Cashing In On ‘TV Everywhere’

Authentication Pacts, Advertising Gains Lift Prospects for Programmers, Analyst Predicts

By Mike Farrell -- Multichannel News, 7/19/2010 12:01:00 AM

A robust upfront and the promise of higher affiliate fees bolstered by authentication agreements should drive cable networks forward in the second quarter and beyond, according to several analysts.

Authentication, also known as TV Everywhere, could be a big driver of affiliate-fee increases. Pioneered by Time Warner Cable and Comcast, TV Everywhere would allow existing cable subscribers to access select cable programming online as part of their cable subscription. So far, TV Everywhere deals have been sparse, but they are expected to be a big part of carriage-renewal agreements over the coming months, according to Miller Tabak media analyst David Joyce.

“The notion that we’re getting closer to authentication and TV Everywhere means that a business model can be salvaged in the TV world,” Joyce said. “It’s not ready for primetime yet, but my understanding from some executives in the industry is that they’re ready to roll out authentication whenever they’re working through their carriage agreements.”

In a detailed research report last week, RBC Capital Markets media analyst David Bank wrote that although networks may be giving up some amount of control over their online destinies with authentication, the benefit in higher affiliate fees may be too good for programmers to pass up.

Just how much those fees will grow remains to be seen. But the addition of authentication in the mix could soften the blow for some cable operators, Bank said.

“As the specter of over-thetop competition looms large at a time when retransmission consent is becoming a more powerful economic force, and cable affiliate fees are continuing to grow at double-digit levels, the MSOs could have their bargaining chip in the form of TV Everywhere,” Bank wrote. “We believe that the content providers would likely be better off by participating in TV Everywhere rather than alienating the MSOs, especially as the independent over-the-top opportunity just doesn’t have much to offer currently.”

While TV Everywhere could be a boon for the future, Bank and Joyce both see strong growth in the June quarter for most of the cable networks, based on a stronger ad market (upfront pricing rose an estimated 20% in the most recent round) and continued momentum from ad revenue increases in the first quarter.

According to both analysts, Discovery Communications and Time Warner Inc. are expected to report a 10% increase in advertising revenue in the second quarter. Discovery, which was the only cable programmer to report positive ad-sales growth in 2009, is also expected to announce either a share buyback plan or dividend in the relatively near future, which should help the stock, according to Bank. Discovery shares more than doubled in 2009 and rose another 19% in the first half of the year.

Bank added that Discovery “has one of the best growth profiles in the industry, and a potential announcement of a return of capital to shareholders in the near future offers a catalyst.”

Media giant Time Warner Inc. should be able to build on first-quarter momentum, as the company “was likely able to ‘over-monetize’ soft ratings,” Bank wrote. He estimated that overall revenue at the media giant would rise 4.4% to $6.2 billion in the quarter, driven by an 8.1% boost to Media Networks revenue to $3.1 billion. Segment operating income also is expected to rise 6% at Media Networks to $910 million in the period.

The Walt Disney Co. and News Corp., which also own broadcast networks in addition to their cable holdings, should see some strong growth in the second quarter, in part fueled by retrans fees, Bank wrote.

The analysts predicted that Disney’s overall revenue would rise nearly 9%, to between $9.3 billion and $9.4 billion in the fiscal third quarter ended June 30, with Bank predicting cable-network revenue would gain 12.3% to $2.9 billion and broadcasting revenue would be up 2.5% to $1.4 million.

At News Corp., which owns Fox Broadcasting, the analysts predicted revenue would rise about 5% to between $7.9 billion and $8.1 billion, fueled by strong increases in cable and broadcast network revenue.

Viacom, which was hit hardest during the ad slump — domestic advertising revenue was down 6% in 2009 — is expected to reap the benefit of stronger upfront and scatter pricing, Bank wrote. He expects ad revenue at the MTV Networks parent to rise 2.5% in the June quarter to $1.1 billion, with Media Networks revenue increasing 6% to $2.1 billion. Bank also believes that Viacom will be able to return even more capital to shareholders — he estimates that given its free-cash-flow generation, Viacom could return as much as $2 billion to shareholders by the end of 2011.

All in all, it points to another quarter of healthy growth for programmers.

“Despite skepticism about the advertising economy and consumer entertainment market holding up given the global macro backdrop, we don’t think 2Q10 results will demonstrate any real loss in momentum,” Bank wrote.