Networks Should Take Note As Jerry Departs
An encore Fool on the Hill
by Jim Surowiecki

In the normal course of events, last Friday's announcement that this will be the last season of Seinfeld, the nation's most popular TV comedy, would have led to the immediate pummeling of the company that depends on Seinfeld for so much of its revenue. Instead, shares of General Electric (NYSE: GE), which owns NBC, dropped a mere quarter of a point. Nonetheless, the announcement did send shock waves through the network-television establishment, and was taken by many as but the latest in a recent string of batterings that once-mighty NBC, ABC, and CBS have taken at the hands of recalcitrant production companies and bored viewers. The irony of this so-called Media Age, after all, is that media companies are neither as large nor as powerful as we imagine them to be, and profits are harder to come by than all the hype about the information economy would suggest.

To take first things first, the reason the Seinfeld announcement had a negligible impact on GE's stock price is that NBC, which is the most successful of all the major networks, still accounts for just 5% of GE's revenue and earnings. The sheer size of the profit machine Jack Welch has built is such that NBC functions as a small, but important, division of the diversified conglomerate. And while Seinfeld's disappearance will hardly be welcomed by GE investors, especially given that the show generated $200 million in operating profit for the network every year and allowed NBC to charge $500,000 for a 30-second ad spot, in the context of GE's overall company picture this is but a small blip.

Imagine how different the market's reaction would have been had NBC been an independent, publicly traded company, and you get some sense of how massive GE -- with its market cap of $230 billion -- really is. And in a broader sense, the episode should remind us of how small media companies are compared to the U.S. economy as a whole. If you take all the major U.S. media conglomerates, for instance, their annual sales come to just slightly less than three-fourths of the annual sales of General Motors (NYSE: GM) alone. In other words, most of the real work of the American economy has nothing to do with the airwaves.

At the same time, Seinfeld's disappearance is important because it represents yet another blow to the networks' quest for large-scale audiences. Like E.R., Seinfeld has been one of the few programs that has been able to draw large audiences consistently, and one of the few programs that has been able to lure people back to network television. That's not a minor feat at a time when the combined ratings for the four major networks recently slipped below 50% of the TV-watching audience, and when CBS, NBC, and ABC have watched their ratings slip by a third over the past decade. Besides tearing a massive hole in the heart of NBC's Thursday night lineup -- a hole that will become an abyss if NBC fails to win the bidding war for E.R. -- Seinfeld's departure will also contribute to the further fragmentation of the television audience, since whatever replaces it is unlikely to achieve the iconic status Seinfeld now enjoys.

The news comes at a curious moment in NBC's history, when the network is simultaneously enjoying record free cash flow of more than $1 billion and confronting a future that could be very bleak. Unlike Fox, owned by News Corp. (NYSE: NWS), and ABC, owned by Disney (NYSE: DIS), NBC has missed the biggest opportunity for profits in the television business, namely the syndication of monster hits. While Fox has turned The X-Files and The Simpsons, both of which it owns, into cash cows through syndication and merchandising, and while Disney has been able to produce shows for ABC and use the network to promote its other businesses, NBC owns none of its hit shows, and the shows it does own have been mediocre flops. Since the middle of this decade, for the first time, the networks have been able to be both producers and distributors of programming. But NBC has not reaped the benefits of that transformation as others have.

Despite all the doom-saying, it remains true that the networks offer advertisers a unique ability to reach massive numbers of viewers, which is why ad rates have stayed stable and even risen as viewership has dropped. A recent article in Fortune suggested that for the cost of one 30-second spot on the CBS news program Public Eye, an advertiser could buy 18 spots on CNN and actually reach a larger number of viewers. But, of course, running 18 different spots means that you're probably reaching many viewers more than once, while running one spot ensures that you're reaching 10 million different people. And only the networks can provide that kind of guarantee.

Because of cross-ownership and the growing diversification of companies like Disney and News Corp., let alone GE, it's difficult to separate out network television and value it as a business. Still, TV is not going away, and the networks seem to be beginning to think harder about how to leverage their brand names and how to transform themselves into product platforms rather than mere content distributors. For GE investors, the Seinfeld' announcement may have meant very little, but for the networks as a whole, it should be the latest in a long series of wake-up calls. Perhaps this time the snooze button won't work.