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Why The Cable Buzz Is Gone

For years, cable networks have been the cool kids of media, floating on buzz and rising Nielsen numbers. However, what really set cable programmers apart from their slow-grow broadcast rivals was strong, reliable financial results. Save for the financial mayhem after 9/11, they could be counted on for consistent double-digit gains in revenue and operating cash flow.

No more. Financial growth is slowing. Analysts estimate that Turner Broadcasting System and ESPN's revenues are growing around 8%-9%. Discovery Networks' ad sales growth has dropped to virtually zero, though license fees from affiliates are still strong.

Even mighty MTV Networks is feeling pain, evidenced in part by the ousting of CEO Tom Freston (see cover story, page 12). The youthful programmer's growth had been dramatic recently, out of reach for other cable networks. MTVN outpaced its peers by increasing revenues at an enormous pace, hitting a gigantic 26% growth rate in 2003 and even an impressive 17% last year. However, MTVN is suddenly hitting a wall, with both revenue and cash flow expected to slow to a sluggish 6%-8% rate over the next three years.

Don't blame the economy, or even encroachment of the Web. They're suffering from a misery that will eventually afflict us all: maturity. After a 25-year run, cable networks are entering a new phase, one where the American Association of Retired Persons starts sending you magazines and Medigap insurance offers.

Cable networks now have to fight harder for any increase in revenues and profits, and easy growth no longer covers up their mistakes. The buzz is gone. Online video subscribers have seized the buzz, are increasingly diverting viewers and will threaten to eventually steal ad sales. Wall Street rewards the prospect of high growth and yawns at the prospect of modest growth.

“It's a classic stage of the business life cycle,” says Tony Vinciquerra, president of the Fox Networks group. “You have to regenerate the business in some way and introduce new growth.” Tellingly, Vinciquerra has revived the slow parts of his cable portfolio and, hence, was the only network executive I contacted who was willing to discuss the issue on the record.

How did cable suddenly become old media? Executives cite three major factors:

1.) Subscriber slowdown. Cable and DBS have so heavily penetrated the U.S. market it's hard to see cable networks getting much more distribution.

Programmers benefited tremendously from the 1995 birth of satellite TV, which UBS media analyst Aryeh Bourkoff estimates carried their networks into nearly 30 million new homes that couldn't get or disdained cable. That amplified the power of cable networks' magic financial ingredient, the dual revenue stream. DirecTV and EchoStar will give basic and pay cable networks around $9 billion in license fees this year, estimates PriceWaterhouseCoopers.

Satellite viewers account for perhaps $10 billion in ad revenues. Much of that money is incremental revenue that cable systems wouldn't have generated.

However, the engine is shifting into low gear. With cable and satellite penetration surging from 60% of U.S. homes to 80% in the past decade, there just aren't that many new homes that want or can afford to subscribe.

2.) Advertising slowdown. Cable is losing its advertising pricing power. In past upfront ad markets, broadcasters could catch a cold and cable networks would barely get a sniffle. Cable salesmen could raise prices at a pace several percentage points more than broadcasters could. That ended this year, as major cable networks ended up stuck with the same 2% or less gain that the broadcast networks could manage.

In the short term, virtually no boats rise in a soft ad market, not even niche cable networks. However, cable continues to steal audience, with Turner Broadcasting System researcher Jack Wakshlag saying networks set a record this summer by averaging a 62% share of the primetime TV audience. (That will drop sharply with broadcasters' fall season debuts.)

But networks' audience growth will slow for the same reason as their license fees: low penetration of new homes.

3.) Heavy spending. As the easy growth dissipates, cable networks have to spend more heavily to maintain their position.

How to manage maturity? “You continue to look for new ways to develop new businesses,” says Vinciquerra. For TV networks, “online is a natural contributor.”

Cable networks will hit the maturity wall, if for no other reason than the business is so huge. “The base gets so big,” Vinciquerra says, “you can't keep adding 20% per year.”

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