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Cable Economics

Economics

While some ambiguity hovers over which cable news channel attracts more people, there is no question when it comes to which is winning the dollar war.

Here the leader is not Fox News but CNN.

CNN’s operating profits are roughly five times those of Fox News, while MSNBC has barely broken even so far.

While Fox News has closed the gap, and the trends may become more worrisome to CNN with time, the distance between them remains sizable. Some narrowing might be expected, but CNN still has some advantages in its multiple channels to sell to advertisers.

Cable News Profitability
1997 to 2003
Design Your Own Chart
Source: Kagan World Media unpublished data, www.kagan.com
* CNN figures include Headline News

CNN’s operating profits, according to data collected by Kagan World Media, a media market research company, rose from $277 million in 1997 to $297 million in 2002. Fox News went from operating at a loss of $84 million to having a profit of $60 million. MSNBC almost moved out of the red, from losing $60 million in 1997 to losing just $300,000 in 2001, before dropping back to a loss of $15.5 million in 2002.

Kagan’s estimates for 2003 suggest that Fox News has made further inroads: it was projected to increase its profits from $60 million in 2002 to $96 million in 2003, a 60 percent increase. CNN, however, after a drop in 2002, was projected to climb from $297 million to $351 million in profit in 2003, a 15 percent increase. MSNBC was projected to break into the black with an operating profit of $3.1 million.

Cable News Revenue and Expenses, 2002
Design Your Own Chart
Source: Kagan World Media unpublished data, www.kagan.com
* CNN figures include Headline News, except subscriber revenue which is CNN only.

CNN

Why is CNN so much more robust financially when it is trailing Fox News in ratings?

Part of CNN’s financial advantage is that it can offer advertisers package deals on its various channels. These figures describe only domestic revenues and profits for CNN and its sibling 24-hour general news network, Headline News. The two networks are often sold as a package deal to advertisers.

In addition to these, however, CNN also has a separate international arm, CNN International, which operates seven regional networks targeted towards viewers throughout the world (CNN Asia/Pacific and CNN Latin America, for example). CNN also operates a business news network, CNNfn. These networks bring in separate streams of revenue (as do other operations, such as CNN’s airport news service and its Newsource operation, which supplies footage of national and international events to local television stations), but all rely on the same news gathering structure and offer advertisers more options.

Another CNN advantage has to do with the fact that it has been around longer and recovered most of its startup costs years before Fox News and MSNBC began. Outside accounts of CNN’s history estimate that it first broke even around 1985, five years after its launch by Ted Turner. Thus it has an advantage of 10 years of profitability over its rivals.1

This particularly comes into play because of the subscription fee system in cable. Unlike the broadcast networks, cable channels acquire part of their revenue from subscribers. This is based on a subscriber fee negotiated between each cable channel and the cable providers. These fees are normally set up under long-term contracts of five to ten years. The most popular cable entertainment networks (such as Nickelodeon and TNT) charge roughly 50 cents to $1 per subscriber per month.2 CNN’s subscriber fee has remained stable, at around 33 to 37 cents, since 1997.

Fox News and MSNBC rates have been much lower, roughly 17 cents per subscriber for Fox News and 13 cents at MSNBC. Both of the newer cable networks have seen steady increases in their average fee per subscriber since they went on the air. This suggests new contracts negotiated with higher subscriber fees.

The multiyear nature of the subscriber fee system has insulated CNN to some degree but means that some of its financial advantage will diminish unless it can improve its ratings.

CNN is available in almost every cable household in the country (again there are approximately 90 million cable households in the United States, and CNN is available in 86 million). This means that soon CNN will no longer be able to sign on additional cable systems in order to increase its subscriber revenue. Instead, it will have to renegotiate contracts along favorable terms to increase subscriber revenue and to get those higher per-subscriber fees CNN may have to show its desirability by scoring better ratings.

Fox News and MSNBC are also approaching the ceiling in subscriber reach, but if Fox News continues to beat CNN in the ratings, it will be in a much better position relative to the other networks when the time comes to renegotiate its contracts. CNN may very well see its subscriber revenue stagnate while Fox News manages to obtain higher fees.

