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Economics

Economics

By the Project for Excellence in Journalism

Introduction

Record audiences for cable news translated into a strong financial performance in 2008.

Four points stand out:

Profits and Revenues

The final 2008 figures for cable were not released until after this report was released, but most industry analysts projected cable news channels to increase profits at a substantial rate in 2008, despite the ailing American economy.

According to estimates by SNL Kagan, a leading financial research firm, the three major cable news channels were projected to earn a combined $1.05 billion in pre-tax profits in 2008, or 33% more than the $791 million estimate for the year before.

The projections are subject to revision, and even in strong economic times are often adjusted significantly after the year ends. The turbulent economy makes 2008 projections even more uncertain; the latest, revised projections were issued in December, but the full impact of the recession on cable may not be known for some time.1

Still, analysts expected cable television and the Internet to weather the downturn better than other media.

CNN, whose figures include HLN, was expected to have the biggest growth in profits and remain the profit leader of the three channels. For the past three years, Kagan had projected that Fox News would overtake CNN in total dollars, only to have the projection fall short when actual profits were reported; 2008 was the first year in several that analysts had forecast that Fox News would not earn more than CNN.

Kagan’s December projections had CNN and HLN earning $470 million in 2008, up 35% from the $349 million they earned in 2007.  Revenues were projected to grow 15% to $1.19 billion, up from $1.04 billion the year before.

Fox News was not far behind with projected profits of $447 million in 2008, up 30% from $343 million in 2007.

Not only was 2008 the first year since 2005 that Fox News was not projected to overtake CNN in profits, but it was also the first year in that time period that the channel would not see the greatest year-to-year percentage gain. Fox News revenues were projected to grow 22% to $1.06 billion up from $865 million in 2007. That was a greater percentage increase in revenue than expected at either CNN or MSNBC.

Cable News – Profits
2007 vs. 2008, in Millions of Dollars

Channel 2007 Projected 2007 Revised (difference) 2008 Projected
CNN & HLN 336.9 349 (+12) 470.2
Fox News 347 343.2 (-4) 447.4
MSNBC 108 109.7 (+2) 135.4

Source: SNL Kagan, a division of SNL Financial LLC
Note: Numbers are estimates. Projections for the year 2007 were made in March of that year, while projections for 2008 arrived in December of that year.

MSNBC also was expected to post a significant jump in profit, though less of a jump than its rivals. Projections called for profits of $135.4 million in 2008, up 23% from $109.7 million the year before. The network earned 28% more in 2007 than in 2006.

After first turning a profit in 2004, MSNBC has had its profits multiply rapidly, and in 2006 it earned more than six times (565%) what it had in 2005.

Revenues were projected to grow 15% in 2008 to $347 million, up from $301 million in 2007.

Cable News Profitability

1997 – 2008, by channel
Design Your Own Chart

Source: SNL Kagan, a division of SNL Financial LLC
CNN figures include CNN Headline News; all figures are estimates

Cable News Revenue (Estimated)
2007 vs. 2008, in Millions of Dollars

Channel 2007 Projected 2007 Revised (difference) 2008 Projected
CNN & HLN 1,024 1,035.3 (+11) 1,197,7
Fox News 834 864.7 (+31) 1,058.5
MSNBC 299 301.4 (+2) 346.6

Source: SNL Kagan, a division of SNL Financial LLC

Revenue Streams

Cable revenues come from two streams: advertising and subscriber fees. Even if the economic downturn leads ad revenues to fall short of predictions, subscriber fees paid by cable systems are expected to remain stable.

This may mean that over the next year subscriber fees may play a more important role in determining which cable channel comes out on top. As discussed below, CNN has traditionally had higher fee income. Fox News, though, recently raised its fee rate to levels comparable to CNN’s and is beginning to reap those benefits.

Cable News Revenue Streams (Estimated)

2008
Design Your Own Chart

Source: SNL Kagan, a division of SNL Financial LLC
CNN figures include HLN

Subscriber Revenues

Subscriber fees come to cable channels indirectly from viewers. The channels are paid the fees by cable systems (in exchange for their programs), which in turn recoup that money in cable bills to consumers. The amounts of those fees are negotiated with the cable systems based on an estimate of how many subscribers the system will have during the life of the agreement.

