Ecosystem: Pay TV Pays

Nomura study outlines biz's health

The key to the future health of the entire media industry comes down to sustaining a single business model: the TV ecosystem that collects monthly subscriber fees and passes them on to content companies.

That is the conclusion of a far-reaching report by Nomura Securities on the state of the biz.

“Misguided attempts by owners to allow ‘free’ distribution of premium content on the Internet only damages this vital structure,” concluded veteran media analyst Michael Nathanson in his first report for Nomura. Hence, the title of the report “The Only Thing to Fear Is … Stupidity Itself.”

Among the report’s more surprising findings is that although DVR use is growing among viewers, fewer are using them to skip over commercials. And the use of these time-shifting devices is growing auds, particularly among broadcast networks.

Between 2000 and 2009, consumer spending in the U.S. on media grew by 4.6% to $358 billion. More than half of that growth can be attributed to cable and satellite TV subscriptions and ISPs, the report said. “The increased spending on these services has created a crowding-out effect for other products,” Nathanson wrote.

Indeed, it is business-to-business revenue, not advertising, or even what consumers spend, that is becoming increasingly vital to media businesses. The seven biggest media companies, from the Walt Disney Co. to Scripps Networks Interactive, will take in an estimated $40 billion this year from the sale of content to other media companies. Nearly 57% of that will come from affiliate and retransmission fees, with film and TV studio licensing revenues following next. Between 2005 and 2009, B-to-B revenue grew 10% while consumer spending rose 4.7% and advertising declined 2.6%. That outpaced nominal gross domestic product growth in that period, according to Nathanson.

“We see no reason why content costs cannot continue to increase at a faster rate than consumer spending on multichannel TV for the foreseeable future,” he said. “As long as the current TV ecosystem remains healthy, there should continue to be an expanding piece of the pie for content owners to grab.”

As for the threat to pay TV from so-called cord cutting, Nathanson doesn’t believe it is real. “Consumers tend to stop buying new shoes and cars to fuel media consumption,” he wrote. “Absent a suitable alternative, we still see multichannel TV as a share gainer.”

Other conclusions reached in the report:

• Between 2000 and 2009, consumer spending on film content rose just 2%, and at an even slower pace of 0.7% in the last half of the decade. That compares to 6.5% in the 1990s and 17.6% in the 1980s. The spending increases do not include what folks shell out for pay TV channels like HBO. “While television appears anchored by a holy distribution trinity of cable, satellite and telcos, the film industry has as many partners as Max Bialystock in ‘The Producers,’ ” Nathanson said.

“Logic suggests that something will have to break as film distribution points continue to fragment and consumers search for the most economical outlet to both satisfy interest and stay on budget.”

• Advertising spending as a ratio to GDP in 2009 decreased to .95%. The only other weaker periods since 1935 were during, and right after, World War II and in the recession of 1973 to 1975. Going forward, advertising should increase in-line with GDP. “As has been the case in the recent past, this structural weakness will likely to continue to impact local media, such as newspapers and radio, more adversely than national TV markets.”

• As DVR penetration has grown over the past three years, the percentage of commercials being skipped has declined — at least when it comes to the network shows. During the 2007-08 season, nearly 59% of commercials were being skipped, dropping to 53% last season. Nathanson did not have a solid explanation for the trend.

“Whether caused by some of the earliest DVR adopters being ‘power-users’ who skipped more commercials,” he wrote, “or by some other socio-demographic factor, skipping commercials during broadcast network DVR is declining.”

What’s more, the broadcast networks are benefitting greatly from DVRs, growing their auds by 22%, as charted by day three (C3) ratings. By comparison, DVRs have grown cable net audiences by 8%. Nathanson explained the disparity as stemming from the fact that broadcast nets, despite more and more scripted programs on cable, have more of the programs that viewers want to record.

While DVRs are helping broadcast, they also are pinching local TV stations that tend to make money at fixed times, such as the 11 p.m. news. “With so many viewers watching shows on their own schedule the ability to monetize this audience flow at the local station level has become more challenging.”

If cable nets are to get a greater boost from DVR viewing, they will need to invest in more original, scripted content. What also hurts them is that cable programming is often repeated within a few hours or days of its original viewing — preempting the need to record shows on a DVR.

“We think those cable networks built with large slates of repeat and syndicated content and limited brand identity will be hurt, as viewers reduce channel surfing in favor of DVR surfing,” he added.