Stephanie George-Morgan, 33, barely knew anything about ABC's long-running Grey's Anatomy when she stumbled upon reruns of the medical drama on Lifetime last summer. But "before I knew it, I was hooked," says the stay-at-home mom from Jackson, Miss.
So she briefly signed up for Netflix and caught up with all eight seasons of the show, and is now a loyal viewer of new episodes on ABC. Except that she skips all the ads, using a digital video recorder she got six months ago when she switched cable providers. "I'm a DVR freak!" she says. "I record all of my favorite shows to watch later," often in bunches. "That way I'm not left hanging for another week."
Technology has been kind to viewers. But it also is hastening the end of the kind of mass-audience, gather-round-the-tube appointment TV that networks have counted on and Americans have scheduled their lives around for more than half a century.
Beyond the cultural upheaval, it's upended the economics of the $70 billion TV business, which depends heavily on advertising to pay for Grey's and other shows. It's sent those networks and advertisers scrambling to find new ways to get a handle on, and profit from, a viewership that is dispersing at an accelerating rate. And it's put a premium on sports and reality TV, which are more immune to the shifts.
This fall, 38% of young-adult prime-time viewing on the major networks (and 23% of all viewing) consists of previously recorded shows, Nielsen says. That's up from nearly zero a decade ago. "This year has really sort of been the tipping point that we've been expecting," says Leslie Moonves, chairman of CBS Corp., which owns CBS, Showtime and half of CW. Increasingly, "overnight ratings don't mean anything."
It's not just DVRs, now in 46% of homes, that are upsetting TV's ecosystem. The dying DVD business has been replaced by a host of new options:
Free streaming. Hulu, the 4-year-old streaming service owned by the parents of Fox, NBC and ABC, offers viewers recent episodes. Cable's video on demand offers an increasing array of new TV shows. And networks' own websites are another reminder that viewers don't need to bother tuning in at their favorite show's regular time; they can be watched later, anywhere.
Online purchases. Apple's iTunes store sells past season episodes for $3 apiece. For $8 a month, rival Netflix offers unlimited streaming commercial-free, encouraging binge viewing of serialized shows on a laptop or Internet-ready TV. And a paid version of Hulu offers a trove of former series.
Mobile. All that content can be watched in more places: not just on laptops but also on tablets, smartphones and other devices for which viewership isn't currently measured, making it harder for programmers to profit from them and for advertisers to know whether they're reaching potential customers.
"Everything is being disrupted by technology," says Tim Spengler, CEO at New York ad firm Magna Global. "Television is very effective for advertisers, (but) we just can't rely on it to do the whole job the way we used to. What advertisers are forced to do is look at a much more diverse mix" of media, and "the younger the target audience, the more diverse the mix needs to be."
TV ratings slump
Nearly two months into the new TV season, ratings for three of the four big networks are down 10% to 30% from last fall, and off-channel viewership is only one reason. The crop of new series just hasn't excited viewers, and there's stronger competition from cable, where shows such as AMC's The Walking Dead and FX's American Horror Story have led many of their big-network rivals among key audiences.
One cause for alarm is that overall TV usage by young adults ages 18 to 24 is down 9% since this time last year, more than any other age bracket. That group is most likely to watch elsewhere, a habit fueled by TV studios' sales of their content to online destinations.
"Nothing is a free lunch," says Michael Nathanson, media analyst at Nomura Securities. "All these guys who sell their content to Netflix" have to realize that "users paying for subscriptions find it valuable, and that's sucking time away" from TV watching.
While "top streamers are watching the least amount of television," counters Dounia Turrill, senior VP of consumer insights at Nielsen Co., "they're still watching 12 times more television than streaming content."
And some see a silver lining in the wider array of viewing options, funneling new viewers back to TV the way George-Morgan, the Mississippi mom, came back to ABC for Grey's.
A day before The Walking Dead began its third season earlier this month, the zombie hit's previous season was released exclusively on Netflix, and a couple hundred thousand subscribers watched all 13 episodes in one day.
While the number is tiny by TV standards, it's an extreme sign of fan devotion, and in a small way it might have helped prime the pump for the show's new-season opener, which set a cable-drama record the next night with 12 million viewers.
"It's canary-in-the-coalmine behavior," says Netflix chief content officer Ted Sarandos, and "an indicator of a massive shift in consumer behavior around television," especially among the young viewers most in demand by advertisers. "The more you live your life online, the more you have an on-demand expectation" to watch what you want when and where you choose.
"The network challenge is, how do you value and monetize the network (programming) off the network, which sounds crazy, but it's what everyone's facing," says Mark Ghuneim, president of Trendrr, a social-media tracker.
And the habits are spreading: Because of its younger audience, "We were the first ones to feel it," says CW chief Mark Pedowitz of a shift that helped send its traditional TV ratings plummeting. But every demographic is behaving more like millennials, he says.
