|By the Project for Excellence in Journalism
The financial picture of cable news continued to show Fox News gaining ground on CNN, with MSNBC not performing as well as analysts had projected. Among the major trends of 2005:
Over all, the cable news channels were projected to have a healthy 2005.1 They began the year with profits and were projected to earn higher incomes through a combination of cost-cutting and growth in revenues.
The cable news business continues to be a profitable one. Taken together, the three cable news channels were projected to earn $579 million in pre-tax profits. That was a jump of 21% from 2004, when they generated $478 million.2
CNN was projected to remain the most profitable channel in 2005, but Fox News continued to close the gap.
According to Kagan Research, the market research firm, CNN was projected to generate operating profits of $304 million in 2005, up 6% from the $287 million it earned in 2004. The number includes CNN and CNN Headline News, but none of the other CNN affiliated outlets.3
Fox News, on the other hand, was expected to jump 31% in 2005, to $248 million from $190 million in 2004.
If those estimates hold true, CNN’s profits would be $56 million more than those of Fox News in 2005. A year earlier, CNN had a lead of $97 million. Fox News would have narrowed the gap by 42% in a single year.
From losing $30 million in 2000, Fox News was now expected to make more than $200 million in pre-tax profits for News Corp. As it approaches its tenth anniversary, Fox News appears well positioned for an extended run, and bigger gains are expected in 2006 as it finally renegotiates those disadvantageous licensing contracts.
MSNBC, in turn, was projected to turn a profit of $26.8 million in 2005, its first meaningful profit in its history. Yet past projections for MSNBC have proven overly optimistic. In 2004, Kagan Research projected that the network would earn $32 million in profit; it earned only $600,000. It will be important to keep an account of how it actually performs in 2005 vis-à-vis expectations.
Revenues and Expenses
To understand those profit estimates more clearly, it is necessary to take a closer look at revenues and expenses of each of the news channel operations. When we do so, one can see more fully the nature of Fox News’s growth.
For 2005, analysts were predicting that Fox News’s revenues would grow at four times the rate of CNN. At the same time, expenses were also expected to grow at four times CNN’s. Putting revenue dollars back into the product normally points to a long-term interest in building the business. Some of that is visible in Fox News’s 2005 spending (see Cable News Investment).
Kagan Research projected in July that Fox News’s revenues would grow 21% in 2005, to $614.8 million, from the $507 million they earned in 2004. The picture for total expenses (or investment) is similar. Fox News’s expenses, which were less than half of CNN’s previously, were projected to increase almost 16% in 2005, to $366.6 million, from $316.5 million in 2004.
CNN’s totals are still higher than Fox News, but its increases in 2005 were projected to be smaller. Kagan projected that CNN would bring in $878.2 million in total revenue in 2005, an increase of less than 5% over 2004 ($839.2 million).4
CNN’s lead in sheer dollars at least partly reflects the fact that it draws on a larger infrastructure than both Fox News and MSNBC. Its resources include the news bureaus it owns and operates around the world and its sibling channel, Headline News (see Cable Ownership). Kagan Research’s data for CNN include both CNN and CNN Headline News because the two channels are sold to advertisers and distributors as a package.5
Such a scale of operations also has implications for costs. Kagan Research projected that CNN would have $574 million in total expenses in 2005, a 4% increase over the $552 million it spent in 2004.
CNN spends a slightly larger share of its revenue, 65%, to cover expenses than does Fox News, at 60%. Thus not only was CNN’s percentage growth in revenue less than the growth for Fox, but it has a bigger cost structure to support — one of the biggest costs being its overseas bureaus, something that Fox News has kept to a minimum.
MSNBC — an Afterthought?
MSNBC remained the perennial also-ran of cable news in 2005. Not only were its revenues comparatively small, but whatever profit it was expected to make would come largely from cost-cutting.
According to Kagan Research, MSNBC would take in $261 million in total revenues in 2005, an increase of 13.6 million. Expenses were projected to be $234.6 million, down $12.5 million from $247 million in 2004.
If accurate, those projections would leave MSNBC with a $26.8 million profit, largely from cutting costs.
A year earlier, though, Kagan Research had estimated that MSNBC would earn a profit of $32 million on revenues of $286 million. The projection proved too optimistic. The news channel instead turned a profit of $600,000 on revenues of $248 million.
To fund operations, cable networks depend on two revenue streams: advertising and license fees, money paid by the cable systems that carry the channel. The fees are negotiated on a per-subscriber basis irrespective of how many subscribers happen to watch the channel. Most cable channels market toward specific niches, and cable news’s sales pitch to potential advertisers has been that news appeals to just such a specific population demographic — well-educated and affluent people. This niche positioning largely determines advertising rates. The sales pitch to cable channels has been the indispensable nature of the content: no subscriber would seriously consider not having a 24-hour news option.
Historically, cable news channels fall between general-interest cable channels and broadcast networks in how much they can charge advertisers. On one hand, their rates can’t be as high as those of the broadcast networks because cable channels have such a narrow target demographic. On the other hand, they do compete with general-interest cable channels (with much larger audiences) because news consumers are seen as a hard audience to reach through television.
