Two major events occurred this year that restored faith in the cable industry. One was the collapse of a potentially huge competitor that was backed by Rupert Murdoch. The other was Bill Gates' investment of $1 billion in a top cable operator, rekindling Wall Street's interest in cable in the process. These two disparate events have made Murdoch, the ultraconservative head of News Corp., and Gates, the much-feared father of Microsoft, unlikely poster boys for the cable industry.
It was Murdoch's inability to pull together American Sky Broadcasting, the much-vaunted satellite venture nicknamed Deathstar, that caused cable executives to breathe a collective sigh of relief last April. Unlike other direct broadcast satellite players, ASkyB, a joint venture between News Corp. and EchoStar Communications, planned to offer a spate of local broadcast stations as part of its service. But the deal fell apart last spring when Murdoch got cold feet about costs and insurmountable regulatory hurdles. Since then, he has become a no-vote minority partner in Primestar, a rival satellite service owned by a consortium of top cable operators.
As if the capitulation of a would-be competitor weren't enough for the cable industry, just two months ago Bill Gates decided to drop a cool $1 billion-pocket change for him-to buy an 11 percent stake in Philadelphia-based Comcast, the country's fourth-largest cable operator. That news sent the stocks of major cable operators soaring again and convinced many mediawatchers that the cable industry remains the preeminent deliverer of new products and services, despite failing to deliver on its past promises (anyone remember 500 channels?).
"The driving factor [behind the optimism] was Murdoch's move into the cable arena [and away from ASkyB]," says Marvin Shapiro, a managing director with Veronis, Suhler & Associates. "But Gates' move was a tremendous vote of confidence in the cable industry, and he picked the right company to invest in. [Comcast] has strong management."
Surging cable stocks may benefit the industry as a whole. But the programming side of the cable business-the more than 50 viable cable networks fighting for a share of television's $20-billion advertising pie-ebbs and flows as a result of completely different forces. Though there has been more flow than ebb, sales executives at some of the major cable networks remain frustrated at their inability to push their ad rates up more than single-digit percentages.
It's a problem the broadcast networks wish they had. Though their collective cost-per-thousand increases rose in the double digits during this spring's upfront, the overall revenue increase was much smaller. Those CPM increases were making up for ratings shortfalls that continue to plague cable.
Conversely, cable networks such as TNT, Nickelodeon, Lifetime, A&E and The Discovery Channel have seen their prime-time ratings-and therefore, the gross-ratings points they have to sell-grow dramatically in the last few years. They all reaped considerable ad revenue increases in the upfront just passed-in the range of 15 to 25 percent over the 1996 upfront market-but their CPM increases rarely broke 5 to 8 percent, often ending up lower than 3 percent.
Media buyers who believe that cable fared quite well this year expect similar marketplace conditions next year. For one thing, nobody expects ratings among the cable networks in general to drop anytime soon. And that means that budgets put aside by media buyers for cable will increase to fill those ratings points, not to push up CPMs.
"The trend will continue, as we see it," says Steve Grubbs, executive vice president/director of national broadcast at BBDO. "Of the total TV pie, cable, naturally, is going to grow its share. The whole process of planning cable [into TV budgets] has become more accepted. But talking about CPM increases is kind of irrelevant. Their interest is in growing revenues, and they can increase their revenue 20 to 30 percent" based on ratings growth, he adds.
It should be noted, though, that several mature cable networks have suffered their own ratings erosion at the hands of their smaller cable brethren. TBS Superstation, CNN, MTV and USA Network, even ESPN, have seen prime-time ratings gradually shrink during the last five to seven years, while smaller networks such as The Learning Channel and Comedy Central draw larger audiences. Ironically, it's those big networks-except USA and TBS-that draw the highest CPMs in cable, based on their longevity and demographic purity.
Gene DeWitt, president of media buying firm DeWitt Media, points out that the high end of cable CPMs is no longer the exclusive territory of CNN and ESPN, thanks to the higher-profile program stunts by other networks. "The cable guys are getting good at promotion," DeWitt explains. "When a cable network delivers a high rating-a Turner special or a Discovery special-it can get a network-level CPM. This is the first year I've seen that happen."
It's no longer just the big networks that can lure a larger audience, either. Only a few weeks ago, FX exemplified the ratings growth that the medium-size networks are enjoying. Though it counts only 30 million homes, FX delivered a huge 3.3 household rating in its universe with its off-network premiere of The X Files. And the premiere of NYPD Blue, another off-net acquisition, drew a 2.2 universe rating its first night out.
For now, the fourth-quarter scatter market appears devoid of activity. Sales executives have complained that few dollars are working the market, but that could have been due to the pre-Labor Day lull. If the lull continues, it could bode ill for cable going into 1998, an Olympic year that draws many big-name advertisers with hefty budgets out of the marketplace.
"If they had any hopes of getting premiums in scatter," cable is in for a big surprise, says Julie Friedlander, senior vice president/director of national broadcast at Ogilvy & Mather. "They had to be really aggressive to sell the huge volume of inventory in the upfront, to try and tighten up scatter. If the ratings continue to grow, that's going to work against them and hold back their ability to get the higher [CPM] increases."
As it stands, the cable networks will probably end up from 14 percent to 17 percent ahead in revenue, while CPM increases will remain in low single digits, according to John Popkowski, president of ad sales at MTV Networks. Popkowski expects his networks to slightly outpace the market, although he admits MTV, as one of the more mature cable networks, will increase its ad revenue by about 12 to 13 percent, ahead of the 11 percent average of the mature cable services.
His advice on reading the market: "Follow the earnings reports of the advertisers."
'98 SPENDING FORECAST:
'97 SPENDING a/o 5/31: $2.3 bil*
'96 SPENDING: $4.7 bil*
*Source: Competitive Media Reporting