Fewer quick hits
TV networks have encouraged this behavior. In marketing stunts, first episodes of more new shows were available online or on demand, often weeks before their official premieres, dampening the hoopla surrounding official premiere week.
CBS polled 2,000 viewers and found just 42% tried a new show in its scheduled broadcast slot in September, down from 53% just a year ago, while their dependence on DVRs, streaming and video on demand climbed, sometimes sharply.
Such dispersed viewing, however, makes it harder to generate quick hits in a business that depends on them, even with social media as a megaphone for fans to proselytize.
"There are so many things now that collectively upset the sense of urgency," says Fox entertainment chairman Kevin Reilly, conceding that while "you can't turn back the clock" on technology, "some of our efforts in general have probably exacerbated the problem." (His boss, Rupert Murdoch, tweeted last month that DVRs are "giving networks fits.")
NBC's Revolution is the top new show this season among young adults and is averaging about 13 million viewers. But nearly a third of that audience — 4.4 million viewers — time-shifts the drama to another night, up to a week after its Monday premiere. All told, 14 network shows add 3 million or more viewers apiece when seven-day viewing is added, representing a net gain of 20% to 55%.
The networks point to so-called DVR "lifts" as evidence that TV remains a hugely popular source of entertainment. And that extra viewing has helped extend the lives of marginal ratings performers such as Fox's Fringe and NBC's Community that previously would have been sure-fire bets for cancellation.
Problem is, networks get paid for few of those dallying viewers. That's because, in a compromise worked out years ago between Madison Avenue and Hollywood, advertisers pay only for eyeballs that pause to watch the commercials, and then only for the first three days after they air. (In an uphill battle, network executives are now angling to base ad rates on seven-day viewing, citing growth in DVR usage.)
That's why the cost to televise (and sponsor) major sports is soaring: Unlike most other programming, they are almost always watched in real time. "There's more of a reliance on sports, because it is sort of technology-proof," Spengler says. Ad rates for sporting events "are going up faster than for anything else" on TV. Competition-reality shows like The Voice and American Idol also are recorded far less frequently than sitcoms and dramas.
Nielsen estimates that only half the ads are skipped in recorded shows. Still, programmers are leaving wads of cash on the table.
Many, in what's perhaps wishful thinking, view DVRs as a transitional technology that will eventually give way to video-on-demand services offered through cable and satellite providers. Like streaming, on-demand viewing doesn't require viewers to plan ahead and choose shows to record. But it also prevents them from skipping commercials, beefing up Nielsen ratings.
For that reason, Nathanson says, programmers would be better off if on-demand activity eclipsed DVRs, and if a slow-starting initiative dubbed TV Everywhere — in which cable systems stream shows to their customers on other devices — proved more popular than Netflix. "But the genie is not going back in the bottle."
A customer and competitor
Netflix is both friend and foe to commercial networks. It's a big source of revenue, paying hundreds of millions for the right to stream recent TV episodes to its 25 million customers. (TV now represents 70% of its streaming activity.) But it marks yet another destination for viewers no longer beholden to what's on TV now, and it will further invade their turf with big-budget original programming.
House of Cards, produced by The Social Network's David Fincher and starring Kevin Spacey as a scheming congressman, is being adapted from a British miniseries, and Netflix will release the first of two 13-episode seasons all at once on Feb. 1. Three more series will follow, including new episodes of cult comedy Arrested Development, canceled by Fox in 2006.
"I honestly think we're in some beautiful sweet spot of being both a competitor and a source of improvement to the business models of the networks," Sarandos says.
Hulu is also airing original shows and acquiring titles from overseas broadcasters, and Google is investing $100 million in YouTube channels featuring original content.
Pay channels such as HBO and Showtime are making shows more widely available, on demand and on free mobile apps such as HBO Go, which offers every episode of nearly every series ever aired on the channel. About 7 million of HBO's 30 million subscribers have signed up for the free app, which is unavailable to those who don't pay for the channel.
But because HBO sells no advertising, the network doesn't care where their viewers watch. "What we're always trying to do is add value to the subscription," says HBO chief operating officer Eric Kessler. "We not only need to have great programming, but we need to deliver it on devices they choose to want it on, and that's particularly true of the younger generation."
On average, just 20% of HBO's viewership comes from initial Sunday night episodes of such series as True Blood and Boardwalk Empire. But Girls, an Emmy-nominated new comedy about twentysomething friends, counts just 14% of its audience that way; 22% watched on DVRs, 6% on HBO Go.
Moonves is optimistic that more viewing options will ultimately help, not hinder, TV networks. For young-skewing CW, "Netflix and Hulu (revenues) put us into profit," he says. "That's a totally different strategy than CBS," which until now has been reluctant to sell shows to online outsiders.
"All this stuff is going to be a big positive," Moonves says. "But we need accurate measurement, because people are watching all over the place. I want to get to the point where I'm platform-agnostic."