Even with overall audience growth slowing, market researchers continue to be bullish about cable’s financial prospects. Kagan Research predicted that cable networks as a whole had rebounded from their advertising market downturn following the 2001 recession and were poised for “double-digit growth as far as the eye can see.”6
CNN, the first cable news channel, has always received the most advertising revenues,7 but 2005 was expected to see the first shift in the balance of power: Estimates were that Fox News’s advertising revenues would surpass CNN’s. Indeed, in June 2005, media reports on the “spring upfront” season (the annual springtime period when advertisers buy commercials for the rest of the year) said news channels were able to increase their ad revenue commitments, with Fox News at the higher end of the scale.8
The report was supported by the projections released by Kagan Research. They estimated that Fox News would make $336.1 million in advertising revenue, a leap of 31% from $257 million in 2004. CNN was projected to make less — $334.9 million, up just under 6% from 2004 ($317 million).
Net Ad Revenue of Cable Channels
Source: Kagan Research, “Economics of Basic Cable Networks 2006,” Kagan Research, LLC, June 2005 (Net Ad Revenue refers to revenue generated by a network after discounting the commission that goes to ad agencies)
Thus, Fox News’s ad revenue growth was projected to be more than four times that of CNN. While both channels were expected to increase ad revenues, Fox News was expected to see an increase of $79 million, versus a much smaller $17.5 million increase for CNN.
Also, for the first time ever, Fox News was expected to bring in more total advertising dollars than CNN. While the lead is small (just $2 million), it may mark an important shift in industry dynamics. CNN’s historical position of being the most lucrative news channel for advertisers may quickly erode as they become attracted to Fox News’s growing audience numbers.
CNN is losing the lead position it traditionally occupied in license fees, too.
License fee contracts are usually long-term — even up to ten years, as in the case of Fox News. In 2005, that meant Fox News was still locked into contracts it signed when it launched in 1996. Consequently, the revenue per subscriber it received was far less than CNN’s. In 2005, CNN was expected to receive an average of 44 cents and Fox News 25 cents per subscriber per month — a marginal difference of one cent more per subscriber for CNN from the previous year and two cents more for Fox News. Based on those rates, Kagan Research projected a total increase for the year in license fee revenues of $16.4 million for CNN and $27.8 million for Fox News.9
Negotiations with cable distributors for the 2006 contracts are certainly in Fox News’s favor. Industry sources told the trade publication Multichannel News that the licensing fee of 23 to 25 cents per subscriber as of October 2005 could quadruple to $1 a month — a potentially astonishing increase in the current climate. The thinking is that in the face of competition from News Corp.’s own satellite TV provider DirecTV and potential new entrants like SBC and Verizon, cable operators are not likely to want to drop Fox News, even at four times the price.10
News Corp.’s purchase of DirecTV in 2004 has proved a boon for Fox News. It is no longer dependent on the cable system of Time-Warner, CNN’s sister company, for distribution in key markets. The purchase also gives the news channel leverage over cable operators in general.11
At MSNBC, $114.7 million in 2005 would come from advertising, an increase of $3.6 million. That is a better picture than in 2004, when its advertising revenue of $111 million reflected a loss of about $12 million over 2003.
The rest of the revenue increases would come from license fees. MSNBC’s license fee revenues have been generally stable. In 2005, the channel was expected to generate $9.7 million more in subscriber revenues, making a total of $144.2 million, up from $134.5 million in 2004.
MSNBC has always argued that its revenue figures must also be seen in the context of advertisers who are buying time on both MSNBC and NBC News programs under package deals. The news channel has the advantage of drawing on parent NBC’s extensive news operations, which helps the news division as a whole amortize expenses. In reality, though, that has done little to paint a solid financial picture for the channel standing alone. The NBC news division as a whole is profitable.
There is no denying that MSNBC must improve its finances if it is to remain a viable player in the cable news market. It will be worth keeping an eye out for what impact the changes in management will have on the channel in 2006.
2. Figures from Kagan Research, “Economics of Basic Cable Networks 2006,” Kagan Research, LLC, June 2005, www.kagan.com
3. CNN has more than a dozen affiliated channels (including CNN international and CNN airport network; see list in Cable TV News Investment section). Kagan figures presented in this chapter do not include any of those. They include economic data for CNN/U.S. and CNN Headline News only.
4. In its January 9, 2006 issue, the trade publication Broadcasting & Cable released its analysis of the top revenue earners. Its numbers were much lower than those estimated by Kagan. It reported that in 2005, CNN earned revenue of $794 million (it wasn’t stated whether that included CNN Headline News) and that Fox News earned $574 million.
5. This report separates the two CNN channels in audience analysis because Nielsen Media Research, which aggregates data on audience figures, provides figures for each one individually.
6. News Brief, “Kagan: cable has recovered, will grow at double-digit rates,” October 3, 2005 , Media Post Web site. Online at: http://publications.mediapost.com/index.cfm?fuseaction=Articles.san&s=34735&Nid=15794&p=327979
7. In January 2002, when Fox News first matched CNN in viewership, its ad rates were roughly half of CNN’s. See James L. Levre “The Fox News channel tops CNN’s audience, and casts its eyes toward its advertising rates”, the New York Times, January 30, 2002.
8. “The latest upfront news is, well, news,” Media Daily News, June14, 2005.
9. CNN was projected to make $470.8 million, up from $454.4 million in 2004. Fox news was projected to make $264.2 million, increasing from $236.4 million in 2004. (Source: Kagan Research, “Economics of Basic Cable Networks 2006,” Kagan Research, LLC, June 2005)
10. R. Thomas Umstead, “Large Rate Hikes by Fox , USA ,” Multichannel News, October 31, 2005 .
11. John Dempsey, “The Fox ripple effect,” Variety, March 13, 2005 .