CBS changes channels

CBS Inc. president and CEO Les Moonves sketched out a pretty remarkable transformation of the media company’s business model over the past two years during the company’s third-quarter earnings call this week (full transcript here). According to Moonves, its mix of advertising and non-advertising revenue during the period was roughly 50-50, compared to a just a few years ago when the mix was weighted 70-30 in favor of advertising.

“The driving force behind our continued strong performance is CBS’s evolution into a company focused around content,” Moonves declared. “And once the separation of our Outdoor Americas business is complete, you’ll be seeing more quarters like this one with about half of our revenue coming from non-advertising sources.”

Nowhere was the shift more pronounced than at the CBS broadcast network. While ad sales on the network were up 4 percent in the quarter, revenue from content licensing (Netflix) and syndication was up 18 percent, while revenue from affiliate and retransmission fees was up a whopping 23 percent.

The marquee development in the latter category, of course, was CBS’s showdown with Time Warner Cable, which ended in victory for CBS.

“It was obviously unfortunate that we could not reach a deal with Time Warner Cable more quickly and peaceably, as we did with Verizon FiOS, but we emerged with better rates, full digital flexibility and more viewers,” Moonves said. “We are the number one network and we will continue to negotiate rates that are more in line with the numbers of viewers we bring to our programming distributors.”

While advertising will obviously remain an important part of CBS’s business, its shift in emphasis from monetizing its audience to monetizing its content has done more than simply shift the revenue mix. It is also driving a shift in how the company allocates capital.

“We greatly increased our output of original programming, including the expanded schedule for Big Brother, new episodes of Unforgettable and the debut of Under the Dome,” Moonves said. “As you know, ratings for Under the Dome were beyond all expectations. And we own 100 percent of this new franchise, meaning we will continue to monetize it for years to come.”

He also gave a shout out to a new series for next summer called Extant, starring Halley Berry, which CBS will also own outright. “Through the success of our summer programming, we have in essence created a whole new day-part where we are now generating significant new advertising revenue, creating new digital streaming models to fund production and launching new, wholly owned content franchises that will pay off for years to come.”

The CBS broadcast network, in other words, is starting to behave much more like its sister premium cable network, Showtime. Once primarily a distribution channel for third-party programming, Showtime, like its peers HBO and Starz, has evolved in recent years into programmer in its own right, focused on developing original, long-lived content franchises that can be exploited across multiple platforms.

While the shift in emphasis is particularly striking at CBS, given its broadcast roots, it’s in keeping with a broader shift underway among all ad-supported TV networks. Both 21st Century Fox and Time Warner this week also announced third-quarter results that significant increases in investment in original programming aimed at driving higher carriage and licensing fees.

As the Wall Street Journal put it, “Time Warner and 21st Century Fox are taking the view that the short-term financial drag from such programming investments will pay off in the long term, helping them boost carriage payments from pay-TV operators—the main driver of their growth in recent years.”

Put another way, they’re all Netflix now.