This story first appeared in the May 25 issue of The Hollywood Reporter magazine.
Kids these days aren't like they used to be. Just ask executives at television networks that cater to children. Over the past year, a sea change in viewing habits has thrown one of the most profitable segments of Hollywood into a chaotic period of transition. Longtime leader Nickelodeon has suffered a nearly 30 percent drop in ratings, while rivals Disney Channel and Cartoon Network have seen increases. At the same time, upstarts such as The Hub, PBS Kids, Sprout and even Netflix are siphoning off viewers, to say nothing of the online programming and gaming options that compete for the attention of young people.
It's enough for savvy executives -- many of whom are heading to the NCTA conference beginning May 21 in Boston -- to begin questioning where the business model for kids television is headed.
"It's dramatically different from how I grew up and dramatically different from how kids were growing up 10 years ago," says Cyma Zarghami, president of Nickelodeon since 2004, of the way children are consuming content. "This generation of kids has grown up in an on-demand world, so they can watch what they want when they want it."
Finding those kids and serving them what they want is now a multibillion-dollar business. In the U.S. alone, Viacom-owned Nickelodeon and its affiliated networks sold $1.6 billion in ads in 2011, plus hundreds of thousands of dollars more in affiliate fees. Time Warner/Turner's Cartoon Network generated $267 million in ad sales, while Disney Channel, which doesn't air commercials, took in more than $1.2 billion from its 99 million subscribers (not counting revenue from 141 million viewers outside the U.S.). The male-oriented Disney XD channel, which does carry ads, sold nearly $100 million in commercials, leading Disney CEO Robert Iger to cite the Disney channels as a key revenue driver on a recent earnings call. (All estimates according to analysis by SNL Kagan and other sources.)
With the stakes so high, a swing of just a few ratings points can impact the bottom line significantly. So networks have been pulling out all the stops in an effort to lure and maintain audiences. Increasingly, one strategy for reaching fickle kids is to make popular shows -- once constrained to a single branded network -- available via multiple outlets and platforms.
"You can see SpongeBob SquarePants on Nickelodeon, but you will also see it on Nick Jr." notes Margaret Loesch, a four-decade veteran of children's television and current CEO of The Hub, the joint venture between Discovery Communications and Hasbro that is available in 64 million homes. "On the Disney Channel, you will see Phineas and Ferb, but you can also find it on Disney XD. It's a big change in the business to take your star show and provide it across all your platforms."
The message is clear: If a kid won't return day after day to a network, the content is going to find the kid wherever he or she is. At the same time, what was once an immutable principle of kids TV -- that children like to watch their favorite shows again and again -- also is being questioned.
"Their appetite for repeats is not as great as it used to be," says Zarghami. "They have been served new stuff, so they have an expectation that everything they're going to want to watch is going to be new."
Disney Channel for the first time beat Nickelodeon in first-quarter 2012 among children 6-11 when measured around the clock. Most analysts attributed the shift in part to Nickelodeon relying on only a handful of high-performing series (SpongeBob, iCarly) while Disney, Cartoon Network and others now offer a more diverse slate of new shows.
"Our strategy has been to build a strong, consistent portfolio of content and not rely too heavily on any one series," says Gary Marsh, president and chief creative officer of Disney Channels Worldwide. "If you get into that trap, the bottom can fall out on you, and I think that's what happened to Nickelodeon."
Zarghami says Nickelodeon is addressing the problem by developing more new shows. At Nick's upfront presentation in March, she announced plans to roll out 650 new episodes in the coming year, by far the most in its history.
Zarghami admits the move is a direct response to the ratings slide as well as to the proliferation of social gaming, digital hubs such as Club Penguin and other online distractions for kids. "One of the ways we explain the ratings is the fragmentation of the kids audience," she says. "Our competitors are doing a good job, kids are consuming media in other places, and our viewers are going to our own other channels.
"But I don't think it's a permanent shift," adds Zarghami. "One of the reasons we are putting so much new content on the air is we think kids have an appetite for it and more great new stuff will bring them back to television."
