Thank you. I am very happy to be with you again. Much has happened since
I spoke at this conference last year. Then I focused on the need for our
industry to complete its work with the Grand Alliance on developing a digital
television standard ... and to work with the FCC in gaining approval for
Events of the past few days demonstrate that you have done your work
well over the past year. We have a working model of a state-of-the-art
high definition TV system at this conference, and we had FCC agreement
last Thursday on a plan for broadcasters to install a digital TV infrastructure
across the U.S. over the next five years. This will create tremendous benefits
for our country's citizens, our advertisers, and our industry.
Many people in this room today deserve credit for helping the broadcast
industry through these challenging times. First of all, Eddie Fritts and
the staff of the NAB, who provided firm and steady leadership. Second,
the MSTV and the Broadcaster Caucus who provided wise counsel and assistance.
And, finally, the commissioners and members of Congress who patiently worked
with us over the past year and kindly brought things to resolution in time
for this meeting.
The transition to digital television marks the third leg of a technical
revolution that has totally and permanently changed the media industry.
First cable, then satellite, and now digital broadcast technology....those
advances are driving a dramatic restructuring of the industry, a paradigm
shift in the economic premises of the media business, and a new debate
over the broadcaster's public interest commitment. Today I intend to speak
about those changes and their implications for the industry and the country.
Let me begin by suggesting that our industry - the over-the-air broadcasters
of TV and radio - reaffirm our commitment to fulfill our public interest
responsibilities to the citizens and communities of America as strongly
as we have for the last 75 years. This has been a noisy and sometimes contentious
year in the public policy arena. Whenever there is dramatic change, there
is naturally contention and debate over issues and events. Let us be sure
that no one interprets that healthy debate to be a retreat from our public
But let us also be sure that all understand how the forces of change
and competition that are buffeting the industry today, making it increasingly
difficult to meet our public service obligations ....and indeed could threaten
the continuation of universal free over-the-air television. We believe
the digital transition is a necessity to remain competitive with alternative
delivery systems; but it is clearly not a bonanza for which the government,
should extract a high price.
Embarking on this third leg of the technical revolution of the media
industry is important to the continuation of free television. That was
the major reason that the U.S. government, a decade ago, encouraged broadcasters
to take the lead in developing digital television, For the other two legs
- cable and direct broadcast satellite - are neither free nor obligated
to the public interest.
Cable's competitive advance is the major reason for the continuing erosion
of the four networks' market share. With over 100 cable networks and hundreds
of channels on DBS appearing over the past two decades, broadcast television
is weathering a competitive challenge more significant than any other I
know in the consumer world.
Reaching 100 million homes to, cable's 70 million and DBS' 5 million,
the television networks and stations' are still holding their own. But technology
is creating a proliferation of channels and the potential for a variety
of programming greater than anyone can comprehend. Finding the way through
all the channels for viewers has become like trying to sample all the restaurants
in Manhattan. This saturation will inevitably have an effect, for better
or for worse, on how network programming is value.
Just around the bend is another revolution - the replacement of the
economic rules of engagement - that have shaped the media industry to the
current day. The proliferation of programming and alternate delivery mechanisms
is driving the total costs of video to the home ever higher and higher.
For the networks, affiliate compensation and programming costs continue
to rise. Cable companies will face the paradox of dramatically increased
investment to upgrade to digital infrastructure while facing consumer resistance
to any further price increases. For DBS, there will be increased competition
as they need to address escalating service costs. I believe the total
cost structure in the industry will rise at the rate of 10 to 15% annually.
Revenues cannot be expected to match this pace. Even in good years,
advertisers cannot be expected to increase media revenue by more than
6 to 7%. Cable subscribers will not be willing to double their monthly
payments just to increase access from 50 to 150 channels. Pay-per-view
will continue to appeal only to a limited number of households.
What then are the implications of this cost/revenue gap for our industry?
I believe there are three major changes that will take place.
First, investment risks will grow and failures of new ventures will increase.
The past tendency to overshoot financial and competitive realities with
the expectation that values will increase in a hot market, will no longer
work. With the increasing size of the key industry players, the public
market will dominate industry wealth creation. Right now the analysts are
confused as to where value will be created -- upstream or downstream. But
once this sorts itself out over the next two to three years, we should
see a more uniform viewpoint on which properties and companies are performing.
While I believe private risk capital will diminish, there will be public
market support for new ventures like cable channels, if they fill an immediate
consumer need and have the prospect of positive cash flow in the not-too-distant
future. In some new areas like the Internet, investment funds will
still be available with payoff postulated on a longer term horizon. But
we will see a limited number of big-ticket startups.
