Cable Operators

Cover Story: Extended Reach

7/05/2009 2:00 AM Eastern

More than two dozen cable networks will hit a major -- some might say meaningless -- milestone before the end of the year: 100 million subscribers.

Research firm SNL Kagan projects that by year-end 2009, 20 national networks, including TBS, The Weather Channel, Discovery and Nickelodeon, each will have amassed more than 100 million cable, satellite and telco TV subscribers, down as far as VH1. Comedy Central, a sibling within Viacom’s MTV Networks, will be just 300,000 short of 100 million when 2009 wraps up.

Cover Story July 6, 2009In all, 24 networks (down to Cox Communications-owned Travel Channel) will have more than 99 million subscribers each at years end. (See related charts, pages 7 and 33.)

The milestones are no sudden guarantee of bigger profits, brand loyalty or even consumer awareness for individual programmers, but they do reflect the continuing spread of multichannel pay TV services, even in a recession, and to the perception and reality of cable-network programming approaching parity with the “Big Four” broadcast networks: ABC, CBS, NBC and Fox.

“I’d like to think it’s a strong statement on the power of the cable networks, and it closes the gap with broadcast when it comes to numbers, ratings and reach,” said Turner Network Sales chief operating officer Coleman Breland.

Breland represents three networks nosing up toward 100 million: TBS, which leads cable networks’ distribution at 99,228,000; CNN and HLN (the former CNN Headline News), listed as a combined 99,088,000; and TNT at 98,268,000, according to Nielsen Media Research data as of May 2009.

“More people are finding cable programming to be more entertaining and more people are signing up for it,” Breland said. “It’s really another metric that closes the gap between broadcast and cable.”

An equally important metric is percentage of subscribers to home passed, said Bridget Baker, president of TV networks distribution for NBC Universal, which includes The Weather Channel (99,029,000, third on Nielsen’s list) and USA Network (98,429,000, No. 6 in reach but tops in primetime ratings).

Just as important is the percentage of subscribers to homes passed, and national cable programmers have increased that rate to the point where the distinction between multichannel video and broadcast television is blurring, Baker said.

According to Nielsen data, there are a bit more than 102 million cable plus satellite and telco TV customers in the U.S.

Total U.S. households for the 2008-2009 TV season grew 1.5% from the previous year, to 114.5 million.

Total cable, telco and satellite-TV penetration to total U.S. households is now over 90% — closer to the omnipresent broadcasters than ever before.

The number of U.S. TV viewers also grew during the latest television season, according to Nielsen, increasing 1.3% to almost 290 million (age 2 and older), with older viewers (age 55-plus) showing the fastest growth rate (up 2.7%).

Multichannel video providers — riding on the transition to digital broadcasting this year, which pushed some people into the pay TV camp — could keep closing the gap, but are unlikely to ever approach 100% penetration of homes, SNL Kagan analyst Derek Baine said. In fact, as the economy continues to suffer, he doesn’t think any cable network will ever reach full penetration of total U.S. TV households.

“There are just some people who will never sign up for multichannel service,” Baine said. “Some are older and don’t see the need to subscribe to a service for the few shows they regularly might watch. Some customers may be forced to downgrade in the troubled economy. And some younger viewers may just avoid TV altogether.”

Multichannel video networks have been strong in recent months, though, and Leichtman Research Group principal Bruce Leichtman credits the transition to over-the-air digital television.

In the first quarter of 2009, 900,000 net new customers were added to networks’ subscriber totals.

It was the strongest three months for the industry since the fourth quarter of 2001, according to Leichtman.

The majority of net new customers came from the telephone companies. Dish Network and DirecTV collectively added about 400,000 new customers during the first quarter (with Dish’s losses dragging down DirecTV’s gains). Even though cable operators lost customers collectively during the first three months of 2009, they lost fewer than they have in the past.

The numbers are also particularly impressive given the fact that there has essentially been little, if any, new housing in the last year to help bump subscriber numbers, Leichtman said.

