Would the big U.S. TV networks sell their stations?

Earlier today, TVNewsCheck ran a story about the positions of the Big 4 U.S. television networks (ABC, CBS, Fox and NBC) on ATSC 3.0. The Advanced Television Systems Committee (ATSC) administers the U.S. standard for digital terrestrial television broadcasting, and ATSC 1.0 is the system currently in use. ATSC 3.0 is intended to implement capabilities that are limited or missing in the current standard, including support for image resolutions beyond HD. Most importantly for many broadcasters, however, is that ATSC is intended to bring mobile TV reception to parity with the fixed HDTVs that we use today, The broadcasting industry realizes that an ever-increasing percentage of its audience is watching television outside the home on smartphones and tablets, but today, access to those devices is mediated by the mobile phone carriers (AT&T, T-Mobile, Sprint, Verizon, etc.). Broadcasters want direct access to those devices and viewers, and are hoping that ATSC 3.0 will give them that access.

The transition to ATSC 3.0 won't be without problems: Broadcasters spent many billions of dollars on new cameras, production equipment and transmitters to move from analog to digital television. Moving from ATSC 1.0 to 3.0 probably won't entail that level of investment, but it will still be expensive for broadcasters. In addition, smartphone manufacturers, mobile phone carriers and consumer electronics companies will have to be convinced (or required by law) to support the new features of ATSC 3.0 in their products. That will take time--potentially as long as ten years.

According to TVNewsCheck, both ABC and CBS have gone on the record as withholding their judgment on ATSC 3.0. Both NBC and Fox support ATSC 3.0 in principle, but both are waiting for more details of the standard to emerge before making a commitment. That led me to wonder whether the network broadcasters actually want or need to make the investments needed to support ATSC 3.0 in the television stations that they own.

All of the top four commercial television networks in the U.S. own and operate several television stations in major cities; in the industry, these are called O&Os (for Owned & Operated.) For example, all four networks own and operate stations in New York, Los Angeles, Chicago and Philadelphia. In Dallas-Fort Worth, all but ABC own and operate their own stations; in San Francisco-Oakland-San Jose, all but Fox own their own stations. The local stations are a big source of revenue and earnings for the networks; for example, in 2013, CBS's network had gross revenues of $8,645 billion and operating income of $1.593 billion, while its local Owned & Operated stations, both television and radio, gross revenues of $2.696 billion and operating income of $807 million. On a percentage basis, the local stations, while not the most profitable unit of CBS, made a much bigger profit than the network (30% vs. 18%.)

On the surface, it seems obvious that CBS, and the other big networks, should keep their stations. However, when you look further, the choice becomes less clear:

• The major networks could easily get $1 billion or more for each of their stations in the top U.S. markets, and those sales would be taxed as long-term capital gains, not ordinary income.
• The networks are already getting a significant amount of their income from retransmission fees charged to cable, satellite and IPTV video operators. They get those fees directly from the video operators in the markets where they own stations, and indirectly in other markets through the fees that they charge their affiliates for carrying their programs. If the networks sell some or all of their stations, they would get affiliate fees from those stations without any of the costs of operating the stations.
• If the networks no longer own over-the-air stations, they would no longer be directly subject to FCC rules. That means no more multi-million dollar fines for "fleeting expletives" or unplanned nipple slips. The networks would still have to abide by FCC content rules to protect their affiliates, however.
• Over 90% of U.S. households already get their television via cable, satellite or IPTV. Over-the-air reception is increasingly an anachronism.

As little as ten years ago, it would have been unthinkable for the Big 4 networks to sell their stations--if anything, they aggressively wanted to buy more. However, since then, we went through the 2008 Great Recession, which hammered local ad revenues. Network television viewership has been declining for several years, and ratings for many of today's successful network series would have guaranteed their cancellation just a few years ago. Now, many industry analysts are forecasting that digital will supplant broadcast television as the biggest recipient of advertising revenue within the next few years. If the Big 4 have the choice between spending billions of dollars to upgrade their stations to comply with ATSC 3.0, or making billions of dollars from the sale of their stations, it's looking increasing likely that sales, at least of their smaller-market stations, will make more sense.

Cable Networks 2.0 (or 3.0)

The cable network model that we all know, which was based on the broadcast television model that we all know, is this: A centralized organization acquires programming, schedules and distributes it to affiliates (broadcasters) or cable operators. The network produces some of its own programming (or most of it, if it's a news or sports channel), but it acts primarily as an aggregator, scheduler and dsitributor.

It was a wonderful model for 1925, or 1949, but it's completely obsolete today. It was based on the technical limitations of the dawn of the radio and television eras, limitations that no longer exist. It was effectively impossible to have a two-way conversation between media creators and consumers prior to the Internet and broadband speeds. Now, we've got the means for that two- (or N-) way dialog. The cost of production and distribution is a tiny fraction of what it was even thirty years ago, which was in turn far less expensive than what was being done in the 1960s. YouTube...well, you know all about YouTube, and Vimeo, and Dailymotion, and, and...

My point is that the one-way, centralized network model is obsolete. I don't believe that a new, one-way network will be successful. Future cable networks will have to bake an open, two-way model into their architecture from the very beginning. What does that mean?

It means that the network becomes more of a curator than an all-powerful programmer. It selects and makes available content from external producers, internal teams and viewer/producers (since viewers can now easily be their own producers). It also enables viewers to curate their own programming and make their own selections.

The production process will become far more distributed. Viewers with a few thousand dollars and a high degree of patience can create content that looks as good as anything seen on broadcast television or cable. Field production is simple; it's done thousands of times a day. Studios can be built and sent anywhere. A shipping container can be turned into a perfectly functional television studio. Put it on a fast-and-dirty foundation and you've got a permanent studio. If you want room for an audience, there are a lot of older movie theaters out there being underutilized or gathering dust. Extend the stage, put in LED and fluorescent lights to keep the heating load down, and voila, instant studio!

You may argue that this model has already been tried, at Current, and it hasn't worked very well: Current TV just laid off 80 staffers, shut down production on some shows, and is consolidating two Los Angeles facilities into one. However, the problem wasn't with the production model, it was with trying to fit that model into a conventional cable/broadcast channel. The most-watched shows on Current have been InfoMania and SuperNews: Fairly conventional (from a structural point of view) 30-minute productions that viewers can find easily and that are repeated many times during the week. The bulk of Current's airday has been taken up with brief, four-to-eight minute videos, many of which are submitted by viewers. The problem is that it's been impossible to know exactly what's going to be on when. If you happen to tune in when they're showing a video that's engaging, you're likely to stick around for a while, but if you don't like what you see when you first tune in, you're unlikely to wait around for something better.

The problem with Current TV is that it's programmed from the top down, just like any other cable network, even though viewers contribute a lot of content. Current also has a web presence that allows a more egalitarian approach to programming (in other words, watch what you want, when you want), but with serious limitations: Cable operators prohibit Current.com from running its on-air feed live, or from making programs available prior to their airdates.

That brings me to my last point: The cable network of the future will reside primarily on the Internet, not on cable. So long as the cable operators can dictate terms of when and where programming can be shown, no cable network can become a truly two-way operation. That's why Current is struggling, and why Hulu is only a shadow of what it could be.

In the future, the cable network will be equivalent to the "curated feed", but the open ecosystem will reside on the Internet.