Monthly Revenue per Subscriber
1998 to 2002
Design Your Own Chart
Source: Kagan World Media unpublished data, www.kagan.com

Fox News

When Rupert Murdoch launched Fox News in late 1996, as part of his strategy for an international news conglomerate, his News Corp. deployed a novel tactic to establish itself. Many cable channels began as initiatives of the cable systems themselves in order to provide programming that would entice viewers to start subscribing to cable. Other channels were begun to provide niche programming, such as Lifetime, now known as “Television for Women.” Fox News, which is not linked to any cable system and was attempting to crowd into a niche already occupied by CNN, took a different approach in order to gain distribution for its new 24-hour channel: When it was launched, Fox News decided to pay for its spot on the cable box by offering local cable systems a $10 fee for every one of their subscribers. It was, according to Multichannel News, “an unprecedented move at the time.”3 Cable technology then could accommodate a much smaller number of channels than today. Other networks, such as Animal Planet and the Cartoon Network, adopted the same strategy of paying for their spot on the cable box.4

Fox News executives apparently gambled that if the channel proved successful, this so-called cash-for-carriage payment would pay off down the road, since Fox News is getting 13 cents per subscriber every month. One press account at the time of Fox News’ launch reported, “Murdoch says he doesn’t expect FNC to break even until the next century.”5

While Fox News is now making a profit, what about that $10-per-subscriber investment over the long term? By now, at 13 cents a subscriber a month, Fox News has probably taken in almost $6 per head in subscriber fees in return for that $10 it paid out in the 1990s.

Fox News network executives suggest that shows like “The O’Reilly Factor” helped draw attention and increased awareness of Fox News to the point where subscribers began to demand that their cable systems provide it.6 Also, with the arrival of digital cable boxes, there are fewer bandwidth restrictions on the number of channels a cable system can offer, making it easier for Fox News to get placement on even more systems.

The path to profitability has also depended on keeping costs low. Fox News, basically, tries to produce a cable news channel with fewer reporters and bureaus than CNN does and to focus in depth on fewer stories. Its success is changing the nature of cable news, shifting it away from taped edited packages and toward a narrower menu of stories (see News Investment).

MSNBC

MSNBC, meanwhile, was created as part of a strategy devised under Andrew Lack, the former NBC News president, to amortize the costs and brand of NBC News across multiple platforms. The content and even much of the staff feeds directly off of NBC News, keeping costs at a minimum, and providing revenue for NBC News that might not otherwise exist. So with minimal added cost, NBC brings in additional revenue from MSNBC, CNBC and also the MSNBC Web site. In 1999, CNBC alone brought in revenues of nearly $400 million and pretax profits of $200 million. According to the journalist Marc Gunther, NBC’s average cost per hour of news fell from $250,000 in 1994 to just $50,000 by 1998.7

NBC sells itself to cable system operators as a package of MSNBC, CNBC and an agreement to carry NBC’s broadcast stations. Part of the appeal for cable systems is NBC’s strategy of spreading Olympics coverage among all three channels, although some smaller cable operators have complained that NBC’s practices, which obligate them to pay fees for three networks at once, are unfair.8

Revenue Streams

Cable channels sometimes complain that Nielsen’s methods for measuring audience undercount the true audience. The reason for their irritation is that advertising rates are based on those ratings. Because their Nielsen audience ratings are so much smaller than the broadcast networks’, cable channels are unable to command anywhere near the ad prices of the broadcaster.

On the other hand, cable, unlike broadcast, has two revenue streams, not one. In addition to advertising, cable operators and cable channels get revenue from subscriber fees.

The question is what happens if the cable universe continues to rise, while broadcasting continues to suffer. Should broadcast networks be paid subscriber fees by cable companies the way cable channels are? Isn’t the ability to get the old networks in a clear signal a major attraction for viewers to buy cable? And if the networks were to rearrange their economic structure, would they invest any new revenue in news gathering? Or, because of audience trends, are they moving toward a point where they might get out of the business of providing a signature nightly newscast and sustaining a general news division and abdicate the role of basic news gathering to cable? If so, the content studies suggest the effect on television news quality might be devastating.

Footnotes

1. See “Cable News Network,” entry, The Encyclopedia of Television. Available at: http://www.museum.tv/archives/etv/C/htmlC/cablenewsne/cablenewsne.htm.

2. See Richard K. Miller & Associates, The 2002 Entertainment, Media and Advertising Market Research Handbook, p. 172.

3. Steve Donohue, “Fox News raced to 80M subs,” Multichannel News, June 3, 2002.

4. Robin Dougherty, “Animal Magnetism,” Salon, March 25, 1997. Available at: http://www.salon.com/march97/media/media970325.html.

5. Marcus Errico, “Fox News Channel goes live Monday,” E! Online, October 6, 1996. Available at: http://www.eonline.com/News/Items/0,1,237,00.html.

6. Steve Donohue, “Fox News raced to 80M subs,” Multichannel News, June 3, 2002, p. 8.

7. Marc Gunther, “The transformation of network news,” Nieman Reports, Summer 1999, p. 28 and p. 29.

8. See, for example, “American Cable Association Files FCC Petition for Inquiry Into Retransmission Consent Practices,” press release, American Cable Association, October 1, 2002. Available at: http://www.americancable.org/press18.htm.