December 29, 2009

Cable And Net Could Mean The End Of “˜Free TV’

Broadcast experts say the current television business model, which has allowed TV stations to broadcast news, sports and entertainment for free while making their money by showing commercials, may be coming to an end, The Associated Press reported.

Industry analysts say cable TV and the Web have fractured the audience for free TV and siphoned its ad dollars, while the recession has squeezed advertising further, forcing broadcasters to accelerate their push for new revenue to pay for programming.

Such changes could mean higher cable or satellite TV bills, as the networks and local stations squeeze more fees from pay-TV providers such as Comcast and DirecTV for the right to show broadcast TV channels in their lineups.

Meanwhile, the networks might even do away with free broadcast signals in the next few years and operate as cable channels "” a move that could bring an end to free TV.

News Corp. owner Rupert Murdoch told a shareholder meeting this fall that good programming is expensive and can no longer be supported solely by advertising revenues.

Fox has publicly warned that its broadcasts "” including college football bowl games "” could go dark Friday for subscribers of Time Warner Cable, unless the pay-TV operator gives Fox higher fees.

Comcast Corp.'s takeover of NBC could also decide the future of free TV, as Jeff Zucker, who runs NBC and its sister cable channels such as CNBC and Bravo, told investors this month that "the cable model is just superior to the broadcast model."

Cable channels have been insulated from the recession by having two revenue streams "” advertising and fees from pay-TV providers. This has caused over-the-air stations to cut staff, and at least two broadcast groups sought bankruptcy protection in 2009.

Fox's broadcast operations reported a 54 percent drop in operating income for the quarter that ended in September. Its cable channels, which include Fox News and FX, grew their operating income 41 percent.

The big networks will probably end the year with a 9 percent drop in ad revenue, followed by an 8 percent drop in 2010 and zero growth in 2011, according to Analyst Tom Love of ZenithOptimedia.

Media economist Jack Myers projects online video advertising will grow into a $2 billion business by 2012, from just $350 million to $400 million this year.

However, that's not significant enough to make up for the lost ad revenue on the airwaves. The Television Bureau of Advertising said advertisers spent $34 billion on broadcast commercials in 2008, and that's down by $2.4 billion from two years earlier.

Now the major networks and local stations are mimicking what cable channels do by charging pay-TV companies a monthly fee per subscriber to carry their programming.

Matt Polka, the head of the American Cable Association, says its members "” mainly small cable TV providers "” have seen their costs for carrying local TV stations more than triple over the past three years.

He says those fees have gone "straight to consumers' pocketbooks" in the form of higher cable bills.

Gannett Co., which operates 23 stations, has taken in $56 million in fees from pay-TV operators this year after negotiating a new batch of agreements, up from $18 million in 2008.

Dave Lougee, president of Gannett's broadcast arm, said broadcasters were late to the game in really starting to go after the fair market value of their signals.

CBS managed to get as much as 50 cents per subscriber in its most recent talks with pay-TV providers that carry CBS-owned stations, according to analysts.

"Such fees should add hundreds of millions of dollars to revenues annually," said CBS Corp. chief Leslie Moonves.

CBS and Fox are also asking for a portion of the fees that their affiliates get, arguing that the networks' shows are what give local stations the leverage to ask for fees.

The networks might be able to get even more money in the near future by abandoning the affiliate structure and undoing a key element of free TV.

Pay-TV providers are paying the networks only for the stations the networks own -- which amounts to a little less than a third of the TV audience. That means local affiliates recoup two-thirds of the fees.

In theory, the network could get the fees for the entire pay-TV audience if it operated purely as a cable channel and cut the affiliates out.

But affiliates would have to air their own programming, including local news and syndicated shows, if forced to go independent.

At least one of the four broadcast networks "could explore" becoming a cable channel as early as 2011, according to Fitch Ratings analyst Jamie Rizzo.

Last year, CBS's Moonves called the idea a "very interesting proposition," but added that it "would really change the universe that we're in."