Cable connects with advertisers - Statistical Data Included

More original programming, more nets bringing in more advertising

After what has arguably been cable television's strongest advertising year ever, the industry will try to continue to grow in the coming quarters with more original programming and aggressive forays onto the Internet.

At the same time, cable companies have gone through a rapid consolidation as players in and outside the industry place bets that cable will be the dominant broadband conduit into the home. Software billionaires Bill Gates and Paul Allen are behind cable. So is AT&T chairman Michael Armstrong, who became the largest single cable operator in one year by chasing the company's $48 billion acquisition of TeleCommunications Inc. with its $62 billion purchase of MediaOne this past spring. Comcast and Adelphia followed suit with their own billion-dollar broadband deals.

The merger of CBS and Viacom as this story went to press demonstrates that even companies known chiefly as content engines are looking for economies of scale.

In general, projections for cable's future seem bullish. Boosted by a solid economy that has all categories dumping unprecedented amounts of money into television advertising, cable's $1 billion upfront increase popped the total upfront to about $3.8 billion this year. If the economy remains stable, those numbers will likely be repeated or surpassed next year.

Those new dollars will flow to networks experiencing growing ratings thanks to both original programming and expanding distribution bases.

As the advertising business cooks along, cable's production of original content continues to improve and expand into more and more services. "The quality of our product is up so much that the audience and dollar migration continues," says Steve Heyer, president and COO of Turner Broadcasting.

Indeed, networks such as VH1, E!, TBS and others have joined TNT, USA and Lifetime as well as HBO and Showtime in creating original films that draw significant ratings. VH1's Sweetwater, its first original movie, drew a 1.8 national rating, making it the fourth-largest telecast ever for VH1 and increasing the time period's average rating by 189 percent. TBS' First Daughter, with a 5.3 national rating (5.3 million households), was a record for both the network and for an original movie on basic cable. Instead of three networks developing big-budget originals, now there are as many as 10.

"If the content is good, people will show up, and if people show up, you are in business," says E! Entertainment Television executive vice president David Cassaro, who says E! has a slate of original movies, including Best Actress, on tap for next year as his network chases audiences with originals.

"Those projects are very appealing to cable operators, and they can be a home run for ad sales," says Brad Adgate, senior vice president of research for Horizon Media.

Zenith Media has cable's total-year numbers climbing 15 percent next year, to $8.6 billion from $7.3 billion this year. That number will grow to $9.6 billion in 2001, according to Zenith.

Veronis, Suhler, in its annual Communications Industry Forecast, concludes that advertisers are putting a greater value on the cable audience because "better programming and the ability to deliver larger audiences are making cable more attractive to advertisers."

The report estimates that national advertising on cable will continue to rise at double-digit rates. "Advertiser spending on network cable will rise by an estimated 17.6 percent, to $8.1 billion in 1999, and, at a compound annual rate of 14 percent over the forecast period of the report, will hit $9.3 billion in 2000, $10.8 billion in 2001, $12.3 billion in 2002 and $13.7 billion in 2003," according to Veronis analysts.

In the fine-tuning department, cable network sales and research executives point to the growing sophistication of optimizers and interconnects in local markets as forces that will also continue to funnel more ad dollars into basic cable.

Part of cable's success story is that its total universe is expanding and, with it, the reach of individual networks. Nielsen universe estimates for September have TBS in 78 million homes, followed by: Discovery, with 77.3 million homes; CNN, with 77 million homes; and USA, with 76.9 million homes. Of the top 43 cable networks, 17 are now in 70 million-plus homes.

But the smaller services are seeing even sharper subscriber-acquisition spikes, with Travel Channel, Disney Channel, Animal Planet, Home & Garden Television and TV Land all growing by more than 10 million subscribers from September 1998 to September 1999.

The Veronis, Suhler report concluded that the surfeit of networks has attracted viewers not only from broadcast but also from the leading cable networks. According to the report, smaller networks are showing more growth in prime time than larger networks. USA, TBS, ESPN and CNN/Headline News were flat or down in 1998 compared to 1993. The top 10 networks in 1993 had a combined rating of 14.3. That number rose only 1.9 points by 1998, while the ratings for the 32 other networks measured increased to 12.5 in 1998, from a 6.1 in 1993.

