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THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE

DEPARTMENT OF TELECOMMUNICATIONS

TRANSITIONING FROM BROADCAST TO ONLINE PLATFORMS

ETHAN ZERBE SPRING 2020

A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in Telecommunications with honors in Telecommunications

Reviewed and approved* by the following:

Krishna Jayakar Professor of Communications Thesis Supervisor and Honors Adviser

Matthew Jackson Associate Professor of Communications, Head of Department of Telecommunications Faculty Reader

* Electronic approvals are on file. i ABSTRACT

This thesis examines the current state of the television broadcast industry and how companies are adapting their business strategies to align to the recent rise of Streaming Video On

Demand (SVOD) services. CBS is currently at the forefront of this trend, with their streaming service CBS All Access having been out for over half a decade. This thesis examines the company’s demographic and financial information, and uses said information to better understand the factors that go into shaping the company’s current trajectory. It concludes by using the case example of CBS to better understand the broadcasting industry and the future for more traditional television companies as a whole.

ii TABLE OF CONTENTS

LIST OF FIGURES ...... iii

LIST OF TABLES ...... iv

ACKNOWLEDGEMENTS ...... v

1.Introduction ...... 1

2.Literature Review...... 4

3.Methodology and Sources...... 7

4.Overview of the CBS Corporation ...... 10

5.Case Study of CBS All Access ...... 13

6.SVOD Demographics ...... 17

7.Broadcasting Financials ...... 20

8.Conclusion ...... 27

BIBLIOGRAPHY ...... 31

iii LIST OF FIGURES

Figure 1. CBS All Access Subscribers Over Time (in Millions)……………………14

Figure 2. Number of US Subscribers by Platform in 2019 (in Millions)…………....15

Figure 3. Average Number of SVOD Services Among US Households…………....17

Figure 4. CBS Revenue by Type from 2018 to 2019 (in Billions)………………….20

Figure 5. CBS Net Advertising Revenue/Total Revenue (%)………………………23

iv LIST OF TABLES

Table 1. Number of Online Subscribers in the US Over Time (in Millions)………15

Table 2. Total TV Ad Spending in the US (in Billions) Over Time…………..…...21

Table 3. Revenues by Type as a Percentage of Total Revenue Earnings by Year....22

v ACKNOWLEDGEMENTS

I would like to thank Krishna Jayakar and Matthew Jackson for their help and guidance with writing this thesis.

1

1. Introduction

Recent trends over the last decade have shown a in the way audiences are consuming television in the . With the rise of the in the early 21st century as an integral part of most people’s everyday lives, everyone is turning to online platforms for their primary source of entertainment as opposed to more traditional forms of .

This is among one of the reasons for the recent phenomenon called “cord cutting”: the discontinuing of cable subscriptions in favor of other services for entertainment purposes

(Strangelove, 2015). In recent years, this trend has increased significantly. In 2015 alone, one in seven Americans identified as “cord cutters,” which is a major portion of potential audiences

(Pew, 2015).

A result of this shift has been a decline in ratings across television and pay TV networks nationwide as more and more people, especially in the younger demographics, are quitting cable networks for alternative forms of content consumption. Nationally, the largest pay TV providers saw 5 million lost subscribers over the past 5 years, with losses more than tripling in Q2 of 2019

(Hayes, 2019). Over the last 4 years alone, the largest television networks in the United States

(NBC, CBS, ABC, and Fox) have all seen a decrease in total viewers by as much as one million

(Moraes, 2019). The result of this decline in ratings leaves the broadcast and basic cable networks in a difficult position, given how fundamental advertising is to their overall income. In the United States alone, over 190 billion dollars was spent on advertising in 2016, the largest amount by any country in the world (Guttmann, 2017). The majority of this spending was for traditional media forms such as , television, and newspapers. Then in 2019, for the first time

2 digital advertising on platforms like Google and outspent traditional advertising

(Wagner, 2019). This major shift in the system has the potential to collapse many network giants unless changes are made in the way these entertainment industries acquire parts of their general revenue.

This thesis attempts to evaluate how the relationship between traditional and online media has affected broadcasters. Broadcasters in this context is referring to television stations that work with local affiliates to air programming from a unified source while primarily relying on ad revenue (Halbrooks, 2019). For these broadcasting networks, there is still uncertainty about what the future may hold with regard to where their main form of income will draw from.

CBS considers its advertising department as “strong” (CBS, 2019) and company reports show the amount of money earned from advertising as remaining consistent (VIACBS, 2020), while audience reports show the ratings on traditional television falling, while consumption of online media is rising (Nielsen, 2019).

