Why is Oprah going to cable? Hint: It's nothing to get teary about

Oprah Winfrey is a smart cookie. I am guessing she knows all too well that you can make more money in cable than you can on a TV network. If it's like other cable networks, her new Oprah Winfrey Network (OWN), which she co-owns with Discovery Communications (DISCA), will be much more profitable than the TV networks.

And her departure from her popular show will cost those TV networks big money. How much? Show broadcaster, Walt Disney's (DIS) ABC, will lose millions in ad revenues, according to the New York Times. CBS Corp. (CBS), which owns Oprah's syndication rights, will similarly lose millions.

Meanwhile Oprah has no money worries. Forbes reports she had a net worth of $2.7 billion, which she got from her stakes in various shows. Those include the Oprah Winfrey Show, which airs in 144 countries and brings in 44 million U.S. viewers each week and Harpo, her production company, which produces Dr. Phil and Rachael Ray. She also has a new show hosted by frequent guest Dr. Mehmet Oz.

Before getting into how well Oprah will do with OWN, scheduled to start broadcasting in January 2011, consider how challenging it is to run a TV network, which in a good year earns 10% margins on advertising and syndication revenues.

The TV network audience is getting smaller -- the New York Times reports that 56 years ago in the1952-53 TV season, over 30% of U.S. TV households watched what is now General Electric's (GE) NBC (RCA owned it back then). In 2007-8, NBC's share had fallen to 5.2%. Meanwhile, the costs of producing programs are rising as the odds of achieving ratings success with those programs decline.

By contrast, cable channels earn 40% to 60% net margins. How so? They make huge amounts of money from subscriber fees. Consider the comparison that the Times presents between NBC and ESPN. They had roughly equal 2008 revenues -- NBC made $5.6 billion from advertising while ESPN sales of $6 billion came from $1.6 billion in advertising and $4.4 billion in subscriber fees. Yet ESPN's cash flow margin -- cash flow divided by revenue -- of 23% trounced NBC's 5%.

How will Oprah benefit from going cable? It remains to be seen how much traffic she can drive to OWN. But her partner, Discovery, expects to use her arrival as an excuse to raise subscriber fees and advertising rates. And if Oprah's ratings magic can transfer to producing popular shows on OWN, she will probably end up making more.

But I think she's going to miss the power and adulation she will have enjoyed for 25 years when her show ends in September, 2011.

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He owns GE shares and has no financial interest in the other securities mentioned.

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