The second quarter is traditionally a slow time for multichannel video growth. Yet Nielsen data showed that the industry had gained 93,000 net new subscribers in the first two months of the quarter, rising from 102,574,000 customers at the end of March to 102,667,000 by the end of May.

With the digital transition complete, “the market is clearly more saturated than ever before,” Leichtman said. “Growth going forward is going to be more limited than it’s ever been before. You can get from 80 million subscribers to 100 million subscribers. But it will be increasingly difficult to go from 100 million subscribers to 120 million subscribers.”

Competition has clearly affected how cable, telephone-company and direct-broadcast satellite TV providers lure subscribers. Leichtman said the number of networks close to reaching 100 million households shows that the competition between cable operators, telcos and DBS has made the pie bigger.

In other words, more people are subscribing, rather than just switching between the three platforms.

Increased competition is clearly upping the ante when it comes to marketing, said The Weather Channel executive vice president of distribution and business affairs Becky Powhatan. Consumers better understand what multichannel video and know the benefits of subscribing to it, translating into bigger numbers for the networks.

Overhanging the current growth is concern that emerging new-media platforms could cut into pay-TV growth — and risk the dual-revenue-stream structure of license fees and ad sales.

Time Warner Inc.’s Turner Broadcasting System networks are at the center of Comcast’s coming trial of the “TV Everywhere” concept. TNT and TBS shows, presumably including hits such as The Closer and Tyler Perry’s House of Payne, will be made available online, via Comcast sites, to about 5,000 of its cable subscribers. Several other networks are also involved, with full-length episodes on offer from Scripps Networks, Cablevision Systems’ Rainbow Media, A&E Television Networks and Comcast Networks outlets. (See related coverage, page 2.)

Breland said it was crucial for networks to adapt to consumers’ desire to watch shows on computers and mobile devices.

“The industry has to look at itself and we have to be cognizant of the fact that license fees and advertising revenue are intersecting, and that is why the industry is creating entities like [advanced-advertising developer] Canoe and TV Everywhere,” Breland said. “As an industry, we need to make sure we are enabling our customers to view our programming however they want. Growth going forward will be slower, but there will be growth.”

The Weather Channel has steadily added about 3 million subscribers per year, said Powhatan, and has had success in getting added to new broadcast-basic and international tiers.

“We think of ourselves as a must-carry network and we would like to see ourselves in every household,” Powhatan said. “We continue to grow about 3 million customers a year and we don’t see that slowing down. We expect housing growth to rebound and we certainly see opportunities with mobile and the Internet.”

With more of a group perspective, Disney and ESPN Media Networks executive vice president of U.S. affiliate sales and marketing David Preschlack looks at the upside for newer networks such as ESPNU and ESPN Deportes. ESPN is the eighth-most distributed network, at 98,140,000 households, and ESPN2 should be in 99.4 million homes by year-end, according to SNL Kagan.

“Multichannel TV is at the highest penetration rate it has ever [had] before and there have never been more homes subscribing to it,” Preschlack said. “More is always better, and I think that analogy applies here. Having 100 million subscribers is meaningful for several reasons. It means the gap between broadcast and cable is narrowing and that is a positive sign. Having more people with access to those networks is good for advertisers and it’s good for rights-holders.”

The more subscribers a network has, the more revenue it generates from affiliate fees and advertisers, which means they can spend more on series development, NBCU’s Baker said.

“The big networks can afford to buy the scripted dramas that draw big crowds but are expensive to buy and/or produce,” she said. “It’s a big shift in the business and it’s exciting. It used to be cable got all the old shows and concepts from broadcast. Now the tide is beginning to shift the other way. We now have shows and concepts for shows that have been born on cable that are migrating to broadcast.”

The multichannel video networks expect to spend $24 billion on original programming in 2010, up from $21 billion in 2009, said Chuck Thompson, executive vice president strategic operations sales and marketing for the Cabletelevision Advertising Bureau. Almost 70% of the programming shown on basic cable is original, he said, compared to just 56% of the broadcast lineup.