This shows the dichotomy between linear and non-linear forms of entertainment, with traditional television networks serving as a linear experience where the viewer has little control over when they are shown what they desire to watch (BMCC, 2016). Viewers of linear television are bound to the time slots allotted to the programming they wish to see and any attempt to get around these time restrictions require external applications like DVR. This used to be the only way people consumed television programming until online media such as streaming allowed for a non-linear experience where the viewer can choose when to watch for however long they wish.

More control has made non-linear an increasingly popular form of media over traditional television that until had solely relied on a linear experience.

3 With all of this uncertainty regarding the viability of the traditional model for monetary earnings for broadcasting networks, this thesis seeks to help answer the question: will television as we know it today survive this wave of streaming services that are taking over modern entertainment?

CBS and CBS All Access will be used as a single-case study to examine this phenomenon, which will then be extended to better understand the television broadcast industry as a whole. The reason for selecting CBS All Access is that compared to other streaming services being unrolled by competing broadcast networks, All Access has been around for a long time and has plenty of useful data relating to it (for more information see Methodology and Sources).

The overall structure of the paper is as follows. First, the basic foundation for the CBS corporation as a whole will be examined to see where the company today currently stands and how its recent merger with has shaped it, followed by a similar overview of CBS All

Access. Then, the next sections cover the findings regarding streaming services in the United

States and the financial data available for the CBS corporation. The paper ends with a conclusion regarding the overall findings of the research and tentative predictions regarding the future of television.

These findings show a lucrative opportunity for television networks in online streaming.

A wave of young audiences are becoming more invested in streaming content, and the way the market is currently positioned there is an opportunity for more services to be released before saturation occurs. This will allow the broadcast networks to utilize both advertising and streaming subscriptions in a multi-platform capacity that can stem the loss of revenue from cable cutting. Despite the recent trajectory of cord cutting, traditional television is not going anywhere anytime soon and growth in streaming will make broadcast networks stronger than ever.

4 2.

Literature Review

Many articles and trade journals today tend to focus on companies like ,

Hulu, HBO, Video, and now more recently, Disney+, as the next big things in the way people consume media. Ever since Netflix started producing original content in 2012, websites such as and The have published articles crediting the company for having “changed the way we consume television” (Bakare, 2018) and “helped change the way we consume entertainment” (Mudhar, 2019). Investopedia has similarly written articles about

Netflix’s disruption of traditional television programming and cable industry, crediting it for

“breaking the mold for how television is made and watched” (Investopedia, 2020). In his book on the future of television entertainment, Michael Strangelove devotes significant space to

Netflix and other popular streaming services since companies like CBS and Time Warner don’t

“...come close to the market share of online audiences gained by Netflix and ” (Strangelove,

145).

There are many studies being done on how the greater market share is changing the entertainment ecosystem and whether streaming is the way of the future or if it is a bubble waiting to pop as more and more companies saturate the market with their own services. In 2017, the Pew Research Center conducted a study about how the viewing habits of young viewers has become altered, specifically as it related to Netflix and HBO Go (Pew, 2017). This focus on entertainment streaming companies often leads to the more traditional television companies being overlooked or discredited as simply suffering a slow, inevitable end to newer forms of entertainment. It is important to look more closely at the way broadcast television fits into this equation as companies learn that they must adapt or die in the near future.

5 What people in the entertainment industry still don’t know yet is what effect the rise of all these new Streaming (SVOD) services will have on the market. Netflix, founded in 1997 originally as a DVD rental service (Le, 2019), has been in the SVOD game for many years now as a free-standing, over-the-top content provider which rose in prominence as an ad-free entertainment option. Other companies have followed its lead and created their own services with different tradeoffs. Hulu streaming debuted in 2007 (Bloomberg, 2020) as a versatile platform that can be bundled with other services such as ESPN+ and Spotify as a more cost-effective solution. Hulu supports less expensive, ad supported options, unlike Netflix which is completely ad-free. HBO offered its content for streaming ad-free (HBO Go) in 2010 for existing TV subscribers and then later in the form of a standalone service (HBO Now) in 2015.

Amazon Prime began developing its own streaming service in the form of Prime Video in 2006, which serves as complimentary content alongside Prime Music and Prime Reading, which are added benefits for a subscription to the shipping service. Amazon is an interesting case where a traditionally e-commerce site became involved in digital streaming as a part of a bundle offering for shipping subscribers. The most recent player on the block has been Disney Plus, which debuted in 2019 as an ad-free streaming experience where the huge library of quality content serves as its main selling point (Spangler, 2019). But these are still unknown waters for all of these companies, and nobody knows what effect releasing all of these streaming services will have on the market since it has never been done before. This is why there is need for new research to examine this growing phenomenon.

