The Outlook for the Broadcast Networks

Transcription

1 UBS 39TH ANNUAL GLOBAL MEDIA AND COMMUNICATIONS CONFERENCE The Outlook for the Broadcast Networks David F. Poltrack Chief Research Officer, CBS Corporation President, CBS Vision Good Morning. First, the required preamble. 1

2 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This presentation may include "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements including those due to changes in economic, business, competitive, technological, strategic and/or regulatory factors, and other factors affecting the operations of the entities' businesses described herein including, without limitation, of CBS Corporation. Such entities' news releases and filings with the Securities and Exchange Commission including, but not limited to, their respective most recent Forms 10-K, 10-Q and 8-K contain a more detailed description of factors that could affect future results. The forward-looking statements are made only as of the date of the presentation and we do not undertake to update any forward-looking statements to reflect subsequent events or circumstances. 2 The Cautionary Statement Regarding Forward-Looking Statements. 2

3 UBS 39TH ANNUAL GLOBAL MEDIA AND COMMUNICATIONS CONFERENCE The Outlook for the Broadcast Networks David F. Poltrack Chief Research Officer, CBS Corporation President, CBS Vision My theme this morning will be that broadcast network television not only remains a the dominant mass medium today but that it has enhanced its mass medium status by 3

4 Broadcast Network Television: The AmassA massing Medium 4 Amassing viewers through new distribution channels. Let s start with the short-term outlook. 4

5 The Outlook Outlook for 2012 Review of forecast for Before presenting the Outlook for 2012, I will review my 2011 forecast from last year. 5

6 Original 2011 Forecast Network Television Ad Revenues +3.4% Underlying Growth Rate +5.0% 6 My original forecast for 2011 called for a gain of 3.4% in broadcast network television advertising revenues. Since this was a non-olympic year, adjusting for the 2010 Olympics yields an underlying gain of 5.0%. 6

7 The Outlook Outlook for 2012 Review of forecast for 2011 The economic picture turns hazy 7 At this time last year, we were fairly confident that we were on the road to recovery but less confident regarding the pace of that recovery. Moving forward to the present time, we remain confident that we are still on the road to recovery and still less confident about the pace of that recovery. 7

8 The Outlook Outlook for 2012 Review of forecast for 2011 The economic picture turns hazy Savings down/spending up Private sector strengthening Government sector weak 8 The recent recession was characterized by a significant shift in the ratio of savings and spending among consumers, with consumers reacting to the loss in value of their 401K plans and their homes by increasing their rate of savings. This year that trend was reversed. The rate of consumer savings is down and consumer spending is increasing in real terms. Based on the early holiday sales, this trend appears to be continuing. In fact, the private part of the economy looks strong. The drag on the recovery is in the government sector. Government spending is down due to the national and local budget crises. This is the missing element relative to the previous recovery which was stimulated by increased spending from the government sector. This is also what is keeping the unemployment level so high. While the current government crisis and the problems in Europe will remain a drag on the recovery, we believe that consumer spending will continue to increase, fueling that recovery. 8

9 The Current Market Strong Upfront Market Cautious Scatter Market 9 The positive signs in the economy in the first half of 2011 led to a very strong scatter market which, in turn, led to a strong Upfront Market. This was also in line with my original forecast. However, the difficulties in Washington and the growing European problems have created uncertainty on the economic horizon. This has led to some concern on the part of advertisers. While scatter prices for the 4th Quarter remain above Upfront, advertisers are moving cautiously. Marketers want to get out in front, but not too far out in front, of the consumer as that consumer increases spending. Some of them are now holding back as the calendar year closes due to the continued economic uncertainty and the normal last minute efforts to reach their fullyear financial goals. 9

10 Current 2011 Forecast Network Television Ad Revenues +3.4% Underlying Growth Rate +5.0% 10 Despite the impact of these factors, I still expect the full year 2011 gain to equal my original 3.4% estimate and 5.0% underlying growth rate, adjusting for the 2010 Olympics. Which brings us to

11 2012 Forecast Network Television Ad Revenues +7.3% Underlying Rate +5.0% 11 I am going to stay with my original 2011 underlying growth rate of 5.0% through Adjusting for the 2012 Summer Olympics, that brings the total ad revenue growth for the four broadcast networks in 2012 to 7.3%. I would use the analogy of a NASCAR race to describe the current television advertising market. The latest economic setbacks have resulted in the advertisers operating under a caution flag during the 4th Quarter of They are jockeying for position, conserving fuel, and fine-tuning their race strategies, but no one has dropped out of the race. As soon as the economic clouds clear and the green flag is given, they will begin competing at full throttle to capture a share of the increased consumer spending. The only question is when they will see that green flag. 11

12 The Outlook Outlook for 2012 The Audience Situation The Competition from Cable The Election Year Impact The Summer Olympics 12 Meanwhile, the fundamentals for the broadcast networks are very strong. Starting with their season-to-date performance. 12

13 The Outlook Outlook for 2012 The Audience Situation Audience Deficiencies 13 As is the case every year, the networks ability to capitalize on any increased market demand will be affected by the audience delivery of their programming and the degree to which they avoid accumulating a significant amount of audience deficiencies with their upfront advertisers. Let s see how they are doing. 13

