Broadcast TV Is Having a Rough Time, but Don't Count It Out

The Ad-Supported TV Model Survived Cable and DVRs, and It Will Adapt to Digital, Too

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In this season of upfront presentations, the major broadcast networks are facing their toughest challenges in memory. Will they survive? History tells us yes.

The 2012-13 broadcast season has been, with little question, the most disruptive to the broadcast television industry since the medium was in its infancy over 60 years ago. Cable networks, which have been siphoning off viewers and ad dollars for three decades chiefly with sports, news and children's programs, now are reaching parity with broadcast television for original scripted entertainment shows. And online video programming reached a defining moment, producing more quality original content.

Initially cable networks waited until the summer before scheduling such programs, despite lower viewing levels, because that was when broadcast networks offered minimal competition. In recent years original scripted series have aired on cable during the broadcast season with modest success compared to broadcast shows.

In the first quarter of 2013, however, two original programs -- AMC's third season (second half) of "The Walking Dead" and The History Channel's mini-series "The Bible" not only aired during the broadcast season, they thrived. Both had an average audience of 11.4 million viewers, ranking in the 10 highest-rated shows on television for the week and tops on Sunday night. The adult 18-49 rating for "The Walking Dead" has been the highest of any scripted show on television this year. The audience-delivery gap between broadcast and cable, which has gotten smaller each year, is becoming negligible.

In the online department, on the Friday before the Super Bowl, Netflix released its first major original scripted program, "House of Cards." The streaming video service released all 13 telecasts at once, allowing subscribers to "binge view." In the first quarter, Netflix said it had streamed more than four billion hours of content, which would make it one of the most watched sources if it were a television network. Netflix has over 29 million household subscribers in the United States, making it similar in scale to HBO, Showtime and other premium pay cable networks. During peak hours Netflix accounts for one-third of all Internet traffic.

The largest source of video streaming, YouTube, recently announced that globally it draws over one billion unique visitors monthly, 50% greater than one year ago. Nielsen estimates that YouTube videos reach more U.S. adults ages 18-34 than any cable network. This year's digital upfronts (or NewFronts) had 18 participants, many touting quality original content and audience growth. eMarketer reports that ad volume for online video will grow 41% this year, making it the fastest growing segment on the Internet.

Also of concern for broadcasters and cable operators is that, with less than one month to go in the broadcast season, viewing by adults 18-24 is down by 7% in prime time and 9% in late night, compared to last season. This will likely lower ad revenue in the coming season, since many advertisers that target young adults pay a premium to reach them.

The 95.8% TV penetration rate this season was the lowest in the United States in over 40 years. As consumers (especially young adults) continue to view video content in a variety of nontraditional methods, Nielsen has redefined a television household for the upcoming 2013-14 to include homes that can receive video content on a television set via a broadband connection.

Another potential threat to the broadcast model is Aereo, a service begun by Barry Diller that was first offered in the New York market in February 2012. For a fee, Aereo streams to subscribers the over-the-air broadcast signals from local stations into such devices as PCs. Aereo plans to roll out the service next in Boston. Broadcasters, citing copyright infringement, have sued and threatened to change from over-the-air broadcast stations into subscriber-based cable networks if Aereo prevails in the courts.

Does all of this mean that the broadcast television model is broken? No. It has withstood such potential disruptions as the invention of the remote control in the 1950s, the roll-out of cable networks in the 1970s, the arrival of the VCR in the 1980s and more recently the DVR and, at least so far, Aereo and online video. People still listen to the radio and read printed content, albeit on non-traditional screens and platforms, which fragments the advertising revenue; this appears to be happening to video content as well.

But this year the broadcast networks have for the first time in years ordered over 100 pilots, investing hundreds of millions of dollars on program development. Similar to print and radio, ad-supported television content can be watched anywhere, creating an exponentially more fractionalized video landscape. This year, more companies had upfront presentations than ever before and in all probability a mobile upfront and a social network upfront are next. The reason? Advertisers will be investing billions of dollars on broadcast television, and other content providers are seeking a place at the table).

The broadcast networks still generate more viewers than any other tuning source and unlike their rivals create demand with the limited supply of advertising inventory they sell, which has enabled them to maintain or increase ad dollars. As viewers migrate to other screens and platforms, the TV model will move along with them. Need further proof? Both CBS and NBC had digital upfront presentations this year.

Brad Adgate is Senior Vice President, Research, Horizon Media.
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