2005 Annual Report - Cable TV Economics

In trying to assess the main economic trends in cable heading into 2005, three themes emerge.

• Looking back, 2004 marked the first year all three cable channels earned sizable profits.

• Despite being No. 2 in ratings, CNN continues to lead cable news in economics, and there is some evidence that its brand is more highly regarded in advertising circles than Fox's. Nevertheless, its financial lead over Fox appears to be shrinking rapidly.

• Even if its audience growth is shrinking, Fox's profits should continue to grow as agreements limiting its licensing fees begin to expire.

To maintain its leadership in profits, CNN clearly must do something, either by changing its content to attract more viewers or by creating new revenue sources. It also faces the challenge of deflecting the allegation that it is merely a liberal network, lest it lose its prestigious reputation among advertisers. The most basic message about cable news economics, however, is that for short term, this is an increasingly profitable business across the board.

Profits

The most obvious landmark over all in 2004 was that all three news networks earned significant profits for the first time.

MSNBC, which lost money from its inception in 1996 until 2002 and basically broke even in 2003, finally broke through in 2004 and generated profits of some $32 million, according to Kagan Research.

What happened? Part of MSNBC's success is linked to the fact that it carried ads for the Olympics. NBC was able to assign ad spending across its cable network group, and the high ratings garnered by the Games ended up benefiting MSNBC.¹

The success should be kept in perspective. The profits are still less than 10% of what CNN makes and 12% of Fox. Yet finally, MSNBC can claim to be moving in the right direction financially.

The second theme that stands out heading into 2005 is that CNN remains dominant economically, but Fox is making further strides in closing that gap.

Consider this: In 2003 Fox's profits were 40% less than CNN's. In 2004 it is estimated that the gap narrowed to just 20%, according to Kagan Research.

Put into dollars, CNN was projected to earn $337 million in operating or pre-tax profits in 2004. Fox News was projected at $274 million. MSNBC was put at $32 million.

The shrinking gap in profitability between CNN and Fox News -- about $60 million -- obscures, however, some other facts about the finances of the two networks that are important to understand.

Cable News Profitability

1997 to 2004

Design Your Own Chart

Source: Kagan Research, www.kagan.com

When it comes to revenue, CNN brings in much more than Fox News. In 2004, Kagan Research estimated, CNN would end up bringing in $887 million in overall revenue vs. $539 million for Fox.²

The difference is that CNN supports a much larger infrastructure. Kagan puts its total expenses at $550 million in 2004 and Fox News's at less than half that, $265 million. CNN is supporting a much larger newsgathering operation, with at least 26 foreign bureaus to Fox's five, and more reporters as well. CNN is also providing content to more outlets, including Headline News and CNN's international networks.³ (See Newsroom Investment.) As a consequence, a larger share of CNN's revenue, 62%, goes to cover expenses, compared with 49% of revenue for Fox News. That allows Fox to make a profit with lower revenues than CNN.

The disparity between revenues and profits is worth considering for a moment. One might argue that the revenue figures are more significant than the profits because they also indicate something about the depth of what CNN is offering. Does the greater expenditure on newsgathering suggest a qualitative benefit to advertisers? Or is there no value in demographics, loyalty, cume, or other measures from having more bureaus, more reporters, and more newsgathering reach? Does Fox simply succeed by having a more popular lineup of talk-show hosts?

In only six years on the air, Fox News has gone from the bottom of the cable news ratings to the top. It has also gone from losing $30 million in 2000 to making almost $190 million in profits for News Corp. in 2003. But it's not making the highest profits of the cable news channels; nor is it bringing in the most revenue.

MSNBC, meanwhile, had estimated expenses of $254 million in 2004 -- about the same as Fox's -- but its revenue is much smaller, $286 million, meaning that expenses ate up 89% of revenue. (That is true even though its newsgathering expenses can be amortized across the NBC networks.)

The expense numbers also help explain something about the marketing of Fox and MSNBC.

MSNBC tried to market itself by building its schedule around content drawn from the NBC News library and other sources. NBC reporters have been commonly featured on MSNBC since its debut, but the network's most well-known personalities have not really been used to establish the channel's identity. The network's strategy seemed to be based on transferring the "aura" of NBC News to MSNBC, but that was never pursued aggressively. Anchors like Matt Lauer and Jane Pauley showed up on MSNBC, but usually in peripheral roles, such as providing voice-overs for programs built around old NBC News footage. In fact, it could be argued that the most notable migration has been in the opposite direction: in 2002, NBC decided to start a Sunday morning talk show built around the "Hardball" host Chris Matthews.

When Fox News began in 1996, there was no way owner Rupert Murdoch and the channel's president, Roger Ailes, could compete with CNN in pure numbers of reporters, bureaus and sheer resources. It could not piggyback on a major network news organization, as MSNBC could, nor did it have a significant library to build on. Fox had to compete for viewers another way.

So Murdoch and Ailes built a different product. To begin with, they understood, or soon came to understand, that they might have great appeal in prime time to the same audience that gravitated during the day to talk radio. To do that, they would have to play, as talk radio does, as a conservative alternative to a mainstream press that was perceived as part of a liberal establishment.

They also had some news personalities who were already well known, such as their Washington bureau chief, Brit Hume, and the former Current Affair host, Bill O'Reilly, and contracts with commentators like Fred Barnes.

Fox News hit on a formula of building shows around anchor personalities rather than a universal news desk, livelier graphics and pacing, heavy focus on a few hot-button topics, particularly Washington and politics, and an appeal to its audience in part through ideological affinity. The marketing slogans "Fair and Balanced" and "We Report, You Decide," seemed to many to be code for another message: The competition isn't fair. It's biased.

In short, Murdoch and Ailes turned necessity - limited resources and a possible conservative reputation - into a virtue. They couldn't compete against either CNN or MSNBC (backed by NBC) on sheer muscle when it came to gathering, verifying and synthesizing information. They played instead to their own potential strengths, and toward what they perceived as CNN's potential vulnerabilities - being the establishment network that lived and died by events but had rarely been able to create distinct shows. The strategy may well have been the best one available from a business point of view. Fox developed a cable news network whose appeal was not built mainly on the size of its newsgathering resources.

Now, as Fox has grown, it appears gradually to be building up those resources, but as the expense numbers show, they are still not comparable to CNN's.