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"Silicon Valley" actors Thomas Middleditch, T.J. Miller, Zach Woods, and Josh Brener at an event in Los Angeles in May 2016. Jeff Kravitz/FilmMagic for HBO
Commentary

Forget the Ratings, Television Is a Growth Business with Record Profits

Jan 17, 2017

On Dec. 14, 2011 the top broadcasters in the U.S. renewed their long-standing TV rights agreement with the National Football League. The deal, which kicked in for the 2014 season, promised billions of dollars in future revenue to the NFL, in exchange for what the networks have always considered to be guaranteed viewership. "No other franchise delivers ratings the way an NFL game does,” CBS CEO Les Moonves said in a statement at the time.

Six years later, football games remain some of the most-watched programming on television. But with NBC, CBS, Fox, and ESPN paying roughly $5 billion this year to broadcast games, ratings weakness early in the 2016-2017 season sparked a slew of negative headlines. “There is a lot of noise about declining NFL ratings,” 21st Century Fox CEO James Murdoch acknowledged on the company’s earnings conference call in November.

“I do think that ratings generally are falling for everything,” Mike Cramer, former president of the Texas Rangers and Dallas Stars, tells me in an interview. “It certainly appears younger viewers are using other devices,” said Cramer, who runs Texas Program in Sports and Media at The University of Texas at Austin.

Indeed, 223 million people in the U.S. now have smartphones, according to eMarketer. That’s more than two-thirds of the population. It’s also up from 93 million Americans—or less than a third of the population—when TV’s big players renewed their NFL deal. In addition, the collective user base of Facebook, Twitter, and Instagram in the United States has increased by more than 60% since 2011. And Netflix’s user base has grown 125%, from 22 million U.S. subscribers to roughly 49 million.

Despite those headwinds, TV executives can point to an encouraging fact when they gather this week in Miami for the National Association of Television Program Executives' annual conference: Television remains a growth business. “Entertainment companies are all posting record profits,” Alec Berg, executive producer of HBO’s Silicon Valley, says. “What has changed in TV is the way they make money,” says Berg, who earlier in his career wrote and produced for NBC’s Seinfeld. “There used to be a few giant stacks of money. Now there are dozens of smaller stacks. But the total amount of money is much higher.”

TV advertising remains the industry’s Trojan horse. According to PwC, U.S. ad revenue is expected to rise to $81.7 billion in 2020, up from $69.9 billion in 2015. But networks are also benefiting from lucrative retransmission agreements they negotiated with pay TV providers. Those fees are expected to hit $11.6 billion by 2022, according to market researcher SNL Kagan. And although streaming services like Netflix are increasingly producing their own television shows, they remain big buyers of licensing rights to network TV shows.

“If you have a hit network TV show, you have a massive opportunity to make a lot more money from it internationally, as well as through second, third and even fourth runs on other channels and platforms,” says Mark Gordon of The Mark Gordon Company. Gordon has produced some of television’s biggest hits, including Grey’s Anatomy, Ray Donovan, and Criminal Minds. More recently, he’s enjoyed success with Quantico and Designated Survivor. “Take our show Criminal Minds, for example—you can’t flip through your cable guide today and not see it playing somewhere.”

Given the modern-day recipe for success in television, top producers say reaching quick conclusions about a show’s hit status based on traditional ratings can be misleading. “The definition of a hit has absolutely changed,” notes Gail Berman, CEO of production studio The Jackal Group. During her time as Fox’s president of entertainment, Berman developed top shows including American Idol, 24, and Family Guy. “Factors now include linear same-day ratings, delayed and cross-platform performance, critical acclaim and press/fan fervor. To be a ‘hit,’ a show doesn’t need to kill it in every category, but it needs to over-perform in several. As we know, Netflix has hit shows, but no one knows how they actually perform from a ratings standpoint.”

And if there was any doubt television remains one of the most popular gathering spots for big events, look no further than the U.S. presidential election campaign. November’s U.S. election-night coverage was the most watched in the history of cable news.

“We are still in a world where the spike from event programming—live or otherwise—is valuable not only because it increases delivery to advertisers, but also because it increases circulation for the networks, who are running promos for their other shows,” says Berman, who recently produced Fox’s remake of The Rocky Horror Picture Show. “The event nature of Rocky Horror delivered Fox its biggest Thursday audience in years.”

For the most part, television’s most talented creators have yet to be lured away by better offers on newer storytelling platforms like virtual reality. "I’m curious about virtual reality,” Breaking Bad creator Vince Gilligan tells Fortune in an email. “I’ve tried it—it’s a marvelous technology that allows its users to have some truly amazing experiences." Gilligan is currently working on the third season of his latest show, Better Call Saul. “But I’m not clear on its potential as a narrative tool," he adds. "Personally, I wouldn’t have the first clue how to tell an old-fashioned story in VR. Maybe that’s not the point of it. Perhaps it’s best as a freeform experience, like a ride on a rollercoaster or a visit to the Grand Canyon.”

What is happening, though, is that creators are increasingly migrating to non-advertising–driven networks. “As the last remaining form of distribution that’s pegged to ad dollars, there’s constant pressure from broadcast networks for a show to appeal to the largest number of eyeballs,” notes Alec Berg, whose show Silicon Valley is entering its fourth season on HBO. “Where it affects them is in the form of fear and meddling from the executive side. The way writer/producers get noted to death by sometimes literally fifteen executives is appalling and pointless. The highest number of HBO folk I’ve ever had in the same room on Silicon Valley is three. Usually it’s one or two. They give concise and clear notes, are incredibly smart, helpful and deferential, and let us get back to work.”

When asked if Seinfeld would have found its footing in today’s broadcast television landscape, Berg promptly responded: “Absolutely one hundred percent not. No chance. Zero.”

Netflix and Amazon have been building reputations as creator-friendly distributors. Together the companies have garnered 17 Golden Globe nominations for this year’s awards. Five years ago, they collectively had none. “Hit shows are driven by great writing and stars, and for broadcast TV, it’s more difficult to secure the best writers and top-tier actors,” Gordon says.

And as Amazon lures more creators to develop standout original shows, it’s also selling viewers add-on video subscriptions for services such as Showtime and Starz. “Amazon is a modern-day aggregator,” says Bruce Leichtman, president of media industry research firm Leichtman Research Group. “They’re aggregating content much the way pay TV has always done. And then selling it in bundles.”

That shift is arguably more important to watch than the day-to-day ratings trends on broadcast television. It’s one of the key reasons why, for example, AT&T’s DirecTV recently unveiled DirecTV Now, a cable-like internet streaming service targeting younger viewers, which is meant to be watched on mobile devices such as smartphones or tablets. Rival Dish Network launched its own over-the-top television service, Sling TV, in 2015.

If pay TV operators can successfully bridge the gap widening between older and younger TV viewers, it could allow the traditional TV business to remain in growth mode. Failing that, you can expect more networks to lay the groundwork for taking their content directly to the consumer. Disney, for example, announced last August it would spend $1 billion to acquire a minority stake in MLB Advanced Media’s BAMTech, a leading streaming service. “It gives us an interesting opportunity to create product that is more user-friendly and, therefore, is likely to gain more consumption,” Disney CEO Bob Iger told analysts during a conference call in November.

Jon Erlichman is a Toronto- and Los Angeles-based contributor. He is television anchor with BNN, Canada’s leading business news network. He is also a correspondent and anchor with CTV National News, the country’s most watched newscast.

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