Despite Cable's Growth, Networks Remain Mr. Big : Although cable market share is expanding,many outlets are feeding on each other's audiences

By RICHARD MAHLER

Nov. 11, 1990 12 AM PT

The programmers of cable TV networks face twin themes this fall, one positive and one negative.

On the plus side, more Americans are watching cable than ever before. According to data compiled by A. C. Nielsen Co., 26% of all viewing now involves cable-only channels. And a record 58.9% of all TV households now subscribe to cable.

Yet on an individual basis, most cable channels are shunned by most viewers most of the time. Even successful services like CNN, ESPN and USA Network attract only a fraction of the audience that over-the-air broadcasters enjoy. On a good night, for example, CNN is lucky to be seen in 2 million homes, while even third-ranked ABC easily draws 10 million households on an average night.

Indeed, today’s video marketplace has become so crowded that many cable networks are actually losing their already tiny share of viewers.

“This is cable TV’s equivalent of the Persian Gulf crisis,” says Bob Maxwell, vice president of research for Home Box Office, the nation’s top-rated but slow-growing pay channel. “Until now, cable has taken its audience from the (ABC, CBS and NBC) networks. For their viewership to keep growing, cable services are going to have to cannibalize each other.”

Wait a minute. Something’s wrong with this picture. Isn’t cable supposed to be the sinister force that’s keeping network executives awake at night?

“The so-called growth of cable is deceptive,” claims Larry Hyams, director of audience analysis for ABC. “Because more and more people are subscribing every month, overall viewing of cable is rising steadily. But for a number of individual cable services, their actual share of the total TV audience is flat or declining in the face of today’s stiff competition.”

Statistics compiled by Nielsen and other researchers confirm broadcaster assertions that the cable business has entered an era of maturity in which holding on to fickle viewers may prove increasingly difficult.

Nielsen ratings data, for example, suggest that all-news CNN has maintained the same 1% market share during the last three years, even though it actually has about 18% more viewers in 1990 than in 1988. This apparent paradox is explained by the fact that 61% of TV households can receive CNN today, compared with 52% in 1988.

Similarly, HBO’s coverage has stalled at about 22% of cable-equipped homes--the same as it was in 1983--because its subscriber growth has only kept pace with cable’s overall rate of expansion.

“Our prime-time usage is down about 2% this year,” concedes Maxwell, HBO’s research chief. “On a 24-hour basis, we’re stable. But the same thing is true for our (pay cable) competitors: With few exceptions, their usage is flat or down.”

Even with the relentless wiring of America factored in, there are plenty of signs that cable’s novelty is wearing thin. Last year, for example, pay cable showed an increase in subscribers of only 5.3%, compared to 10.6% growth in 1988. According to Nielsen, HBO lost 350,000 subscribers during the year ended June 30. Viewing of basic-cable channels was up 18% for the year ended Sept. 30, Nielsen reported, but analysts attribute much of the increase to growth in the number of homes that subscribe to cable and to the industry’s acquisition of major sports events such as NFL football.

Part of the problem is VCR ownership, which has soared to 70% of American TV homes, and the rise of independent television, now available on 400-odd stations versus 120 only nine years ago. But to a far greater extent, cable’s current dilemma is a function of simple Darwinian economics. With 56% of all viewing on a 24-hour basis divided among ABC, CBS, NBC and Fox, and with another 13% of the audience watching independents, cable gets 26% of the video pie--or only one in every four viewers--and that is divided among some 90 national channels and 60 regional or local services (although a typical system can accommodate only about 25 of these).

Why do people who subscribe to cable still prefer over-the-air channels? Industry veterans say it’s as much a function of habit as anything else.

“Most of us have only three or four primary viewing channels and another five or six that we watch occasionally,” says Mel Harris, president of the Paramount Television Group. He oversees his studio’s 50% stake (MCA owns the other half) in the USA Network, the nation’s most popular basic-cable channel (and, ironically, the one whose format most closely resembles that of a broadcast-television station). “You watch whatever your habits are, which is why the preponderance of viewing is still going to (broadcast) networks and over-the-air stations.”