The highest fees are typically paid for sports and general entertainment channels. The highest is the $3.26 per subscriber per month, commanded by ESPN.

Among the news networks, CNN, the oldest all-news cable channel, has drawn the highest fees. In 2008, CNN received a fee equal to 47 cents per subscriber. It was projected to make $550 million in fees, a 6% increase over the previous year.

Fox News, however, was catching up – a reflection of its ratings growth it enjoyed over recent years. It was charging an average fee estimated to equal 42 cents per subscriber, a 7-cent jump from 2007.

Fox News increased its subscriber revenue by slightly less than a quarter, the biggest jump of the three networks. In 2008, it was projected to get $475 million, a 22% increase over the $389 million in 2007.

The reason behind the rise in Fox News’ fees is that many of its contracts came due in recent years. With those contracts looming, Fox News made a concerted effort to negotiate higher fees from the cable systems, having established itself in the cable news world. By virtue of the increase fees, the channel was finally beginning to reap the benefits of its ratings growth. Long-term deals call for Fox News’s fees to eventually rise to 75 cents, according to Multichannel News.2

When MSNBC started in 1996, its fee per subscriber was 13 cents a month. In 2000 it inched up to 15 cents, where it now remains, the lowest among the three channels by a significant margin. That reflects its third-place ranking in ratings, although its ratings gains in recent years could eventually cause its fee to creep up.

MSNBC was expected to see 6% growth in license-fee revenue, $171 million in 2008, up from $161 million the year before.

In 2008, the three cable news channels were projected to have nearly the same reach, with 90 million to 100 million subscribers each. Fox News was projected to have an average of 94.3 million subscribers, MSNBC was projected to average 92.1 million, and CNN, 97.5 million.3

Cable News Monthly Revenue per Subscriber

1998 – 2008, by channel
Design Your Own Chart

Source: SNL Kagan, a division of SNL Financial LLC
CNN figures include HLN

Advertising Revenues

The other big revenue source for cable channels is advertising. Cable news channels do not earn as much from advertisers as the broadcast networks or some sports or niche entertainment networks. In large part, this is because the ratings for cable news for any one program are fairly low. The highest-rated cable show, Bill O’Reilly, is still only about a quarter of that of the lowest-rated evening network newscast, the CBS Evening News With Katie Couric, for instance, and most cable programs are only a fraction of that.

Advertising Costs on Television
2007, Select Networks (Cost per Thousand Viewers)

Cable Channel CPM
ESPN $13.51
Golf Channel $11.77
MTV $10.56
Fine Living $8.69
Comedy Central $7.50
TLC $6.28
CNN $6.25
Lifetime $5.05
Weather $4.40
E! $4.27
Fox News $4.06
MSNBC $3.46

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 a 30-second ad (termed CPM or cost per thousand in the advertising industry).

For example, if Nielsen estimates that 1 million people watch Fox News on a given day, a 30-second ad would cost $4.06 times a thousand (or $4,060 per ad). These costs vary depending on the show and day part.

In general, analysts view advertising as having greater potential than subscriptions for long-term growth. That is because it is harder to sign new cable subscribers, or get existing ones to pay substantially more each month for the cable bill, than to generate more ad revenue.

All the cable news channels posted ad revenue gains in 2008 of about 30% from 2007. But Fox News was projected to maintain the lead it developed for the first time in 2007 over CNN/HLN.

Cable News – Net Ad Revenue*
2000-2008, in Millions of Dollars

Channel 2000 2001 2002 2003 2004 2005 2006 2007 2008
CNN & HLN 412.8 445.9 359.8 399.2 317.4 375.9 399.0 427.5 556.3
Fox News 51.2 59.9 109.8 208.6 257.0 345.3 388.3 459.2 566.9
MSNBC 138.8 115.7 98.4 113.1 111.0 106.4 116.6 135.4 172.7

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. Figures for 2008 are projections.

