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As it has gathered in New York over the past few weeks for the annual “upfront” season, when network pitch advertisers on their upcoming shows, the TV industry has come face to face with the possibility of its own disruption. Yet no one is talking about cord-cutting, or over-the-top, a la carte delivery, or any of the other technological factors long expected to be the main vectors of disruption for the traditional pay-TV industry.
Instead, the forces of disruption are being felt at the programming level.
The upfronts began on a sobering note. In the four weeks beginning March 19, according to the New York Times, NBC lost an average of 59,000 viewers in the critical 18-49 age category compared to the same period last year, or roughly 3 percent of its audience. CBS lost 239,000 in the same period (8 percent), ABC lost 681,000 (21 percent) and Fox lost 709,000, a whopping 20 percent of its audience.
While some shows naturally were hit harder than others the erosion was felt across the board, and could not be blamed on a drop off in one or two formerly hit shows. Viewers disappeared en masse.
The fall off comes at a particularly difficult time for the networks. The spring upfronts traditionally set basic advertising rates for most of the upcoming TV season. With viewership down sharply heading into those negotiations the networks are in a severely weakened position with advertisers. As Horizon Media senior VP or research Brad Adgate told the Times, “these numbers represent billions of dollars in sales.”
The broadcast networks are not the only traditional TV channels being squeezed, either. Many major cable networks also saw significant ratings declines in the first quarter, according to data compiled by Reuters. Ratings for Viacom’s Nickelodeon and MTV networks were off 27 percent and 14 percent, respectively. News Corp’s FX was off 12 percent and Time Warner’s TNT and CNN fell 18 percent and 28 percent, respectively.
Theories abound as to where all the viewers have gone, but the declines are out of all proportion to any plausible estimates for the amount of cord-cutting going on. If cord-cutting is a factor, it’s not the major factor.
Rather, the declines appear to reflect a basic shift in how consumers watch TV content, in favor of time-shifted and on-demand access over live viewing, which is occurring whether or not viewers are actually cutting the cord.
“We are seeing the cumulative effect of nonlinear viewing,” the former head of entertainment at NBC, Jeff Gaspin, said last week. “I think we are at a tipping point in how people are going to watch shows.”
In its own way, however, that shift in behavior could turn out to be just as disruptive to the traditional TV business as could cord-cutting.
The decline in viewers of live, prime-time TV will inevitably hurt the networks with advertisers, who value live TV viewers over all others. Worse, the declines are happening just as alternative channels are becoming more aggressive in competing for advertising dollars. YouTube, Yahoo, Hulu and Google are holding their own version of the upfronts this month as they showcase their growing lineups of original, professional programming for advertisers. That competition could further drive down ad rates for the networks.
More critically, the decline in live TV viewing undercuts the networks’ leverage with cable and satellite providers when it comes to negotiating carriage and retransmission fees — an increasingly important piece of the networks’ revenue model. That loss of leverage will be felt most acutely in the networks’ ability to force cable operators to accept and pay for low rated channels from a network owner as the price of access to higher-rated channels, as with the many spin-off flavors of ESPN Disney forces on operators.
That power to bundle — to force pay-TV operators as well as subscribers to buy programming as a package — is at the heart of the current TV ecosystem. If it’s being lost, it’s not because people are cutting the cord altogether but because viewers are shifting their habits, and because new entrants are competing more effectively both for viewers and for advertising dollars.
The changes caused by those competitive forces are likely to have a more lasting effect on the structure of the TV industry than will people dropping out of the market altogether by cutting the cord.