The goal of this research paper is to examine and compare the online content distribution strategies of one of the three biggest broadcast companies, CBS, in the context of changes in the competitive landscape for television production and distribution. Specifically, look at the

6 strategy being employed to SVOD services that will compete against other already established services such as Netflix or HBO.

By using CBS All Access as a case study in how a traditional media company moves to online platforms, two hypotheses may be tested with regards to how businesses are adapting into the 21st century of entertainment. Through a review of the published research and conversations with professionals in the industry, two competing explanations are identified regarding the move to online platforms. They are that either creating SVOD services is a way for companies like

CBS to follow their audiences that have left linear television and reclaim these lost demos, or that creating SVOD services is a way to expand their market by reaching new audiences and growing their business in that fashion. To further explore these two ideas, an in-depth study is conducted of the current state of the television industry in the United States and specifically of the CBS corporation’s position in this industry. By looking at financial and ratings data for both

CBS and its competitors, this study aims to ultimately determine whether the Internet will be a viable revenue source for traditional broadcast networks in the future.

7 3.

Methodology and Sources

For this research topic, an exploratory single-case study was chosen, focusing on one particular company in the television broadcast industry. An exploratory case study is defined as a type of study which “investigates distinct phenomena characterized by a lack of detailed preliminary research” (Mills, 2012). The decision to use an exploratory case study was based on a number of factors given the topic for this thesis. The transition of broadcast networks to online distribution platforms is a relatively new phenomenon; no prior examples of this have ever occurred in the history of entertainment media. This means a history or archival analysis would be impossible for this subject matter. It was decided to focus on just one company for this study to allow a deeper and more focused examination of the data. Also, the primary motivation of the study was to examine what the strategy of one company looks like to gain insight over national trends.

CBS was selected out of the big three broadcast networks because of its stand-alone, already established streaming service; CBS All Access. It is worth noting that this wasn’t the first time a television broadcast network tried a hand at streaming. Hulu was formed in 2007 and initially began as a cooperative venture between NBC Universal, , and later on ABC Enterprises (Hosch, 2009). While this service began over half a decade before

All Access, it wasn’t ideal for the purposes of this paper. Because Hulu started as a joint venture, it isn’t as useful in studying how the creation of one company’s streaming service can help recapture lost audiences for their network. So while Hulu could easily have been a viable case study, this paper is more interested in studying competition between television networks as opposed to cooperation. NBC has recently announced a new streaming service called Peacock

8 which will serve as a direct competitor to CBS. However, at the time of writing this paper the service has not be released. CBS is one of the longest running broadcast channels in the history of television, and with its streaming service over half a decade old, it serves as the perfect company to study shifts in the broadcast industry.

When looking at which type of case study to conduct, the exploratory case study was chosen since it enables the researcher to look more closely into a particular phenomenon: the strategy of shifting from traditional to online platforms by broadcast networks and what effect this is having on the market. This was a scenario where the phenomenon mattered more than the actual case subject (CBS). But it is also a project where the results were not meant to be concrete explanations but rather new insights that can be up for interpretation. Since this phenomenon is currently ongoing, there is no definitive end point for the research beyond estimated projections.

As such, the time frame covers the starting point of CBS All Access (2014) until the time of the writing of this paper in 2020.

When looking for evidence that would be used for this case, a variety of pathways were examined as means procure data. Books and other print publications were less useful for the study due to the recency of the phenomenon. The pace of change in the industry and in technology has been so dramatic that the information in publications older than a couple of years were not useful for this study. In the time it took to conduct research on the subject material, major changes occurred within the overall industry and at CBS, so sources were required that were as up to date as possible. Trade journals and online publications thus served as the primary source of research, since they sourced credible data from the most contemporary information being given out by the companies themselves. The official website for CBS (which later became

VIACOMCBS) became an incredibly useful resource for insider information on earnings,

9 business policy, and company leadership. In addition, this website allowed access to earnings calls made for investor information. A senior management level person who works for the company’s television distribution and online content was also interviewed, who wishes to remain . Databases were helpful in providing comparative analysis on both CBS and its competitors to track how the company was faring in relation to others. A1ccess to IBIS World and S&P Global through university resources was vital in this regard.

As research progressed, the main focus was shifted through different aspects of this topic.

