs is creating change, DeJoseph said. Brands are becoming more aggressive with sponsorships of entertainers and in television content development.
"The sophisticated ones are going way beyond product placement," he said. "They are going to try to find a group of producers and get involved in story development early enough so that the brand message can be woven into the story in a credible way."
Networks are also considering the elimination of the traditional television season, the 35-week period from mid-September to mid-May. NBC has been especially aggressive with plans to introduce new shows year round and to have fewer repeats in the summer. There's also active consideration of eliminating the three yearly "sweeps" periods.
These changes have given rise to reality shows that cost little to produce and, when successful, garner high ratings and huge profits. The downside is the programs usually have no syndication, and little future earning, potential.
"We are concerned about reality television, which is a cheap alternative to address rising program costs," said Stefanie Kane, a partner specializing in media economics at PricewaterhouseCoopers. "Reality television cannot sustain a lifecycle in syndication. The audience for reality diminishes rapidly. This is of great concern to the economics of television."
Though the broadcast networks still express public support for their local affiliates and regard their O&O stations as important local branding vehicles, there is virtually no public talk among industry players of the transition to digital terrestrial broadcasting.
The subject seemed mostly irrelevant at the recent Media Summit in New York City sponsored by several McGraw-Hill companies. One participant noted that local stations might become more relevant in the big media picture when they finally figure out a business model for digital broadcasting.
Even HDTV is now viewed mostly in terms of luring the cream of the crop in high-end pay television subscribers.
"The satellite guys were the first to roll it out. Cable was pained to lose their best customers and that's obviously driving their decision to add high definition at a rapid pace in all the major MSOs," said Karl Meisenbach, director of advertising at HDNet.
The topsy-turvy economics of television is causing media companies to re-aggregate their assets and take a new look at the profitability of creating programs, said Leonard Asper, president and CEO of CanWest Global Communications, owner of the Global Television Network in Canada.
"Today you have to accept that the first run of your new TV show isn't going to get the same license fee it used to get," said Asper. "It isn't going to attract the same advertising revenue. But that's OK, because the show is going to get a little bit more in syndication, it will get more in pay-per-view, more in VOD, and you will sell the DVD. And maybe you'll create a music soundtrack. New revenue has to come from the fragmentation to pay for the content."
BIGGER ISN'T ALWAYS...
With this re-aggregation comes management hurdles, Asper noted.
"Media becomes powerful because they've aggregated a bunch of assets under one roof," he said. "However, this is very difficult to control because there are people involved. I don't think media companies are nearly as powerful as the media itself makes it out to be."
Global media conglomerates are headed for trouble, said Patrick Vien, president of network enterprises at the Universal Studios Television Group.
"I think these oligarchies are going to get very difficult to manage. All empires eventually break down. They are then rebuilt by true independents. So over time that will happen in this business as well," he said.
The music business has already begun a swing back toward independents and other parts of the entertainment business, television included, will eventually go the same route, said Jay Boberg, former president of MCA Records.
"We are returning to the era of the independent entrepreneurs that don't have the baggage of the big, dark corporate giants," Boberg said. "We've seen these waves of decentralization and then the bigger companies buy up the small ones. Then there is some paradigm shift like we've just seen and the big companies start to lose their power and a whole crop of independents pop up. Then they are consolidated again."
Today, Boberg continued, the people running the major media companies understand this cycle, but they have difficulty knowing when to seize the moment to make the right moves.
"There are times when it's better being an oil tanker and there are times when it's better to be a jet skier," he mused. "It just depends on where you are in the whole technological marketplace. Right now being on a jet ski is a much better place to be."