We like to be entertained and informed. Since 1948, no medium has done more to entertain and inform us than television. The last 66 years have seen megacorporations rise and fall as upstarts cash in on our changing viewing habits.
Technology deserves credit for the shift. Improved distribution has freed us from the programming schedule listed each week in TV Guide, and we've enjoyed an explosion of new and inventive programming as a result. Not just in the U.S., but also globally. Enterprising companies are tapping emerging markets for billions in new revenue and profit.
And yet if history proves anything about the industry, it's that television is an ever-shifting business in which the mighty can be made meek in a matter of hours. Here's a primer for anyone currently invested in, or interested in investing in, the television industry.
What is the television industry?
Viewers were first introduced to television on a mass scale at the 1939 World's Fair in New York. But it would take nine years and the end of an epic world war to give birth to what we know today as the television industry, a multibillion-dollar market where moguls (i.e., broadcast TV networks) compete with upstarts (i.e., from niche cable channels to YouTube).
In its most basic form, the television industry specializes in video programming. Creators develop a concept, and then pitch to investors (i.e., "producers") and a network for distribution. Approved projects then get budgets for hiring writers, directors, on-air talent, and a crew to make a pilot for network executives, who then decide whether to order more episodes. Taking a show from concept to pilot to "greenlit" can take months under the best of circumstances.
How big is the television industry?
The variety of programming available makes it difficult to put a box around the television industry. Sure, network programs certainly qualify. But so do online shows that keep a regular schedule. Tens of thousands of "shows" that attract less than 1 million viewers are now part of the television industry.
And yet broadcast and cable TV still account for the lion's share of revenue in the market, especially in the U.S. An early 2014 study from Nielsen and Simulmedia found that 283 million Americans (some 89% of the population) watch TV monthly, consuming 146 hours each. Only 155 million of us watch online video content monthly, consuming six hours each.
Meanwhile, AdWeek puts the TV industry at $74 billion versus $3.5 billion for online video. Advertising accounts for most of the total for both, though some channels (e.g., HBO, Showtime) rely on subscribers. The point is that online video appears to be efficient when it comes to producing revenue per viewing hour, and that's changing the business.
How does the television industry work?
Production, on the other hand, remains about the same as it was decades ago. Shows are still sponsored and created by studios in concert with creators. The main difference is in the variety of vehicles available for distributing programming today.
Joining broadcast TV is cable television and online video, or streaming. Broadcast is the oldest and still most-watched source of televised programming. Under this model, major Hollywood studios fund shows and then distribute to a network of television stations, or "affiliates," which then rebroadcast programming at predetermined hours.
Cable television came to life in the 1970s as a way to offer consumers more choice. Operators would pay broadcasters what are known as "retransmission" fees for showing their programming to subscribers. Later, they graduated from being mere aggregators to producers of original programming.
Streaming followed the rise of the Internet and is now considered a major form of distribution in the U.S and around the world. New studio-like enterprises are funding shows viewable on smartphones, tablets, desktop computers, video game consoles, or any of the tens of millions of Internet-connected "set-top boxes" that bring programming straight to your living room TV.
What drives the television industry?
What began as a handful of over-the-airwaves channels broadcasting scheduled programming, such as Texaco Star Theater, to rabbit-eared boxes has been replaced by thousands of cable and Internet channels broadcasting all day, every day, to every sort of Internet-connected device.
Therein lies the fundamental difference between the television industry of yesteryear and what we know today. Even if the act of producing a program hasn't changed much, new distribution channels have turned what was a passive medium into an active medium where consumers can increasingly choose what to watch and when to watch it, which may also help to explain why online video -- where choice is most prevalent -- offers the best economics on a per-hour basis. Investors should expect a slow but steady migration of new and existing programming online as a result.
Which stocks should you invest in if you want exposure to the television industry? Stick with the conglomerates. Walt Disney (NYSE:DIS), which makes and distributes programming through its ABC Television network, and Time Warner (NYSE:TWX), which produces shows for most broadcast networks, are among the safest thanks to their well-diversified operations and sustainable dividends.