It started by first researching CBS overall as a company, including where their main sources of revenue traditionally came from and where the company currently stands financially. Then it shifted to specifically looking at CBS All Access as a part of this revenue model and its relation to the wider change in media consumption that is cable cutting for SVOD. This allowed comparisons of CBS to other broadcast companies and their media strategies. Dividing research into different sections for data regarding ratings, demographics, and financials was beneficial in organizing the different aspects of the topic.

10 4.

Overview of the CBS Corporation

The CBS Corporation has remained one of the largest media companies within the United

States ever since its founding in 1927 (McGinley, 2019). It has historically been classified as one of the “Big Three” American broadcasting television networks alongside ABC and NBC during the early era of television. Prior to the recent VIACOM merger in December of 2019, the overall corporation was divided into four main segments: entertainment, cable networks, , and local broadcasting-- including 29 different TV stations (McGinley, 2019). These include a wide range of programming that reaches an array of audience segments, including broadcast news, public affairs, and sports. Entertainment made up the majority (70%) of the revenue for CBS in

2018 and includes the CBS Television Network, which produces the programming found on their main channel and CBS All Access (Annual Reports, 2018). Other segments such as publishing

(6%) and local media (13%) made a small fraction of the corporation's earnings. Today, the combination of CBS and VIACOM has restructured the company to further include theatrical segments of revenue in addition to already owned telecom industries such as radio (VIACBS,

2019). For the purposes of this paper, these segments of the company will not be focused on.

Robert M. Bakish serves as President and CEO of the VIACOMCBS parent company

(VIACBS, 2019) while serves as Chairman and Chief Executive Officer overseeing the CBS-branded assets of the Corporation (Littleton, 2019). Inalliello’s goal as Chief

Executive over the company is to continue pushing CBS as a multi-platform premium content company, which has been a cornerstone in the company’s public branding for over a decade.

This idea of selling premium content is continually brought up by upper management for the company as one of its strongest assets and source for the company’s success (CBS Corp, 2019).

11 Premium content is what marketers want and is the crux for growth in ad revenue. As such, the

CBS Corporation has invested a lot of money into developing new programs for its audiences

(see Broadcasting Financials).

On August 13th, 2019, a second merger between the CBS Corporation and Viacom was announced and officially completed on December 4th, 2019 (CBS Corporation, 2019). Viacom, a , owns many which made it a valuable asset for CBS, including Pluto TV, , VH1, and . The combined company now has a vastly expanded portfolio of content, strengthening the CBS brand to compete against the likes of other diversified companies such as Disney and . Bob Bakish continues CBS’s policy of using premium content as a powerhouse for extending the company’s reach in advertising based and subscription based services (Weprin, 2019). The idea is that since CBS is more subscription based and Viacom more advertiser based, combining the two serves was a way to “appeal across the board” according to senior analyst Tuna Amobi (Atkinson, 2019). This relates to another quote made by the former Viacom CEO Summer Redstone during the companies’ previous merger back in 2000: “Our businesses span all ages and all audiences, across virtually all media” (CBS News, 2000). This desire to dominate in both advertising and subscriptions is an important aspect of CBS’s business model that will be looked at more closely when analyzing its financial information.

The company has continued to expand its offering of content into the modern day with diginets such as , released in 2019. Diginets, short for digital networks, are a method of compressing programming streams into a single signal that reduces video quality but increases efficiency of content distribution. This allows CBS to expand its offerings to a wide variety of

12 niche audiences, such as in the case of Dabl which offers feel-good lifestyle programming to middle aged women (Albiniak, 2019).

But perhaps the biggest shift CBS made in the turn of the decade was the move onto online SVOD with the release of CBS All Access in 2014. This was a major move for the company and particularly relevant for the purposes of this paper, since the early adoption of subscription based streaming services by CBS makes it a unique case study into how this business strategy affects the parent company.

13

5.

Case Study of CBS All Access

CBS launched All Access on October 28th, 2014, as a risky new venture to push forward with the rise of SVOD. While the company’s rivals NBC, ABC, and Fox pooled some of their content to help launch Hulu in 2007, CBS kept its content and digital rights in house until it could accumulate enough of an offering that it could start its own streaming service (Steel,

2014).