14 Primetime Year-Over Over-Year Season-to to-date Live+7 +27% +22% +21% +23% +6% +3% +4% +6% +3% +1% +3% n.c. -6% -8% -6% -7% CBS NBC ABC FOX Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/13/11 vs. 9/20/10-11/14/10; Primetime, All Programs; Live+7 Data 14 First, looking from the viewers perspective, we see a positive picture for three of the four major broadcast networks in Live+7 day program ratings. 14

15 Primetime 4-Network 4 Totals Season-to to-date Live+7 +6% +7% +6% +2% 4-NETWORKS Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/13/11 vs. 9/20/10-11/14/10; Primetime, All Programs; Live+7 Data 15 Overall, the four networks are up on a total audience and key demographic basis. 15

16 Primetime Year-Over Over-Year C Season-to to-date C3 +45% +46% +38% +31% +4% +3% +2% +3% -6% -5% -2% -7% -6% -1% -5% -6% CBS NBC ABC FOX Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/13/11 vs. 9/20/10-11/14/10; Primetime, All Programs; Live+3 Commercial Data 16 Switching to the advertiser s perspective and the all-important C3 currency measure, we see two of the four networks posting gains and two posting declines. The higher percentage gains shown here for FOX are a function of the big gain from a seven-game World Series which has a low ratio of playback to live viewing. 16

17 Primetime 4-Network 4 Totals Season-to to-date Date vs. Year Ago C3 +8% +8% +5% +5% Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/13/11 vs. 9/20/10-11/14/10; Primetime, All Programs; Live+3 Commercial Data 17 Collectively, the four networks are up in Total Viewers and in the key demos. So, on an overall basis, we do not see the network market being negatively affected by a significant audience deficiency problem. But that is on an overall basis. We all know that the broadcast networks leverage in the ad market is derived, to a large extent, by the demand for their top programs. When we look at just the top programs, the results for the networks are even stronger. 17

18 Primetime Top Show Performance Season-to to-date Date vs. Year Ago Live+7 and C3 Top 10 Top 20 +3% +11% +12% +8% +9% +7% +4% +9% +8% +5% +1% +1% n.c. n.c. -1% -2% Live+7 C3 Live+7 C3 Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/6/11 vs. 9/20/10-11/7/10; All Programs; Live+7 and Live+3 Commercial Data 18 Whether you focus on the top ten programs or the broader top twenty programs, on a key demo basis, season-to-season gains for both Live+7 or C3 measures reflect that the top network programs are, collectively, performing better than last year. In other words, the big money shows are performing well. 18

19 The Outlook Outlook for 2012 The Audience Situation Audience Deficiencies New Programs 19 The key to the long term success of a broadcast network is its ability to re-generate its primetime line-up with new franchise programs to replace key aging hit programs. This season the networks have been quite successful in developing promising new series. 19

20 Primetime New Series Rank Season-to to-date Source: Nielsen NPM. 9/19/11-11/27/11, Excludes cancelled series; Live+SD and Most Current Data 20 Here are the top new programs ranked by total viewers. Also shown for each program is whether or not it is number one in its time period in viewers or key demos; and whether or not it is up from the program in its time period last fall. As has been reported, there are several promising freshman series. 20

21 The Outlook Outlook for 2012 The Audience Situation Audience Deficiencies New Programs The Cable Competition 21 Now let s take a look at the cable competition. 21

22 Primetime Year-Over Over-Year Season-to to-date Most Current +1% +2% +2% -1% -4% -2% -9% -5% All Ad Supported Cable Top 10 Billing Cable Homes Viewers A25-54 A18-49 Source: Nielsen NPM. 9/19/11-11/20/11 vs. 9/20/10-11/21/10; All Programs; Most Current Data 22 On a Most Current basis, the Ad Supported Networks are down slightly in Total Viewers and up slightly in the key demos. However, the Top 10 Billing Cable Networks are down in all key categories. 22

23 Primetime Cable C3 Season-to to-date Season-to to-date Date vs. Year Ago All (40) Ad-Supported Cable Networks Plus Minus Same Adults Adults Source: NTI, 9/19/11-11/6/11 vs. 9/20/10-11/7/10; 40 Measured Ad-Supported Cable Networks 23 On a network-by-network basis, we see a continuation of the pattern of last year with a fairly even split of gainers and losers 23

24 Primetime Cable C3 Season-to to-date Season-to to-date Date vs. Year Ago Top 10 Billing Ad-Supported Cable Networks Plus Minus Same Adults Adults Source: NTI, 9/19/11-11/6/11 vs. 9/20/10-11/7/10 24 and a slight majority of losers among the Top 10 networks. 24

25 Primetime - Share of A18-49 Audience Combined Broadcast vs. All Ad-Supported Cable THIS SEASON LAST SEASON 41% 59% 40% 60% 4-Broadcast Networks Ad Supported Cable Networks 4-Broadcast Networks Ad Supported Cable Networks Source: NTI, 9/19/11-11/20/11 vs. 9/20/10-11/21/10, Most Current Data 25 When you put it all together, you have the broadcast networks gaining on their cable competitors 25

26 Primetime - Share of A18-49 Audience Combined Broadcast vs. Top 10 Ad-Supported Cable THIS SEASON LAST SEASON 67% 33% 64% 36% 4-Broadcast Networks Top 10 Cable Networks 4-Broadcast Networks Top 10 Cable Networks Source: NTI, 9/19/11-11/20/11 vs. 9/20/10-11/21/10, Most Current Data 26 and making more substantial progress against the Top 10 adsupported cable networks. 26

