Medi Outlook: Cable TV – High Interest

The demand for news and success with original series draws new ads.

Following five years of dizzying highs and precipitous lows, the cable industry is expected to settle in for some steady, even growth next year and beyond. According to Veronis Suhler Stevenson’s annual forecasting report, overall spending, including advertising and license fees on satellite and cable, is projected to grow at a compound rate of 7.5 percent for the five-year period that began in 2002—down from the 10.8 percent annual compound growth rate in 1997-2002, to reach $110.8 billion in 2007.

Spurred on by more original programming and increased interest in news, ad-supported cable networks’ prime-time share of audience during the 2002-03 TV season grew 3.6 percent to reach 49.3, according to the Cabletelevision Advertising Bureau. After making inroads against broadcast this year by beating the seven networks in share of viewers in May and during the summer, cable is expected to win the season within two years. “Cable could pass broadcast during half of the season next year, if not the whole season,” says Tim Brooks, Lifetime’s evp of research.

“With global security issues, economic issues, education issues, a war and an upcoming election, this has been one of the most dynamic news periods in recent years,” adds Greg D’Alba, evp/chief operating officer of ad sales at CNN. “News viewing has become so mainstream.”

Few of cable’s original scripted programs, aside from HBO’s The Sopranos, have made a significant ratings impact on their own, but the combination of all these efforts, including USA’s Monk and Peacemakers; FX’s The Shield and Nip/Tuck; TLC’s Trading Spaces; and Bravo’s Queer Eye for the Straight Guy has helped boost cable as a whole. Cable networks, including premium channels, are expected to spend $7.6 billion in programming this year compared with $7.1 billion in 2002. As the investment continues, total audience share netted by ad-supported and premium cable channels is projected to hit 66 percent by the 2006-07 season, according to Veronis.

Though it is difficult to predict exactly how the marketplace will swing, a healthy flow of network and local ad dollars is expected to follow programming improvements. According to Veronis, network advertising will grow 8 percent next year to reach $12.4 billion. By 2007, network cable will hit $16.6 billion. “The economy is always a big question, but it looks like 2004 will be a good media year,” says Neil Baker, svp of ad sales at E! Entertainment Networks. “Advertisers sound confident; I just returned from Detroit where automakers said they were looking to strengthen market share.”

Extra money coming in coupled with sold-out broadcast inventory could make for a tight 2004. “We are looking at a healthier economy,” says Fred Dubin, managing partner at Mediaedge:cia. “If people open their pocketbooks, we could be looking at an ugly second-quarter marketplace next year.”

Due in part to election spending next year, most of which goes to TV stations, local cable is expected to post strong gains. The Veronis report projects an 8.5 percent increase in local ad dollars that will take the total windfall to about $3.9 billion next year. Lee Westerfield, managing director at Jeffries & Co., is more bullish and puts local cable’s take at about $4.4 billion next year. For the five-year period beginning in 2002, local cable is expected to grow at an annual compound rate of 12.2 percent to reach $5.9 billion in 2007, according to Veronis.

Additionally, due to the expansive rollout of interconnected cable systems (there will be 75 by year’s end) through the rep firm National Cable Communications, national spot cable also is expected to grow. According to Westerfield, national spot will post about $550 million in gross billings this year, which could reach almost $700 million next year.

On the operator side, cable subscriber growth has flattened and is expected to hover at around 71 million next year. Satellite is expected to make modest gains at about 11 percent to reach 23.9 million subscribers in 2004, according to Veronis. With the firm grip cable has on U.S. households, satellite will only be able to make minor advancements against it. “There is saturation on both sides,” says Bruce Leichtman, president of the Leichtman Research Group. “Eighty percent of television households have one or the other. The rest don’t subscribe to either for a reason.”

Cable will continue to deflect satellite’s encroachment by packaging high-speed Internet with video subscriptions, digital cable boxes and video-on-demand. Citing the Federal Communications Commission, Veronis reported that cable operators are investing approximately $17.8 billion in system upgrades this year. “Cable is doing very well with cable modems, reaching 15 percent of all households where it is available,” says Leichtman. “VOD is close to passing 50 percent of homes, but there is still a lot of work to be done to grow awareness of the product.”

News Corp. is expected to give DirecTV a little shine after it finalizes its purchase of the satellite operator from General Motors, but because of bandwidth constraints, satellite won’t likely match cable’s delivery of VOD and other bells and whistles. Megan Larson writes about cable TV for Mediaweek.