Millennials cut the cord, kill TV networks

Video might have killed the radio star but the internet looks to be killing commercial TV.

On 16 September 1956, Bruce Gyngell stood before a TV audience for the first time. ‘Welcome to Television’, he said. Sadly, he’s not around to bid free-to-air television’s goodbye.

Signs that the days of commercial television might be numbered have been around for a while. Over the past three years, the share prices of the three major commercial networks has fallen with Nine Entertainment (ASX:NEC), Sevenwest Media (ASX:SWM) and Ten Network (ASX:TEN) down around 20%, 58% and 60% respectively.

That shouldn’t be a surprise. More and more viewers are ‘cutting the cord’, replacing their traditional TV viewing habits with new online platforms that allow consumers greater flexibility in what they watch – often ad-free - and when.

In a recent Roy Morgan finding, the number of people aged 14 years and over that claim to watch no commercial TV in an average weekday has more than doubled, from 7% percent in 2008 to 15% in 2015.

More importantly, almost one in five people in the 14 - 34 age range now ignore commercial television altogether. That’s triple the number in 2008 and a big problem for network TV. This is a key demographic for advertisers, and one that’s fleeing Seven, Nine and Ten.

These people aren’t giving up TV. In fact, they’re watching it more than ever, but doing so using subscription services and YouTube. Netflix (NASDAQ:NFLX) is now estimated to be in around one million households in Australia, reaching 2.7 million people.

Following its fourth quarter earnings announcement, Alphabet (NASDAQ:GOOGL) overtook Apple (NASDAQ:AAPL) to become the world’s most valuable company by market capitalisation. Increased advertising revenue from YouTube was a main driver of the result.

These are two small examples of the structural shift. With viewing habits changing, so are the spending habits of advertisers, attracted to the lower cost, flexibility and ability to target specific demographics available online.

YouTube claims that spending $100 a day on advertising will get you 20,000 views compared to only 3,329 on television. And unlike on TV, where you pay regardless of whether someone is watching or not, YouTube only charges advertisers if a commercial has been viewed in its entirety.

Myer (ASX:MYR) has made no secret of its increasing focus on digital advertising. Page 31 of its strategy review says so. Their annual report also mentions how it has teamed up with powerful fashion bloggers to spruik their brands, another growing trend that spells trouble for the major TV networks.

Savvy advertisers are now going straight to influencers, the celebrities and bloggers that appeal to their target market, paying them to mention their brand or share photos of them using their product on social media. Rumours are that A-grade celebrities can earn up to $20,000 per tweet or Instagram post. That’s money that would almost certainly have been spent on TV ads in the past.

It is hard to see any way the networks can reverse the shift to digital entertainment. If Disney’s (NYSE:DIS) powerhouse live sports channel ESPN is struggling to stop cord-cutters, it is hard to see what reality cooking shows and celebrities playing survivor in Africa can do for the Aussie networks. These are businesses in structural decline.

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