Thriller on TV: The Future of Networks

The stock market cheered when CBS announced that it would show hit movies next season--”Born on the Fourth of July” and others--thanks to a deal that it has signed with MCA Universal Pictures.

CBS stock rose $2.75 a share to $180.125 on Monday--although it slipped a notch Tuesday to $179.50--because investors saw movies helping CBS recover from its dismal showings in the ratings, where once again it is running third.

However, skeptics questioned whether even hit movies could lift TV ratings these days. The world has changed, and people don’t tolerate commercials in movies when they can rent them for $2 and watch without interruptions for ads. Indeed, the 10 movies CBS is paying almost $60 million to show will first be sold to the videocassette market, where a single film such as “Born on the Fourth of July” can bring in half as much as the whole CBS deal.

The comparison is yet another reflection of the fading stature of the TV networks, CBS, NBC and ABC, which have lost millions of viewers to VCRs and cable and independent stations and now attract 65% of the national audience, down from 90% 10 years ago. Fewer viewers mean less money. Network operating profits have declined, particularly so in the case of CBS.

And the outlook, suggests a highly regarded financier who structured deals for some of the biggest names in television, is gloomy. The value of networks could keep going lower, the financier mused in a recent private conversation.

Which is curious because other smart business people think differently. Four years ago some big names bought into the network business. Investor Laurence A. Tisch acquired a controlling interest in CBS, edging out Ted Turner. Capital Cities, aided by investor Warren Buffett, bought ABC. Chairman John Welch’s General Electric Co. bought NBC.

And note that when the big names bought into TV in 1986, profits were already slipping as rising program costs ran into advertiser resistance. But that is typically just the time smart money buys into anything, when the economics of the business are changing.

Tisch and the shrewd executives who run Capital Cities and GE foresaw much of the networks’ loss of viewers--but they saw it as a period of transition that they could survive by cutting costs. In the end, even though competitors such as cable had taken some viewers, the network owners would emerge owning properties of great value--the premier, mass media in the enormous and vibrant U.S. market.

Were they correct in their vision or did they underestimate the extent of change and competition?

The answer is they correctly foresaw today’s conditions, but maybe not tomorrow’s.

For the next few years, the networks are likely to see a boost in profits. They will soon benefit from a change in regulation allowing them to share in the syndication of programming to independent stations in the United States and overseas. That can mean big money: more than $1 million per half hour for old episodes of Three’s Company, for example.

And ad revenues are running strong this season because advertisers recognize “that if you want to reach a lot of customers, the networks are still the mass medium,” says analyst Alan Gottesman of Paine Webber.

Sure, it’s a tough business. In a way, the trend in television is toward radio, where there is programming for individual tastes, listeners twirl the dial and market shares for even leading stations are low. That’s not much different from what a cable-television household with 40 channels has become.

But the networks can deal with that by presenting premier attractions: sports and hit movies on CBS, individual stars on NBC or original programing on ABC.

The real challenge, however, will come later in the decade when the technology of entertainment and communications shifts massively. That’s when television will be transformed from a passive, watch-me medium to an interactive medium. Viewers will order up what they want to watch, and more. They will be able to explore a world of video products as they now do a library, and they will be able to interact as in a lecture hall, office or coffee shop.

Allowing them to do all those things will be a quantum leap in video capacity. Direct broadcast satellite, which is in the experimental stage even now, can bring a tremendous increase in channels and choices.

And later in the decade the coming of fiber-optic cables will bring so much communications capacity to the home that today’s telephone and television will use up only one-thousandth part of it, say experts.

In his new book “Life After Television,” author George Gilder envisions an interactive medium--combination TV sets and personal computers--that seems ill-suited to companies thinking only about providing programming for prime time.

Still, the networks could adapt. A TV network, after all, is a programming and distribution business--a movie studio by another name. If the networks adapt to change, as the movie studios have done before them, they can participate in that technological future. If not, they will vanish, one way or the other. Indeed, the most exciting cliffhanger on television might be the fate of the networks themselves.