The fact that several networks are close to surpassing the 100 million-subscriber mark is clear evidence that the TV industry is growing and that cable networks are responsible for that growth, Thompson said.

Ironically, now that the cable networks are so close to reaching parity with the broadcast networks in terms of viewers, total audience volume doesn’t matter that much. That’s because basic cable’s story has always been about who is watching rather than the total number of eyeballs watching any particular show or network, Thompson said.

“Gross ratings points are an old currency,” he said. “The new currency is the connection the advertiser feels it must have with viewers. Ratings now come in second. The fact that cable networks are reaching this milestone is relevant because it proves that TV is growing and that cable is driving TV. Smart marketers and programmers are driving viewers, because they’re giving something relevant for everyone and advertisers are paying attention to that connection more than just reaching eyeballs.”

TV spots will continue to be sold on a cost per thousand basis for some time to come, SNL Kagan’s Baine noted. And with multichannel video providers within a stone’s throw of the reach of the broadcasters, the gap between what those spots cost will continue to close. He expects to see the CPM for multichannel video to remain somewhat steady going forward. But he expects to see the CPM for broadcast to dip.

“We’re starting to see more measurement services emerge with new products that will provide more granular details of viewership and that should help the cable networks,” Baine said.

The challenge for cable will be staying on top of its game, NBCU’s Baker said.

“We need to make sure we continue to program our networks so viewers want to watch,” she said. “We have to maintain our strong brands and build new ones. The onus is on us to build the value of our content and our brands in every way we can and be available to viewers however and whenever they want to watch us.

“We’ll still see growth, but it’ll be a little different going forward,” she added. “We’ll still see a dual revenue stream, but we have to figure out which platforms will be best and then we have to draw in viewer and monetize that.”

THE ROAD TO 100 MILLION
Milestones for the fully distributed basic-cable networks:

Network Launch Date Year to Pass 50 Mil. Subs Est. YE Subs 2009Y
SOURCE: SNL Kagan
TBS 1976 *1989 101.9
The Weather Channel 1982 1991 101.7
Discovery Channel 1985 1990 101.5
Nickelodeon/Nick at Nite 1979 1990 101.4
USA 1980 *1989 101.2
TNT 1988 1990 101.1
CNN/HLN 1980 *1989 101.0
Food Network 1993 2000 101.0
Lifetime 1984 1990 100.9
TLC 1980 1996 100.9
HGTV 1994 1999 100.9
Spike TV 1983 1990 100.8
ESPN/ESPN HD 1979 *1989 100.7
Cartoon Network 1992 1998 100.6
Disney Channel 1983 1999 100.5
MTV 1981 1990 100.4
CNBC 1989 1993 100.3
History 1995 1998 100.3
A&E Network 1984 1991 100.1
VH1 1985 1995 100.0
Comedy Central 1989 1998 99.7
ESPN2 1993 1997 99.4
ABC Family Channel 1977 1990 99.1
Travel Channel 1987 2001 99.1
C-SPAN 1979 1994 98.6
Animal Planet 1996 1999 98.4
Fox News Channel 1996 2000 98.4
TV Land 1996 2000 98.4
TruTV 1991 2000 98.3
FX 1994 2000 98.2
Sci Fi Channel (Syfy) 1992 1998 98.0
E! 1987 1998 97.3
AMC 1984 1994 96.0
MSNBC 1996 1999 95.9
Bravo 1980 2000 93.0
Fox Sports Net 1996 1997 91.4
CMT 1983 2001 91.4
BET 1980 1997 90.0

NETS ON THE VERGE
Services with more than 98 million subscribers:

SOURCE: Nielsen Media Research data, May 2009
TBS 99,228,000
CNN/HLN 99,088,000
Weather 99,029,000
Discovery 98,796,000
Nick 98,574,000
USA 98,429,000
TNT 98,268,000
ESPN 98,140,000
Food 98,087,000
A&E 98,005,000
TLC 98,003,000
September