Harris points out that even during a crisis, CNN seldom commands more than a 2% share of TV’s available audience, whereas local stations routinely command four or five times that many viewers within their coverage areas.

The contrast is even more pronounced in Los Angeles, where cable reaches just 54% of all homes and competes with more over-the-air signals than any other city.

During a typical week here, nearly 400,000 homes tune in at least one prime-time movie on independent KCOP-TV Channel 13, for example. Over the same period, a combined total of only about 55,000 households are watching films on cable’s Bravo, Cinemax, American Movie Classics, TNT and The Disney Channel.

“If my station delivered audiences like those,” observes KCOP General Manager Rick Feldman, “I’d go out of business.”

Yet across the country, a similar story unfolds. During July, typically a strong month for the cable medium because the broadcast networks are mostly programming reruns, 19% of prime-time’s national audience went to cable, compared with 51% to network affiliates and 25% to independents.

“Rick’s point is a good one,” says Harris, whose USA Network garnered what for it was a record 1.3 prime-time share last summer. “A heck of a lot more people are watching Channel 13 in L.A. than are watching The Family Channel.”

Nearly 23 times more, to be precise.

Facing odds like these, cable has had no choice but to remain dependent on the per-subscriber fees paid to them by system operators, providing a dual-revenue stream unavailable to broadcasters. While the few pennies forwarded to programmers for each subscriber to CNN, USA and ESPN may seem trivial, they add up to millions in revenue nationwide. According to estimates by the Cable Advertising Bureau and Paul Kagen & Associates, fully two-thirds of basic cable’s $750 million in net revenues for 1988 came from operator fees. By 1995, that revenue stream is expected to top $1.1 billion, most of it coming out of the consumer’s pocket in the form of rising subscriber fees.

These revenues, coupled with interlocking financial interests among the industry’s major players, have managed to nudge cable’s largest programmers comfortably into the black.

“No cable networks could survive on advertising alone,” declares Harris. “Subscriber fees are absolutely essential to their survival.”

Harris and other cable executives insist that what differentiates their business from broadcasting is a new fundamental truth about video consumers: They’re willing to pay for choices that advertising alone cannot or will not support.

“It’s a little deceptive to look solely at cable’s audience levels,” says Ellen Agress, NBC’s vice president of legal policy and planning, “because that’s not its primary source of revenue.”

Agress, who is also a board member of the Arts & Entertainment Network (part-owned by NBC and ABC), says that the “huge amount of cash” that cable services are now generating should enable them to approach parity with their broadcast competitors in program quality.

“Maybe cable’s ratings haven’t improved much lately, but I think its programming is getting better,” says Steve Grubbs, senior vice president of national TV for the BBD&O; ad agency. “And with better shows, you’ll see advertisers even more willing to invest.”

“We make a substantial amount of money on advertising and all of those dollars go right back into programming,” confirms John Silvestre, the USA Network’s senior vice president of ad sales.

Like other cable network executives, Silvestre won’t discuss monetary specifics, but he pronounces USA’s revenues healthy. “I wouldn’t say we’re recession proof,” he says, “but we haven’t felt any downturn yet.”

In a trend that mystifies some analysts, cable remains a Madison Avenue darling even while many media advertisers slash their budgets to cope with a softening retail economy.

“Cable is still in a growth mode among national advertisers,” says Grubbs of BBD&O.; “I think you’ll see even more ad dollars funneled into cable because it’s perceived as an underpriced medium versus the broadcast networks.”

In other words, sponsors are drawn to cable shows because they represent a cheap alternative to ABC, CBS and NBC. A 30-second commercial that typically sells for $350,000 on the Big Three may command only $30,000 during the same prime-time slot on USA or other top-ranked cable services. It’s also in Madison Avenue’s interest to stimulate rivalry among TV programmers, since competition tends to hold down the cost of air-time, which has continued to increase even though audiences are declining.

