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Economics

Economics

By the Project for Excellence in Journalism

Financially, cable news continued to be a robustly growing business in 2007. Fox News grew most. MSNBC inched its way into healthier economic territory. CNN and CNN Headline News remained steady.

But when we look at the expectations from Wall Street, the story becomes more nuanced. In examining how the news channels did compared with the revenue and profit estimates from analysts for 2006, MSNBC actually exceeded expectations, CNN (including Headline News) hit the mark, and Fox News fell short.1

Profits

Starting with the bottom line, the cable news industry continued to increase profits at a substantial rate in 2007.

According to estimates by SNL Kagan, a leading financial research firm,2 the three cable news channels were projected to earn a combined $791 million in pre-tax profits in 2007, a 20% growth over the $657 million the year before.

Fox News again was projected to have the biggest growth in profits. Kagan expected it to earn $347 million in profits in 2007, a jump of 30% over the $266 million the year before.3

Analysts, as they have the past two years, again overreached in projecting that Fox News would overtake CNN in profits. Every year, however, Fox News chips away at the gap, and its rate of growth continues to be much higher than CNN’s.

If it does match projections, Fox News would earn about $10 million more than CNN ($347 million to CNN’s $337). In 2006, however, it fell $60 million short of projections and ended up lagging behind CNN.

CNN, whose numbers include CNN Headline News,4 was projected to see a more modest 10% growth in profits. In 2007, it was expected to earn $337 million, up from $307 million in 2006. Its revised figures for 2006 were pretty much what analysts had projected (just short of estimates by about $3 million).

Cable News – Profits
2007 vs. 2006, in Millions

2006 Projected 2006 Revised (difference) 2007 Projected
CNN & CNN Headline News
310.1
307 (-3)
336.9
Fox News
326
266 (-60)
347
MSNBC
64
84 (+20)
108

Source: SNL Kagan, a division of SNL Financial LLC
Note: Numbers are estimates

Considering that it first earned profits in 2004, MSNBC has had a good run the past two years. It was expecting to earn $108 million in profits in 2007, a noteworthy 28% jump over $84 million the year before. That figure of $84 million was much better than what analysts had expected it to be in 2006, and $20 million more than projections the year before.

Cable News Profitability
1997-2007, by Channel
Design Your Own Chart
Source: SNL Kagan, a division of SNL Financial LLC
Note: CNN figures include CNN Headline News

Revenues

Profits are the difference between the revenues channels bring in and the expenses they pay out (see discussion on their expenses in News Investment). In 2007, all three channels are expected to see steady revenue growth.

Let’s look at each channel individually.

Having spent its first decade establishing a formidable audience base, Fox News is reaping the financial benefits. Both advertisers and cable operators – the two main sources of revenue for a cable channel – now recognize the channel’s reach, and are paying accordingly.

In 2007, Fox News was projected to bring in revenue of $834 million, a 21% increase over the previous year’s $688 million — more than triple CNN’s growth rate and double that of MSNBC in 2007. Whether it will have reached those figures is not clear. As with profits, analysts tended to overreach in their expectations about how much Fox News would make in revenues in 2006. Fox News’ actual revenues in 2006 ($688 million) were roughly 10% lower than the expected $754 million.

CNN (these figures include only its two U.S. cable news channels, CNN and CNN Headline News), in contrast, has seen smaller growth, in the single digits, the past four years, but it has managed to keep a lead over Fox News in sheer dollars. It is projected to make $1.024 billion in 2007, growing about 7% over $961 million the year before. Its revised figures in 2006 show that it did not grow as expected, falling $24 million short of expectations.

MSNBC was projected to take in $299 million in total net revenue in 2007, a 10% improvement over its previous year’s figure of $270 million. It should also be noted that, unlike its two competitors, MSNBC met projections for profits for 2006 ($269 million).