Second, the trend toward consolidation will continue, driven not only
by the need to seek public market funding, but also to create scale to
decrease costs and to position competitors closer to the source of ultimate
revenues. Our own company, Westinghouse, participated in the first phase
of consolidation. We had very profitable television and radio station groups,
but wanted to become a significant player in this industry. Our merger
with CBS radically increased our distribution scale and put us firmly in
the content business.
We've also taken the lead in the consolidation taking place in the radio
industry, which has traditionally been one of the most fragmented industries
in the country. Besides economies of scale, we're finding opportunities
to offer stronger advertising packages and to create and attract more sophisticated
radio programming. For the first time radio has an opportunity to take
significant market share from newspapers in local markets.
Both horizontal and vertical integration opportunities are driving the
consolidation move in the industry. For example, at CBS we're finding ways
to cross-promote our television and radio stations in the major markets,
and we are experimenting with shared programming in a few instances, like
the simulcast of "60 Minutes" on many of our news radio stations.
Programming cooperation is a major factor in the two cable channels that
we currently own - CBS TeleNoticias and CBS Eye on People. In fact, the
many opportunities to use CBS News staff and programming on Eye on People
are the principal reason that our channel has far less risk than the kinds
of cable ventures I discussed earlier. We also expect to find synergies
between CBS Television and the two cable channels we recently acquired
-- The Nashville Network and Country Music Television.
Greater vertical integration will allow programming businesses to get
further downstream towards the source of advertising revenue. We can expect
to see a greater effort by the networks to own programming for later syndication
and foreign distribution. And networks will form separate entities like
our Eyemark, to serve the off-network market. All these efforts will seek
to amortize network investments in increasingly expensive primetime programming,
and to offset the trend in decreasing network margins.
The third major change I anticipate is the dramatic evolution of the
media buying system...which allocates revenues from brands to specific
advertising vehicles. These changes are long overdue...Adam Smith would
not agree that current media buying practices allocates dollars according
to economic utility.
The current Nielsen sample controversy is but the latest set of issues
for the major broadcast networks. They all ignore the fact that the networks
are the only medium with the reach to build a community of interest across
a broad audience at one point of time...the only medium able to support
major events like the Super Bowl and Olympics...or to command the broad
reach of popular series like ER and Seinfeld. That reach is absolutely
vital to America's consumer companies and the reason why broadcast television
revenues continue to rise while its market share decreases.
The ratings system failure also threatens another benefit of the broadcast
networks - which are the major source of first-quality entertainment programming
and broad-based local, national, and international news. That programming,
in fact, has been vital to the viability of non-broadcast media.
The broadcasting marketplace has changed dramatically with the increase
from three to six networks, the competitive encroachment of cable, and
the fragmentation of audiences. Yet, the current system of measuring and
pricing advertising for television has been virtually unchanged for the
past two decades. We are using yesterday's tools that were appropriate
when broadcast networks had an 80% + share...today they have barely a 60%
share of a far more fragmented market. Program content labeling, channel
surfing, 100-plus channels, aging of the population, and many other trends
have changed the face of the business.
What should take the place of current measurement systems? While adjusting
the age-based demo categories would help to reflect better the consumer
of today, I believe we need to go further to do the research and experimentation
to shed more light on buying motivation.
The almost total reliance on age to the exclusion of other market factors
like lifestyle, income, education, loyalties, and affinities distorts the
picture. Advertisers have all kinds of sophisticated behavioral research
to develop strong advertising messages. Yet they have few tools to determine
placement of ads in media for optimal impact.
That is not to say that age is not important. When I ran Frito Lay in
the 1980s, our advertising targeted the younger demographics, particularly
18 to 49, to pick up households with teenagers -- our prime target. Like
most advertisers, we felt that if we could win the young consumer to our
brand, we would have a lifetime consumer. And we knew that that age group,
the baby boomers, was the largest demographic.
The baby boomers have grown older; now they're 35 to 50. And with the
proliferation of brands and alternative products, lifetime brand loyalty
has disappeared... if it ever really existed. That's why CBS' programming
strategy emphasizes the standard 25-54 demo, which fortunately is the category
most appropriate for our traditional CBS audiences. While we are the only
network with a focus on that demo, we see that as a tremendous competitive
advantage going forward.
Our "boomer strategy" is targeted to the age group that is
the fastest growing force in our society, and that also has the highest
levels of discretionary income ... income available to be spent on our
Over 85% of discretionary income is in the hands of adults over the
age of 35, and yet the highest pricing for demos continues to go to the
under-35 demo. Again, Adam Smith must be rolling over in his grave. What
happened to his principle that economic resources gravitate to the place
of greatest utility.