27 The Outlook Outlook for 2012 The Audience Situation Audience Deficiencies The Cable Competition The Continued Impact of the DVR 27 The DVR continues to have a major impact on the primetime performance of the broadcast networks and their cable competition. 27

28 DVR Penetration 100% 90% 80% 70% 60% 50% 40% 30% 20% 11% 21% 29% 34% 38% 43% 10% 0% Fall 2006 Fall 2007 Fall 2008 Fall 2009 Fall 2010 Fall 2011 Source: Nielsen NPM Sample Penetration 28 DVR penetration is still growing at a significant albeit slower pace. From last fall to this fall penetration went from 38% to 43%. 28

29 DVR Impact Season-to to-date vs. Prior Two Years DVR PENETRATION Primetime All DVR Playback* Primetime - All DVR Playback 5.4 HHLDS +17% % 38% 43% +8% DVR PENETRATION A % % Source: Nielsen NPM. 9/19/11-11/13/11 vs. 9/20/10-11/14/10 vs.. 9/21/09-11/15/09 29 While the absolute gains in time-shifted viewing remain substantial, the relative gains are lessening. This season, timeshifted viewing is up just 8% on a household basis and 6% for younger adults, compared to 17% and 12%, respectively, last season. 29

30 Primetime - Network Live+7 vs. DVR Playback Season-to to-date DVR Playback DVR Playback HH RATING ADULTS CBS NBC ABC FOX Source: Nielsen NPM. 9/19/11-11/6/11; Live+7 Data for Networks 30 In total, collective playback exceeds the live Adult audience of each of the four networks and the total audience of every network but CBS. For the broadcast and cable programmers, this means that they have to compete with another major competitive force in each primetime hour, playback of their own programming. 30

31 DVR Playback Viewers (000) Season-to to-date 5-Net Avg 7,246 8,028 1,064 1,650 9,960 NCIS 17,040 18,608 2,438 3,011 22,489 Modern Family 10,082 13,019 3,438 4,659 18,179 Live Same Day Playback 1-7 Day Playback C3 Source: Nielsen NPM, Primetime Original Entertainment Series; 9/19/11-11/6/11 31 Up until now, I have been dealing with averages. However, time shifted viewing is concentrated among the most popular shows. This chart highlights two shows with an extraordinary amount of playback, NCIS and MODERN FAMILY. NCIS, the #1 program, adds over five million playback viewers to its 17 million live viewer base to reach over 20 million viewers overall. MODERN FAMILY, the program with the highest playback audience, adds about 8 million viewers to its 10 million live audience base. Unfortunately, not all of these viewers are included in the C3 currency audience. The yellow bars show the C3 viewers for each of these programs 31

32 Primetime - Share of Playback Season-to to-date 64% 36% Broadcast Networks Ad-Supported Cable Networks Source: NTI, 9/20/11-11/6/11, Playback Only, Households 32 The DVR has provided the broadcast networks with a valuable weapon in their fight for viewers with the growing array of cable challengers. This season, looking at the combined broadcast + ad supported cable audience in Primetime, 64% of Primetime playback is to broadcast network programs vs. just 36% to cable programs. 32

33 Primetime - Share of Playback vs.. Live Season-to to-date PLAYBACK LIVE 62% 38% 38% 62% Broadcast Networks Ad-Supported Cable Networks Broadcast Networks Ad-Supported Cable Networks Source: NTI, 9/19/11-11/6/11 vs.. 9/20/10-11/7/10, Playback Only vs.. Live Only, Households 33 When you contrast these playback shares to the live audience shares, you really get the picture of how the DVR has enhanced the competitive position of the broadcast networks. The broadcast networks 64% of playback far exceeds their 38% share of live viewing. 33

34 Primetime Broadcast vs. Cable Share Season-to to-date vs. Year Ago THIS SEASON LAST SEASON 45% 58% 43% 59% 4-Broadcast Networks Ad Supported Cable Networks 4-Broadcast Networks Ad Supported Cable Networks Source: NTI, 9/19/11-11/13/11 vs. 9/20/10-11/14/10, Household Share, Live+7 Data 34 Overall, this season-to-date the networks have re-captured share from their cable competition, moving from an overall primetime share of 43% to 45% while the ad supported cable networks collectively dropped one point, from 59% to 58%. Remember, shares can add up to over 100% because a home can have a cable show on one TV and a broadcast show on another TV. 34

35 The Outlook Outlook for 2012 The Audience Situation Audience Deficiencies The Cable Competition The Continued Impact of the DVR The Election Year Impact The Summer Olympics 35 The final two elements that will a boost the advertising revenues for the four broadcast networks are the quadrennial elements of political advertising and the Summer Olympics. 35

36 2012 Forecast Network Television Revenues +7.3% Underlying Rate +5.0% 36 So my 2012 forecast is built upon the assumptions of a continuation of the economic recovery with that recovery picking up in pace as the year progresses; a stable audience picture for the broadcast networks; no significant competitive advances by the cable competition; a growing contribution to broadcast audiences from DVR playback and the full quadrennial boost from political advertising and the Summer Olympics. 36

37 The Longer-Term Outlook 37 Now I would like to turn to the longer-term outlook for the broadcast networks. 37

38 An Overview 38 As I was beginning the preparation for this report, I thought to myself at least this year I will not have to refute the end of broadcast network television theme that has been regularly surfaced by the misinformed and misguided throughout the thirty years that I have been speaking at this conference. You can, therefore, appreciate how surprised I was to see the following headline in one of the major trade publications. 38