Cable News – Revenue
2007 vs. 2006, in Millions

2006 Projected 2006 Revised (difference) 2007 Projected
CNN & CNN Headline News
985
961 (-24)
1024
Fox News
754
688 (-66)
834
MSNBC
269
270 (+1)
299

Source: SNL Kagan, a division of SNL Financial LLC
Note: Numbers are estimates

Revenue Streams

Behind these earnings are cable’s two equally important sources of revenue – subscriber fees and advertisements.

CNN dominates when it comes to the contractual subscriber revenue, but Fox News now is thought to make more money from advertisers.

Cable News Revenue Streams
2007
Design Your Own Chart
Source: SNL Kagan, a division of SNL Financial LLC
Note: CNN figures include CNN Headline News

These components are the bulk of a channel’s total’s revenue.5 We look at subscriber revenue and net ad revenue individually.

License Fee (Subscriber) Revenues

The less obvious revenue stream in cable, license fees, is the money paid by the cable systems to carry the channel. These are decided in the form of long-term deals negotiated in advance on a per-subscriber basis irrespective of how many subscribers actually end up watching the channel during the life of the deal. If a cable company enlarges its audience, it can renegotiate those license fees upward when contracts come up for renewal. Also, they tend to be multi-year contracts that have an escalating fee structure, so that every year sees a slight increase in the license fees and the agreed-upon rate is reached over the life of the contract.

CNN, the oldest 24-hour news network, has had the highest fees among the channels. In 2007, it still led, but Fox News greatly narrowed the gap.

For the past decade (since 1996,) CNN has earned more than 30 cents per subscriber. In 2007, it was expected to earn 46 cents. Sports and general entertainment channels handily beat out news channels in attracting higher fees. The highest fee paid to any cable channel is the $2.96 commanded by ESPN.

Cable News Monthly Revenue per Subscriber
1997-2007
Design Your Own Chart
Source: SNL Kagan, a division of SNL Financial LLC
Note: CNN figures include CNN Headline News

When MSNBC started in 1996, its fee per subscriber was 13 cents per month and that has barely budged. Its 2007 projection, 15 cents, is the same as the past three years, and is the lowest fee per subscriber among the three rivals. That reflects the limited audience growth of the channel since its launch.

Fox News, on the other hand, has seen its fee increase over time and, in 2007, projections held that it would earn 33 cents per subscriber. From 2008 onward, these projections most likely will escalate even more rapidly as new multi-year contracts that Fox News has signed with cable operators start kicking in.

The channel began renewing its 10-year contracts in late 2006 and, according to media reports (nothing was declared officially), managed to triple its license fees. Using its high audience numbers and News Corp.’s stature as leverage, the channel was reported to have signed new contracts with all the major cable operators. Predictions of tough competition were, in the end, overrated as no cable operator wanted to lose the highly rated Fox News or tangle with News Corp. over other cable holdings.

The escalating fee structure of the contracts means that the Fox News channel will earn 75 cents and more per subscriber over the lifetime of the contract.6 These new rates make Fox News not only the highest paid news channel, but also put it among the top earners among all cable channels for subscription fees.

This distribution of license fee rates among the three rivals also mirrored the subscriber revenues that each channel makes.

CNN was projected to make the largest amount – taking in $512 million. This would be a small increase (6%) over the previous year’s $484 million. MSNBC was expected to see the same rate of 6% growth, $160 million in 2007 from $151 million the year before.

Fox News grew its subscriber revenue by more than a quarter, the biggest jump. In 2007, it was projected to make $359 million, a 26% increase over the $284 million in 2006. In actual dollars, though, this was still less than CNN.

Advertising Revenues

The other big revenue stream for cable channels is advertising. While cable news channels do not earn as much from advertisers as the broadcast networks or other, more popular, niche cable channels (like sports or entertainment programming), they do draw a comparatively affluent and loyal audience. This attracts advertising despite their relatively smaller audience base.

