• Broadcast Networks' Use of Broadband is Accelerating Demise of their Business Model

    Last weekend I finally got a chance to read "Zuckervision," the splashy cover page piece about NBCU's CEO and president Jeff Zucker in the September issue of Conde Nast's Portfolio magazine. It's a pretty candid expose of the challenges that Zucker faces turning around the flagship NBC brand. More broadly though, it describes the challenges that all network executives have in trying to profitably navigate the digital era.

    Zucker says, "Predicting what the media world is gonna look like in eight years is incredibly daunting. I defy anybody to that." He's right, and I'm not going to take him up on his offer. What's more salient though is to focus on the here and now - on what networks are doing with ad-supported broadband distribution today. From this perspective I think it's fair to conclude that broadcast networks' current use of broadband is accelerating the demise of their business model.

    That's right. For all of Zucker's and his compatriots' lament about "analog dollars being turned into digital pennies," as best I can tell, the networks themselves are actually the ones most responsible for turning this fear into a reality. I touched on this in a previous post, but here are the numbers explaining why.

    When each of us, watches an episode of NBC's "Heroes," for example, on-air, NBC generates approximately $1.00 of advertising revenue (assuming NBC sells 75% of the 22 minutes of ads at a CPM of $30). That $1/viewer/episode figure obviously varies by program, but it's a good benchmark to use. (Note: per the following post, I think these assumptions are a little high, a more accurate range for NBC's revenue/viewer/episode is probably $.50 - $1.00.)

    Now consider what happens when we watch "Heroes" on Hulu, NBC and Fox's well-respected aggregator. There are 5 ad breaks with just one 15 second ad in each break. There's also a 7 second "brand slate" at the beginning of each episode ("The following program is brought to you by....") and a display ad at the conclusion. Rounding up, let's say that totals three 30 second ads. Assuming Hulu sells all the ads at a generous $60 CPM (note that's 2x the on-air rate), the revenue/viewer/episode is 18 cents. That means that when you watch Heroes on Hulu, NBC is generating less than 20% of its customary revenue (hence the "digital pennies" fear).

    Hulu's ad implementation is not unique - if you look at the other network sites, their ad models are roughly comparable. I don't know who came up with this ad approach, but I would contend that in their zeal to move prime time programs online, the networks have all gone too far in emphasizing a user-friendly experience over sound business discipline.

    Of course, as consumers this new ad model is great. We get high-quality, free content at our fingertips, with minimal interruptions. For the vast majority of consumers, this value proposition beats buying and downloading an episode at iTunes any day (all the more so as popular shows like Heroes are bound to cost even more under NBC's new variable pricing relationship with Apple).

    With the current model, NBC needs for Hulu to get more 5x its current CPM (which would be more than 10x NBC's current on-air CPM) just to stay even with its traditional ad model. That's a pipe dream. It doesn't matter how much interactivity or exclusivity Hulu can give an advertiser (and by the way Nissan already had full exclusivity in the Heroes episode I watched) no advertiser is going to pay 10x on-air rates. Simply put, Hulu's and others' minimal quantity of ads cannot be compensated for using higher prices.

    Now that the genie is out of the bottle with the networks' online ad model, it's going to be awfully hard to make major modifications to it. As eyeballs inexorably shift from on-air to online, NBC and the other networks' top line ad revenues is going to get pinched. Also poised to bear the brunt is the whole Hollywood community accustomed to benefiting from on-air economics (Zucker's aggressive attempts to reduce expenses are also discussed in the Portfolio piece).

    Bottom line: the way NBC and other networks have implemented broadband accelerates the vast change that is buffeting the broadcast business.

    What do you think? Post a comment!