Bill Niemeyer

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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

Continue reading “Today’s Cable TV “Revenue Split” and Why Over The Top Likely Can’t Be Ad-Supported Only”