Advertising Costs on Television
2006, Select Networks

Network 2006
Big 4 Networks $17.63
Fine Living $15.80
Golf Channel $14.60
ESPN $11.40
MTV $9.40
Comedy Central $7.08
CNN $5.74
TLC $4.56
Lifetime $4.53
Weather $4.21
E! $4.02
Fox News $3.43
MSNBC $3.38

Source: SNL Kagan, a division of SNL Financial LLC
Note: The dollar amount represents the average cost an advertiser pays per every 1,000 people who view the ad (termed CPM or Cost per Thousand in the advertising industry). For example, if Nielsen estimates that 1 million people see Fox News each day, an ad would cost $3.43 times a thousand (or $3,430 per ad).

And, of the two revenue streams, many see advertising as having greater potential for long-term growth. The prospect of signing new cable subscribers, or getting existing ones to pay substantially more each month for the cable bill, is more constrained.

In 2007, all three cable news channels were projected to increase their revenues from advertising. The biggest growth is expected to come from Fox News.

Cable News – Net Ad Revenue
2000-2007, in Millions

2000 2001 2002 2003 2004 2005 2006 2007
CNN & CNN
Headline News
412.8
445.9
359.8
399.2
317.4
375.9
399
427.5
Fox News
51.2
59.9
109.8
208.6
257
345.3
388.3
459.2
MSNBC
138.8
115.7
98.4
113.1
111
106.4
116.6
135.4

Source: SNL Kagan, a division of SNL Financial LLC
Note: Net Ad Revenue refers to revenue generated after discounting the commission that goes to advertising agencies.

MSNBC, which has the smallest share, actually did better than expected in 2006. And analysts project that ad revenues will grow by 16% to $135 million in 2007, up from the $117 million the year before.

CNN made higher ad revenues than Fox News in 2006, but not by that much. As for 2007, revenues were projected to grow 7% to $428 million up from $399 million.

Even though Fox News has not been able to overtake CNN the past few years, despite predictions, analysts again project that it might in 2007, with $459 million, a growth of 18% over the $389 million in 2006.

If the trend for Both CNN and Fox News of failing to meet projections for ad revenues continues, CNN could still emerge as the highest grosser. But it is losing ground fast.

Still, as industry analyst Andrew Tyndall sees it, so far anyway, CNN and Headline News have been able to buck the trend of advertisers following the most eyeballs (see Audience). After years of lagging behind in viewers, ad revenues for CNN and Headline news continue to be comparable to Fox News. This suggests, according to Tyndall, that their audiences continue to be more valuable to advertisers.

Footnotes

1. Because the news channels are smaller entities of larger media conglomerates (see ownership/top media owners list), their financials are typically not released to the public. As a result, media research firms – like SNL Kagan and Veronis Suhler Stevenson, which we use for this report – use a number of network and industry data, including figures from advertisers, industry associations and firms specializing in media audience, to arrive at estimates each year for the channels. As more information is made available every year, estimates are revised. We have used data from the same sources in every successive annual report to maintain consistency.

2. Various market analyst groups offer roughly similar projections for cable revenue and profits. For the sake of clarity here, we will rely on one them, SNL Kagan, formerly known as Kagan Research. It is one of the most experienced media and communications analysis and research firms in the U.S., widely cited in the general press and in trade publications. Kagan provides us with economic profiles for the individual cable news channels.

3. Releasing figures for the fourth quarter of its fiscal year — April to June 2007 – News Corp., the parent company of Fox News, said that its cable networks, which include the news channel along with other sports and regional channels, saw operating income (profits) rise 46%. Seth Sutel, “Cable Networks Boost News Corp. Earnings,” Associated Press, August 8, 2007

4. SNL Kagan’s projections for CNN include only CNN TV (aired in the U.S.) and CNN Headline News because they are sold as a package to advertisers and distributors. They do not include CNN’s other operations.

5. SNL Kagan’s calculation of total net revenue is the sum of subscriber revenue, net ad revenue and other revenue, which is insignificant compared to the other two.

6. Mike Reynolds, “Fox News and Time Warner Do Business,” Multichannel News, January 8, 2007.