A year earlier, when the final numbers for 2007 arrived in March 2008, they showed that, after years of analyst projections that Fox News would beat CNN in ad revenues, it had finally done so. In 2008, the new projections expected Fox News to stay ahead. Fox News was expected to bring in $567 million in advertising revenue, a growth of more than 23% over the $459 million in 2007.

Kagan projected that CNN would end the year with $556 million in ad revenues, up 30% from $428 million in 2007.

MSNBC, which has the smallest share, did better than expected in 2007. And analysts projected that ad revenues would grow by 28% to $173 million, in 2008, up from the $135 million the year before.

Some of these gains came from political advertising in a high-spending year that benefited a number of media sectors. The cable news channels together took in 200% more campaign advertising revenue in 2008 than in 2004.

Political advertising spending across media sectors was tallied at $2.5 billion to $2.7 billion by the ad measurement company TNS Media Intelligence. Television, particularly local stations, which offer targeted geographic audiences, took the largest share, $2.2 billion, which is consistent with recent elections. National cable, including the cable news channels, which targets demographic groups more effectively, also did well. Combined with the national networks, it received the second-largest amount of political ad dollars, approximately $200 million, according to Evan Tracey, president of TNS’s Campaign Media Analysis Group.4 The rest of the ad spending went to print, radio, online and local cable.

Among national cable networks, the news channels did particularly well. Tracey’s group estimated in September 2008 that the cable news channels would bring in a combined $30 million to $35 million in campaign advertising by the end of the election cycle. When compared to the $11 million taken by these channels during the 2004 race, the percentage growth is more notable than the overall amount.5

The news channels were also reported to have benefited from issue-driven advertising that piggy-backed on the election season. According to Tracey, interest groups like AARP, the American Cancer Society and the Gates Foundation, as well as the alternative-energy advocate and oil tycoon T. Boone Pickens, spent tens of millions of dollars, much of which flowed to the cable news channels.6

Three elements may have helped cable increase its political advertising income. First, cable programming was so heavily focused on the election campaign that advertisers considered it a particularly good place to reach voters. Tracey noted that cable news attracts the type of audience most inclined to make political donations, and this is part of the appeal for campaigns when they decide where to place ads.7

Second, cable now competes in the local ad markets of many cities, taking some ad revenue away from local television stations (see Local TV chapter for more on this). And with lots of candidate money to spend but limited places to spend it, cable may have benefited from the overflow dollars that could not find room on local broadcast television.

Third, the cable industry’s inherent ability to reach niche audiences makes it an ideal venue for political campaigns that wish to micro-target their messages to certain audiences. For example, in July 2008, the advocacy group MoveOn.org Political Action, which supports liberal candidates, paid for a pro-Obama cable television ad on MTV and Comedy Central. The ad, entitled “It Could Happen to You,” featured Rider Strong of “Boy Meets World” and Amber Benson of “Buffy the Vampire Slayer.” The ad was designed to use humor to appeal to the two channels’ generally younger audiences.

Footnotes

1. In past years, Kagan estimates were provided in March of the year in review, nearly a year before the report is released. This time, Kagan revised its figures on a monthly basis, the latest of which arrived at the end of December 2008.

2. Mike Reynolds, “Time Warner Cuts News Corp. Deal,” Multichannel News, January 2, 2007

3. Cable subscribers do not necessarily translate into cable viewers, of course, and not all viewers of cable news are subscribers. This is why the cable news channels, though roughly equivalent in number of subscriptions, do not generate the same amount of advertising revenue.

4. Claire Atkinson, “2008 Political Ads Worth $2.5 Billion to $2.7 Billion,” Broadcasting & Cable, December 2, 2008

5. Robert Marich, “Cable Networks Early Election Ad Winner,” Broadcasting & Cable, September 15, 2008

6. Evan Tracey, “Election Year Rains Millions on Media Outlets,” Advertising Age, July 31, 2008

7. Robert Marich, “Cable Networks Early Election Ad Winner,” Broadcasting & Cable, September 15, 2008