The broadcasting industry has contributed to the fortunes of quite a few billionaires, including Ted Turner, Rupert Murdoch, and even Warren Buffett. Investors have for decades been attracted by the high barriers to entry and hefty profit margins that characterize the market. Let's look at broadcasting, along with what investors can expect from the industry going forward.
What is the broadcasting industry?
The broadcasting industry is comprised of companies that create and/or purchase television or radio content, then distribute that content to viewers through a network of affiliates.
These companies send out (or broadcast) their programming via radio waves, whereby any person with a receiver, for example a radio or TV, can tune in. This makes broadcasters different than cable operators and satellite radio providers, which maintain a direct billing relationship with their subscribers. Instead, broadcasters earn their revenue mainly through advertising sales.
How big is the broadcasting industry?
On television, the major broadcasters include networks NBC, which is owned by Comcast; ABC, owned by Disney; CBS; and Fox. These four giants split the lion's share of the roughly $60 billion spent annually on TV advertising. While that market is growing, the rate of increase has slowed as total broadcast viewership remains stagnant.
Television networks typically draw audiences with comedy and drama series, in addition to sports, news, reality-based, and other programming. These companies each operate radio broadcasts as well, although Clear Channel Communications, with its 850 stations, is the largest radio broadcaster in the United States.
How does the broadcasting industry work?
Since broadcasters do not collect fees from viewers and listeners, their business models are different from those of cable companies and satellite radio providers. Broadcast companies rely almost entirely on the sales of advertising time to support their businesses, rather than on collecting a steady stream of subscription revenue. That model tends to create some lean and fat years for broadcasters, which can turn on just a few major events such as the Olympic Games, the Super Bowl, or a presidential election.
The amount a broadcaster can charge for advertising essentially depends on one thing: the audience that it attracts for its content. Luckily for them, broadcasters boast the biggest potential audiences available. Major network TV stations reach up to 99% of U.S. households, although even the most popular shows draw much smaller audiences than that. July's ratings, for example, show that over 10 million viewers tuned in for NBC's hit America's Got Talent, more than twice the viewership of the highest-rated cable TV show in the same week.
The demographic makeup of an audience is also a critical component for advertisers, which value certain age groups, like young adults, more highly than others. That's why Nielsen ratings play such a key role in the broadcasting business. These ratings tell advertisers about the size and composition of a given audience, and those ratings are critical to establishing the price a broadcaster can charge for advertising time within its programming.
What are the drivers of the broadcasting industry?
As a whole, the industry hasn't seen strong growth lately. Two major trends are to blame for that slip. First, there's the increase in the quality and quantity of content available on cable television, which has drawn advertisers away from broadcast media. AMC Networks' (NASDAQ:AMCX) The Walking Dead in 2012 became the first cable series in TV history to lead the Nielsen ratings in the coveted age 18-49 demographic.
The growth in online advertising is also pulling ad dollars away from broadcast media. You can't blame national brands for following their audience as its attention forks to digital devices such as smartphones and tablets.
Still, with their broad reach, television and radio broadcasters represent an efficient way for companies to promote their products and services either locally or through a national campaign.
The broadcast industry is also highly sensitive to overall economic growth, which drives advertising spending. That sensitivity is a key reason that broadcasters tend to diversify their media assets to include cable networks and other advertising outlets.
Still, consider that the 2014 Super Bowl was rated at a record 111.5 million viewers. Fox collected $4 million per 30-second spot in that broadcast, which was also a record. Numbers like those illustrate why broadcasters' main product, air time, remains highly valuable to advertisers even as cable and digital content options grow.
Demitrios Kalogeropoulos owns shares of Walt Disney. The Motley Fool recommends AMC Networks and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.