Unlike other streaming services like Netflix, which offer an ad-free viewing experience with a flat base fee, CBS All Access went with a flexible paying strategy based on viewer preference. Customers who wish to pay less can opt in for a “standard version” that costs $5.99

($7 cheaper than Netflix) with limited . But then it also offers a “premium version” for those who don’t want any ads that costs 4 dollars more a month (Bond, 2017). According to a source at

CBS, despite being priced higher than the standard version, premium All Access is the more popular choice among consumers for its ad-free content. This is similar to the strategy employed by Hulu in offering the choice between ad and ad free subscription plans. While originally

“laughed at” for trying to take on pre-established titans of the SVOD market, All Access quickly grew thanks in part to its offering of what Ianniello likes to call “premium content”, such as the exclusive show Discovery. On February 14th, 2019, Ianniello announced All Access had acquired over 4 million subscribers, which was ahead of the company’s original goal of having that many subscribers by 2020 (Pascale, 2019).

14

Figure 1. CBS All Access Subscribers Over Time (in Millions)

Figure 1 shows this continuous growth in subscribers from 2014 to 2019. If the amount of subscribers is multiplied by the monthly cost of a subscription (using the premium price for simplicity's sake), then multiplied by the number of months in a year, CBS roughly made $480 million from All Access subscriptions in 2019 alone. This would be up from the $300 million which would have been made the year prior, an increase by over 37%.

Ianniello sees original content as the driver of these sales, and predicts All Access will continue to successfully grow in the future, seeing it hitting over 25 million subscribers combined with Showtime by 2022. While this is a relatively small amount compared to the 61.7 million subscribers of Netflix or the 28 million of Hulu, it shows that there is indeed growth in the industry for new SVOD services to catch up to the more established brands (Cook, 2019).

15

Figure 2. Number of US Subscribers by Platform in 2019 (in Millions)

Table 1. Number of Online Subscribers in the US Over Time (in Millions)

16 While Figure 2 helps visualize the scope in size of the larger, more established SVOD services, Table 1 shows how the growth rates between these companies compare. It is important to note that while Netflix has the greatest total number of subscribers, it is accumulating new subscribers at a slower rate because of how long the service has been out (GraphFarm, 2020).

Both HBO now and CBS All Access were introduced at a similar period in time (2015 and 2014 respectively) and have both seen a high growth rate over the last 4 years. The incredibly high growth rate seen from HBO shouldn’t detract from All Access’s success however, since this steep growth could be due to a number of factors, including the final season of HBO’s hit series

Game of Thrones coming out in 2019. All Access’s high growth rate and reliance on premium, exclusive content will help it continue to prosper in the future.

17

6.

SVOD Demographics

In an August interview, Chief Digital Officer Marc DeBevoise made the statement regarding CBS All Access that there is “plenty of room to grow,” citing the fact that 80% of customers have a SVOD service and most customers have up to 3 different subscriptions

(Malone, 2019). This statement was backed up by data collected in a 2019 study by Ampere

Analysis, where 33,000 internet users from 16 different countries were surveyed to find out what the average number of SVOD services were owned per household. Figure 3 shows this steady rise from 2015 to 2018 in the number of services owned, going from an average of around 1.7 streaming services per household to just under 3 services (eMarketer, 2019).

Figure 3. Average Number of SVOD Services Among US Households

18 In a more recent survey conducted by Piper Jaffray for Netflix, most consumers of

SVOD services would not give up their current subscriptions in favor of a newer service but would rather maintain the subscriptions they currently have. This is due in part, according to analyst Michael Olson, to reduced spending on traditional TV offerings by consumers (Sheetz,

2019). As consumers spend less on cable, more of their disposable income becomes available to spend on SVOD services.

In the 2019 Nielson Total Audience Report as well, household access to SVOD services increased within the last year across every ethnic group in the United States (Nielsen, 2019).

Moviegoers 18 and older, when asked what they usually preferred to watch, voted for a paid streaming service over live television by 9 percent. When comparing age demographics to monitor viewing patterns for watching on a television versus watching video on a computer, adults aged 65 years and older reported watching the most amount of television while adults between the ages of 18 and 34 reported watching the most amount of computer content. Pew

Research data analyzed in 2017 supports the finding that, out of all the main age demographics for adults, people ages 18 to 29 were the only demographic that reported having online streaming as the primary way they consume television episodes as opposed to cable (Pew, 2017).

The proliferation of paid video subscription as the rising form of entertainment, particularly among young people, matches the success CBS has had with All Access. Ianniello in

June of 2019 reported that All Access subscribers watch twice as much as CBS.com users,

CBS’s free but limited digital platform (Munson, 2019). Despite having to pay for All Access, consumers of SVOD services appear more willing to watch video content on a streaming service than the advertisement based freemium model.

