Why being a "hit" on iTunes doesn't matter yet

Categories: Internet TV,New TV Technology

Written By

February 17th, 2009

dollar-signs

The current scale of broadcast and cable networks is quite often underestimated by Internet pundits, while the scale of online viewing of television shows is often overestimated by those same pundits.  Incorrect perceptions around the relative scale of things continues to lead to some wacky coverage when it comes to both television viewing and Internet viewing of TV shows.

Does being a hit on iTunes matter when it comes to how TV networks view the show's performance?  Someday, perhaps, but not right now.  We've been running this web site for almost 18 months, and despite increases in downloading and watching TV on the Internet during that time, the needle of how much it matters to the television industry hasn't really moved any in those 18 months. I doubt that it will move much in the next 18 months either.

I'm not a naysayer who doesn't believe in the the Internet or new technology.   I'm not down on bleeding edge, cutting edge or early adopter services.  I watched five seasons of 24, three seasons of House, three seasons of LOST, four seasons of The Wire, two seasons of Supernatural, and 2.5 seasons of Eureka (and I could Go On. and on, and on)  on my iPhone.   I'm a gadget loving geek who has been online for over 25 years now. I like technology just fine, and since the Internet is the only place our content can be read, you can figure we're very pro-Internet!   I love the Internet.  But when it comes to watching TV shows on it, it's nowhere near the scale of television yet.

It's helpful to have a simple framework for thinking about it. Please don't get hung up on the lack of precision with the numbers I'll use here.  I'm looking to keep things very simple. The numbers cited are not precise, or meant to be.  It's a 50,000 foot view of the world.   While the numbers themselves might look quite a bit different at the 5 foot view, they don't look so different as to alter the conclusions or the overall  current landscape.

I estimate that it  took somewhere around 25,000 downloads for Dollhouse to hit the number one spot on iTunes in just over two days time.  There is a lot of data, particularly from NBC, but from other sources I've seen as well, to corroborate that estimate.  It's not precise, of course, but it's not a wild assed guess either.  It's in the right zip code, and the right neighborhood, and if not on the right block, it isn't far away.

Let's say that a traditional TV broadcast network strives to have a $25 CPM for its commercial spots in prime time.  In other words, it wants to sell its advertising at a rate of $25 per 1,000 people.  Obviously scale matters, so in this 50,000 foot view example, if 10 million people watch a show, that means the network can sell each commercial spot  for $250,000.

In a typical one hour show there are 16 minutes worth of commercials or 32 or so thirty second spots.  By this simple 50,000 foot view, a show with 5 million viewers can sell each commercial for $125,000.  Keep in mind, that with rare exception scripted shows with less than 5 million viewers on a broadcast network would get cancelled (though those same 5 million viewers on a cable network would make it a hit show!).

Because there is such a difference in scale, we can discount the price of commercial advertising down to even $100,000 per commercial for that show with 5 million viewers just to have a nice round number.   With 32 commercial spots, it would generate around $3.2 million dollars in revenue.

If 25,000 downloaded a show from iTunes at $2.00 per download, that's $50,000 in total revenue.   Or one half of what the show would make for a single thirty second spot even at only 5 million viewers.  And that assumes that all of the money goes back to the network, which of course isn't  the case  -- iTunes (Apple) gets a cut.   Again, I've deliberately ignored many nuances and disclaimers here just for the purposes of  keeping it simple. Adding all of that discussion and explanation back in just confuses things and doesn't change the end result much.  And the end result right now is simple.  Watching television on television makes a lot more money -- and I mean a lot more money -- than Internet viewing of those same shows.

Many people will say, "C'mon, iTunes schmiTunes!  WAY, WAY more people will watch it on Hulu because it is FREE!"

I completely agree.  But even if 10x as many people watching, or say 250,000 people, it's still not a big deal to the television  networks, at least outside their PR departments.  In fact, even if it's a million people, it's not that big of a deal.   With a $25 CPM if one person were to watch ALL 32 commercial spots of a one hour show, that peson is worth about $.80 total to the network ($25x32/1000=value of 1 viewer)

But Hulu only has about four spots, or about 1/8th the number of television spots.  Even if you doubled the fees of those ads on Hulu compared to TV, that would represent about $.20 per user.   So 250,000 viewers on Hulu would generate about $50,000 in revenue in that example.  Nothing to get very excited about yet for the networks.  Both iTunes and Hulu could increase by TEN times and while it would then be something that was definitely very interesting to the networks, it still wouldn't yet be a huge deal.

There is still a long way to go for the online viewing venues.  The scale of television when it comes to show viewership is so much bigger than online.  Sure, on a show by show basis, that scale generally will continue to erode, but even so,  online alternative means are still  dwarfed by television both in terms of  scale, and revenue potential.

Live viewing is still the single biggest factor, both in terms of original airings and syndication potential.  DVD revenues comes next, and then very far in the distance is online viewing.   In two years things will likely be different, but perhaps not very much different.  Until I see a more dramatic shift in things, I'm thinking it will be at least 5-10 years before the landscape looks very different when it comes to scripted television content.

The biggest threat to scripted content hasn't been and still isn't the Internet.  The biggest threat to scripted content continues to be the much more inexpensive unscripted programming.  Think American Idol, Dancing with the Stars and Survivor, but also Deal or No Deal, Supernanny and Wifes Swap.

Similarly, the Internet currently isn't the biggest threat to broadcast television (ABC, CBS, FOX, and NBC primarily) viewing.  The biggest threat to the broadcast networks, and the number one cause of decreases in broadcast viewing isn't the Internet.   It's competition from cable networks (this also includes viewers who have satellite rather than cable).

I know some are  bound to chime in with the massive amount of  Bit Torrent downloading that occurs.   But as there is currently no way to monetize those downloads for the TV industry, they don't really factor in to renew or cancel decisions.   And while some, certainly the content producers, would argue it represents lost revenue, I've never really bought that argument reagrdless of where I hear it.  It always seems to turn out that most of the time, most of the people who are downloading it for free weren't going to pay for it anyway even if they couldn't download it for free.

Update: Since separately I've just posted a link to a story on Hulu and its competitors it seemed important to point this out:  I know the above waves a somewhat dismissive hand at the current revenue potential  of viewing of TV shows via the Internet, but that was at the level of individual show episodes, which usually doesn’t scale well.   But if you look at iTunes, Hulu, etc. as  large networks for distributing a multitude of content,  in the aggregate there is already quite a bit of scale, and potential for much more.

 
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