39 Big 4 TV Nets Wane As Google, Facebook Command Ad Dollars 39 Big 4 TV Nets Wane As Google, Facebook Command Ad Dollars. If this article was confined to the belief of its author, I would not be concerned, since this author has incorrectly forecast the end of broadcast network television for most of that thirty-year period. What does concern me is that the article used material from several of the most respected Wall Street analysts to support its argument. So today I will, once again, present the case for broadcast network television. I will, hopefully, demonstrate how the broadcast networks will not only survive, but thrive, in the new video marketplace. 39

40 The Broadcast Network Television System 40 Those of you that have heard my earlier addresses know that I believe that you cannot evaluate the future prospects of the networks if you do so outside of the context of the full network television system. That system begins with a studio that develops and produces programs for the network and it includes the owned stations that carry the network s lineup, the syndication operations that sell the network s programs internationally, in the secondary domestic syndication market and the new internet, VOD, and mobile platforms for those programs. My comments this morning will be made in reference to this broader broadcast network television system. 40

41 An Overview The Outlook for the Broadcast Networks The Viewer: Greater access to their programming by viewers The Advertiser: Growing demand for television advertising The Subscriber: Potential new revenues from realignment of current consumer video subscription fees 41 What I will be presenting to you today is a somewhat contrarian perspective on the outlook for the broadcast networks. I will address this subject from the perspectives of the viewer, the advertiser, and the subscriber. I will make the case for a scenario that has viewers gaining greater access to broadcast network content; advertisers favoring the mass medium of television over targeted media; and the realignment of the subscribers video subscription expenditures in favor of the broadcaster. Let s start with the viewer. 41

42 An Overview The Viewer More content than they need or are seeking 42 The television business is centered on the viewer as both a consumer of television programs and a target of television advertising. Today, the average viewer has the choice of over 130 channels of programming, thousands of hours of VOD content, and a vast library of legacy programs from suppliers such as Netflix, itunes and Amazon. In addition, the average viewer has wide choice of video options online. Finally, almost one-half of those consumers have their own inventories of stored programs on their DVRs. So my first premise is that the average consumer has more content than they need or are seeking. 42

43 An Overview The Viewer More content than they need or are seeking Limited access to that content Life gets in the way 43 What the average viewer does not currently have is adequate access to that content. New technologies have, in the past few years, done a great deal to solve the problem of limited access to content. They have substantially increased the amount of program content available and the places where that content can be accessed. What they have not done is fully eradicate the major constraint to the viewer s access to that content, the lack of time. Life gets in the way. Most of the population of the United States has access to more video content that appeals to them, than they have the time to watch that content. 43

44 An Overview The Viewer More content than they need or are seeking Limited access to that content Life gets in the way Needed: Greater access to favorite programs 44 So, I will argue that the consumers are not so much seeking new programming choices, as seeking greater access to their favorite programming. And, today, as has been the case throughout the last sixty+ years, the majority of their favorite programs are the programs presented by the broadcast networks. And while the consumers welcome the increased choice provided by the new technologies, they welcome even more the increased access to their favorite broadcast network programs provided by those technologies. 44

45 An Overview The Advertiser Better measures of ROI The other critical player for the broadcast networks is the advertiser. Even as new revenue streams are opening to those networks, the major source of revenue is, and, for the foreseeable future, will continue to be, advertising. Overall, the news on the advertising front is very good. New research tools are allowing marketers to accurately measure the ROI from advertising investments. As a result, the marketing department is better able to defend advertising investments with the CFO and CEO. This is resulting in a movement of dollars back into advertising. 45

46 An Overview The Advertiser Better measures of ROI Television Advertising gains share Search enhances television advertising These same research tools have also demonstrated the superior ROI for television advertising, resulting in gains for television in share of total advertising expenditures despite the emergence of the internet as a major new advertising medium. The development of internet search has actually contributed to the value of television advertising. For the first time, consumers have an immediate way to act on the awareness of, and interest in, a new product or a new product feature generated by television advertising. 46

47 An Overview The Advertiser Better measures of ROI Television Advertising gains share Search enhances television advertising Borrowed Interest As I read the aforementioned article suggesting that Google and Facebook were going to lead to the demise of the four broadcast networks as advertising media, I realized that the position presented in the article may have been invalidated by a false assumption as to how advertising works. Underlying the discussion in the article is a belief that consumers devote a substantial amount of their time to seeking out information for everyday buying decisions; that they are willing to devote time to researching which snack food or soft drink to buy. That is not how it works. Most consumers want to make these decisions as efficiently and effortlessly as possible. Television advertising is so effective because it employs the concept of borrowed interest to impart information about the benefits of certain products and services in the context of an activity, the viewing of television programs, that consumers seek out and with which they spend a great deal of time. Neither Google or Facebook has yet figured out how to command the attention of consumers for enough time to match the commercial message delivery power of network television. 47

48 An Overview The Advertiser Better measures of ROI Television Advertising gains share Search enhances television advertising Borrowed Interest Mass media efficiency versus targeting precision Another popular theme with the new media advocates cited in this article is the targeting advantage of these new media versus the mass media and the resulting lack of wasted impressions. While, on the surface, this makes intuitive sense, in practice is usually does not work out that way. Today, I will present research showing that, in most real life cases, mass media efficiency trumps targeted media precision. 48

