In trying to assess the main economic trends in cable heading into 2005, three themes emerge.
- Looking back, 2004 marked the first year all three cable channels earned sizable profits.
- Despite being No. 2 in ratings, CNN continues to lead cable news in economics, and there is some evidence that its brand is more highly regarded in advertising circles than Fox’s. Nevertheless, its financial lead over Fox appears to be shrinking rapidly.
- Even if its audience growth is shrinking, Fox’s profits should continue to grow as agreements limiting its licensing fees begin to expire.
To maintain its leadership in profits, CNN clearly must do something, either by changing its content to attract more viewers or by creating new revenue sources. It also faces the challenge of deflecting the allegation that it is merely a liberal network, lest it lose its prestigious reputation among advertisers. The most basic message about cable news economics, however, is that for short term, this is an increasingly profitable business across the board.
The most obvious landmark over all in 2004 was that all three news networks earned significant profits for the first time.
MSNBC, which lost money from its inception in 1996 until 2002 and basically broke even in 2003, finally broke through in 2004 and generated profits of some $32 million, according to Kagan Research.
What happened? Part of MSNBC’s success is linked to the fact that it carried ads for the Olympics. NBC was able to assign ad spending across its cable network group, and the high ratings garnered by the Games ended up benefiting MSNBC.1
The success should be kept in perspective. The profits are still less than 10% of what CNN makes and 12% of Fox. Yet finally, MSNBC can claim to be moving in the right direction financially.
The second theme that stands out heading into 2005 is that CNN remains dominant economically, but Fox is making further strides in closing that gap.
Consider this: In 2003 Fox’s profits were 40% less than CNN’s. In 2004 it is estimated that the gap narrowed to just 20%, according to Kagan Research.
Put into dollars, CNN was projected to earn $337 million in operating or pre-tax profits in 2004. Fox News was projected at $274 million. MSNBC was put at $32 million.
The shrinking gap in profitability between CNN and Fox News — about $60 million — obscures, however, some other facts about the finances of the two networks that are important to understand.
1997 to 2004
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Source: Kagan Research, www.kagan.com
When it comes to revenue, CNN brings in much more than Fox News. In 2004, Kagan Research estimated, CNN would end up bringing in $887 million in overall revenue vs. $539 million for Fox.2
The difference is that CNN supports a much larger infrastructure. Kagan puts its total expenses at $550 million in 2004 and Fox News’s at less than half that, $265 million. CNN is supporting a much larger newsgathering operation, with at least 26 foreign bureaus to Fox’s five, and more reporters as well. CNN is also providing content to more outlets, including Headline News and CNN’s international networks.3 (See News Investment.) As a consequence, a larger share of CNN’s revenue, 62%, goes to cover expenses, compared with 49% of revenue for Fox News. That allows Fox to make a profit with lower revenues than CNN.
The disparity between revenues and profits is worth considering for a moment. One might argue that the revenue figures are more significant than the profits because they also indicate something about the depth of what CNN is offering. Does the greater expenditure on newsgathering suggest a qualitative benefit to advertisers? Or is there no value in demographics, loyalty, cume, or other measures from having more bureaus, more reporters, and more newsgathering reach? Does Fox simply succeed by having a more popular lineup of talk-show hosts?
In only six years on the air, Fox News has gone from the bottom of the cable news ratings to the top. It has also gone from losing $30 million in 2000 to making almost $190 million in profits for News Corp. in 2003. But it’s not making the highest profits of the cable news channels; nor is it bringing in the most revenue.
MSNBC, meanwhile, had estimated expenses of $254 million in 2004 — about the same as Fox’s — but its revenue is much smaller, $286 million, meaning that expenses ate up 89% of revenue. (That is true even though its newsgathering expenses can be amortized across the NBC networks.)
The expense numbers also help explain something about the marketing of Fox and MSNBC.
MSNBC tried to market itself by building its schedule around content drawn from the NBC News library and other sources. NBC reporters have been commonly featured on MSNBC since its debut, but the network’s most well-known personalities have not really been used to establish the channel’s identity. The network’s strategy seemed to be based on transferring the “aura” of NBC News to MSNBC, but that was never pursued aggressively. Anchors like Matt Lauer and Jane Pauley showed up on MSNBC, but usually in peripheral roles, such as providing voice-overs for programs built around old NBC News footage. In fact, it could be argued that the most notable migration has been in the opposite direction: in 2002, NBC decided to start a Sunday morning talk show built around the “Hardball” host Chris Matthews.
