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News Networks’ Top Story: Facing the Future

6/09/2006 8:05 PM Eastern

With three cable news outlets passing some important milestones in 2005 and 2006, the industry seems to be in a particularly self-congratulatory mood. But the cable news business faces some very sobering realities, from slower audience growth to the need to attract younger viewers.

As Fox News Channel prepares for its 10th anniversary in October, the onetime upstart is now the clear market leader, with ratings that are double Cable News Network’s. May 2006 marked the 53rd straight month that Fox has topped CNN in the ratings.

Even perennial also-ran MSNBC is getting some good news for its 10th anniversary this year: Through the first 21 weeks of 2006, its average primetime audience in the 25 to 54 demo was up 24%.

Meanwhile, CNN executives, who celebrated the network’s 25th anniversary last year by revamping programming strategies for CNN and Headline News, are now toasting the results of that strategy. Impressive ratings gains in the May 2006 rating period for Headline News’ primetime lineup and for The Situation Room With Wolf Blitzer, Anderson Cooper 360 and Lou Dobbs Tonight on CNN show that the new strategy is already paying off, according to CNN/U.S. president Jonathan Klein.

“We’re very happy with our business,” said Klein. “When you look at news media platforms, only two are growing — cable and the Internet. Audiences are more interested in information than ever, and we’re happy to ride that wave.”

The Bottom Line
How the cable news outlets have fared ($ in millions):
CNN/Headline News 2005 (ACTUAL) 2006 (ESTIMATE)
Revenues 915.2 985.3
Expenses 643.0 675.2
Cash flow 272.2 310.1
Fox News Channel 2005 2006
Revenue 610.8 754.0
Expenses 366.6 428.0
Cash flow 244.2 326.0
MSNBC 2005 2006
Revenue 251.4 268.2
Expenses 238.8 205.6
Cash flow 12.6 62.6
Source: Kagan Research

CASH FLOW GAINS

And why not? Derek Baine, senior analyst at Kagan Research estimates that in 2006, Fox News Channel will rack up $326 million in cash flow and CNN and Headline News will pull in another $310 million. Collectively, Fox News Channel, CNN, MSNBC and Headline News, will produce about $698.7 million in cash flow in 2006, a whopping 32% bounce over 2005.

The power and profitability of 24-hour cable news, though, has drawn unwelcome attention from critics who complain about their reliance on political pundits and inexpensive talk show formats at the expense of objective reporting.

“When Ted Turner started CNN, he said there wouldn’t be any stars; the news would be the star,” said Linda Ellerbee, whose company produced a 2004 documentary on the cable news business, Feeding the Beast: The 24 Hour News Revolution. Ellerbee, who now anchors Nick News and is producing an upcoming special on Katrina for the show, said “the idea was to turn on the camera and let the viewers see what was happening in the world. Now cable news is dominated by stars. They rarely turn on the camera and let you see what’s happening. The world is filtered through the opinions of those stars and talk shows fill up primetime. That’s very entertaining and very profitable but it blurs the line between opinion and fact.”

Audience growth is also slowing. For many years, cable news networks saw impressive growth as they poached viewers from the big three broadcasters’ news shows. While broadcasters saw their viewers fall from 52 million in 1980 to 27 million in 2005, the average primetime audiences for CNN, Headline News, Fox News Channel and MSNBC nearly doubled from 1.28 million in 1998 to 2.32 million in 2001 and 3.22 million in 2003.

But the collective audience for cable news slid to 2.84 million in 2004 and recovered only slightly to 2.85 million in 2005, despite a series of huge breaking news stories, from the Southeast Asian Tsunami to the death of the pope and hurricane Katrina.

2006 AUDIENCE DECLINES

This year, a much slower news period, the declines have once again resumed. Average primetime audiences hit 2.85 million between December 26, 2005, and May 21, 2006, down from 2.93 million in the same period last year.

“The news networks have reached equilibrium where they can’t expect the kind of audience growth they’ve seen in the past,” said Robert Thompson, professor of television and popular culture at Syracuse University. “They have to battle it out with each other for most of their viewers. That is why you are seeing each of them pursuing very distinct programming strategies” and formats that often have more to do with targeting specific audiences than reporting the news, he said.

Some of the biggest changes have occurred at Headline News and CNN, which have fallen well behind Fox News Channel. After experimenting with a series of star anchors and more entertainment-oriented formats, CNN shifted direction again in late 2004, when it hired Klein to run the U.S. networks.

“When we looked around the landscape, we didn’t see a lot of cable networks that were actually covering the news,” Klein recalls. “So we set out to provide the most thorough and comprehensive coverage available. That has clearly differentiated us as a real news channel and paid off in the ratings.”

HEADLINE SHAKEUP

Headline News took an entirely different tact, a radical change to its lineup. “We have two fully distributed news channels and we wanted to create a primetime schedule for each that was complementary,” CNN Worldwide executive vice president Ken Jautz said. “The theory was that as a news group we could offer viewers more choices and then attract more viewers.”

To that end, Jautz said, they consciously decided to hire “non-journalists like Nancy Grace and Glenn Beck” to host primetime shows that were driven by “opinion and personalities.”

“They are not CNN-type shows,” Jautz admitted. “It was a huge risk, but it has paid off,” both in higher ratings and in attracting younger audiences.