“Cable is becoming a very powerful competitor,” concedes NBC strategist Agress. “Its growth is coming right out of our hide.”

Broadcasters have tried to make the most of cable’s current “fragmentation wars,” as one researcher calls them, arguing that the Big Three are still the only vehicles for reaching a mass audience. They also complain about the statistical reliability of cable ratings, based as they are on tiny segments of the audience.

“There is concern,” says Grubbs, the ad agency official, “about how many people actually make up these ratings. But not enough to keep sponsors away.”

“Ad agencies accept this situation because cable’s commercials are priced like FM radio, never mind network TV,” says Michael Couzens, a San Francisco communications attorney and expert on audience measurement. “What I want to know is: If cable programmers think their ratings are so great, why do they charge so little for their commercials?”

When confronted with that question, cable executives have a host of rationalizations for their fire-sale prices, most of them related to research methodology. Since Nielsen’s national TV ratings are based on the viewing patterns of about 4,000 households (out of 93.1 million), cable networks available to less than 15% of the country (13.9 million homes) aren’t counted because the results would be considered unreliable. And since even qualified services typically attract less than 1% of the audience on a given night, it’s not uncommon for only 35 people to represent the entire national viewership of ESPN, CNN or USA Network. This means, according to Nielsen, that the reliability of specific demographic categories may be off by 50% or more for individual cable channels, compared to 5% or less for ABC, CBS and NBC.

“With a .5 rating, which is typical for many cable services, you can get some wild fluctuations in specific demographics,” says HBO’s Maxwell. He points out that cable audience projections of most interest to advertisers, notably affluent, urban men or women age 18-to-35, may often be based on as few as five or six individual viewers. From one rating period to the next, the size of a key viewing segments may appear to double or triple, then disappear altogether.

“We’ve long suspected that among themselves, our cable competitors worry about this,” says Larry Laurent, vice president of the Assn. of Independent TV Stations, a Washington-based lobbying organization.

Indeed they do. And as cable’s playing field becomes even more crowded, programmers feel lucky just to get in the game.

“We’re not so much concerned with hitting a home run today, but heading in the right direction,” says Dick Beahrs, president of The Comedy Channel, one of many wanna-be networks trying to reach the 13.9 million potential viewers needed to receive national Nielsen ratings.

Despite backing from parent company Time-Warner, The Comedy Channel still has less than 8 million subscribers almost a year after start-up.

The situation is likely to get worse before it gets better, however.

Cable operators have been slow to add new networks or expand channel capacity pending action by Congress on proposed rate regulation. Under pressure from angry consumers and municipalities, lawmakers have been considering imposing some kind of ceiling on the amount that operators can charge their subscribers. The result may have a negative impact on the revenue stream cable networks have come to depend on to off-set their limited advertising base.

In the opinion of many broadcasters, rate regulation is long overdue.

“Nobody in cable (cares) about ratings because they’ve got monopoly franchises in their communities and can charge whatever they want,” sighs KCOP General Manager Feldman. “They’re making money because they own the only store in town.”

If the subsidy that cable programmers get from subscribers is slashed, concedes HBO’s Maxwell, some services may be forced to merge in order to survive. Those cable networks that remain will be compelled to invest more in original programming, and in the promotion and marketing of that product. In short, they will have to pay more attention to ratings.

“The ‘80s were the years of easy growth for cable,” Maxwell concludes. “The ‘90s will be the decade of reckoning.”

PRIME-TIME RATINGS

Cable and network household prime-time averages Jan.1 - Nov. 2, 1990.

Networks and cable: Rating

NBC: 12.3

ABC: 11.3

CBS: 11.0

FOX: 6.2

Independents (combined): 5.9

PBS: 2.3

Top-rated cable channels

Home Box Office: 1.6