19 While there is room for growth in the SVOD industry, as evidenced by its increase in the past few years, there is a limit to the amount that the market can handle. Mike Vorhaus, a media consultant for Vorhaus advisers, cites research from the conference which suggests that consumers can only handle another 1.6 streaming services (Atkinson, 2019). The argument is that an overwhelming amount of services will lead to consumer confusion and decision paralysis when it comes to what to watch. Since companies like CBS are deciding to keep their offerings in-house, the distribution of shows is more spread out and it has thus become increasingly harder to find the shows people want to watch on just a single service offering.

20 7.

Broadcasting Financials

The CBS Corporation as a whole receives revenue from a variety of sources. On

February 20, 2020, total revenue for the year 2019 was reported at being $27.8 billion, up 10 percent from 2018 (VIACBS, 2020). When looking at revenue by type, the three main sources of revenue for the company included advertising, content licensing, and subscription fees, all of which were up from the year prior.

Figure 4. CBS Revenue by Type from 2018 to 2019 (in Billions)

Advertising for many broadcast companies, including CBS, has traditionally been their main form of revenue. Despite the increasing level of cord cutting and the shift to advertisement- free subscription platforms, as seen in the previous section, advertising as a whole still remains a highly lucrative industry in the United States. An eMarketer analysis done in 2018 showed that

21 while the amount of spending on advertising across the entire United States has slight fluctuations, the overall amount spent continues to hover at around $70 billion (Feldman, 2018).

Table 2. Total TV Ad Spending in the US (in Billions) Over Time

While there have been decreases in the total amount spent on advertising in the last several years, most notably in 2017 and 2019, the overall amount has increased over the past half decade. In order to put this change into context, the growth of the United States economy is considered. In the period of time between 2016 (when advertising spending stopped increasing) to 2019, the overall GDP of the United States saw a growth in its GDP percentage by over 2 percent (International Monetary Fund, N/A). When taking into account the rate of inflation since

2016, where the US dollar was worth 7.8 percent less of what it is worth in 2020, this shows that advertising spending is not keeping up with the change in the United State economy. This could be a sign that spending is in fact slowing down in United States instead of keeping up at a

22 consistent increase. So while advertising spending is technically remaining constant, by doing so it is in fact actually falling behind the curve.

U.S. TV Network Industry Benchmarks support this evidence of advertising revenue remaining constant across the entire industry. Gross advertising revenue and net advertising revenue have both remained consistent at around $28 billion and $24 billion respectively over the last 4 years and is predicted to stay at these levels through 2022 (S&P Global, 2019).

While the money brought in by TV advertising appears to remain consistent, the percentage of how much of these companies’ revenues come from advertising has shifted. The following table shows what percentage of the company’s total revenue came from each of the three main revenue sources: advertising, content licensing and distribution, and affiliate and subscription fees (Annual Reports, 2020).

Table 3. Revenues by Type as a Percentage of Total Revenue Earnings by Year

To clarify, this is what each of these three revenue sources encompass for the company, in accordance to the official CBS annual report. Advertising is made up of both national and

23 local revenue that is associated with the CBS Television Network. Content licensing are the fees made from distributing CBS owned content to 3rd parties and other multi-media platforms as a part of multi-year agreements. Affiliate and subscription fees incorporate cable affiliate fees, retransmission fees, station affiliate fees, and digital streaming subscriptions from both CBS All

Access and Showtime. Other is composed of every other source of revenue the company earns.

From this data on Table 3, there is a noticeable increase in affiliate and subscription fees which is proportional to the decrease in advertising, as content licensing has remained stagnant over the last several years. So while the amount of money earned through advertising has remained constant, the actual percentage of the company’s total earnings that it makes up is getting replaced by affiliate and subscription fees.

Figure 5. CBS Net Advertising Revenue/Total Revenue (%)

24 When looking at net advertising revenue as a percentage of overall revenue for the CBS

Corporation, Figure 5 shows a steady drop over the timespan of 2016 to 2023 (S&P Global,

2019). This number has decreased from 83.5 percent in 2016 to a projected 69.9 percent in 2023.

This matches a similar pattern followed by competitors NBC (which dropped from 87.2% to 61.1%) and ABC (which dropped from 78.9% to 56.6%), which also follows trends across the board as the US industry average has fallen from 81 percent to 61.1 percent. This actually makes

CBS above average when it comes to how much net advertising revenue has fallen. CBS also comes out above average when it comes to net advertising revenue per 24 hour rating point, achieving $1.6 billion compared to the industry average of $1.2 billion. Again falling in line with other large broadcast networks who have also maintained revenue numbers above the national average.