Pulling in younger audiences is particularly important, because MSNBC seems to be finally getting its act together. So far this year, MSNBC has been up 14% in all viewers 2 and older and 24% in its target 25 to 54 demos. In primetime, hosts Chris Matthews and Keith Olbermann have shown particularly strong gains.

“We’re at the point where we’re neck-and-neck with CNN in the 25 to 54 demo at 7 p.m. and 8 p.m.,” MSNBC vice president of primetime programming Bill Wolff said.

Like Fox and Headline News, MSNBC’s primetime fare is hosted by personalities who are encouraged to express strong opinions. “All of our programs are slanted,” Wolff proudly said. “The difference is that we have more slants that Fox. We try to differentiate ourselves as having a much wider spectrum of voices.”

THE FOX FORMULA

Far fewer changes can be found at Fox, in part because it seems to have found such a winning formula. So far this year, Fox has 13 of the genre’s top 14 programs in the crucial 25-54 demo, compared to only one on CNN and six programs that average over 1 million viewers a night, compared to only one on CNN.

That success is also paying off on the bottom line. Arriving late to the cable programming game, News Corp. had to pay $10 per subscriber to secure carriage for Fox News Channel when it launched in 1996. Since then, subscriber fees have traditionally lagged behind CNN and Headline News, said Rob Stengel, one of the principals of the Continental Consulting Group and a longtime cable industry executive.

Now that those contracts are expiring, Fox News Channel has announced plans to charge operators $1 per subscriber — three or four times what operators are currently paying for the network. CNN generally gets 45 cents to 50 cents.

Fox’s lead in the ratings and News Corp’s acquisition of DirecTV Inc. certainly strengthen their negotiating position. Few operators would want to lose the most popular news channel to direct-broadcast satellite at a time when they are also facing increased competition from telcos.

Even so, Stengel said, “I don’t see that happening. It’s just traditional cable industry negotiating. You start out with one price and accept something much lower.”

Kagan’s Baine is also skeptical: “The relationship between programmers and MSO has been so contentious in recent years. There is no way that the MSOs can pass along rate increases higher than inflation. They will fight tooth and nail any kind of dramatic increase.”

Fox executives declined to be interviewed.

Fox News Channel’s ascendance faces some looming challenges. All cable news channels skew old, but Fox’s audience is the oldest at 64.6, higher than CNN (60.9 years old), MSNBC (57.2) and Headline News (55.9).

Those demographics pose problems for all cable news channels as they try to replenish audiences and attract younger viewers, who are increasingly abandoning print and television for the Internet. But it is particularly a problem for Fox News Channel because it lags far behind CNN and MSNBC in the online and mobile world.

“The tide of history is going from television to the Internet,” said MSNBC’s Wolff. “It’s like manifest destiny. Finding ways to capitalize on that migration is the most important issue facing the news industry today.”

David Payne, senior vice president and general manager of CNN.com, said the network has been pouring resources into online and mobile products. CNN launched free video in June of 2005 on CNN.com and began offering a subscription online video offering, “CNN Pipeline,” in November.

Subscription content has been a tough sell to online users, Payne admits, but he notes that they are now working to cut deals with cable operators and broadband providers to expand the distribution of the product. One possibility would be to bundle CNN Pipeline with the channels as part of carriage deals.

“We are looking at a number of business relationships that will help drive adoption outside the consumer market place,” he said.

Mark Lukasiewicz, vice president of digital media for NBC News, said that “digital media was part of our strategy right from the inception of the channel 10 years ago and today we’re consistently the top or No. 2 news Web site in the country.”

A joint venture with Microsoft Corp., MSNBC.com currently streams 2 million to 5 million videos a day and their two mobile products, NBC Mobile and MSNBC.com Mobile, serve up about half a million podcasts per month. While most of these efforts are ad supported, NBC News has also cut a deal with Apple Computer Inc.’s iTunes, making it the first news division to sell their content through iTunes.

Measured by unique visitors, MSNBC.com is leading the digital news wars among the cable news nets, with 27.8 million unique users in April 2006. That’s slightly behind Yahoo News (29.6 million) but ahead of CNN.com (21.0 million) and much higher than the other TV news organizations, including ABCNews.com (8.1 million), CBSNews.com (6.4 million), and FoxNews.com (5.5 million), according to April 2006 statistics from ComScore.

But MSNBC.com and Yahoo News are helped by the fact that both are tied to portals that drive traffic, argued Payne. A better measure is the fact that CNN.com leads in terms of the share of time spent on news sites. For 2005, it had 15% of the average monthly share, more than Yahoo (13%), MSNBC.com (9%). FoxNews.com lags far behind with 4%.

“I don’t consider FoxNews.com to be in our competitors set,” said CNN’s Payne. “That is not to say I would discount Fox’s ability to catch up. But at the moment, they’re not in the game.”

MAKING DIGITAL NEWS

CNN and MSNBC executives are also seeing a direct payoff from their digital efforts. Greg D’Alba, chief operating officer of CNN Advertising Sales and Marketing, said that about 80% of the deals they cut last year involved some form of digital media.

“We’re once again poised for double digital revenue growth,” D’Alba said. “The digital platforms are still a small part of the revenue pie,” CNN’s Payne said. “But being able to market all of those platforms is a huge competitive advantage.”

 

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