Replacing David Letterman and the Business of Late Night

Hosting late-night talk shows has become a young(er) man's game. David Letterman, the last host with direct ties to Johnny Carson, told a studio audience Tuesday he was retiring in 2015. Letterman, who was passed over as host of The Tonight Show for Jay Leno (who just stepped down a few weeks ago), went to CBS (PARA 2.91%) and launched Late Show 21 years ago, becoming the first real challenger to Tonight's dominance.

Though Leno almost always got better ratings, Letterman was considered an innovator and the more talented of the two. Rival Jimmy Kimmel, who hosts Jimmy Kimmel Live opposite Late Show for Disney's (DIS 1.54%) ABC, took to Twitter and summed it up perfectly tweeting "David @Letterman is the best there is and ever was."

Why Letterman is leaving

Late night television has become a fractured landscape with no one host dominating in the way Carson did. Increasingly late night has become more about building a loyal audience across not just a television show but through social media, which is partly why a number of shows -- including Conan on TBS and The Daily Show and Colbert Report on Comedy Central and even Chelsea Lately on E! -- can be economically viable with relatively small audiences.

Letterman may have pioneered what has now become known as the viral video (some of his old Late Night stuff would be gigantic if the Internet had existed in those days), but at 66 (and cranky), Letterman isn't going to compete with new Tonight Show host Jimmy Fallon, Kimmel, or Conan on social media. Letterman may be an innovator and a comic genius but it's hard to picture him after 30-plus years behind the desk getting too excited about tweeting or producing a Vine video.

Late Show is still a financial success bringing in $179.6 million in ad revenue in 2013 (the most of any of the talk shows) while drawing 2.8 million viewers with an average age of 58.9, according to Ad Age. Leno, despite having higher ratings, only brought in $113 million with similarly old viewers.

For Letterman leaving in 2015 may be a case of choosing to go out on his own terms and not waiting for CBS to replace him with a younger model.

Who will replace David Letterman?
Unlike NBC, which first tried to replace Leno with the younger O'Brien (which failed, leading to TBS entering the late-night battles) and now with the even younger Fallon, CBS has no obvious replacement sitting on deck.

Craig Ferguson, who follows Letterman with Late Late Show at 12:35 a.m. on CBS, is 52 next month, younger than Letterman but certainly not a choice that would create any sort of buzz for the network. Ferguson also has viewers who are 50-years-old on average, according to The Hollywood Reporter, which makes his audience almost as old as Letterman's and much older than the cable shows -- Conan viewers are the youngest with a median age of 38.8, The Daily Show comes in at 40.5, Colbert is 39.4, and Chelsea Lately is 42.8.

The most logical replacement for Letterman would be The Daily Show's Jon Stewart because while he, like Ferguson, was born in 1962, his audience is much younger. The Daily Show is also a social media player and Stewart (who is one of the few hosts to receive a Letterman-like level of respect with critics) is probably the only hire CBS could make that would seem like a trade up. Stewart might even be available -- Entertainment Weekly reported in 2012 that the host had renewed his contract with Comedy Central through 2015. Stewart's show took in $55.6 million in ad revenue in 2013 with 1.4 million viewers, Ad Age reported.

Stewart's network-mate Stephen Colbert also makes some sense as a potential replacement as his contract, according to the same article, runs out at the end of 2014. Colbert's show brought in $52 million in ad revenue in 2013 with just over a million viewers.

Of the existing talk show hosts, the other possible players seem even less likely. O'Brien is a financial success bringing in $67.4 million in ad revenue in 2013, but he has a long-term contract with TBS where he also produces the show that airs after his. O'Brien -- who did succeed in taking over for Letterman once before -- also has both The Tonight Show failure and the fact that his current show only averaged 808,000 viewers in 2013 working against him.

Chelsea Handler, the only woman in late night, has an expiring contract with E!, so she is available, but the outspoken host seems like a poor fit for CBS. She also only averaged 571,000 viewers in 2013 with $30.3 million in ad revenue, according to the same Ad Age article.

Of course CBS could reach outside the talk show world to pick someone as NBC and CBS have done in the 12:30 a.m. hour with Ferguson and Seth Meyers, respectively, but 11:30 is a different game. With nearly $180 million in revenue to protect, CBS is unlikely to tap a neophyte because it's more likely it will get the next Chevy Chase than the next Letterman.

What CBS must do

If CBS wants to have any chance of maintaining its ad revenue lead and being a ratings player along with NBC and ABC, it must lure Stewart into Letterman's chair. Though there might be some some backlash -- Stewart tends be a tad liberal on The Daily Show while Letterman mostly kept politics to himself -- nobody else makes sense in Letterman's seat.

Colbert would be the second choice, but he's a distant one. While he has some of Stewart's credibility, he's playing a character on The Colbert Report and not himself. It's likely he could make the transition, but short of a 40-year-old Carson returning from the dead, there is no safer choice than Stewart.

Of course Leno's name will be bandied about, but CBS won't go in that direction because you don't replace a host in his 60s with another one, even if it's a Band-Aid that might work for a while. The only choice is Stewart, who once had a holding deal with Letterman's Worldwide Pants production company -- it chose Craig Kilborn over Stewart to take over for Tom Snyder on The Late Late Show, opening up The Daily Show hosting slot for Stewart.

CBS can't make that mistake again and should spend whatever it takes to land Stewart. It won't be easy -- he reportedly already makes $25 million to $30 million, more than Letterman at $20 million, according to TV Guide.

Still money is only part of the equation and CBS, which can offer a much larger potential audience than Comedy Central, should find a way to make a deal. Give Stewart control of 12:30 as well. Give him a deal to produce prime-time shows -- let him sub on the nightly news -- but do whatever it takes so at some point in 2015 CBS can send Letterman off and launch Late Show with Jon Stewart.