Cable TV Economics

To fund operations, cable networks depend on two revenue streams: advertising and license fees, money paid by the cable systems that carry the channel. The fees are negotiated on a per-subscriber basis irrespective of how many subscribers happen to watch the channel. Most cable channels market toward specific niches, and cable news’s sales pitch to potential advertisers has been that news appeals to just such a specific population demographic — well-educated and affluent people. This niche positioning largely determines advertising rates. The sales pitch to cable channels has been the indispensable nature of the content: no subscriber would seriously consider not having a 24-hour news option.

Historically, cable news channels fall between general-interest cable channels and broadcast networks in how much they can charge advertisers. On one hand, their rates can’t be as high as those of the broadcast networks because cable channels have such a narrow target demographic. On the other hand, they do compete with general-interest cable channels (with much larger audiences) because news consumers are seen as a hard audience to reach through television.

Cable News Revenues & Expenses, 2005

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Source: Kagan Research, "Economics of Basic Cable Networks 2006", June 2005

CNN figures include CNN Headline News, except subscriber revenue

Advertising Revenues

Even with overall audience growth slowing, market researchers continue to be bullish about cable’s financial prospects. Kagan Research predicted that cable networks as a whole had rebounded from their advertising market downturn following the 2001 recession and were poised for “double-digit growth as far as the eye can see.”6

CNN, the first cable news channel, has always received the most advertising revenues,7 but 2005 was expected to see the first shift in the balance of power: Estimates were that Fox News’s advertising revenues would surpass CNN’s. Indeed, in June 2005, media reports on the “spring upfront” season (the annual springtime period when advertisers buy commercials for the rest of the year) said news channels were able to increase their ad revenue commitments, with Fox News at the higher end of the scale.8

The report was supported by the projections released by Kagan Research. They estimated that Fox News would make $336.1 million in advertising revenue, a leap of 31% from $257 million in 2004. CNN was projected to make less — $334.9 million, up just under 6% from 2004 ($317 million).

Net Ad Revenue of Cable Channels

2000 - 2005, in $ Millions

Source: Kagan Research, "Economics of Basic Cable Networks 2006," Kagan Research, LLC, June 2005 (Net Ad Revenue refers to revenue generated by a network after discounting the commission that goes to ad agencies)

Thus, Fox News’s ad revenue growth was projected to be more than four times that of CNN. While both channels were expected to increase ad revenues, Fox News was expected to see an increase of $79 million, versus a much smaller $17.5 million increase for CNN.

Also, for the first time ever, Fox News was expected to bring in more total advertising dollars than CNN. While the lead is small (just $2 million), it may mark an important shift in industry dynamics. CNN’s historical position of being the most lucrative news channel for advertisers may quickly erode as they become attracted to Fox News’s growing audience numbers.

License Fees

CNN is losing the lead position it traditionally occupied in license fees, too.

License fee contracts are usually long-term — even up to ten years, as in the case of Fox News. In 2005, that meant Fox News was still locked into contracts it signed when it launched in 1996. Consequently, the revenue per subscriber it received was far less than CNN’s. In 2005, CNN was expected to receive an average of 44 cents and Fox News 25 cents per subscriber per month — a marginal difference of one cent more per subscriber for CNN from the previous year and two cents more for Fox News. Based on those rates, Kagan Research projected a total increase for the year in license fee revenues of $16.4 million for CNN and $27.8 million for Fox News.9

Cable News Monthly Revenue per Subscriber

1997 - 2005, by Channel

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Source: Kagan Research, "Economics of Basic Cable Networks 2006", June 2005

Negotiations with cable distributors for the 2006 contracts are certainly in Fox News’s favor. Industry sources told the trade publication Multichannel News that the licensing fee of 23 to 25 cents per subscriber as of October 2005 could quadruple to $1 a month — a potentially astonishing increase in the current climate. The thinking is that in the face of competition from News Corp.’s own satellite TV provider DirecTV and potential new entrants like SBC and Verizon, cable operators are not likely to want to drop Fox News, even at four times the price.10

News Corp.’s purchase of DirecTV in 2004 has proved a boon for Fox News. It is no longer dependent on the cable system of Time-Warner, CNN’s sister company, for distribution in key markets. The purchase also gives the news channel leverage over cable operators in general.11

At MSNBC, $114.7 million in 2005 would come from advertising, an increase of $3.6 million. That is a better picture than in 2004, when its advertising revenue of $111 million reflected a loss of about $12 million over 2003.

The rest of the revenue increases would come from license fees. MSNBC’s license fee revenues have been generally stable. In 2005, the channel was expected to generate $9.7 million more in subscriber revenues, making a total of $144.2 million, up from $134.5 million in 2004.

MSNBC has always argued that its revenue figures must also be seen in the context of advertisers who are buying time on both MSNBC and NBC News programs under package deals. The news channel has the advantage of drawing on parent NBC’s extensive news operations, which helps the news division as a whole amortize expenses. In reality, though, that has done little to paint a solid financial picture for the channel standing alone. The NBC news division as a whole is profitable.

There is no denying that MSNBC must improve its finances if it is to remain a viable player in the cable news market. It will be worth keeping an eye out for what impact the changes in management will have on the channel in 2006.