TV Networks Adjusting to New Economics

As if responding to some cosmic and mysterious signal, some of America’s smartest investors (Warren Buffett and Laurence Tisch), shrewdest corporate executives (Jack Welch of General Electric, Tom Murphy of Capital Cities) and most flamboyant entrepreneurs (Rupert Murdoch and Ted Turner) are either buying into television or increasing their involvement in it. With the sale of ABC now completed, GE’s purchase of NBC pending and Tisch’s Loews Corp. increasing its stake in CBS, a tectonic shift clearly is occurring.

Yet much of the talk in financial circles treats the upheaval as an almost routine matter of cash flow. And comment elsewhere focuses narrowly on the present--pondering whether network brass will lose their limousines or how ABC will counter-program NBC’s Bill Cosby.

But the shock waves in television, set off in 1984 when the Federal Communications Commission expanded limits on station ownership, go a lot deeper than that. What we are seeing in broadcasting is the kind of change that deregulation brought to airlines and banking.

As in those other industries, economics is forcing change. The business of television, wrote Les Brown 15 years ago in his landmark book “Television: The Business Behind the Box,” consists of delivering the audience to the advertiser. The three major networks, through their affiliated stations nationwide, provide the chief delivery service. But lately advertisers have been balking at the networks’ rates. And smaller, fleeter operators have been delivering audiences at lower prices.

The networks are big--$8.3 billion in ad revenue last year--but stalled. Revenue was off 3% last year and is down so far this year. Meanwhile, the number of independent television stations has grown to 283 in 1985 from 120 in 1980, and their advertising revenue has more than doubled to $2.5 billion in that time. Moreover, barter syndicators, who trade programming at cut rates to local stations in exchange for advertising time--which they then sell to national advertisers--did $530 million of business last year.

That data appears in the annual report of the newly named Capital Cities/ABC Inc., in a discourse on television over the signature of Thomas S. Murphy, the company’s chairman. To get a glimmer of understanding of where trends are going in TV these days, you could do worse than examine Cap Cities, the company that last year bought ABC.

A $1-billion (revenue) owner of TV and radio stations, newspapers and magazines--even before it merged with ABC--Cap Cities’ headquarters staff consists only of a couple of dozen people, including Murphy. Its station managers, in Houston and Philadelphia, Tampa and New Haven, have always made their own programming decisions, geared their fare to local audiences.

Why is that important? Because it contrasts with the centralized programming staffs of the networks, which in recent years have written fat sports events contracts that will never earn a return because the events can’t attract the projected audience and hundreds of millions worth of entertainment programming that may never recover its cost. Advertisers have cooled toward programs that cost $1 million an episode to make. The limos that everyone talks about are only a symptom; the networks’ disease is obesity.

But they will slim down and more in the new environment. We’ll see a shift to specialization and localization in programming. We can discern the outlines of it if we think of the magazine business, where Life and Look gave way to such as Sports Illustrated and Money that could deliver a more specific audience. “That’s already occurring with such cable channels as ESPN and Cable News Network,” notes analyst John G. Nelson of the Brown Bros., Harriman investment firm.

There will be more attention to local preferences in network programming, diverse programs for diverse markets. That’s where the new men see their business. “The strength of news and other local programming is the key factor in our consistent success,” writes Murphy in his discourse on television.

Why is this happening? Because the people are demanding it. They are not watching less television, but for years they have been watching less network television. So change is coming. ABC founder and builder Leonard Goldenson undoubtedly saw this and so sold his company to Cap Cities, an outfit attuned to the new environment.

As it happened, one of the entrepreneurs responsible for creating that new environment, Ted Turner, was sitting in Cap Cities’ reception room the other day. (Turner didn’t say if he was there to buy or sell.) Asked why a lot of smart people were buying into television, Turner replied: “Power. They want power.”

Perhaps. But as powerful as the networks still are, it doesn’t mean a thing if the people don’t watch the programs.