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How the television industry maintains its perch

June 22, 2012|By Meg James
  • Needham & Co. says viewers pay roughly 30 cents for every hour of television they watch. No word on the Griffins' cable bill, but watching a half-hour of them in "Family Guy" costs only about 15 cents.
Needham & Co. says viewers pay roughly 30 cents for every hour of television… (Associated Press )

Advertisers this month agreed to shell out $9 billion for prime-time commercials on the major television networks, underscoring the value of TV. So far, the industry has been able to weather the digital hurricane that has badly battered other media segments.

There are several reasons, according to Needham & Co.

Key among them:

"TV offers one of the best price / value ratios of any consumer product," Laura Martin and Dan Medina, media analysts with Needham & Co., wrote in a report released Friday called, "The Future of TV: the Invisible Hand." 

The average monthly cable bill in the U.S. is about $75 a month for 135 TV channels.  According to Nielsen, the average household consumes an aggregate total of about 8 hours of television a day.

"Consumers pay about 30 cents for every hour of TV they watch," the authors wrote. "Compared with other forms of leisure time, this looks inexpensive." 

It costs $125 for a single park-hopper ticket to Disneyland, and $300 to see a One Direction concert or an NBA game, the analysts pointed out. 

The TV industry also has embraced technology, despite some resistance, to improve its product and viewer experience. What's more, creating television programs is hugely expensive. 

"Today, the Internet content creators cannot create perfect substitutes for TV content, owing to the enormous content costs," Martin and Medina said. "For example, broadcast networks -- ABC, CBS, Fox and NBC -- typically spend $2 billion to $3 billion each year, equating to about $2 million to $5 million per hour of prime-time programming."

"The primary reason that TV networks can commit to these enormous production budgets is because the business model of the ecosystem raises money before anyone knows which channels and shows will be hits," the authors note. 

More than three-quarters of revenue to the major networks comes from the upfront advertising market -- that $9 billion in commitments, which is keeping broadcasters in the game.

But much like other media sectors, including newspapers and the music industry, television economics are supported by a system of bundling. TV programs are rolled up into TV channels, which are sold to cable, satellite and telephone company distributors. 

In other words, people currently pay for channels they don't watch, which keeps the overall industry profitable. That also explains why the TV industry has been so resistant to calls from some in Washington and consumer advocates to "unbundle" TV channels and offer channels a la carte.


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