49 An Overview The Subscriber Point of Resistance Broadcasters Share Most U.S. households are paying some form of subscription fee for their television content. For cable and satellite customers, this fee is usually determined by pre-set or tiered packages of channels. These fees have grown considerably as the number of channels have grown. Economic pressures and new, more limited, but less expensive, video distribution options have led to recent resistance to these fees; and some minimal cord cutting ; and a more significant amount of downgrading of these subscriptions or cord shaving. From the subscribers perspective, what they are paying for includes clear access to the broadcast channels. Until recently, the broadcast stations and networks did not share in the subscriber revenues. Today, that is changing. The broadcasters are beginning to receive retransmission payments from the cable and satellite distributors and also are entering into shared revenue arrangements with the new video distributors. 49

50 An Overview The Subscriber Point of Resistance Broadcasters Share Towards subscription fee/viewing alignment The new configuration of the video distribution market is likely to lead to a significant realignment of the allocation of subscription fees among the various players. It is still too early to predict how this disruption of the current video distribution market will play out. However, it is very likely to result in a more consistent alignment of subscription fees and actual viewing. If this does turn out to be the case, the upside for the broadcasters, with their large shares of overall viewing, will be substantial. 50

51 Broadcast Network Television: The AmassA massing Medium 51 Returning to the viewers and their quest for greater access to their favorite programs, one place where access to that content is growing is on the internet, through video streaming. 51

52 TV Program Streaming Have Streamed Programs 86% 85% 60% 64% 62% 68% 41% 51% Total Viewers Adults Adults Adults Source: CBS Entertainment Panel, Nov. 2010, Nov We have been tracking video streaming for several years now with the members of our Entertainment panel. This panel in made up primarily of people that are heavier than average television viewers and internet users. Last month, just under two-thirds of these panelists, 64%, reported streaming television programs. This percentage was up from 60% last November. As you would expect, the younger adults are more likely to be streamers. However, the rate of growth in streaming is greatest among the older viewers. 52

53 TV Program Streaming More Often 30% 36% 41% 34% 31% 35% 34% 24% Total Viewers Adults Adults Adults Source: CBS Entertainment Panel, Nov. 2010, Nov About one-third of these streamers, 36%, say that they are streaming programs more often, up from 30% last November. 53

54 TV Program Streaming Less Often 21% 20% 21% 22% 13% 10% 12% 15% Total Viewers Adults Adults Adults Source: CBS Entertainment Panel, Nov. 2010, Nov This compares to the much lower, and declining, percentage of viewers that say they are streaming less often. 54

55 TV Program Streaming How Streamed 50% 42% 58% 62% 18% 27% 10% 19% On Desktop On Laptop On TV On Mobile Device Source: CBS Entertainment Panel, Nov. 2010, Nov This streaming is also moving from the desktop computer to the laptop computer and, more significantly, to the television set and/or mobile devices. 55

56 CBS.com Breaks Records with Premiere Week Results extending through Q4 CBS.com had the best premiere week ever with 7.5mm unique visitors (up +50% YOY). Set single day record for traffic on Monday 9/19 with over 1.8mm Unique Visitors. Broke that record the next day, Tuesday 9/20, with more than 2mm Unique Visitors (up 100% YOY). Broke records in social referrals (2mm+) reflecting the popularity of CBS.com social events like Tweet Week and its Facebook pages. CBS.com/CBS Audience Network generated nearly 18mm total video views and 7.5mm full episode views the first full week of premieres. Source: CBS internal logs This season, the impact of this growth in streaming activity was clearly evident in the performance of CBS.com. For Premiere Week, CBS.com attracted 7.5 million unique visitors, up 50% from last season s premiere week level. Overall, CBS.com and the CBS Audience Network generated nearly 18 million total video views and 7.5 million full program views during the first week of premieres. 56

57 CBS - The #1 Broadcast Network Online for 35 months Monthly Average Total Unique Viewers (Sept Sept 11) Monthly Average Total Streams (Sept Sept 11) 330M 275M 18.2M #1 90M 79M CBS ABC NBC FOX #1 8.6M 5.4M 4.6M Monthly Average Total Minutes (Sept Sept 11) 1.1B 804M #1 #1 386M 352M CBS ABC NBC FOX CBS ABC NBC FOX Source: comscore VideoMetrix, September 10-September 11 Keeping CBS.com #1 among the broadcast network home sites consistent with the CBS dominance with Total Viewers on air. 57

58 Leading Ad Completion Video Ad Completion Rate by Video Length, Q % 96% 59% 77% Full Episodes Industry Average Clips CBS/CAN Source: CBS internal logs, Q2 2011; *FreeWheel Q Report 58 This has enhanced online as a valuable advertising outlet for CBS on both a full-episode and program clip basis. Ad completion rates for CBS & Audience Network have been consistently high. In Q2 2011, overall video ad completion rates for Full episodes was 96%, 15 percentage points above industry average, while completion rates for Clips was 77%, 18 percentage points above industry average. 58

59 A New Broadcast Network Television Model? Current Model Ad Value Live 10 Minutes of Ads = 20 Ads x DVR Playback 10 Minutes of Ads = 20 Ads x Online Streaming 2 Minutes of Ads = 4 Ads x Last year at this conference I introduced the concept of a new Broadcast Network Television Model. Let s revisit that subject. Originally, online streaming of television programs only included two minutes of ads. This made online streaming a far less attractive alternative than either live on-air or DVR playback viewing in terms of advertising revenues. However, research we had done at that time and experimentation with full ad loads online by CW demonstrated that viewers would accept far greater ad loads online. 59

