« September 2008 Models: Shifting to Small Caps | Main | American Apparel Story Gaining Credence »

September 04, 2008

Cable Nets Best Positioned Media

The world of TV transitioned from the Olympics to the political conventions over the past week. The ratings of each event provide some insight to investors.

Broadcast networks (ABC/Disney, CBS, FOX/News Corp, and General Electric/GE) are still the only place where really large audiences can be reached. This is true for event programming or nightly prime time. Fundamentals for broadcast networks face sever secular and cyclical pressure but the ability to draw tens of millions of viewers means the fundamentals will deteriorate gradually and that there will be winners and losers.

Cable networks continue to gain viewers. The trend is firmly in place and will not change anytime soon. Advertisers will follow viewers. This provides a revenue growth opportunity that can drive operating fundamentals even as similar but different secular and cyclical challenges abound for cable networks. Cable networks are the only place in domestic media that still have decent fundamentals with upper single digit advertising growth. The most direct pure plays are Discovery Communications (DISCA) and Scripps Interactive (SNI). Among the diversified major entertainment conglomerates, Viacom and the new Time Warner have the most exposure. News Corp and Disney also have meaningful cable networks segments. If you are going to maintain exposure to domestic media companies you should restrict your holdings to that list. I recently bought Time Warner for Northlake clients. DISCA and SNI are my next choices though Northlake is not yet long either....

....
As widely reported, the Olympic ratings were enormous. NBC pulled in 20 million viewers on many nights. Over the course of entire Olympics, over 200 million Americas watched at least a few minutes of the coverage. Nothing shown on cable networks can rival these numbers. ESPN can get high single digit millions for NFL football but most nights, most cable networks will only bring a few hundred thousand to a few million viewers. Top rated primate time programs pull 10-15 million viewers. Poorly rated programs on the big four broadcast nets get at least a couple of million viewers, almost always larger than anything on cable.

The ability for the broadcast networks to get mass audiences will keep advertisers aboard even as ratings steadily dwindle. If you want to promote your new movie, you have to do it on networks that reach tens of millions of ticket buyers. Same thing if you want to launch a new car or roll out anew brand of soap. This reality means that broadcast networks will continue to offset ratings declines with price increases. The result is a surprisingly stable or even very slowly growing advertising revenue pie to be split among the big four networks. Winning networks who are on top in the ratings or rising can gain advertising share and produce decent revenue growth. Broadcast networks are a high operating leverage business so a revenue surge can lead to a larger profit surge. Right now, FOX and ABC are the winners, CBS has stalled and is in risk of decline, and NBC is struggling mightily to get out of the cellar.

The Democratic convention is a reminder of why the future of TV remains cable networks. Ratings from the first three nights were quite good, up sharply over 2004 on a combined broadcast and cable basis. However, all of the growth came from cable networks. On Monday, Fox News was up 84%, CNN was up 85%, MSNBC was up 88%. On Tuesday and Wednesday the trend was the same with the cable news nets up 40% plus across the board. Through the first three nights, broadcast networks as a group were flat with 2004. NBC was up, ABC was flat, and CBS was down.

Besides the massive market share gain for the cable news networks, their showing in the all-important demographic race also improved. CNN and MSNBC enjoyed a more than doubling of their ratings in the coveted 25-54 year old demographic, while Fox News was up over 40%.

While the political conventions happen once every four years, the market share/ratings gains for the cable news networks are a microcosm of the trends in TV. Cable wins, broadcast loses. Every year a couple percent of viewers move form broadcast to cable. This is why cable network advertising growth is still in the mid to upper single digits even as ad budgets are being cut due to the economy and the internet steadily gains shares. This is why cable networks can charge cable and satellite operators a slightly higher subscription fee for every subscriber every year.

Challenges remain. The ad cycle is working against all media stocks. Cable networks face increasing programming costs as they attempt to close ratings and ad pricing gap. However, in a media world starved of growth, cable networks are the only play in town.

Posted by Steve Birenberg at September 4, 2008 09:33 AM in Media