You will be redirected back to your article in seconds

Subscriptions are key to revenue growth

Cable viewers equal dollar signs

Recently pressed by a particularly insistent New York Times reporter to encapsulate in one word the future of behemoth AOL Time Warner, CEO Jerry Levin chose not “plastics” but “subscriptions.”

Indeed, corporate tub-thumping at the world’s largest media company has been to emphasize the solid, stable and predictable flow of consumer shekels into the corporate coffers from its vast network of subscribers, which include 12.5 million basic cable subs at Time Warner Cable; 27 million AOL Internet subscribers, who pay, as of July 1, $23.90 per month; 37 million HBO/Cinemax customers; and 62 million cable homes passed by systems offering Turner’s Cartoon Network. The last group may only generate about 12¢ a month per home, but, hey, it adds up.

Just how much AOL TW wants people to focus on its enormous subscriber base was revealed to careful readers of the company’s recent quarterly 10-Q Securities & Exchange Commission filing. In the first such document filed by the newly merged company, revenues were broken out into three categories: Not the expected Internet, Cable, Filmed Entertainment, etc., but Subscriptions, Advertising and Commerce, and Content and Other.

New frontier, new market

These subsets cut across traditional divisional lines to present a glorious new world in which we buy our entertainment and information by the month or by the year. In the Content and Other category were nearly all those activities that have historically constituted Entertainment — the distribution of films, the syndication of TV programs, the sale of videocassettes, DVDs and all forms of music, et al.

Has the company discovered a media mogul’s version of the alchemist’s long-sought formula for turning the base metal of unpredictable entertainment rev streams into the pure gold of of ever-growing subscriber dollars? Or is this a clever bit of financial PR designed to put old wine in new bottles? Certainly, Time magazine has had subscribers since Calvin Coolidge was president. And while America Online is just about the only profitable Internet business, it faces a recently emboldened Microsoft, which has been aggressively trumpeting its lowered-price Web service.

However, there appears to be far more to Levin’s fervent belief in his sub model than a simple desire to convince Wall Street that the AOL TWleviathan is nearly immune to those old volatility blues. The relationship between a company and its subscribers is fundamentally different from the traditional interaction of the entertainment industry and customers. Producers of motion pictures, TV programming, videotapes and music have primarily sold to middlemen — theater owners, networks and vid/music retailers while marketing their products to consumers. Distributors of entertainment, as essentially “wholesalers,” were often dependent on how good a job the “retailers” did in presenting their product.

Conversely, with subscribers there is a direct one-on-one relationship between producer the consumer. Once you gain that sub, he or she is inexpensive to retain and, more important, relatively difficult to lose.

Subscribers to cable networks typically receive channels as part of a package of programming via a local cable company, making them technically reachable only through a middleman. However, there exists a constant and direct ability to promote — and crosspromote — to that subscriber base. AOL Time Warner has, in just a few short months, shown that it can successfully, and inexpensively, market diversified offerings to its multiple subscriber bases.

AOL TW is not, of course, the only major media conglom pursuing the subscription model. Vivendi Universal CEO Jean-Marie Messier has also sounded downright messianic about the role subs will play in the future.

As the parent of Canal Plus, Messier already knows a thing or two about the value of subscribers. Europe’s largest — by far — pay TV service boasts 15 million continentwide customers. But it is revenues from mobile devices on which he is pinning his hopes for building a major new flow of subscription euros and dollars.

Messier has stated his belief that these revenues will come in the form of micropayments from subscribers to a host of entertainment/info services. Here, Vivendi possesses two key strengths: The far more rapid penetration of hand-helds in Europe than in the U.S. and its powerful position as the world’s No. 1 purveyor of music. It’s not just that la jeunesse, the primary music aud, has been the first to take mobiles to its heart. It’s that music is obviously better suited to a 4-inch hand-held than fancy audiovisual material.

Vivendi U’s planned acquisition of MP3.com further signals its corporate conviction that large chunks of music will be distributed electronically, primarily on a sub basis, directly to wired and wireless consumers. Bertelsmann, with its Napster connection, is clearly pursuing a similar vision.

Subs vs. ads

So where do Viacom, News Corp. and Disney fit in this subscriber-based scenario? Viacom, at least in its pre-CBS iteration, was a sub-driven entity. MTV, VH1, Nickelodeon and TNN are all available in more than 70 million homes each; CMT and TV Land each reach about 50 million.

Sumner Redstone and Mel Karmazin, having shelled out a snappy $2.3 billion in stock for Black Entertainment Television holdings, plus assuming nearly $600 million of BET debt, indicated how highly they valued BET’s base of 62 million households.

But Viacom is increasingly an advertising-dependent company, with blurbs accounting for 50% of corporate revs. Almost exactly two-thirds of the $3 billion MTV Networks grossed last year came from ads, with affiliate fees providing the balance. Showtime is the company’s one pure subscriber biz, with a gross of nearly $900 million last year.

