Cable Television and the Future of Basic Cable Networking

David Waterman and Zhaoxu Yan


Although basic cable networks reach higher income, more demographically
focussed audiences, the cost per thousand (CPM) prices which basic cable
networks are able to charge advertisers have generally remained
substantially lower than broadcast network rates. The economic viability
of basic cable has been limited by these price shortfalls.

Using a pooled cross section/time series data base covering 14
basic cable networks over a 6 year period, we show that limited TV
household reach, or penetration, is the main reason that cable CPMs
have remained so low. No cable networks reach more than the
approximately 70% total penetration of U. S. multichannel
households, and most reach substantially fewer homes.

Our results are encouraging to the future prosperity of advertiser
supported cable, to the extent that U.S. household penetration of cable,
and especially of multichannel competitors such as DBS, continues. We
estimate that total advertising revenues of basic networks will increase
approximately 2% for each additional 1% increase in cable penetration, and
that if cable networks had no coverage handicap, cable CPMs would be
approximately 18% above broadcast rates on average.

On a policy level, our results lend credibility to claims that
larger MSOs have excessive influence over the entry and survival of
newer, especially "independently" financed basic cable networks. An
MSO which controls programmer access to 10% of US multichannel
subscribers, for example, has the power to reduce total advertising
receipts of a basic network by more than double that percentage.

In conclusion, we discuss parallels between the cable advertising
experience and the economic viability of internet advertising.