The Billion-Dollar Numbers Behind the Cable News Business

Cable news networks are in the middle of a major transition that could force some of the biggest players in the space -- CNN, MSNBC, and FOX News -- to change how they run their business.

In this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Daniel Kline as they look at how the events depicted in the final season of HBO’s The Newsroom actually mirror what’s happening at major media companies in the real world. They also dig into the revenue and profit numbers behind the cable news business, including the carriage fees make it more important than ever to draw in loyal viewers.

A full transcript follows the video.

This podcast was recorded on Aug. 2, 2016.

Vincent Shen: Just to step back a little, so listeners can understand what the numbers are on the actual business impact that some of these networks have ... CNN and MSNBC and Fox News are part of three bigger entertainment companies, or companies that overall, I'm sure our listeners are familiar with. Fox News, obviously was Twenty-First Century Fox (FOX) (FOXA). MSNBC with NBCUniversal, which is under Comcast (CMCSA -0.37%). Then, CNN is under Time Warner (TWX) as part of their Turner segment.

These networks, during primetime, which is the ideal evening time slot, they average about three million viewers. Hence, the evening news show on The Newsroom was called News Night with Will McAvoy. Daytime totals are weaker for these news networks in general, about two million viewers. Just to give you some perspective in terms of where that sizes out, with the three networks averaging three million viewers during primetime ...

Dan Kline: And about two-thirds of those are Fox, it's worth noting.

Shen: Yeah. A hit cable show like AMC Network's The Walking Dead, for their season five finale, had 16 million viewers. We're already operating at a lower level. With that said, there is definitely quite a bit of a financial incentive for these companies.

Kline: Yeah, the economics are different. Because the cable world is rapidly changing, it's becoming more pressing. Cable networks, especially news networks, make a big portion of the revenue from carriage fees, meaning, on your cable bill, you're actually indirectly paying a few cents for those channels. As we move to more of an "à la carte" or even a limited subscription cable world, if you choose to not have CNN because it's not relevant to you, well, if they lose a few million viewers, that's very relevant money. We've seen the hits ESPN and Disney have taken. So, it becomes important not just for them to attract viewers but to get you to actually care about their programming, meaning, if you love Anthony Bourdain, and otherwise watch Fox News, you might still pay for a package which includes CNN. But if there's nothing on MSNBC that appeals to you, and you have the option of not paying an extra quarter to get it, or whatever the carriage number is, you may not. So it's becoming a much more pressing financial matter to actually have people care about your station.

Shen: Yeah. And there's the double whammy The Newsroom touches on. You want to have the programming that people want, and the viewership. These networks can make some money from advertising. Then you have the loyalty, I guess you might describe it as, so that when it comes down to some of these more "à la carte" options, and they make their affiliate fees -- just to be clear, those are basically coming out of your cable bill and going to the content providers from the cable company.

Kline: Yeah. And basically, it's all a compromise. You watch The Newsroom, and they're pushing integrity and doing the news the right way, but they're all still really good-looking. They're not putting on ugly newscasters. So they still understand that there's a balance. You have a Fox News which is called "advocacy journalism," and it's very highly rated, but is there some compromise where you should be doing news, or you should be working as advertised and being fair and balanced? It's a very complicated case, and it plays out beautifully on The Newsroom.

Shen: Yeah. Stepping back, in terms of the investing angle here, as I mentioned earlier, these three major networks we're talking about are part of bigger companies, part of their business. Revenue among the three networks in 2015, I think I have an estimate here, gathered from Pew Research and Nielsen, was estimated to hit about $4 billion. That's up over 120% from 2006, over the past decade. Fox News, again, is the leader, not only viewership, but they had about $2.3 billion in revenue. There's a profit number provided, but I'm not sure what kind of profit that is, exactly, operating or maybe some type of net profit. 