News Corp., as always, is marching to its own drummer. While nearly as ad-dependent as Viacom — an estimated 46% of 2000’s top line — it is working the subscriber side of the street in its worldwide satellite television activities. Should it gain control of DirecTV, it will add over 10 million very valuable, if very pricey, subscribers. Murdoch has placed nearly all of his future bets on satellite, which suggests he either believes that its technology will permit a reasonable approximation of cable’s multiple interactive offerings or, deep down, he doesn’t really believe in interactivity, beyond ordering a pizza or taking a flutter on a horse race.

This year has shown the dangers of being too heavily ad supported, with total television blurb spending likely to be down about 6% this year, and with the outlook for 2002, based on the state of the upfront market, perhaps worse.

Old content businesses had, and have, the undeniable virtue of operating independent of the business cycle — although they are not as recession-proof as often proclaimed. Barry Diller’s USA Networks, with only 15% of its revenues from ads, is looking very strong this year, thanks both to its strategy and to “Traffic.”

Betting on content

As for Disney, Eisner remains downright defiant in his belief that it’s the content, not the conduits, stupid. While the 1995 acquisition of ABC brought 80% of ESPN into the corporate fold, and despite long-established Disney Channel’s, the Mouse House retains a distinctly old-media look.

Eisner recently proclaimed that “for us, the main product is intellectual product.” His disdain for those who criticize Disney’s failure to buy distribution pipelines bravely flies in the face of Wall Street thinking — usually a smart thing to do.

But the AOL Time Warner model is the combination of product and pipeline. The pure pipeline companies — AT&T, Comcast, etc. — run the risk of being reduced to common carriers for the programming of others. Disney, to the extent it remains a nearly pure content supplier, runs the considerable risk of being shut out of a variety of emerging methods of distribution. It also has to continually produce boffo content, a goal that has more or less eluded it the past few years.

The meltdown of nearly every Internet-based scheme to radically revise the way we acquire entertainment and information mandates a cautious approach to predicting revolutionary change. But the idea that, bit by bit, we will become a world of subscribers has great appeal and an undeniable validity. Those who control both vast amounts of programming and the means — traditional and electronic –to deliver it should remain firmly in the catbird seat.

More Biz

  • Discovery CEO David Zaslav Sees 2018

    Discovery CEO David Zaslav Sees 2018 Compensation Soar to $129.4 Million

    Discovery Inc. president-CEO David Zaslav is once again making headlines for an enormous compensation package. Zaslav’s 2018 compensation soared to $129.44 million in 2018, fueled by stock options and grants awarded as the longtime Discovery chief signed a new employment contract last July that takes him through 2023 at the cable programming group. Zaslav received [...]

  • Jonathan Lamy RIAA

    Jonathan Lamy Stepping Down From RIAA

    Jonathan Lamy, the Recording Industry Association of America’s longtime executive VP of communications and marketing, is stepping down from his post after 17 years, he announced today. As he put it in an email to Variety, “I started back in 2002, which means it’s been 17+ years, four different RIAA CEOs, three format changes and [...]

  • Fox Layoffs

    Disney-21st Fox Layoffs: TV Divisions Brace for Deep Cuts

    A second day of layoffs has begun on the Fox lot in the wake of Disney completing its acquisition of 21st Century Fox on Wednesday. Longtime 20th Century Fox Television Distribution president Mark Kaner is among the senior executives who were formally notified with severance details on Friday morning. 21st Century Fox’s international TV sales [...]

  • anthony pellicano

    Hollywood Fixer Anthony Pellicano Released From Federal Prison

    Anthony Pellicano, the Hollywood private eye whose wiretapping case riveted the industry a decade ago, was released from a federal prison on Friday, a prison spokeswoman confirmed. Pellicano was sentenced in 2008 to 15 years, following his conviction on 78 charges of wiretapping, racketeering, conspiracy and wire fraud. He had been in custody since 2003, [...]

  • This image taken from the Twitter

    HBO’s Reaction to Trump’s ‘Game of Thrones’ Campaign

    Everyone wants a piece of the “Game of Thrones” lemon cake. From Bud Light to Red Bull the world of Westeros is open to a lot of brand partnerships, unless you’re using that iconic typeface to push a political agenda. In November of 2018 President Donald Trump unveiled a “Thrones” inspired poster with the words [...]

  • Leaving Neverland HBO

    'Leaving Neverland' Lawsuit Proves to Be a Judicial Hot Potato

    The Michael Jackson estate sued HBO last month for airing the documentary “Leaving Neverland,” which accuses the late King of Pop of serial child sexual abuse. Since then, the case has had a difficult time finding a judge to handle it. Three federal judges have recused themselves in the last week, citing potential financial conflicts [...]

  • Members of the public mourn at

    Guy Oseary’s New Zealand Fundraiser Nears $150,000, Continues Raising Money

    In the wake of the horrific shootings at New Zealand mosques last week that killed some 49 people, Maverick chief Guy Oseary launched a GoFundMe campaign to “support those affected by this tragedy at this very difficult time,” and began it with an $18,000 donation. Boosted by donations from many celebrities — including Amy Schumer, [...]

More From Our Brands

Access exclusive content