When Fox News began in 1996, there was no way owner Rupert Murdoch and the channel’s president, Roger Ailes, could compete with CNN in pure numbers of reporters, bureaus and sheer resources. It could not piggyback on a major network news organization, as MSNBC could, nor did it have a significant library to build on. Fox had to compete for viewers another way.
So Murdoch and Ailes built a different product. To begin with, they understood, or soon came to understand, that they might have great appeal in prime time to the same audience that gravitated during the day to talk radio. To do that, they would have to play, as talk radio does, as a conservative alternative to a mainstream press that was perceived as part of a liberal establishment.
They also had some news personalities who were already well known, such as their Washington bureau chief, Brit Hume, and the former Current Affair host, Bill O’Reilly, and contracts with commentators like Fred Barnes.
Fox News hit on a formula of building shows around anchor personalities rather than a universal news desk, livelier graphics and pacing, heavy focus on a few hot-button topics, particularly Washington and politics, and an appeal to its audience in part through ideological affinity. The marketing slogans “Fair and Balanced” and “We Report, You Decide,” seemed to many to be code for another message: The competition isn’t fair. It’s biased.
In short, Murdoch and Ailes turned necessity – limited resources and a possible conservative reputation – into a virtue. They couldn’t compete against either CNN or MSNBC (backed by NBC) on sheer muscle when it came to gathering, verifying and synthesizing information. They played instead to their own potential strengths, and toward what they perceived as CNN’s potential vulnerabilities – being the establishment network that lived and died by events but had rarely been able to create distinct shows. The strategy may well have been the best one available from a business point of view. Fox developed a cable news network whose appeal was not built mainly on the size of its newsgathering resources.
Now, as Fox has grown, it appears gradually to be building up those resources, but as the expense numbers show, they are still not comparable to CNN’s.
To further understand the profit picture, it is useful to take a closer look at revenues.
The economic model of cable news is basically the same as it is for all cable channels. To fund operations, cable channels depend on two revenue streams: advertising revenue and revenue from license fees – money paid by the cable systems that carry the channel. Most channels are marketed toward specific niches, whether a demographic (like young men, who are targeted by Spike) or people with a particular avocation (such as amateur cooks, for whom the Food Network was designed).
Cable news is no different: its guiding justification is that news appeals to a specific population demographic – namely, well-educated and affluent people. Because of their narrow targeting, cable channels are generally unable to charge the high ad prices that the mass-marketed broadcasting networks enjoy. But because news consumers are seen as a hard audience to reach through television, cable news is able to charge prices for its ads that match those for general-interest cable channels with larger audiences.
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Source: Kagan Research, www.kagan.com
* Based on 2004 estimates.
Let’s break down ad revenues first.
Despite having only a little more than half the audience of Fox, CNN continues to lead in ad revenues. In 2004, Kagan Media Research estimated, CNN would take in $404 million in ad revenues, Fox $288 million and MSNBC $148 million.
How can that be when CNN has lower viewership? A strict comparison of ad rates does not tell the full story, because there are any number of techniques cable channels use to win advertisers, such as offering volume discounts and multi-channel or cross-media deals. The basic story is that Fox News was initially obliged to sell ads at a much lower rate than CNN as it was establishing itself. Even when it matched CNN in viewers, it could not immediately hike its rates to CNN’s level because that might have alienated its existing advertisers.4
Instead, rate increases have been a slow but promising process. Most of Fox News’s gains have come during successive “upfronts” — the period in spring when advertisers commit to purchasing ads for the coming TV season, and the time of year when channels tend to roll out rate increases.5 According to market analysts of cable, as recently as spring 2004 Fox had generally been able to charge only about 75% to 80% of CNN’s ad rates.6 But the gap is reported to have narrowed by the end of 2004 — thanks in part to Fox’s viewership gains toward the end of the campaign season — and Fox News was matching CNN’s ad rates.7
In 2004, Kagan estimated, CNN’s ad revenues would grow by only about $4 million, while Fox’s would grow by $80 million and MSNBC’s by $35 million.
Net Ad Revenue of Cable News Channels
2000 to 2004
Source: Kagan Research unpublished data, www.kagan.com
If Fox continued to gain revenues at the same rate, while CNN held steady, Fox might surpass CNN in the next three to five years. If CNN began to lose revenues – for example, if advertisers started switching from CNN to Fox – the gap would close even sooner.
How has CNN managed to maintain revenues on declining viewership? Three possible explanations emerge.
