Unsurprisingly, the ABC/Hulu deal of two weeks ago got my attention (some interesting insights on that from Bob Iger in the transcript of last week’s Disney earnings call). But, one aspect of the deal in particular got my quantitative interest. It was the long-form TV content online deal ABC elected not do – with YouTube. Several press articles (including "Disney’s Hulu Deal Raises Questions About YouTube Model" via the WSJ) indicated ABC decided not do a long form deal with YouTube in part because they offered a revenue share only agreement – YouTube not being willing to pay fees or provide equity participation.
This prompted me to consider, towards a compare/contrast with online TV content deals – what’s the "revenue share" in television? I put that in quotes because most TV agreements are based on advertising inventory shares (known as an avail split), often combined with fees. Avail splits keep the parties involved from having to get into each other’s business – you sell your inventory and I’ll sell mine. Avail splits also support national and local sales forces doing what they do best.
Nonetheless, what is the "effective" TV revenue share – where do the dollars come from and who gets them? And what does that tell us about whether or not online TV content models – especially with respect to "over the top" platforms (Internet delivered video to TVs) – can be viable with advertising revenues alone or must they go "dual revenue" as cable TV has, namely charge subscription fees as well?
A warning… the quantitative analysis can get messy quickly. But the qualitative takeaway becomes evident even more quickly – so I’ll present it first.
Because such a large share of cable TV revenues ultimately come from multichannel subscriber fees (and broadcast TV is increasingly moving to an analogous model via retransmission fees), TV content likely cannot be monetized online via advertising models alone as online video use grows. Especially as "over the top" platforms come to market and Internet delivered TV programming moves from being additive to being cannibalistic (as it inevitably must as share of viewing increases) – it’s probable the dual revenue model of advertising plus carriage fees must follow from TV platforms to online.
Here’s a stepwise back of the envelope look at the numbers for cable networks.
Version #1 – revenue split – cable network/operator – advertising only
It’s 81/19. Cable networks national ad sales in 2008 were $21 billion (estimate from Magna Global). Multichannel operator sales of cable network local avails in 2008 were $4.7 billion (based on an NCTA estimate for cable and my estimate for satellite and IPTV). A total of $26 billion – the networks get $21B or 81%.
But… that doesn’t include cable network carriage fees.
Version #2 – revenue split – cable network/operator – advertising and carriage fees
It’s 90/10. My estimate is cable networks got $24 billion in carriage fees from multichannel operators in 2008. Added to a total 2008 cable network ad market of $26 billion (see above), that’s a revenue base of $50 billion and the cable networks got 90% of that ($45B total – $24B in fees and $21B in national ad sales).
But… that doesn’t include the revenues multichannel operators get from subscriber fees.
Version #3 – revenue split – cable network/operator – advertising, carriage fees and operator subscriber fees
It’s 63/37 – maybe. Multichannel operators generated $83 billion in video subscriber revenues in 2008 (NCTA says cable was $52B, DIRECTV reported $17B, DISH reported $12B, I estimate AT&T plus Verizon was $2B). I say we should subtract fees paid for premium channel subscriptions and pay-per-view – I estimate that’s about $15 billion. That leaves $68 billion. Now things get fuzzy. You need to figure out what share of the remaining $68 billion is being paid for access to cable network content, add that to the advertising revenue base, and split it out. Here’s a simple (and probably wrong) way to do that. I estimate cable networks are about 2/3 of total TV ratings points in multichannel households (using Nielsen data via the CAB web site). 2/3 of $68 billion in subscriber fees is $45 billion – add that to the overall cable ad revenue of $26 billion (see version #1) for a total revenue base of $71 billion. Cable networks get $45 billion in national ads and carriage fees (see version #2) for a share of 63%.
You could do this calculation much more rigorously (estimating consumer perceived value of cable networks, fees for set-tops and DVRs and so on) but here’s the good news – towards the topline question of whether or not "over the top" business models will likely need to include subscriber fees – I don’t think you have to.
That question seems to have been answered by the version #2 calculations. Cable networks are getting over 50% of their revenues from carriage fees paid by operators. If an online TV platform wanted to go "ad only," it could double the advertising revenue production per viewing hour of cable TV and it would still have to give it all to cable networks to provide them close to the same revenue they get from TV platforms.
Online platforms that provide additive viewing for cable and broadcast networks have a lower bar – they don’t need to match TV in revenue. But as Internet-delivered viewing of TV programming gains market share via platforms like "over the top" – it will necessarily draw viewers away from traditional TV platforms to get that share.
Certainly, advanced digital video advertising techniques need to be employed to drive better revenue generation than linear 30 second commercials can provide (see this past Niemeyer Review newsletter for more). But in order to provide the "dual" revenues that currently support cable (and increasingly broadcast) TV programming, it seems likely that "over the top" platforms will also have to charge subscription fees. How those platforms can provide value to customers to gain subscription fees, while delivering added value for marketers to drive advertising revenues, are two key topics to be addressed for "over the top" business models.