But as I said earlier, age is only one factor that today's marketer
considers. Let me suggest a few approaches broadcasters should be considering
to better serve today's advertisers.
The first consideration relates to the concept of direct response marketing.
The driving theory behind that relatively new field is the "80-20
Axiom"... 80% of sales are purchased by 20% of the consumers.
At CBS, we think that applies to broadcast advertising, and we're doing
some experiments that suggest we're correct. Nielsen is identifying and
monitoring the viewing habits of the individual within each household who
makes most of the buying decisions. We call that individual the "Principal
Shopper". I fully expect that some day our entire industry will be
rating programs by Principal Shopper rankings. It simply makes good sense
to pay a premium for those programs that reach the viewer within each household
who spends the most money on advertisers' products.
Marketers are always seeking greater involvement between customers and
their products or services. Television can play a role in building that
affinity. Throughout the history of the television medium, many studies
have been conducted concerning the relationship between a viewer's involvement
with a program and that viewer's recall of, or reaction to, the advertising
carried within that program. The conclusion of this research has been that
program involvement can be positively and causally linked to advertising
We believe that kind of qualitative data should be used in media placement
and pricing. For example, we all know that certain current TV programs
have very strong loyalties among their viewers as evidenced by the dramatic
volume of correspondence about those programs. We've been conducting research
on our programs that indicates that audience involvement carries over to
viewer recall to advertisements and commitment to a sponsor's products.
Each network has shows with audience commitment. One of CBS's high loyalty
shows is Touched By An Angel We get an incredible amount of endorsements
from its viewers. We recently tested recall of commercials with the viewers
of the top 3 network programs competing in its time slot. We discovered
a significantly stronger recall of the commercials aired on Touched
By An Angel .
We've been using ad hoc research. One way to institutionalize the measurement
of such qualitative factors is to use the familiar TVQ score which measures
the percentage of viewers who characterize a program as one of their favorites.
Besides giving us a better understanding of advertising effectiveness,
the TVQ scoring approach helps in discriminating among programs. The spread
of all primetime TVQ scores is significantly greater than current audience
ratings. For example, the TVQ scores of todays Top 10 programs vary from
a high of 56 to a low of 12. We certainly will be able to offer advertisers
a greater range of choice than the current system.
I have described for you the economic revolution that I see emerging
for our industry. As the years roll forward, we'll see how well those predictions
of mine stand up. But hard upon us...today.. is the reality of the technology
revolution that is digital broadcast television.
Digital TV provides the opportunity to bring a far greater richness
and texture to our programming, and to our commercials, than ever before
possible. That will make the appeal to viewers and the advertising effectiveness
of TV more powerful. At CBS we're moving quickly to prepare for a digital
environment, preparing to upgrade our production and transmission facilities,
working with our O&O's and affiliates to share technology.
In the arena of digital radio, we also see the need for aggressive leadership.
For the past 5 years, Westinghouse and CBS have been working in partnership
with Gannett to develop an in band, on-channel digital radio standard for
both AM and FM radio. We formed USA Digital Radio and gave them the mission
to develop a digital system that offers the least disruption to the existing
airwaves and provides listeners with 9p quality sound. We have invested
millions of dollars in this effort and leveraged some of the best electronics
expertise from our former defense businesses.
We're pleased to see that USA Digital Radio has made tremendous progress
toward creating a robust system that will require limited investment by
the industry. Thankfully for both the industry and the FCC, our approach
uses the current spectrum. We have already begun, forming technical partnerships
with strong industry players to help us resolve the remaining technological
issues. We are also now seeking financial partners to help us prepare to
bring the technology to market.
Like many other companies in this industry, Westinghouse and CBS responded
to the government's call for the United States to take the lead in HDTV.
We have worked hard to bring us to the digital threshold and we are planning
to spend many millions to make it a reality. We are therefore concerned
when we hear calls for us to pay for the use of the digital spectrum -
pay in cash, in free political airtime, in additional public service contributions.
We are an industry facing a tough economic environment and a market filled
with competitors who have no public interest obligations. We continue to
believe that the greatest public interest - the best assurance of the
continuation of free and universal over-the-air broadcasting - is an
economically vibrant broadcasting industry.
These will be challenging times for our industry. Some will fail...most
will survive on the strength of their assets and brands...a few will flourish
by adapting to the changing imperatives that I have been discussing. We
at Westinghouse -- soon to be the CBS Corporation -- intend to be in that
last category and to flourish.
What gives me confidence for my own company...and for this industry...is
pride in what the people in this room today have accomplished during this
past year. I'm honored to call myself a broadcaster.