60 A New Broadcast Network Television Model? Current Model Ad Value Live 10 Minutes of Ads = 20 Ads x DVR Playback 10 Minutes of Ads = 20 Ads x Online Streaming 10+ Minutes of Ads = 20 Ads x So we increased our ad loads in the CBS programs online to 14 ads per hour. Since not every ad position is filled each day, we have used a 10+ ad unit level in the chart shown. We also currently get a significant CPM premium for these online ads as compared to the broadcast CPM. All of which translates to an ad value of 20 plus for an online streamed view. What that means is that a viewer streaming our program online is now worth substantially more to us than a person watching that program in playback mode and skipping many of the commercials. In fact, the value of the online viewer is now surpassing that of the live viewer as well. 60

61 Broadcast Network Television: The AmassA massing Medium 61 That is truly amassing! The broadcast network system amasses audiences in other ways as well. Let s look at what is happening with VOD. 61

62 VOD 62 When I spoke to this conference in 2003 and 2004 I took the then controversial position that the DVR would enhance not damage the position of the broadcast networks. I called that one right. However, I made another prediction which has not yet been realized. I predicted that the DVR was a transitional technology that would be rendered obsolete by VOD. The cable and satellite distributors went in another direction promoting the DVR. As this device brought in new revenues, they resisted the advertising-subsidized VOD model that I believed would replace the DVR. Well, I have not given up on this prediction yet. 62

63 63 An industry coalition, the Advanced Advertising Media Project, has recently been formed to study the subject of VOD advertising. 63

64 Sponsors 64 The coalition includes key players from all sectors of the business, broadcast and cable networks, MSOs, advertising agencies, the 4As, and technology companies. The first two phases of a planned threephase research project have been completed. 64

65 Key Findings 1. VOD is fundamentally a television experience, but different 2. Consumers accept advertising on VOD 3. Ad load on VOD does not impact ad efficacy or viewer enjoyment 4. VOD rewards different ad formats Source: AAMP Ipsos 65 Here are the key findings: VOD is fundamentally a television experience, but different; Consumers accept advertising on VOD; Ad load on VOD does not impact ad efficacy or viewer enjoyment; VOD rewards different ad formats; Work is just beginning on Phase III a real world test of the recommended approaches from this research. 65

66 CBS VOD Performance Season-to to-date 15 Primetime Shows Viewing Increase 2011 vs Source: Rentrak OnDemand Essentials; 9/20/11 11/27/11 vs.. 9/21/10 11/28/ Meanwhile, VOD is growing as a distribution medium for primetime network programming. At CBS we have seen a 19% increase in VOD viewing of our primetime series this fall. 66

67 CBS VOD Performance Season-to to-date 15 Primetime Shows 70 Million Views Source: Rentrak OnDemand Essentials; 9/20/11 11/27/11 vs.. 9/21/10 11/28/ Adding up to 70 million views. With its addressability and dynamic ad insertion capabilities, VOD remains an advertising medium of great potential. I have not given up on my prediction yet. 67

68 Broadcast Network Television: The AmassA massing Medium 68 I have characterized the U.S. viewer as having access to more desirable television content than they could possibly watch. I would not make that same characterization regarding television viewers outside of the U.S. 68

69 The International Market 1,300,000,000 English speaking people in the world 75% outside of the U.S. 565,000,000 Internet users access Internet in English Source: Wikipedia 69 Today, there are approximately 1.3 billion people throughout the world for which English is a first or second language. Three quarters of them live outside of the U.S. In addition, English is the Internet language for over 500 million internet users. The English-speaking portion of the world s population outside of the U.S. represents a huge and growing market for the programs of the broadcast network system. 69

70 6 of Top 10 U.S. series in Italy 4 of Top 10 U.S. series in Germany 3 of Top 10 U.S. series in France and Sweden 2 of Top 10 U.S. series in Spain Source: CAD/MSS/MediaMetrie, October And that market is not confined to just those English speaking viewers. CBS International currently has top performing series dubbed into many different languages. 70

71 Reaching $1 Billion revenue mark CSI named by Mediametrie as the most watched series in the world New Distribution deals Netflix: Canada, Latin America Hulu: Japan Source: MediaMetrie 71 As a result, International distribution is a fast growing part of the broadcast network system. CBS International is poised to break the billion dollar mark in revenues. CSI was named by MediaMetrie as the most watched series in the world. And CBS International is also entering new distribution relationships with Netflix in Canada and Latin America and Hulu in Japan. 71

72 India Both channels have grown to #2 positions with their target markets in first year Australia Tv1 is the #2 subscription TV channel ELEVEN is the #1 digital free-to-air channel in its target demo Sci-Fi, the only channel in Australia dedicated to sci-fi and paranormal programming U.K. Our channels have doubled their audiences since launch. Source: India=TAM; Australia=OzTAM;UK=CAD/BARB 72 We are also very excited about the early returns from our new, jointly-owned networks in India, Australia and the U.K. 72

73 Big 4 TV Nets Wane As Google, Facebook Command Ad Dollars 73 Now, let s switch the focus to the advertiser. The argument for the future decline of the broadcast networks presented in the article contains two advertiser-related elements common to much of the conjecture about the bleak future for network television. They are 73