The first, offered by CNN itself, is that all three news channels may be benefiting from advertisers who are cutting their spending on broadcast news programs and boosting their cable advertising budgets. In media reports, Greg D’Alba, head of sales for CNN, has taken the stance that CNN’s primary goal is to win more and more revenue over time from advertisers leaving behind network news, rather than focusing on beating out Fox News and MSNBC.8
A second factor that has kept CNN advertisers from switching to Fox News is that Fox may not yet enjoy the same “brand” reputation. One Wall Street Journal article on the economics of cable news advertising quoted an anonymous ad agency executive defining CNN as “prestigious” and another saying Fox News “is not perceived as pure news, because it really is no different than talk radio.”9 A fall 2004 poll of advertising executives found that they were much more likely to see CNN as a “balanced” news organization than Fox News, by a 43% to 14%. A substantial portion (35%) saw CNN as “liberal.” But an even larger portion of the executives saw Fox News as conservative — 70%.10
A third CNN advantage has been its ability to package ad sales with its compatible corporate siblings – including not only Headline News in the U.S., but CNN International as well. Fox News’s cable siblings, by contrast, include entertainment networks like F/X and the National Geographic Channel, making cross-network deals difficult.11
The biggest advantage of all, though, is the higher ad rates CNN has been able to charge. The battle over the rates is intense. As discussed in the audience section (see Audience), CNN makes the case that its audience really is bigger than what is measured by simple cable ratings. Nielsen’s ratings system measures at-home viewers, but cannot capture businesses or commercial settings. Earlier this year CNN released a study by Nielsen suggesting that thanks to televisions tuned to CNN in bars, airports, waiting rooms, and elsewhere, it has more “light viewers” than all other networks (including not only Fox News and MSNBC but ESPN and the broadcast networks, too).12
Fox News, on the other hand, argues that its higher ratings mean it has replaced CNN as the “default” news channel, and that advertisers should accordingly replace CNN with Fox if they’re trying to reach the well-educated, upper-income demographics that tend to be most interested in news. Nielsen research shows that Fox News viewers tend to watch for longer stretches than CNN viewers; Fox News argues that this means its audience is more attentive and, thus, more receptive to ad messages.13
MSNBC, meanwhile, still lags in the competition for advertising revenues, but has its own argument. Much of its appeal to advertisers is based on the ability to buy time on both MSNBC and NBC News programs under package deals.
Besides ad revenue, cable channels receive income from license fees. Here, so far, CNN also has had the edge. The system works through contracts signed by cable systems and channels, in which the cable systems agree to turn over a monthly fee to the channels according to the number of subscribers the systems serve. Because the contracts are habitually long term (as long as ten years, in many cases), Fox News is still locked in to subscriber contracts signed when it first went on the air, and it receives much less revenue per subscriber than CNN — 23 cents, according to recent estimates, compared with 39 cents per subscriber for CNN.
As some of those contracts expire, Fox might have more leverage in raising fees, but there are still some complications.
While it has passed CNN in ratings, Fox has also been limited in its ability to do anything about the license fee imbalance because CNN is a corporate sibling of Time Warner’s gigantic cable system, which Fox depends on for distribution of its cable channels (such as F/X and other entertainment networks) in markets like New York and Charlotte, North Carolina.14
1998 to 2004
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Source: Kagan Research, www.kagan.com
Going forward, however, Fox News is in a better position to assert leverage against cable operators than it has ever been before. With the purchase of the satellite company DirecTV in 2004, News Corp., Fox News’s parent, now has a media distribution system of its own. That gives it power to dictate the terms on which its satellites will carry Time Warner programming — and vice versa.15 (See Ownership.)
In a conference call with investors this year, according to a transcript from the financial news wire Fair Disclosure, News Corp. executives promised to negotiate with cable systems for better terms as its license-fee contracts start to expire in 2006. As CEO Rupert Murdoch put it, referring to CNN, “They’re still getting double the affiliates’ fee for half the audience. So clearly, that will be put right.”16
It is hard to see how CNN’s strategy – counting on its reputation as a better but smaller brand and using its corporate muscle to ensure higher subscriber fees – can last indefinitely.
Fox’s ad revenue growth may be limited as well, if it turns out that its audience is hitting a ceiling. But that may not be much solace for CNN.
The most obvious need for CNN — and much of this applies to MSNBC as well — is to somehow increases in audience. The most important way to do that is to change its programming — to improve it, make it more memorable and more compelling, and broaden its appeal. CNN appears to be thinking along those lines. It is already experimenting with longer-form programming for CNN Headline News in prime time. Insiders say that CNN executives hope to use Headline News as something of an experimental laboratory.17 They also acknowledge privately that CNN programming is bland.
The question is whether CNN has the ideas, vision and spirit of risk-taking to make changes that will really distinguish the product. The network’s attempts over the past 24 years, frankly, raise questions about that. CNN’s limitation, and what made it vulnerable to Fox in the first place, was that its technological vision — of linking the world by satellite to 24-hour news — was never matched by an innovative execution of what that news might be.
