Prime-time ratings often blur the reality of the television business. Even though they are the only numbers readily available to the news media, they tell only part of the story.
The distortion they tend to produce is especially pronounced when it comes to the single richest fiefdoms in present day television: basic cable networks.
Consider, for example, CNN, the oldest of the cable news networks. For the past 10 years, the story that has become a staple of print media is that CNN is in dire trouble because it is trounced by Fox in the prime-time ratings race. The New York Times clucked  this April, for instance, that “in a repetition of a pattern that has become familiar for CNN, the surge of interest in breaking news that helped drive up its audiences has faded—and so have CNN’s ratings.”
It is true that in every hour of prime time, CNN has trailed Fox for the last seven years. But here is the paradox: In the same period, 2003-10, CNN has more than tripled its earnings. In 2010, it netted over $620 million, which is more than it has ever made in its 30-year history.
How can a cable network consistently lose the prime-time war, but make more and more money? The answer is threefold.
First of all, advertising is not basic cable’s only source of revenue. It also gets paid a fee by the cable systems that carry it. In the case of CNN, the fee, which goes straight to its bottom line, now exceeds, and is independent of, its ad revenues.
The reason the take continues to be so rich is because of a perverse benefit it gets from the rating success of Fox: The more wildly opinionated Fox becomes—Bill O’Reilly pulls in the biggest audiences by far in prime time—the more cable systems need to retail CNN for a semblance of balance.
As one top executive of the news network’s parent, Time Warner, explained regarding this odd symbiosis, “Fox has made us indispensable to our affiliates.” This indispensability allows CNN powerful leverage in negotiating higher carriage fees. This year, in fact, CNN will get nearly one-third of a billion dollars in those fees.
Secondly, despite the media’s fixation on prime time, it constitutes only about 10 percent of television time. The other 90 percent may not be as profitable in terms of advertising revenue, but it provides a larger total audience. So, even though Fox wins prime time, CNN had a much larger total audience, and, on any average day, more viewers watch CNN than Fox.
Finally, the prime ratings supplied by Nielsen Media Research to news media is an average of a minute-by-minute tally. So, a heavy viewer who watches the same program for an entire hour gets counted 60 times, while 60 light viewers who go in and out of programs are counted as a single average viewer. To filter out this discrepancy, advertisers look at a different number supplied by Nielsen (and not readily available to the media) called the “cume,” which is the total cumulative number of viewers that watch a channel per day.
CNN gets relatively high cumes because its viewers tune in to watch brief news stories or weather. Fox gets relatively low cumes because its viewers tend to loyally stay tuned for an entire show. As a result, an advertiser, such as Audi , that wants to reach different people, pays attention to cumes. Even in prime time, in which Fox can offer much better cost-per-thousand numbers, CNN is able to sell ads and product placement deals on the basis of its better cumes.
To be sure, Fox News also does amazingly well, and will book a profit of more than $730 million this year. That is 15 percent more profitable than CNN, and it comes down to its lower production costs. It is far cheaper to produce O’Reilly-type opinion than send news teams around the world.
Of course, with $630 million in operating income, CNN is already a money machine for Time Warner. And if it moves to close the profit gap with Fox, the result will be an ineluctable race to the bottom of the opinion ocean.