How to Save Broadcast Networks

If you’re a broadcast network today you’re in pretty bad shape. One of the big themes of this past year has been the shift from advertising to the paid / a-la-carte business model and while still a slow, the bad economy has accelerated this.

Cable networks are destroying broadcast TV these days because of their dual revenue stream, they earn both ad revenue and per-subscriber revenue from MSOs, and nowhere is this advantage clearer than for ESPN. Now a $4 Billion + per year behemoth, ESPN has the money to buy rights to just about any sports property it likes, and this gives it power over MSOs for higher per-subscriber fees. The networks don’t have this luxury. Despite record ratings for NBC’s Sunday Night Football this season, by all accounts a huge success, the network still loses money. And they’re ok with that, it’s one source of leverage.

According to a report by Brian Stelter in The Times today, ESPN’s per-subscriber revenue is the highest of any cable network, at $4 per sub on average. A Times article in November of last year put the fee at $3.65 per subscriber citing research by SNL Kagan. By comparison, Stelter reports that CBS earns “up to 50 cents for each subscriber, although the deals vary.”

Which leads us to the current battle between FOX and Time Warner Cable, not to mention a related battle with Mediacom, a smaller provider with a large footprint in Iowa which could mean tens of thousands Hawkeye fans will miss their team playing in the Orange Bowl. While not unfamiliar to subscribers of various cable operators who have gone through a similar experiences with the launches of the NFL Network, the Big 10 Network and a close call during negotiations at the beginning of 2009 between Time Warner Cable and Viacom, it will continue to be a larger deal moving forward.

This battle for retransmission rights is why we have seen the networks begin to cooperate for online viewing authentication for cable network subscribers (TV Everywhere), and on industry standards for digital advertising in the form of Project Canoe. They don’t have all that much bargaining power when it compares to going up against cable networks like ESPN which have built in guaranteed subscription revenues so they need every bit of revenue driving power and all the end-user support they can muster.

So here’s how to save broadcast networks, and YouTube for that matter. They need to to build out dual revenue streams which will be viable when in the coming years their audience is inevitably smaller and fragmented.

Network television’s power, like YouTube’s power is in their massive reach. While advertisers won’t touch YouTube with a 10 foot pole, the networks are still getting high CPMs but the two will meet in the middle. YouTube CPMs are artificially low because brands don’t trust the content, TV’s are artificially high because advertisers do. Eventually all of this will even itself out, we’ll have equilibrium, but at equilibrium the current network broadcast model doesn’t work any more than YouTube’s does. The long tail of content is reducing the networks’ audience at a rapid rate. So networks need to work toward a dual revenue stream of their own.

First the networks should get in bed with, or buy outright regional sports networks. Content is still king and they should begin building up the content which will drive the largest long term audience. Second, start charging for content. The big sports leagues have bypassed local carriers because the market has shown a willingness to pay a premium for that live content. Package your most valuable content, protect it, and charge a price viewers will pay to see it, subsidized to the extent that makes sense by advertising. This is the long term model.

Eventually I hope we will see the day when the MSO oligarchy gives way to a-la-carte pricing wherein users instead of a tiered system select the content they want to watch, the platforms they want to watch them on, and pay only for the right to watch those channels on those platforms. Until then we have to slog through TV everywhere hurdles on a case by case basis to watch TV online and your grandmother who doesn’t watch sports will still be paying $4 to ESPN.