USS Clueless -- The future of commercial TV

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The future of commercial TV

I have seen the future of TV, and it is low budget. The coming of TV cable has changed everything, and the old model is dying. There's no way to revive it. Many people will lose their jobs.

When TV originally appeared, the only way to get material to the viewers was with grossly expensive transmitters. The cost was sufficiently high that moderate size corporations were formed around each individual transmitter, employing a very large staff for purposes of broadcasting a single channel. The TV networks, in turn, created large groups of these affiliates. The economic model was that the TV network would pay the local affiliate to carry its programming, and also permit the affiliate a certain number of minutes per hour to run local advertising. The networks, in turn, would product material to broadcast and would pay for all this by itself selling advertising, at a very high price. And when TV could only be broadcast, and when there were only three to five broadcasters in each major market, this was viable. And fortunes were made.

The entire concept is exceedingly inefficient and as a result it is addicted to high budgets. When the process of broadcasting a single network nationwide involves tens of thousands of employees, then this places a floor expense level on the whole enterprise, which ratchets up the expenses everywhere else. As a result, actors in a top-rated drama or comedy can make hundreds of thousands of dollars per episode, millions of dollars per year. A top rated comedy now can cost several million dollars per episode just to produce, and uncountable millions more to distribute to the viewers who themselves pay nothing for the material. All this is passed on to the advertisers, who pay immense sums for the privilege of delivering their message to (hopefully) millions of viewers. (In fact, most first-run comedy and drama shows now run at a loss, with the networks making the money back on reruns and syndication in later years.)

All that changed with the development of TV cable. TV cable started small, simply being a convenience for people who couldn't reliably receive TV broadcasts. But soon the "superstations" appeared, notably WTBS and then WGN. While these were standard broadcast channels in their markets (respectively Atlanta and Chicago) they also made deals to have their stream handled by cable systems all over the country. The revolution had begun.

The big potential of cable came from two differences. The first was efficiency. A cable company has about the same size staff as a local broadcaster and has about the same capital investment to set up their system. But the cable company now has the ability to transmit a hundred channels or more to their customers, thus making the distribution cost per channel far lower with cable. Even more critically, customers of cable systems pay for this service. This provides a significant source of operating income.

What all this means is that the cable-only channel had become economically viable. Distribution is far cheaper and it is subsidized by the viewers themselves. With a substantial lowering of all thresholds, a new economic model became possible. Instead of needing 35 million viewers to break even, it became possible to have 2 million viewers and be enormously profitable. This is accomplished by tuning all the dollar numbers lower, and by specializing. The material broadcast has to be substantially cheaper, so you don't employ big names which cost a premium. Distribution of your material is nationwide by cable companies, so a large audience can be reached for a relatively small expense. Since your viewership is smaller, your ad revenue will be lower. But since your expenses are also far lower, the result is a profit if you manage everything well.

The first channel built on the new assumptions was A&E, and they created a shrewd model which survives and prospers to this day. They noticed the popularity of PBS's "Masterpiece Theater" and other shows based on imports of programs from the UK, and realized that this represented exactly the kind of high quality, low expense material which would work properly within the model described above. In particular, they noticed that the audience demographic for shows like that tended to the affluent, and thus they'd be able to get premium ad rates per thousand viewers, which was necessary then in order to establish the new model, which was highly speculative.

Ted Turner, always a pioneer, was second when he created the Cable News Network. News is also a cheap commodity, especially if you can get it from one of the established news organizations like Reuters or Associated Press, both of whom had long since branched out into television from their roots in print. As CNN became more successful, they began to collect their own news and CNN has been a great commercial success.

Then the new channels began to flow. Nickelodeon noticed the kids market was ripe for the plucking in the new model, and established another success. Ted Turner created ESPN. The USA channel realized it could create a network completely out of reruns of popular network shows, long a staple of local broadcast channels anyway.

MTV was a major advance. It shot for one of the most desirable audience sectors: teenagers and young adults. For certain advertisers (Nike, Coca-Cola, Levis) this was gold, and MTV was an instant success, not least because they were also being paid by the producers of the music videos they broadcast, in as much as MTV is one long extended advertisement for CDs.

The Discovery channel was created, basing its programming on the wealth of documentaries available from independent producers. Its programming was rather broad-stroke, but it has since spawned several offspring with more restricted targets: the History channel, The Learning Channel, the Travel channel, and onwards.

Home Shopping Channel was particularly amazing; who would think that 24 hours of commercials could pay off?