But, the cable networking programming segment at 21st Century Fox had $13.8 billion in revenue. $2.3 is a pretty sizable portion of that. They had $4.7 billion of operating profit, that's about 70% of the total operating profits. Where this $1.5 billion number comes from for Fox News still is a huge portion of that, so you can see that, as much as Will McAvoy and his team on The Newsroom wanted News Night to be this idealistic take on the nightly news, I can also see the other side, with Pruitt wanting to drive the ratings and the revenue.

Kline: And that's what you heard in the clip you heard before. The answer is that they're both right. You need the two sides fighting against each other. In any newsroom, you talk about the separation between church and state, which is the separation between editorial and advertising. But, that's kind of a 1960's notion. Now, you have to be aware of eyeballs. If you look at it, Fox News is a much bigger business than CNN or MSNBC. It's not likely that either CNN or MSNBC are going to be able to catch up. They're going to become niche products. Now, they might become niche products that serve a specific audience of older people who are willing to pay for them. They may become premium products. But unless you do something leaning very specifically in one direction, or switch completely to entertainment programming, then the market for the news on television has disappeared with younger people, because you don't have to wait for the news. We've seen the same thing with ESPN and Sports Center. Nobody under 30 watches sports clips on an hour-long evening show. They go to YouTube or other formats. Fox is operating with a little bit more protection, because they're doing something to a very specific right-wing audience. CNN and MSNBC, they're going to go up and down as the news cycle goes up and down, and there's no real way to get out of that unless they really change and go TMZ, or some other completely different direction.

Shen: Yeah. And that's reflected in some of the numbers, too, among the financials for CNN. Estimated revenue in 2015 was about $1.2 billion, the Turner segment where CNN falls, that includes some of Time Warner's other networks --

Kline: TBS, TNT. Cartoon Network. Things like that.

Shen: Exactly. The overall segment revenue for Turner was about $10.6 billion. A smaller piece of that. In Turner segment, though, overall, for Time Warner, is by far the biggest operating profits. I think they make about 60% of the bottom line.

Kline: Comcast and Time Warner are two very different stories. I don't discount Comcast because of MSNBC, or even NBC News, because it's such a tiny percentage of the company. It's OK for them to run a boutique news service as kind of a public service. For Time Warner and CNN, it's not as big of a company, it doesn't have theme parks and a movie -- well, it has Warner Brothers, but it doesn't have quite the level of movies that Comcast has. So there, I look at CNN as a drag, and think CNN might be better operating as a quasi-public partnership, where the goal is to break even. There are a lot of newspapers working that way. CNN might make more sense partnered with CBS or one of the networks to defray costs. But as a stand-alone money-making cable organization, you're going to have to have a lot more Anthony Bourdain shows, and Morgan Spurlock, and things that attract an audience, and cooking shows, or whatever it is, to offset the cost of having news bureaus and flying Anderson Cooper all over the world.

Shen: Yeah. The last point I wanted to end on was with the affiliate fees, to give our listeners an idea of what's going into their cable bill, if they haven't cut the cord yet, or slimmed it down in some way. The most recent numbers I could find had Fox News at about $1.50 per month per subscriber for their subscriber affiliate fee. CNN commanded about $0.60, and MSNBC about half that. That's basically what you're paying to have access to those networks.

Kline: And those are pretty good numbers. Aside from ESPN, which is roughly $6.30, last time I looked --

Shen: It's king of the heap, admittedly.

Kline: That puts Fox very high up there. It's a huge base of revenue, but as that model changes, you're going to need to sell more ads, or, you're going to need to have people pay directly to subscribe to you. Fox News might make more money if it's sold as a $9.99 streaming service. CNN and MSNBC, for the few hundred thousand people they have watching religiously, it wouldn't work. We saw, when Al Gore tried to do Current with Keith Olbermann, who's about the biggest star in that world, there wasn't really an audience for it. In a changing cable universe, I think Time Warner and Comcast have to absolutely worry about that.