74 The Longer-Term Outlook The broadcast networks will continue to lose share of national television advertising to cable television networks. More targeted new media options will capture advertising dollars from mass media The broadcast networks will continue to lose share of national television advertising to cable television networks. 2. More targeted new media options will capture advertising dollars from mass media. Let s start with broadcast versus cable. 74

75 Advertising and Marketing Year Total Marketing Spending Advertising Television Broadcast Networks $ Billions % of Total Marketing % of Total Advertising % of Total Television Advertising , , Source: Wilkofsky & Gruen 75 During the recent recession, broadcast network advertising revenues were affected by the decline in marketing spending, and the decline in advertising s share of that spending. Offsetting those forces was the shift of a greater share of advertising dollars to television advertising. If you study the last column showing the share of television advertising going to the broadcast networks, you see a positive trend from 2007 to the present. However, this is somewhat misleading. The gains in broadcast network share were a function of the decline in the local television share of overall television dollars. Actually, during this period, the broadcast networks were losing share to the cable networks. 75

76 All TV Ad Spending - Share Shift Broadcast to Cable Total Spending All Categories 62% 52% 48% 38% 48% 52% Broadcast Share Cable Share Source: Wilkofsky & Gruen; 4 Broadcast Networks vs.. All Cable Networks, All Dayparts 76 If we examine the long-term trend in television spending, we see a greater share of television advertising dollars moving from the broadcast networks to the growing array of cable networks. Today, the split is 48/52 in favor of the cable networks for all advertisers. 76

77 Growth in the Number of Rated Cable Networks Source: Nielsen NPM; Ad-Supported Cable Networks rated by Nielsen 77 A significant amount of this shift is the result of the introduction of more and more new cable networks and the increase in the penetration of these networks. As more and more cable networks have been introduced, Nielsen has expanded its sample in order to be able to measure these new channels with their niche audiences. As soon as one of these channels reaches the minimal audience size to be measured, they can start selling advertising on a national level. It is the proliferation of these new cable channels and their growth in penetration as the distributors have expanded their channel capacity that has allowed cable to take audience share, and with it advertising dollars away from the broadcast networks. 77

78 All TV Ad Spending - Share Shift 48% Share to 52% Share Total Spending All Categories +$1,600,000,000 Actual 4 Broadcast Network Spending With 52% Share Source: Wilkofsky & Gruen 4 Broadcast Networks and Cable Networks, All Dayparts 78 Since 2005 alone, this change in share has moved 1.6 billion dollars from the broadcast networks to the cable networks column. The billion dollar+ question is whether or not this migration will continue. We have already seen some evidence suggesting it will slow down significantly, if not stop. The proliferation of cable networks has pretty much run its course and most of the popular cable networks have reached full penetration. And, as we have already seen, the cable networks, particularly the major cable networks, do not appear to be capturing significant audience share from the broadcast networks. But this competitive change is likely to be less important than the answer to the basic question: Did this shift to cable work? Did it deliver a positive ROI for the advertiser? 78

79 CPG TV Spending - Share Shift 2010 Total Spending $20+ million with 60% Cable Share CPG Categories 68% 32% Broadcast Share Cable Share Source: Kantar Media/CMR, Jan-Dec Totals; Broadcast Networks and Cable Networks, All Dayparts 79 Most of the money shifting from broadcast to cable came from the major CPG advertisers. These advertisers have always been the most priceconscious media buyers. Faced with static or declining demand during the recession, they shifted money to the lower CPM cable option. We have isolated 36 product categories each with over twenty million dollars in spending between broadcast and cable and over 60% of that money going to the cable networks. 79

80 CPG TV Spending Share Shift 2010 From 32% to All-Category 48% Broadcast Share Total Spending $20+ million with 60% Cable Share CPG Categories $1,032,000,000 $688,000,000 +$344,000,000 Actual Broadcast Spending With 48% Share Source: Kantar Media/CMR, Jan-Dec Totals; 4 Broadcast Networks and Cable Networks, All Dayparts 80 What if we could demonstrate to these advertisers that they are spending too much in cable and not enough with the broadcast networks? Just getting these categories back to the all-category 48/52 split would add $344 million in broadcast network spending. Most of these CPG advertisers use some form of media mix model or algorithm to plan their television campaigns. In recent years, as media prices rose and audiences did not, the media buyers have found it more and more difficult to meet GRP and Reach & Frequency targets with the budgets they had been given. This led to a leaning of the mix, replacing higher cost media such as broadcast network primetime with lower cost media such as cable ROS. But did this leaning of the mix reduce the effectiveness of the advertising campaign? 80

81 81 New single-source marketing research tools from TRA and Nielsen/Catalina are allowing advertisers to answer that question for the first time. Advertisers can now directly measure the Return-On- Investment for each component of an advertising campaign. 81

82 82 TRA has specifically addressed the relative effectiveness of broadcast network primetime advertising versus advertising on cable and in other dayparts. 82

83 TRA - Primetime ROI Analysis Broadcast = 3X Greater ROI vs. Cable Average Multivariate ROI (National) Broadcast Dominant Buys $0.99 Cable Dominant Buys $0.32 Source: TRA; eight multivariate studies conducted between 2008 and TRA s early work in this area showed Broadcast Network dominant buys, despite their premium price, delivered superior Return-On-Investments when compared to cable dominant buys. 83