The Weather Channel took the model to its logical extreme. Their expenses are particularly low, since the fundamental material they broad cast is given to them for free by various governmental agencies, and their staff and broadcast facilities are also small and cheap. I'd be surprised if they have more than 500 employees in total. So they can survive on a particularly small viewership, in as much as people generally tune for ten minutes or so, long enough to get their local forecasts. (The cable channels participate in this, using computers to dump local forecasts and reports into the video stream periodically. But the labor cost involved is negligible; it's nearly all automated.)

FoodTV was a particularly interesting one, and when it first appeared I was rather incredulous: an entire network of nothing but cooking shows? Sheesh. But the situation is that those kinds of shows are extremely cheap to make, especially with a no-name star like Emeril or Mario. What was needed were genuinely talented cooks, who were charismatic, but were unknown and weren't going to charge an arm-and-leg for their time. Such people exist; in many cases they're making similar shows already for local broadcast channels. A cooking show is made in real time (with some post-production) on a TV stage, with no-name cast and crew who are not starving but not pulling in the big bucks either. Emeril isn't being paid what Dan Rather is, not even remotely.

And sometimes these networks achieve a big win. This is luck, and their economic model doesn't require it, but they certainly don't say no when it happens. FoodTV has hit big with a Japanese import: Iron Chef. (It's a kick; I watch it all the time. Much of the presentation of the show is ludicrous but the core of the show, the cooking, is completely serious and very credible, and this saves it.)

Why this matters to the big networks is that they are addicted to big budgets. Their fundamental expense base associated with the broadcast model means that they have to think big, and they've reached the point where only a home run is enough. Overall ratings for the TV networks have been declining for years, and yet their expenses continue to rise. There's a point where the advertisers won't pay more to reach a smaller audience, and we've reached it. So the big networks have started to suffer losses, and they're starting to cut back, which is the beginning of a death spiral. The situation was exacerbated in the 1990's by the arrival of two new big-networks (Fox and WB) who chose an unbelievably bad time to try to break into a dying model, resulting in dilution of a declining market into five pieces instead of three.

And all the time they're being eaten by ants. There are now upwards of thirty of these small cable-only channels who are succeeding by catering to small targeted niche audiences, often the ones that are particularly desirable to certain groups of advertisers. By bleeding these niche audiences away, they leave the networks in a bind of serving a large but undesirable and shrinking audience, which further erodes their advertising rates.

What's interesting about this is that television now is going through exactly the same revolution that magazines did about 35 years ago, and for much the same reason. The big-distribution magazines (Life, Saturday Evening Post) were collapsing under their own success, being eaten alive by the expense of their material. Also, because their advertising was distributed widely it was relatively ineffective. (A maker of feminine products could be certain, for instance, that about half the readership wasn't interested in the slightest.) So effectiveness of the advertising was low and thus rates were low.

The new model for magazines was "Model Railroader" and "Sky and Telescope". These were low-distribution magazines concentrating on a very restricted subject matter, where customers actually valued the advertising as much as they did the material. What made these magazines possible was the rapid advances in cheap computing and printing, so that the overhead involved in creating magazines like this plummeted. Where in a Saturday Evening Post the ads were something that gunked up the pages and got in the way, in Sky and Telescope the readers actively peruse the ads, eager to see what kinds of products have become available which they might be able to buy for their hobby. This is an advertiser's dream, and S&T gets a much higher rate per thousand readers than a broad-distribution magazine because the advertising is much more effective.

And that's what's happening with these new-model TV channels. Where there's no thematic continuity on NBC between the programs and the ads, on FoodTV the ads are overwhelmingly about cooking: cookware, wine, restaurants; and thus the advertising is more effective. All this helps make this new model viable.

The old network companies may survive, but the networks themselves won't, and neither will the local broadcasters. Cable has made them obsolete and there's no place for them anymore. Their overhead is too high. Why would anyone want to watch a local channel broadcasting reruns and old movies when the same thing comes from USA network or "Nik at Night", which reaches the entire country? Nickelodeon can do the same thing for cheaper; the local broadcasters can't compete. For the moment, they survive mostly through broadcast of the high budget big-audience shows of the networks, but there's trouble looming there, with profitability in peril everywhere.

The network companies realize this, I think, and some of them are branching into the new model. Time Warner bought out Turner's empire. CBS is part owner of A&E. These companies may survive, but massively transformed and much smaller,   really little different than the company which owns The Discovery Channel and its brethren.

And for the local broadcasters there is no escape. They're in competition with the cable companies and the cable companies will bury them, through simple economy of scale. They're as obsolete as buggy whips.

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