Originally, CNN followed the maxim that “the news is the star.” After the arrival of Fox, and the merger with AOL, it shifted to thinking, at least in prime time, that the “star,” or anchor, is the news (as represented in the hiring of Connie Chung and Paula Zahn by the new AOL-led management). That strategy did not fully succeed. Chung was soon dropped and Zahn has had ratings difficulties. The news channel has not been able to figure out how to compete in the 8 p.m. prime-time slot with a news program. Its most successful evening program has always been Larry King, a late-night talk show it shifted from radio before radio talk went conservative.
It remains to be seen at the beginning of 2005 what difference might come with the arrival of Jonathan Klein, founder and chief executive officer of The FeedRoom Inc., a high-speed Internet news network and video streamer, as head of CNN’s U.S. news operations. “Six years steeped in the digital information industry have helped me understand today’s news consumers in ways never before available to media executives,” Klein said in a statement on November 22.18
CNN’s biggest immediate problem, however, may be contending with the knotty question implied by Fox’s marketing. CNN’s brand strength, at least according to the reported perceptions of the advertising community, is that it delivers news in a straight way. The more headway Fox makes in marketing the idea that it and CNN have a kind of parity – that CNN is a liberal network on the one side and Fox a conservative one on the other – the more Fox may erode that brand.
In that sense, CNN might actually welcome competition from INdTV, the cable news channel being backed by former Vice President Al Gore that is slated to go on the air in spring 2005. If that channel were to explicitly position itself as a liberal alternative to Fox News – though that is not certain to be the case – CNN might benefit from being able to position itself as a moderate voice on the ideological spectrum of cable news.19
The ideological argument has implications for journalism that may be far-reaching. It also has economic implications for CNN that could be devastating. Somehow, CNN has to take the challenge head-on and prove that it is what it contends, an independent and neutral news source, and that Fox is not.
1. Paige Albiniak and Anne Becker, “Games score big: As Olympics ratings rise, so do NBC’s profits.” Broadcasting & Cable, August 23, 2004.
2. Kagan Research, Economics of Basic Cable Networks, 2004.
3. Josh Rottenberg, “Conventional power,” Entertainment Weekly, September 24, 2004.
4. In January 2002, when Fox News first matched CNN in viewership, its ad rates were roughly half CNN’s. See Jane L. Levere, “The Fox News Channel tops CNN’s audience, and casts its eyes toward its advertising rates,” The New York Times, January 30, 2002.
5. See Richard Linnett, “Fox claims win over CNN in cable upfront,” Advertising Age, July 14, 2003. Although cable news channels don’t have “seasons” as the entertainment networks do, for the sake of convenience they participate in the “upfront” alongside them.
6. Julia Angwin, “The right price: for Fox News, ad-sales market isn’t fair, balanced,” The Wall Street Journal, May 20, 2004.
7. Jacques Steinberg, “Fox News, media elite,” The New York Times, November 8, 2004.
8. Mavis Scanlon, “A day in the life: CNN ad sales’ Greg D’Alba,” CableWorld, September 20, 2004.
9. Julia Angwin, “The right price: for Fox News, ad-sales market isn’t fair, balanced,” The Wall Street Journal, May 20, 2004.
10. Joe Mandese, “Papers, local TV seen as more credible than network news; consumers, trade split on bias,” MediaPost.com, November 1, 2004.
11. Julia Angwin, “The right price: for Fox News, ad-sales market isn’t fair, balanced,” The Wall Street Journal, May 20, 2004.
12. Jon Lafayette, “CNN touting greater out-of-home viewers,” Television Week, March 22, 2004.
13. Andrew Grossman, “Fox, Univision sights on ad mart,” Hollywood Reporter, March 4, 2004.
14. For more on the initial struggle between Time Warner and News Corp. over adding Fox News to Time Warner’s cable lineup, see “Goliath vs. Goliath,” FAIR Extra! Update, December 1996. Online: http://www.fair.org/extra/9612/goliaths.html.
15. Ronald Grover and Tom Lowry, “Rupert’s world,” Business Week, January 19, 2004.
16. FD Wire, “Q2 2004: The News Corporation Limited Earnings Conference Call,” February 11, 2004.
17. CNN staff member in interview with Project for Excellence in Journalism staff.
18. Megan Larson, “Klein named president, CNN/U.S.,” Mediaweek, November 22, 2004.
19. For more on InDTV, see Ron Russell, “Looking inside INdTV,” SF Weekly, July 28, 2004.