Broadcast Television Says Goodbye to a Most Disruptive Season

The 2012-13 season has been a monumentally disruptive year
for broadcast television.

With five million homes "cutting the cord," television
penetration was the lowest in over forty years. These cord cutters skewed under
the age of 35. Adults 18-24 in television homes were watching less TV, and TV
usage in that demo dropped 7% in primetime and 8% in late night compared to the
prior season. This younger demographic is one many advertisers want to reach
and it is also the age group that is more likely to watch streaming video. Now,
Nielsen will revise the definition of a television home in 2013-14 to include
streaming video content through the television set.

The 2012-13 season was also a lackluster period for new
programming. Only one new broadcast program, The Following on
Fox, cracked the top 20 top-rated shows among adults 18-49, and it placed 20th.
The networks introduced 10 new comedies in the fall and only two were picked up
for a second season. Across the entire season, NBC introduced a whopping seven
new comedies and none were picked up for season two. Even top-rated CBS had
only one new show (Elementary) renewed for a second season.

Equally dismal were the ratings for many second season shows
that reported double-digit percentage losses in audience delivery from their
first year. This is an indication that these programs may not have long-term

Two of television's most popular reality shows, American
and Dancing With the Stars, also suffered notable losses in
audience delivery but remain top-rated programs.

Meanwhile, cable television continued to produce original
scripted content that attracts viewers. In an industry first, the highest-rated
scripted program among 18-49-year-olds on television in 2012-13 was cable's The
Walking Dead
on AMC.

When NFL football is included, two of the five highest rated
programs in primetime throughout 2012-13 were on cable. And in March 2013, the
History Channel televised The Bible, a miniseries that averaged nearly
11 million viewers, making it one of the most-watched programs of the season.

Top-Rated Regularly Scheduled Primetime Showsin 2012-13
Among Adults

In another industry first, not one drama from the "Big Four"
was nominated for an Emmy Award last year. The six finalists were: Downton
on PBS (the only broadcast drama nominated), Breaking Bad and
(four-time Emmy winner) Mad Men on AMC, Boardwalk Empire and Game
of Thrones
on HBO and Showtime's Homeland (the winner). Not
surprisingly, all six dramas air on Sunday nights.

In its third season, Downton Abbey became a ratings
juggernaut for non-commercial-supported PBS. The debut of the time period drama
in January 2013 averaged 7.9 million viewers, nearly double the four million
that watched the second-season debut. Nonetheless, the audience was a four-fold
increase of PBS' average primetime performance. The show's finale on Feb. 17
performed even stronger, averaging 8.2 million viewers, making it the highest
rated telecast on PBS in decades.

In yet another first, Univision, the most-watched Spanish
language broadcast network, finished ahead of a Big Four English language
network, NBC, in the February sweeps. Previously, NBC had won its first
November sweep in nine years and was the top-rated network for the adults 18-49
demographic for 13 of the first 15 weeks. Univision finishing fourth was more
indicative of a weak NBC schedule for the month (its top-rated show was Saturday
Night Li
ve) than an indicator of ratings strength from Univision.

Sporting Life

As usual, sports continues to be a big part of television's
programming strategy. NBC's Sunday Night Football was the top rated show
in primetime for the second straight season. In fourth quarter 2012, the Sunday
afternoon games on Fox and CBS averaged 19.8 million and 17.7 million viewers,
respectively. In 2012, NFL ratings were down compared to 2011 (including the
post-season). Even the Super Bowlreported
a drop in audience for the first time in seven years, yet the big game still
averaged 108.4 million viewers, making it the third-most watched television
program in U.S. history.

The five biggest media companies -- Comcast-NBC,
Disney/ESPN, Fox Sports, Turner and CBS -- have agreed over the last two years
to spend $72 billion for the TV rights to the Olympics and various other sports.
Many of these agreements will not expire for another decade. (For example, the
television contract for the NCAA Basketball Tournament runs through 2024, while
and the NFL contract with three broadcast networks extends through 2022.)

NBC, CBS and soon Fox will have dedicated sports cable
networks that compete with ESPN. Why? Because live sporting events are
typically watched live and, therefore, are less likely to be time shifted. Sports
triggers more comments on social media than any other programming genre, and it
systematically produces a desirable upscale audience.

Sports can also garner higher subscriber fees from
Multichannel Video Programming Distributors (MVPDs) than other cable networks.
According to SNL Kagan, ESPN receives $5.54 per subscriber per month, with 100
million households that provide the Disney-owned network $6.65 billion in
revenue in 2013.

The NFL Network is also a winner in affiliate fees,
receiving $1.34 per subscriber per month. With 70 million subscribers, the
network receives over $1.1 billion in revenue.

Regional Sports Networks (RSNs) also charge MVPDs a hefty
premium, with the average network receiving $2.67 per month. Cablevision,
DirecTV and FiOS have implemented a monthly surcharge to their subscribers for
the sports networks they distribute. In essence, sports account for about 3% of
all programming, 20% of all viewing and 50% of a cable bill.

Affiliate fees remain an issue between content providers and
distributors. In December 2012, Time Warner Cable (with 14 million household
subscribers) announced it was dropping Ovation from its lineup because of poor
ratings. Time Warner said that "steeply escalating programming costs are
forcing us to closely assess each network as it comes up for renewal."

