• by Diane Mermigas , February 10, 2012

The appeal of traditional television to Google and Apple is apparent in the changing economics of the business: Subscription revenues growth is accelerating, advertising is holding its own and video is becoming the streaming gold of an exploding mobile ecosystem.

Even in its transformation, television is a business that everyone wants a piece of. Television's vitality lies in its inherent transference to the digital sphere. Instead of being rendered obsolete, television will become a driver.

It could help transition consumers to a more robust, universal pay-for-play metric across all connected devices. Increased tier pricing for content would come at the expense of programmer's revenues, forcing smaller players to experiment to survive in today's $1.5 billion online video distribution market.

Google, which plans to launch a home entertainment system leveraging YouTube, search and advertising, and Apple, which is expected to unveil a full-fledged Apple TV by 2013, will make video a business priority.

Morgan Stanley analyst Benjamin Swinburne presents a good case for a changing, but vibrant television business and its appeal to high-tech, Internet giants in a report titled "Media : A Three-Peat."

Although 40% of total TV industry revenue this year, subscription fees hitting $90 billion this year are expected to equal advertising as an income source before decade's end--making television less of a cyclical business.

As much as 10% growth in subscription fees over the next five years will be fueled by significant renewal increases at ESPN, Turner and Discovery in 2013, even as OTT intensifies. Sports networks and retrans revenues will account for about 44% of industry subscription fees in 2015, up from 27% of industry subscription revenues in 2000.  Home video , which declined another 8% in 2011, will continue to lose ground to over-the-top streaming video.

Programming expenditures will increase high-single to low-double digits for cable networks, in particular, in the face of intensified competition for higher affiliate fees and digital and international licensing, while staving off declining ratings and distributor willingness to simply drop channels and networks. For many cable networks, the gravy train is long gone.

Overall, taking and maintaining a substantive share of television advertising and subscription dollars is becoming more challenged and requiring bigger bets. Online and connected mobile are beginning to erode cable margins the same way cable has for years eroded broadcast TV.

TNT, ESPN and Travel Channel saw 18-to-49 viewer ratings plummet--24%, 13% and 17%, respectively the end of 2011. Ratings deterioration generally continue with CBS' 18-to-49 ratings down 11% in 2011 and NBC's falling another 15%.

Domestic advertising revenues will grow only a mere 3 % in 2012 (tracking expected 2.2% GDP growth) even with the presidential election and London Olympics spending. It will be led by 5% to 6% growth in national U.S. TV spending and as much as 17% increases in online spending.

Swinburne calls it "good enough"-- a dangerous attitude considering the radical ways in which advertising and marketing are morphing into more transaction-based income streams in a mobile market. Even so, Morgan Stanley is placing its bets on contrasting media players CBS (a pure-bred broadcaster) and Walt Disney Co. (a hybrid broadcast-cable-online video content provider fueled by ESPN), given their ability to fuel organic growth and leverage vast amounts of content.

None of this scares the biggest players in the Internet and digital mobility. These are the fluid, economical platforms where pay-versus-free, audience fragmentation and other chronic TV conflicts will be reconciled. " If Netflix is the appetizer, is Apple the main course?" Swinburne asks.

The rise of virtual MSOs such as Apple TV and Google TV, building smart offerings around a home video management hub, is the single most potent and unpredictable change agent on the television scene. Such players can expect to command the same $30-plus per subscriber, per month in subscription fees that cable, satellite and telco distributors average, as long as content rights can be secured for what Swinburne says could be 25% premiums to media companies.  

The playing field is already crowded. Netflix, with its 22 million users soon will be challenged by an Amazon Prime standalone, a discount pricing service. Hulu Plus will spend $500 million for content this year, including two new original series, to stay in the game. Google's YouTube has surpassed 4 billion daily views as it ramps its new $100 million niche TV channel strategy.

Comcast's Disney deal will take Xfinity anywhere viewing to a new level. Verizon is introducing a new OTT video service that could breathe new life into pay-per-view. Still more new entrants are expected including BSkyB, which is launching a new internet payTV service in the UK.

Google and Apple will likely revolutionize video search, storage and creation by using the home base as a video hub to support countless mobile-connected devices used outside the home. Apple and Android-based devices will become defacto remotes.

On a macro level, these trends will more starkly distinguish the "haves" from the "have-nots" in a video marketplace in which M&A consolidation will be fueled by the economic benefits of scale. The stakes clearly are high for all traditional media players that rely on television as a core revenue source.

According to Swinburne's overall earnings forecasts, the losses will become steeper as the gains moderate. For instance, in a non-election and Olympics 2013, CBS' earnings could be compromised by 28% or boosted 14%, depending on the way the online video winds blow.

Likewise, News Corp., with its Fox broadcast and cable networks, could suffer a 21% hit to earnings or a 11% gain in 2013, depending on how well it mines new digital opportunities while straddling traditional TV advertising and subscription revenues.

For media overall, the bear case is an earnings decline of 15% or a gain of 10.4% next year, which means many traditional media company fortunes could eventually be up for grabs.