Troubled Waters Ahead
Tracking Consumer Habits In Tough Times
by George Winslow -- Multichannel News, 1/4/2009 7:00:00 PM
For years, the biggest question facing television executives as they headed into the Consumer Electronics Show was the impact of digital media on their traditional business. Now they face a much more immediate and arguably bigger threat to their core business — an economic meltdown that has already prompted significant layoffs at a number of major media and telecommunications companies.
“Regardless of the economy, 2009 was going to be a hard year for electronic media,” said Mike Vorhaus, president of Magid Advisors at Frank N. Magid Associates. “Consumer behavior is shifting and that means they have to do business differently, which is hard enough in normal times. But when you add in a deep cyclical economic situation, the result is a deep pain like they've never seen before.”
Much of that pain will be felt in advertising revenue. Retailers are reporting the worst existing store sales since 1969 and the auto industry is seeing the worst sales slump since the 1940s.
Fitch Ratings is already forecasting that the 2009 ad market will be the weakest since 2001. It predicts that major advertisers could “pull back considerably” and at even higher levels than they did in 2001.
Amid this gloomy picture, one bright spot is digital media and the opportunities that changing consumer use of video might open up for media companies.
In September 2008, over 125 million Americans viewed video content online, according to Jack Wakshlag, chief research officer at Turner Broadcasting System.
“Online video is no longer a specialized niche audience,” Wakshlag said. “It has become a product with mass appeal. There were 8.9 billion videos streamed in September 2008, and the average number of streams per user was 71. So we are talking about something that is widely used.”
But revenue from the rapidly expanding digital platforms remain small — media buying firm Magna predicts that online video advertising will total only $805 million in 2009 — and even those relatively small numbers could be hurt by economic conditions.
“I don't think you will see a dip in digital [ad revenue] but I don't think it will grow as fast, especially on the video side where there will be pressure on pricing,” Starcom Worldwide senior vice president video innovations director Tracey Scheppach said.
That means the industry this year will have to build more robust business models for digital media and find better ways of squeezing new revenue out of all the major distribution platforms.
“The economic pressures coupled with competitive pressures, particularly the Internet, will be a real driver for innovation in 2009 in the traditional businesses and help sharpen the business models,” Forrester Research principal analyst James McQuivey said.
Traditionally, much of the expansion into digital media by programmers has been funded from advertising and subscription revenue from their linear television networks. While many of those investments were motivated by the fear that digital media would eventually usurp the traditional business, the proliferation of digital platforms has in fact been accompanied by steadily growing TV viewership.
In the third quarter of 2008, the average person in the U.S. spent 142 hours and 29 minutes watching TV each month, up 4.1% from a year earlier. This continues a decade-long trend in increased viewing. In the 1997-1998 broadcast year, the average person watched 3 hours and 58 minutes of TV each day; between September 2007 and September 2008, it rose to 4 hours and 45 minutes, a 20% increase.
“You hear that people are not watching TV because they are watching more video on the Internet and mobile phones, but that's not true,” said Pat McDonough, senior vice president of insights, analysis and policy at The Nielsen Co. “They are certainly doing more video consumption online and on mobile phones, but they are still watching even more TV. And it is increasing for all age groups.”
“We've found the newer platforms to be additive,” added Rich Battista, president of Fox National Cable Networks at the Fox Networks Group, who noted that putting shows like FX's It's Always Sunny in Philadelphia online at Hulu.com and the recently revamped FXnetworks.com site has helped boost ratings.
While broadcast ratings continue to decline, the ongoing fragmentation of audiences is not yet hurting the major cable networks, Battista and others argue. “We are up across the board this year with our three major national networks [FX, Speed Channel and National Geographic Channel],” Battista said.
In fact, the average audience of people 2 and older increased for seven of the top 10 ad-supported networks in 2008, according to Nielsen. Even in the 12- to 17-year-old demo that is a large user of alternative media, eight of the top 10 ad-supported cable networks saw their average audiences climb.
“We've seen broadcasting decline as a result of cable television's growth but we haven't seen cable television flattening as a consequence of people spending more time online with computers or with mobile devices,” Rainbow Media president and CEO Josh Sapan said.
Ratings for WE tv and AMC increased in 2008, while “we saw growth in our Web sites and dramatic growth in our [video-on-demand] utilization,” he said.
The economic impact on cable operators and premium channel providers is less certain. Subscriber counts for multichannel providers traditionally have held up pretty well during recessions and a recent study by the Consumer Electronics Association found cable or satellite subscriptions were among the least likely areas where consumers would make dramatic cuts, with only 11% saying they might drop service.
At Nielsen, McDonough said the company has been tracking the issue carefully but “have yet to see an impact” on subscriber counts for either multichannel providers or premium channels.
Looking forward, some even see the economic troubles as an opportunity for MSOs to boost the penetration of bundled services.
“When consumers start to look at their costs and what they are spending, I think we'll see something of a rush towards bundled services as they realize they can save a lot of money by going to cable operators,” said Howard Horowitz, president of the research firm Horowitz Associates.
Cable operators also plan a wide variety of new video services in 2009 that could strengthen their businesses. Derek Harrar, general manager and senior vice president of video services for Comcast, said the nation's largest cable operator will launch Project Cavalry this year to transition its customers from analog to digital.
As part of the upgrade, subscribers will get more channels and access to an interactive programming guide and VOD. But the payoff is probably bigger for the operators. “This will allow us to redeploy about half of the analog bandwidth in the markets where we do it,” he says. “We will redeploy this bandwidth for more HD channels, a broader ethnic and international channel selection, as well as higher data speeds with DOCSIS 3.0 and more on-demand content.”
Higher data speeds, the deployment of interactive services and the MSO's recent focus on bulking up Comcast Fancast and other online products, will also help transform the way subscribers access video.
“We have a variety of different things that we are looking at that will begin to tie together the video experience on the television with the high-speed data experience of video online,” Harrar said.
How people of various age groups use those services and how MSOs hope to profit from evolving video use is the focus of the articles and data that follow.
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