According to Veronis, the total day ratings for all of cable will continue to climb, to 16.3 in 2000 and to 17.1 in 2001, when it, for the first time, will surpass the estimated 16.1 rating for all broadcasting stations' total day rating. By 2003, all cable will have a total day rating of an 18.5 compared to a 15.3 for all broadcast stations. As for household delivery, Veronis, Suhler reports cable's average household delivery will grow to 16.3 million in 2000, surpass all broadcast stations in 2001 and reach 19.1 million in 2003.

Turner's Heyer predicts that cable will cement its gains by marrying ratings with behavioral data that will show the cable audience is more prone to consumer-specific products and therefore worth more to advertisers.

Heyer also said the cross-promotion capabilities of the Internet will continue to transform traditional television. For example, fans of NASCAR on TBS can go to the network's Web site to watch the racing from a camera in their favorite driver's car, or participate in online contests tied to TBS specials, such as "The 13 Days of 007," which consists of 13 nights of James Bond films.

"The Internet is going to allow the measurability to move us from eyeballs-only to other kinds of measures that really start to speak to delivery of results to advertisers," says Heyer, who hopes to continue to tie the Web to traditional networks next year.

But there are some potential trouble spots.

While cable is poised to use the Internet as a promotions and eventually a programming vehicle, it is also a source of further audience fragmentation.

The growth of digital set-top boxes will continue next year, reaching a universe of about 2 million households and further fractionalizing the marketplace with hundreds of new channels.

"As you get more fragmentation, you get to the point when the numbers are not meaningful anymore. At some point, it's going to become a major issue for the advertising community," says Ellen Oppenheim, senior vice president and media director at Foote, Cone & Belding.

Cable strength in the upfront also resulted in tension between ad buyers and sellers, with deadlocked negotiations causing some concern on the part of buyers that sellers are too focused on dollar figures and not enough on client-vendor relationships.

"As the result of this market, cable is selling unusually high levels of their inventory," says Kristian Magel, vice president of national broadcast at DeWitt Media. "In fact, in a lot of cases they are selling out. As a result of these heavy sellout situations, I think it is more important than ever for cable networks to pay attention to the stewardship of buys."

Competition from the direct-broadcast satellite industry is a real factor, with both DirecTV and EchoStar signing up record numbers of new customers. In total, the DBS industry added 2.2 million new customers in 1998 and is well on its way to matching or besting that figure this year. The satellite plays are also poised to start offering local programming that will compete head-on with cable in markets. However, cable will be able to hold market share if operators successfully roll out broadband services such as high-speed Internet access and telephony within the next two years. Another factor that has at least some ad buyers concerned is the turnover of senior executives at several networks. Lifetime USA and E! have seen a shift, and buyers are waiting to see if those services will continue to produce quality content under the new regimes. Finally, the economy, while strong now, could experience a dip, which could flatten out ad spending from the exploding dot.com category.

There will also be interesting sideshows. The economic jitters will keep the industry on edge. The jury is still out on what kind of impact the millennium will have on advertising and, as usual, the Olympics will spike ad budgets. In the political realm, CNN, for the first time, will have significant competition in election coverage from MSNBC and Fox News Channel.

How the government will deal with the continuing cable consolidation will be an area to watch. And finally, cable's application of technology--the industry's longtime gremlin--will be tested by the rollout of digital television (expected to be in 2 million homes next year), cable modems and eventually interactive television.

                                 SPENDING

'89 $.9525
'90   $1.1
'91   $1.2
'92   $1.6
'93   $2.3
'94     $3
'95   $3.4
'96   $4.7
'97   $5.8
'98   $6.7


1999 SPENDING: $7.3
2000 SPENDING FORECAST: VERONIS +14.5% ZENITH +15%
All numbers in billions unless otherwise indicated
Sources: Competitive Media Reporting, except 1999
Spending: Zenith Media Services

COPYRIGHT 1999 BPI Communications, Inc.
COPYRIGHT 2000 Gale Group