Cablevision (with nearly three million subscribers that are
primarily in New York) has recently taken Viacom to court over bundling.
Cablevision has accused Viacom of coercing it into paying for 14 low-rated or
obscure "Suite Networks" channels such as Palladia and Tr3s if it also wants
eight "core network" channels such as Comedy Central, TV Land and VH1.
According to Cablevision, the alternative would have been roughly a $1 billion
dollar penalty.

In May 2013, Sen. John McCain (R-Ariz.) introduced the Television
Consumer Freedom Act of 2013, which proposed legislation encouraging cable
operators and entertainment conglomerates to unbundle channels and offer
programming "a la carte."

McCain said the bill was voluntary, offering incentives that
would hopefully result in consumers being able to purchase their preferred
channels individually. However, cable providers (and content companies) have
long resisted such ideas. Meanwhile, a recent study by the NPD Group found the
average monthly cost of pay TV in the U.S. hit $86 in 2011 and is projected to
rise to $123 by 2015.

Competition Stiffer
Than Ever

The competition for viewers is stiffer than ever. According
to Nielsen, in 2012 the average TV home had 179.1 channels to select from,
which is an increase of 50 channels since 2008. The number of channels actually
watched (defined on at least 10+ contiguous minutes during one week) has not
kept pace. In 2008, TV homes watched 13% of channels receivable, and in 2012
that figure dropped to only 10%.

Despite the importance of sports to broadcast networks, more
long-running sporting events are migrating to cable. In 2014, TBS will televise
the NCAA Final Four for the first time and in the near future the network will
televise the NCAA Championship Game.

In May, ESPN announced that beginning in 2015 they will
televise the U.S. Opentennis tournament, after it appeared on CBS for
nearly a half-century. ESPN signed an 11-year agreement for the all the
television rights, with the contract running through 2025 at a total cost of
$825 million. Previously, ESPN signed an agreement to telecast all tennis
matches at Wimbledon.

Big-event sports will continue to play a key role in 2013-14
season. Fox will air the two highest-rated programs of the season: the NFC Championship(a "late
window" game this year) and the Super Bowl. NBC will undoubtedly win the
February sweeps next season with it coverage of the Winter Games from Sochi,
Russia. And both networks will use these sporting events as launch pads for
their mid-season shows.

After the broadcast season ends, the world's second biggest
sporting event (after the Olympics) takes center stage. The 2014 Men's Soccer World
Cup will start on June 12 and conclude on July 13 in Brazil (which also hosts 2016
Summer Olympics). TheWorld
Cupgames will air on ESPN, ABC and Univision. The English-language
broadcasts for the 2018 Men's World Cup(from Russia) will air on Fox.

Stream Dream

The 2012-13 season also brought about the emergence of
Netflix as a distributor of original content and as another competitor to
broadcast television. During Super Bowl weekend, Netflix released all 13
episodes of the first season of its original House of Cards series with
Kevin Spacey. Netflix paid $100 million for the rights to the series, even
agreeing to stream the show before a pilot was filmed. Four months later,
Netflix released the fourth season of Arrested Development (seven years
after it was canceled by Fox) again, releasing all the episodes (15 in all)

Netflix said it plans to spend up to 15% of its entire
licensing budget on the production of original content within the next few
years. In September 2013, Netflix will debut Derek, a comedy with Ricky
Gervais. Netflix rival Amazon also announced plans to produce and distribute
five original series based upon crowd-sourced feedback from its subscribers.

With advertisers poised to invest over $20 billion in the
upfront ad marketplace, most every video platform wants to be heard. With all
this competition and disruption, the broadcast networks are trying to adapt to
better serve their viewers' tastes. In 2013-14, there will be 52 new series on
the five English-language broadcast networks. There will be more original
scripted programs than in the past, less repeats, more year-round programming
and the continued migration of watching programming on-demand and on multiple

Video is following audio and print vehicles in making their
content available to consumers on a variety of platforms. Without quality
content, however, viewers will not come.

As CBS Corp. CEO Leslie Moonves said at the CBS upfront, "broadcast
[TV] is not an old medium being left behind by new ones. Far from it, we're at
the center of it all...a media landscape that would be barren without us."

The following day at its upfront presentation, USA -- the
most-watched cable network for the past seven years and one of the more
prolific producers of scripted original content on cable -- spent more time
mentioning that ABC's Modern Family was joining the network this fall
than on any of its other programming initiatives.

Broadcast television has survived the remote control, the
advent of cable television, the VCR, the DVR and now video streaming. The video
landscape is more fractionalized than ever before with advent of digital media,
but while counterintuitive, that will help the broadcast networks for several

Even with the success of The Walking Dead and
Univision last season, the Big Four broadcast networks still attract more eyeballs
than any other viewing source. Furthermore, they have less advertising
inventory to sell, creating more demand than cable or online video that raises

Despite a woeful 2012-13 season, the broadcast
networks are still getting increases in CPM rates for the 2013-14 season. Even
with the inclusion of greater video competition, the broadcast model is anything
but broken.