Streaming TV threatens cable networks' value for advertisers
In the streaming TV wars, cable channels are collateral damage.
Brands looking to reach niche audiences—such as an auto intender or travel enthusiast—on TV a decade ago relied on cable networks that catered to those types of viewers. But with the ability to now deeply target very specific audiences through streaming platforms, what once made second- or third-tier cable channels attractive for advertisers is all but obsolete.
As TV network groups—many of which own a dozen or more of these channels—focus on putting their most compelling content on their emerging streaming platforms in an effort to woo audiences and advertisers, smaller cable networks are at risk of being cannibalized.
Smaller cable networks are up against declining distribution as more viewers cancel their pay-TV subscriptions, which is further pressuring the value for advertisers that are eager to follow these audiences to streaming. As a result, a meaningful percentage of ad dollars that typically go to long-tail cable networks are expected to shift to digital.
“What I have seen is a fair amount of the linear ratings points that are available we are shifting to digital properties where we can get a better handle on targets, a better understanding on where our audiences are and specific makeup of those audiences,” one media buyer says. “The issue in the future is if all the content is available on these different streaming services, what value do these smaller cable channels have? Right now, we are taking advantage of efficient ratings points, I just don’t know how much longer they will be able to hold on to distribution, and then audience. A significant amount of our long-tail cable dollars is shifting into digital.”
While the industry has started to see the demise of some of these types of channels—NBCUniversal will end NBC Sports Network by the end of the year—TV network groups aren’t necessarily willing to part with these channels so easily, as ad-supported cable still made up more than 30% of all TV watched in the U.S. last year, estimates Brian Wieser, global president, business intelligence, GroupM. “In absolute numbers, cable is still massive,” he adds.
State of cable
For a while, pay-TV operators wanted more and more channels to beef up their offering to consumers. But many of those operators have found a better business model in broadband, with video coming in further down in terms of profit margins. In another era, carrying multiple MTV channels had an important mutual benefit both for the cable programmer and the distributor.
Before Netflix went all in on original programming, cable had been the go-to for high-quality scripted dramas and buzzy reality fare. It was the place where programming could take bigger risks than their broadcast brethren, and wooed high-profile talent as a home for their passion projects, which drew an equally passionate fan base. And nearly all cable channels—not just the upper echelon—leaned into investing in such programming after decades of relying on reruns of broadcast hits and windowed movies.
But over the last five years, ratings have dwindled considerably, forcing many of these smaller channels to go back to their former programming strategy.
Since the 2016-2017 season, commercial ratings in the three days after a show airs, an industry standard known as C3, have declined 43% for second-tier cable channels and 61% for tier three, according to data compiled by GroupM. In tier two, MTV2 dropped 35% from 2019 to 2020 in C3 ratings, Discovery’s Science fell 27% and A+E Networks-owned Lifetime Movie Network saw its ratings decline 20%. In tier three, independent network Ovation, which focuses on arts and entertainment programming, saw a 44% decline from 2019 to 2020 in C3 ratings; Disney’s ESPNU decreased 22%; and Discovery Life fell 33%. The few networks in these tiers that have seen upticks over the past year fall into the news category (CNBC and Fox Business Network); ViacomCBS’ Pop, which is home to the critically acclaimed comedy “Schitt’s Creek”; and Discovery’s home improvement channel, DIY Network.
Realizing this, some TV network groups are rethinking their cable strategy. NBCUniversal is eliminating NBCSN from its portfolio, shifting much of the sports programming that aired on the channel to its larger basic cable network, USA, as well as its streaming service Peacock. El Rey Network, created by director Robert Rodriguez, ceased operations in the U.S. in 2020. Other channels that have shuttered in recent years include NBCU’s Esquire Network and Chiller.
Others are expected to follow.
With the industry’s conversations currently in a three-way split between cable, broadcast and streaming, cable is often the odd man out. And while David Campanelli, chief investment officer, Horizon Media, believes it’s imperative for advertisers who engage in both linear and streaming buys to be “in both places at once.” He wonders how long non-major independent cable networks can hang on before their remaining viewers cut the cord and shift to streaming.