Despite being above average with the total decline in money brought in through advertising, this is still a large decline in revenue for these companies. During the 7 year timespan between 2016 and 2023, all 3 of the major broadcasting networks are projected to lose over $1 billion in both gross advertising revenue and net advertising revenue totals (S&P Global,

2019). While the CBS corporation has seen a slight increase in total advertising revenue in the past year (see Figure 4), this short-term increase isn’t indicative of the long-term trouble advertising is in. However, despite the loss in advertising revenue, programming and operating expenses remain high. For the CBS Corporation, programming expenses rose from $4.04 billion in 2016 to $4.57 billion in 2019, with a projected increase to up to $4.75 billion by 2021 (S&P

Global, 2019). Similar trends can be observed from NBC and ABC as well, however neither of these companies have the same budget for programming expenses that CBS has currently. This relates back to the company’s brand of serving premium content to advertisers, although it is

25 uncertain how long this can last given the decreasing amount of money advertising is bringing into the company.

While advertising has overall been falling, minus minor fluctuations from year to year, the amount of money accumulated through subscriptions with CBS All Access has been increasing. In 2019, CBS Corporation reported earnings of $1.6 billion through subscription fees, an increase of 12 percent from 2018 (VIACBS, 2020). Unfortunately, it is worth noting that official reports issued by VIACOMCBS don’t separate revenue by streaming service, so for the purposes of this paper there was no way to distinguish how much All Access made when compared to other streaming services the company owns like Showtime.

It is also important to note how affiliate fees relate to subscription revenue. As discussed earlier in this section, CBS lumps affiliate and subscription revenue into a single category. While the company made $1.6 billion over the course of 2019 in subscription revenue, total affiliate revenue totaled $2.13 billion in just the fourth quarter of 2019 alone. Affiliate fees make up a huge portion of CBS’s total revenue, as cable operators pay for licensed content to offer their cable subscribers. There is a complicated relationship between affiliate and subscription revenue, because while affiliate revenue may increase overtime, streaming services actually hurt this revenue source. This is because as more content is being kept in-house for streaming purposes, there is less of an offering for cable to license. With that being said, even if affiliate revenue decreases because of streaming, it won’t noticeably show up in financial data since they are part of the same category financially speaking.

While advertising revenue fluctuates on a year-to-year basis with an overall downwards trend, subscription revenue has shown to increase consistently, with the highest estimate placing

US subscription revenue at $235 billion by 2021 (Watson, 2018). This, in comparison to the

26 $69.17 billion spent on just TV advertising in the United States in 2019, shows just how valuable streaming is not just as a way to retract lost income from ratings but to access a whole new spectrum of money.

27 8. Conclusion

What initially inspired the writing of this paper were the recent observable trends of

“cord cutting” in the United States in response to alternative forms of television consumption.

The goal was to see what more traditional television broadcast networks were doing to handle this marketplace shift. Below are the comments this thesis is confident in making regarding this topic.

This paper first began by asking whether traditional has a place in a future where streaming is the dominant form of televised consumption. A case study approach was used to investigate this question, using CBS All Access as an example of a major television network utilizing streaming. Two competing hypotheses were stated regarding the decision by the CBS corporation to start their own streaming service: a way to either reclaim lost cable subscribers who had switched off of traditional television services for SVOD; or acquire new audiences who may not have been willing to watch CBS television live in the first place but would pay for viewership through SVOD. Then, this paper asked the question of whether the market will be able to support the significant rise in the amount of SVOD services if companies all followed the same model CBS has in recent years.

Based on the accumulated data gathered from multiple different sources, evidence suggests that there is certainly room for growth in the SVOD industry, but to a limited extent. In economics, once the consumer demand has been satisfied any surplus produced will reduce in value. This creates saturation in the market, leaving companies in a position where, if they wish to increase monetary growth, they must either increase the product’s quality or reduce the price of their service. Either of these options will reduce profits when increased production costs are

28 subtracted from overall revenue. With widespread streaming, while there may be growth in 2020 for more services to be released and charge subscription fees, incremental demand will eventually taper off once the US market has reached its saturation point. Projected growth for

CBS All Access as well as the newly released Peacock will continue until full audience satisfaction is reached and all potential subscribers who would be willing to pay for a SVOD subscription with these companies has one. Afterwards, it will be much harder to increase subscriber counts domestically, since previously cited evidence shows it is hard to get consumers to give up a subscription service they already pay for in exchange for another. This is where running the risk of over-saturating the market comes into play, and television companies in the future will have to take this into serious consideration before more new streaming services are created.

