TV Business Model Explained

How Broadcast and Cable Networks Make Money Differently

The TV business model can seem confusing; it is complicated, but it’s key to understanding the changes taking place in the television industry. One vital piece to understand is that broadcast networks and cable networks are fundamentally different. They make money in distinct ways, though that may now be changing.

Broadcast vs. Cable

It’s important to distinguish between broadcast and cable. A broadcast network is one which broadcasts its content via an over-the-air signal – today these include ABC, CBS, NBC, and Fox. With the right antenna, anyone can get broadcast television for free.

A cable network is available only by subscription through a cable or satellite provider. Cable networks are further separated into basic cable and premium cable. Basic cable includes ads in its programming. Premium cable – like HBO and Showtime – does not. Fees for premium cable are higher than those for basic cable.

Broadcast Network Business Model

Throughout history and even today, the majority of a broadcast network’s revenue comes from advertisers. In the traditional broadcast TV business model, networks distribute their shows through a collection of local television stations. Networks own some of the local stations, often in large urban markets, called “owned and operated” or O&Os. The majority of a network’s local stations, however, are owned by separate companies; these are the network affiliates. Networks used to pay their affiliates to air their shows, but the payments have become smaller as audiences have shrunk.

Cable Network Business Model

The majority of a cable network’s revenue comes from fees paid by cable and satellite providers. Comcast and Time Warner are the largest in cable, but there are also many other smaller, local cable providers. DirecTV is the big player in satellite.

These cable/satellite providers pay cable networks a monthly fee for each subscriber. According to Broadcasting & Cable, providers pay an average of $.26 for each channel that they offer to customers (“Business model unraveling for TV networks,” 29 December 2009). Some channels cost more, like ESPN which goes for almost $4; others cost less, like MTV2, which goes for a few cents.

In addition to these fees, cable networks also air ads during their programs so they get revenue from advertisers. As of 2008, cable networks were getting 39% of all advertising dollars, an estimated $21.6 billion (Ibid).

These two revenue streams mean that cable networks have fared better during the rough economic climate. Even though advertisers are spending less money across the board, cable networks still get the fees from cable/satellite companies, so they’ve been hurt less than broadcast networks. Fox is an illustrative example; for the quarter ended September 2009, its broadcast network reported a 54% drop in operating income while its cable networks reported a 41% increase. NBC’s Jeff Zucker has told investors “the cable model is just superior to the broadcast model” (Ibid).

Online Revenues

While most believe the future of television involves the Internet, today it’s still a small portion of a network’s revenue. Networks get paid in two ways – by selling their shows for a per episode fee on sites like iTunes or by streaming them with embedded ads on sites like Hulu and their own network websites. 2009 online revenue is estimated at between $350 million and $400 million. It’s expected to grow to $2 billion by 2012. But that’s a small piece of the overall pie given that advertisers spent $34 billion on broadcast ads in 2008. Some networks like CBS refuse to put shows online because they cannot sufficiently get paid for them. Zucker famously likened it to trading analog dollars for digital pennies. The industry has yet to work out the online TV business model.

Broadcast Networks Changing

Broadcast networks and their local affiliate stations have begun following the cable model: charging cable/satellite providers a monthly fee per subscriber. The Federal Communications Commission has legally allowed them to do so since the 1990s, but broadcast networks have traditionally not sought such retransmission fees for airing their shows. That’s changing. CBS began the trend when it split from Viacom; in 2006 CBS CEO Leslie Moonves proclaimed he would get paid for CBS content. To date, he’s been quite successful, getting as much as $.50 per subscriber in its recent round of negotiations. Moonves says this should add “hundreds of millions of dollars to revenues annually” (Ibid).

That’s not the end of the story. Network affiliates – owned by separate companies – are also negotiating fees from cable/satellite providers. But broadcast networks like CBS and Fox would like a portion of those fees; broadcasters only get paid for their O&Os, the local stations that they own. Yet O&Os represent less than a third of their audience. Network affiliates make up the other two-thirds. Broadcasters argue that their broadcast networks are the reason affiliates can demand fees from cable/satellite providers, so they deserve a cut. That remains a contentious issue.

Death of Broadcast?

The difference in payments for O&Os versus affiliates could eventually lead broadcasters to abandon the broadcast model. If they got rid of the affiliate structure and went to the cable model, they’d get paid for the entire cable/satellite audience, rather than a third of that audience. Such a move would force affiliates to become independent local stations that air their own original programming. CBS’ Moonves has called this “a very interesting proposition,” but which “would really change the universe that we’re in” (Ibid).

Such a move would put an end to over-the-air free television as it has existed since TV’s inception. Naturally, regulators would have something to say about this. For now, broadcasters simply want to be paid more for their shows, making the dual revenue stream of retransmission fees and advertising an attractive option.

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