“At some point you’re cannibalizing yourself” as an advertiser trying to spread your reach too thin, Campanelli says. And in such situations where brands are required to cut their ad spending, “the lesser [cable] networks are the low-hanging fruit.”
Independent networks that don’t have the backing of large media companies have a tricker challenge than the sister networks of larger channels, Campanelli says. Discovery’s portfolio, which aside from larger channels like Food Network, HGTV and TLC also includes Science and MotorTrends, “are kind of shielded by carriage deals,” he says. This means that Discovery is able to use its leverage to push pay-TV operators to carry its smaller channels or risk losing its bigger properties.
Streaming platforms are not the only ones benefiting from ad dollars typically earmarked for basic cable. Over-the-air networks including MeTV have become increasingly attractive replacements to cable, Campanelli adds.
Of course, this doesn’t mean advertisers are completely swearing off cable channels.
“They still hold value to specific clients. It’s not like the audience has totally disappeared from those networks,” Geoffrey Calabrese, chief investment officer at Omnicom Media Group, says of those smaller channels.
Streaming doesn’t necessarily make financial sense for every client. For a pharmaceutical brand, for example, large amounts of streaming inventory won't work, the same way it might for a client targeting millennials.
“The direct response clients that we have are still utilizing those networks,” Campanelli says.
In 2021, the biggest value proposition that second- and third-tier cable networks can give to advertisers appears to be price. “It is a really efficient CPM,” Calabrese says of their cost to reach 1,000 viewers, the industry standard.
“In the near term, they still have audiences that deliver, and in most cases they are efficient, and we really need efficiencies considering how we are being squeezed on broadcast,” the first media buyer says.
The price of ads on Discovery+, for example, is three times higher than on the company’s cable networks, according to a second media buyer.
“Their value has always been and continues to be their efficiency,” Horizon’s Campanelli says. “Linear is getting expensive, especially tier one cable and broadcast; we go to those areas to build up the efficiency of the buy. The audience has shrunk and there’s a lot of duplication.”
But the question is just how long will efficiency be enough?
“Do these cable channels have a long-term future? Probably not,” Calabrese says.
As these cable channels increase their ability to target viewers by household, known as addressable advertising, brands are able to move away from broad-based buys and tie ad dollars to performance in a more accurate way, a third buyer says.
ViacomCBS, AMC Networks and A+E Networks have been testing national addressable capabilities over the past year, and opportunities to run more campaigns in this way are expected to be an important part of their pitch to the marketplace during this year’s upfronts.
“Typically, these networks are focused on a certain type of genre, and they’re delivering a content and environment that is going to play to how a brand shows up,” the third buyer says.
A+E Networks and AMC Networks are among the cable programmers licensing content to these streaming services, instead of building their own, as a way to maintain reach.
A+E has inked deals to add some of its content to the libraries of Discovery+ and Peacock. AMC is licensing its content to a variety of ad-supported platforms like ViacomCBS’ Pluto TV and Amazon’s IMDb TV. Game Show Network, for example, announced earlier this month a partnership with AVOD platform Xumo to bring its digital programming to streaming platforms.
TV network groups are also hoping their streaming platforms could breathe new life into some of their second- and third-tier channels.
Discovery channels including Animal Planet, Science and MotorTrend have been producing up to 400 hours of original content each year for two decades, most of which is owned by Discovery, says Jon Steinlauf, chief U.S. advertising sales officer, Discovery. This, he says, has been the “secret sauce” to Discovery’s streaming service getting off to a good start, because the company has been able to use this content to populate the platform.
In fact, Steinlauf says Discovery+’s algorithm and recommendation engine is often surfacing content from these networks that younger viewers might not have ever watched on the linear channels, but they are now watching content that is anywhere from five to 15 years old. “Some of these channels may not have gotten their fair share of viewership and respect and they are now being discovered,” he says.
How is the TV industry responding to the streaming wars? On May 24 and May 25 hear from ad sales leaders, agency executives and top brands on the state of the TV ad marketplace and how streaming is poised to reinvent the $20 billion upfront marketplace. RSVP here.