How local TV could go the way of newspapers

This is the first of two posts adapted from testimony I am scheduled to present at a Media Ownership Workshop being conducted Friday by the Federal Communications Commission at Stanford University.

The tipping point is not yet at hand, but the economics of local broadcasting may begin to unravel as dramatically – and irretrievably – in the next five years as they did for newspapers in the last five years.

The reason in both cases will be the unparalleled consumer choice made possible by a growing mass of (mostly free) content on the Internet. And here is how it could happen:

Once it becomes as easy and satisfying to view a YouTube video on your 50-inch television as it is to watch “Two and a Half Men,” audiences will fragment to the point that local broadcasters will not be able to attract large quantities of viewers for a particular program at a finite point in time.

This will shatter the mass-advertising model that has served local broadcasters so well since the advent of the medium that some stations in the best of times were able to pocket pre-tax profits as high as 50 cents for every dollar of advertising they sold. While profits nowadays are running at a more modest 20% to 30%, they are well ahead of the pre-tax earnings of such corporate behemoths as Wal-Mart and Exxon.

The challenge to the lucrative local broadcasting model will have a direct impact on the quality, such as it is, of local television news – the medium that approximately 70% of the population counts as its primary source for news. This is a matter of great concern, for which no clear solution is evident.

The technology that appears most likely to threaten local TV broadcasters is called IPTV, which stands for Internet Protocol Television. To put it simply, IPTV enables programming to be delivered over a fast Internet connection to a set-top box plugged into a television.

Once 50 to 100 megabits per second of Internet power is barreling into the high-def centerpiece of the family room, consumers equipped with elaborate, iPad-like remote controls will be able to mix and remix anything – news, shopping, entertainment, games, music, messaging and much more – while leaning comfortably back in their easy chairs.

This will be good for consumers, but a challenge for local broadcasters. Here’s why:

The economics of cable TV programming already are geared to serving small but targeted niches. Both cable and broadcast networks will be able to sell ads (and, perhaps program access) on the shows that individuals download at their websites or at such video aggregators as Hulu. As audiences shatter, however, those options won’t be available to local broadcasters, who will be deprived of the vast reach that enabled the high ad rates and enviable profits long associated with their businesses.

To be clear: The threat is not imminent. But it also is not many years away.

Cable companies, telephone companies, satellite services and other broadband providers are beginning to move with increasing speed toward installing the IPTV gear that seamlessly can integrate traditional TV feeds with those streaming over the Internet.

The operators are motivated by the desire to ensure they are the comprehensive – and they hope, sole – communications provider for each home they serve. As such, they aim to provide video, audio, Internet and telephone service to every home with a single fat pipe – and for a single fat monthly bill.

Although barely 8% of U.S. households had access to IPTV in 2009, this disruptive technology is likely to be available to some 20% of the more than 100 million homes subscribing to pay-television services in 2014, according to senior analyst Lee Ratliff of iSuppli, a private market research company.

Twenty percent penetration of a disruptive new technology is a chillingly significant number for those of us who watched the newspaper industry lose almost half of its advertising base since 2005 – a decline that forced publishers in recent years to fire no less than 15,000 journalists and to sharply truncate the space in their papers devoted to news.

A seismic shift in consumer sentiment and advertiser behavior led to the demise in recent years of such iconic newspapers as the Rocky Mountain News and Seattle Post-Intelligencer, not to mention dozens of smaller daily and non-daily publications. Here’s how the once-mighty newspaper industry unraveled:

The year 2003 was the first point at which 20% of the homes of the United States were subscribing to inexpensive and reliable broadband Internet service. As those consumers began exercising their newfound power to control what they read, when they read it and where they read it, newspaper circulation commenced a quickening decline that has continued to this day.

The drop in readership has been profound: While 48% of Americans said they read a daily newspaper when the Net was in its infancy in 1998, the Pew Center for People & the Press reports that only 25% looked at a print paper in 2008. (Some consumers, of course, now use newspaper websites, instead.)

The drop in newspaper revenues was just as dramatic: Although newspaper ad sales remained healthy through 2005, they began a dizzying – and still unabated – decline in 2006, the first year broadband was installed in a third of the nation’s homes. After achieving all-time high sales of $49 billion in 2005, ad revenues for the industry were barely $28 billion in 2009, reflecting a drop of 43%. Despite a seeming uptick in the economy in the first months of this year, newspaper ad sales continued to decline.

To be sure, some of the newspaper malaise can be attributed to the most severe economic downturn since the 1930s. But the business is highly unlikely to revert to its former strength when the economy recovers.

Next: The threat to local TV news