Ratings are in: investors switch channel to pay-TV, independents

Until four or five years ago, says Ben Murillo, people who invested in one of the "big three" television networks were putting their money into a growth industry.

Not any more. Instead of NBC, CBS, and ABC, much of investors' attention is being riveted by names like TelePrompTer, Metromedia, Warner-Amex, and Times Mirror.

"Now, whatever growth in market share the networks have they got by taking it from each other," says Mr. Murillo, a portfolio manager with the Founders Fund, a Denver-based mutual fund. "The growth is all in other areas."

The latest episode in this market-share series was played out last week, when Fred Silverman resigned as president of NBC, after four years of unsuccessfully trying to improve that network's distant third position. Without "a statement of unequivocal support" from Thornton Bradshaw, who began as chairman of NBC's parent company, RCA, on July 1, Mr. Silverman at least temporarily ended what had been one of the most avidly watched TV careers -- a career that took him near or to the top of all three networks.

But while Mr. Silverman was trying to rescue NBC from its distant third position, the broadcast industry he had ridden so fast to the top was changing under him. There still is a broadcast industry that is growing and is very attractive to investors, but it is not in the three major networks. The favorites today are the firms that produce and supply entertainment to cable-TV, independent stations, and video discs and cassettes.

Advertisers, too, are watching and preparing to react to these changes. "The changes going on in the media are really vast," said Kenneth Olshan, chairman of Wells, Rich, Greene Inc., one of New York's largest advertising agencies. "I don't think anybody knows yet what it all means. . . .At the moment, the only thing the networks have going for them is their distribution system and the fact that they're free. But free is not going to be enough to keep them vital if they don't become creative and involved."

Eventually, he says, advertisers may find ways to put some commercials on what are now commercial-free cable stations. There might be five minutes of commercials between two three-hour movies, for instance. "Free is so powerful that anything that can bring down the cost of pay TV will be attractive [to the public]," he said.

Meanwhile, networks will be unable to continue raising their advertising rates at the pace they've done in the past, posing another threat to their earnings.

The shifts in the broadcasting industry did not come without warning -- cable TV has been in existence for some 20 years -- but the changes came swiftly. In less than two years, the three networks' shares of the viewing audience has dropped from over 90 percent to about 85 percent. Within five years, analysts say, this share could drop another 5 to 10 percent. And in areas of the country that are fully penetrated by cable, the three networks' share could end up as low as 55 percent.

This does not mean the networks are fading to black as business enterprises. "They're going to continue to grow," says William P. Suter, vice-president at Merrill Lynch, Pierce, Fenner & Smith Inc. "They may not grow as fast, but they're going to keep growing." While the networks will have to share more of their audience in the future, there will be more of an audience to share.

By 1985, there will be 10 percent more homes with TV sets than there are today, or some 90 million households, says John Reidy, an analyst with Drexel Burnham Lambert Inc.

Much of this increased audience, however, will be tuning in to cable. About 21 million households are wired for cable TV today, Mr. Reidy says. "By 1985, there could be 35 million homes with cable. That's a significant jump."

It is this audience that keeps investors and other observers watching the industry with as much fascination as a bunch of preschool children in front of the Saturday morning cartoons.

At Founders Fund, which has long had holdings in broadcast stocks, Mr. Murillo says, "We haven't owned any stock in any of the three networks for at least two years. And the last one we held was CBS."

Instead, Mr. Murillo and his counterparts are buying the stock of pay-TV companies, independent networks and stations, and their suppliers. The stock of one such company, Metromedia, which has no cable outlets but owns and supplies programming to independent stations, was selling for $32 a share in 1978, a spokesman says. Today, it is selling for about $150.

"Anything that is in the software end -- the product -- will go up in value," Mr. Murillo said. This includes firms that supply syndicated versions of old network series, movies, individual games, programming for two-way cable systems, and cassettes and video discs.

Video discs are selling surprisingly well and seem likely to overtake the erasable cassettes, says Robert G. Pekurny, assistant professor in the radio and television studies department at Northwestern University.

"Instead of erasing the movies and putting something else on the tape, people want to build archival libraries of old movies and the better new ones," he said.

But "the cutting edge" in broadcasting, Dr. Pekurny believes, will be in two-way cable. "Interactive cable and home computer terminals will grow very fast," he says. "Also play-cable, where you and the guy down the street or in another city can play Space Invaders using your TV and the phone."