84 TRA Primetime ROI Analysis Higher Broadcast = Better ROI Percent Broadcast Percent Cable ROI Food Brand A $1.49 Food Brand B $0.87 Food Brand C $1.10 Personal Care Brand A $0.31 Personal Care Brand B $0.31 Personal Care Brand C $0.17 Source: TRA, Multivariate Studies Conducted Between More recent work by TRA has specifically addressed the issue of the broadcast/cable mix of television campaigns. In this work, TRA found that campaigns with over 50% of the their GRPs on the Broadcast channels delivered consistently higher ROIs than campaigns with over sixty percent of their GRPs in cable. 84

85 IAG Program Engagement Primetime All Regular, No Sports ABC Total Cable * A25-54 A18-49 CBS 79% 79% NBC 77% 77% 79% 60% 78% FOX 74% 72% Total Broadcast 78% 77% 57% Source: Nielsen IAG data, 9/20/10-5/30/11; Originals and Repeats * 18 Measured Cable Networks 85 This should come as no surprise to analysts familiar with the work of IAG which I have presented to you at previous conferences. IAG demonstrated that Broadcast Network Primetime programs offer advertisers a superior advertising environment with higher program engagement 85

86 IAG Brand Recall Primetime All Regular, No Sports CBS 33% 31% NBC 32% 31% ABC A % FOX 32% 30% Total Broadcast 32% 30% Total Cable * 25% A % 23% Source: Nielsen IAG data, 9/20/10-5/30/11; Originals and Repeats * 18 Measured Cable Networks 86 Leading to higher levels of advertising recall, 32% vs. 25% for cable with Adults and 30% vs. 23% with Adults

87 CPG TV Spending Share Shift 2010 From 32% to All-Category 48% Broadcast Share Total Spending $20+ million with 60% Cable Share CPG Categories $1,032,000,000 $688,000,000 +$344,000,000 Actual Broadcast Spending With 48% Share Source: Kantar Media/CMR, Jan-Dec Totals; 4 Broadcast Networks and Cable Networks, All Dayparts 87 So, I believe that this new research capability will motivate advertisers to shift ad dollars back to broadcast primetime. At CBS, we are investing heavily in creating experiments with these heavy cable spender CPG clients utilizing the single source resources of TRA and Nielsen/Catalina Solutions. With the main drivers of the migration of ad dollars from the broadcast networks to cable, a growing number of cable alternatives, greater cable penetration, and a recession-inspired search for lower CPMs all becoming less relevant, the demonstration of the true superior ROI from effective broadcast network campaigns should shift the momentum back to the broadcast networks. 87

88 The Longer-Term Outlook The broadcast networks will continue to lose share of national television advertising to cable television networks. More targeted new media options will capture advertising dollars from mass media. 88 To address the second point regarding the relative effectiveness of mass media vs. more targeted media, I will have to put on my academic hat and call on my 30 plus years of experience as an adjunct marketing professor at NYU and Columbia and my work with the Marketing Science Institute, where I am currently serving as Chairman of the Executive Committee. You see, this is a very old debate among marketing academics, a debate that has, in the past, usually favored the mass media advocates. 88

89 The DVR The new technology from TiVo and Replay provides the ultimate in television convenience, it will spy on you, destroy prime time and shatter the power of the mass market Boom Box,, Michael Lewis; New York Times Magazine August 13, At the turn of the century, this was a major part of the argument put forth by those predicting that the DVR would spell the end of mass media. They referred to the coming age of demassification. This argument is essentially an argument regarding the relative trade-off of the efficiency of mass media and the precision of targeted media. 89

90 Smarter Targeting Associate Professor Jenni Romaniuk Ehrenberg-Bass Institute for Marketing Science 90 The Ehrenberg-Bass Institute for Marketing Science is one of the most prestigious international academic centers for the study of marketing. Its U.S corporate sponsors include Unilever, Procter & Gamble, Coca-Cola, Mars, Kellogg s, Nielsen and CBS. The Institute has done a great deal of research on the subject of targeting which is brilliantly summarized in a paper entitled Smarter Targeting by Jenni Romaniuk. I cannot possibly do the full paper justice in the short time that I have today. I urge you to get a copy. Here are some of the key points made in the paper 90

91 Smarter Targeting Consumer profiles of competing brands seldom differ 91 Consumer profiles of competing brands seldom differ; 91

92 Smarter Targeting Consumer profiles of competing brands seldom differ Even big brands mostly have light buying customers 92 Even big brands mostly have light buying customers; 92

93 Smarter Targeting Consumer profiles of competing brands seldom differ Even big brands mostly have light buying customers For most brands the top twenty percent of customers do not, as the popular 80:20 Rule suggests, deliver 80% of sales. It is more like 50% to 60%. 93 For most brands the top twenty percent of customers do not, as the popular 80:20 Rule suggests, deliver 80% of sales. It is more like 50% to 60%; 93

94 Smarter Targeting Consumer profiles of competing brands seldom differ Even big brands mostly have light buying customers For most brands the top twenty percent of customers do not, as the popular 80:20 Rule suggests, deliver 80% of sales. It is more like 50% to 60%. Only about half of your brand s s heavy buyers this year will be heavy buyers next year. 94 Only about half of your brand s heavy buyers this year will be heavy buyers next year. So the first challenge is how do you define your target? 94