Despite the effort, Nickelodeon and others increasingly compete with their own content on Netflix as their parent companies eagerly make rich licensing deals. In early May, Bernstein analyst Todd Juenger issued a report blaming "drastic declines" in ratings for kids networks in part on repeats of older episodes in homes that subscribe to the streaming and DVD service. The study was controversial because it was based only on data from homes that subscribe to TiVo, which is not necessarily typical of the broad universe of TV homes, but Juenger says "executives should think hard whether they want to sell this content to Netflix. The money looks good in the short term, but if you believe what the data says, as Netflix gets more subscribers and people who use it more get accustomed to it, the impact is going to grow."
Zarghami points out that more than 95 percent of all kids' viewing still is on traditional TV. And she believes Netflix actually will grow appetite for Nick content. "They'll watch it on Netflix and then come back to Nickelodeon for the new stuff," she predicts.
Marsh agrees, noting that Disney doesn't put much stock in that study. "Our streaming is growing, and it doesn't seem to be detracting from the linear viewing experience," he says.
But Juenger believes it isn't a coincidence that Cartoon Network, whose parent Time Warner has refused to resell its content to Netflix, has seen the biggest recent ratings gains.
The Hub also doesn't resell content to Netflix or others and actively discourages its independent producing partners from doing so. But others, such as ad-free PBS, have taken the opposite approach. "Our goal is to reach as many kids as possible. It's not about monetizing them," says Lesli Rotenberg, senior vp children's media at PBS, who oversees PBS Kids. "So we have more content freely available to kids than anybody else in the industry."
PBS Kids only programs in the daytime, so nearly seven years ago, PBS created a joint venture with Sesame Workshop, Apax Partners and NBC Universal (now Comcast) to create Sprout, a 24-hour network aimed at younger children and parents. While it is only in about half of U.S. TV homes, Sprout has done quite well. And in July, the channel will begin providing Saturday-morning programs to NBC stations, which will expose the brand to more than 110 million households every week.
"Every time a new platform comes along, I think they are complementary," says Sandy Wax, the Philadelphia-based president of PBS Sprout. "The goal is to keep kids in the franchise, keep them watching Thomas & Friends, keep them engaged with Barney, so we remain important to children in multiple ways."
Despite the competition, Juenger says his research indicates the audience shift actually could benefit Nickelodeon. "While Nick is down, to the extent they've been replaced by channels that don't take advertising, or that limit the kind of advertising they take, advertisers are losing an opportunity to deliver impressions to kids," he notes. "What that does is make the price of advertising go way up."
HOT LIST: WHAT KIDS ARE WATCHING NOW
AGES 2-5: Wiggly Waffle
Originally created in Australia, the live-action series based on music group The Wiggles has aired on PBS Kids Sprout since 2009. The action -- which takes place around a waffle, where every nook and cranny is a window that opens to jokes, songs, and skits -- aired on Disney before it shifted emphasis to 6- to 14-year-olds. Sprout president Sandy Wax calls the international sensation -- it's on in 100 countries and is helped by The Wiggles' many touring stage shows -- one of its most popular and important shows.
AGES 6-11: Lego Ninjago: Masters of Spinjitzu
Based on a line of Lego toys, the pilot episodes of the fantasy martial arts animated series premiered on Cartoon Network in 2010. It was a hit, so in 2011 it became a series centering on Kai, who lives in a blacksmith shop. The network says they entered into a new partnership with Lego to do more shows "on the heels of the hugely successful Ninjago launch in 2011 -- currently the No. 1 show across first-quarter 2012 with all boys."
AGES 12+: Phineas and Ferb
Already renewed on the Disney Channel (and Disney XD) through 2014, this animated musical-comedy series about two English stepbrothers has been a consistent ratings performer. The TV movie Phineas and Ferb: Across the 2nd Dimension was the No. 1 TV movie among tweens 9 to 14 years old in 2011 and the No. 2 animated cable telecast of all time among the 6-to-11 demo, according to Disney. The characters also appear in theme parks and on tons of merchandise and games.