What this means for advertising is that while advertising sales may continue serving as the primary source of revenue for broadcasting companies, the percentage of the company’s total revenue it contributes will shrink until the point where the market is stable. There will always be some demand for traditional media, especially from older demographics. Radio as an example was said to be dying out once television units became affordable in the United States, however to this day radio still plays a large role in the telecommunications industry, albeit a smaller role than it had before. Likewise, there will absolutely always be demand for live television viewership and advertising will continue to be lucrative as long as audiences are given the same type of quality content as they’ve always had.

There doesn’t seem to be sufficient evidence to say that traditional broadcasting networks will die out thanks to SVOD stealing all their audiences. Cable cutting will likely continue in the future until only those who desire cable will continue paying for it while those who were

29 previously forced to pay for it will have sufficient options that better suit their needs. Research trends show that younger people prefer advertisement-free content and are willing to pay more money for accessing such content. So by allowing the option of CBS All Access to those who would rather consume their television without supplemental advertising, CBS can reclaim lost cable cutters while at the same time attract young adults who are becoming financially independent for the first time who never had cable in the first place. This supports the first hypothesis in the short term, but in the long term may also support the second hypothesis as well.

The internet can indeed serve as an incredibly lucrative method of acquiring revenue when working alongside advertising. The advantages of subscription based services make them a valuable means of revenue for these broadcasting companies when compared to just using advertising. Advertisement pricing is affected by viewer demographics such as age and gender, since not all viewers are worth the same amount for certain advertisers. So an ad seller must offer prices that reflect the value of the average viewer, which means lowering per viewer prices (cost per thousand or CPM). But with subscriptions, companies can offer a flat rate everybody pays for the service, and there is reassurance that the subscriber is a committed user since they paid the upfront cost of the subscription. There is then flexibility on the part of the company with raising or lowering the base cost of subscriptions without having to deal with advertisers.

Finally, it is worth noting that while trends based on previous patterns may serve as useful indicators of future audience behavior, the entertainment industry is a rapidly changing ecosystem which can be unpredictable. While the conclusion that traditional television can be sustained alongside SVOD seems likely based on the current environment, that environment can always change. Entertainment is based on a consumer’s disposable income, and the amount of disposable income one has is dependent on a wide variety of independent factors. The 2020

30 Covid-19 pandemic for instance has played and will continue to play a significant factor in shaping media consumption in the United States. However, if broadcast networks are willing and able to invest and adapt like CBS has, there is no reason why they shouldn’t thrive in the foreseeable future.

31

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38 ACADEMIC VITA

Ethan Zerbe

EDUCATION Penn State University Schreyer Honors College Major: Telecommunications Minor: Digital Media Trends & Analytics

EXPERIENCE Penn State Intercollegiate Athletics August 2017 - May 2020 Part-time employee • Director for Penn State StudentU live sporting events • Prepare and build in-game graphics with Viz and Chyron • Technical Director for sporting events including football, basketball, and hockey • Experience with switcher keys, macros and programing button inputs • Producer for football post-game Facebook (w/ Mitch Gerber & Matt McGloin) • Camera Operator for football videoboard and in-house feeds • RF Camera Operator for basketball videoboard and in-house feeds • Trained interns for camera operation, cord wrapping, and technical directing • ENG editing experience with Adobe Premiere and Adobe After Effects CommAgency LiveStreaming Division August 2019 - May 2020 Part-time employee • Produces livestreams for real clients in student run business • Location scout for equipment placement and set-up • Audio and Camera Operator for livestreams • Drives university vehicle for equipment transportation QVC May 2019 - August 2019 Live Broadcast Operations Intern • Audio Operator in charge of mic checking and managing audio levels unassisted • Played videos for product demonstrations on live television • Graphics Operator in charge of changing on-screen graphics in real time • Jib Operator for QVC2 live television show Centre County Report January 2019 - April 2019 Student Telecom Director • Director and Technical Director for weekly student produced news program • Editor for weekly QuickCasts published on Penn State online newsletters • Remotely controlled robotic cameras for coverage of student anchors Little League International July 2017 - August 2017 Summer Video Intern • Collected, modified and uploaded highlight videos for Little League website • Worked with MLB to pick out interesting plays for publication

ACTIVITIES 46 Live (THON Livestream) September 2017 - present Senior Technical Producer • Leads student production crew in coverage of 46 hour Penn State dance marathon • Manages all equipment necessary for livestream coverage • Trains new production members in camera, audio, and video switching equipment • Organized and assisted in setup and teardown during THON weekend Telecommunications Club September 2018 - present Secretary • Assisted in recruiting industry professionals as speakers for club • Responsible for keeping track of member attendance in Microsoft Excel