SG Cowen Downgrades Broadcasters

11/16/2003 7:00 PM Eastern

Warning investors about the threats that digital video recorders pose to the media industry — and advertising revenue — SG Cowen downgraded its ratings on several broadcasters last week.

SG Cowen, which lowered its ratings on Tribune Co., Univision Communications, Hearst-Argyle Television Inc. and Gannett Co. from "outperform" to "market perform," is the first Wall Street firm to ever downgrade a media company based on the threat of DVRs.

Some analysts have downplayed the threat of DVRs — which are being rapidly deployed by several cable and satellite providers —noting sluggish sales of standalone devices from TiVo Corp. and SonicBlue Inc.'s Replay TV. But SG Cowen says the rollout of cable and satellite set-tops that contain DVRs — coupled with the ability of subscribers to easily skip ads with the DVRs — poses a significant threat to broadcasters.

"High rates of ad skipping among DVR subs will blunt top-line growth and put significant pressure on cash-flow growth rates as broadcasters couple to bring fixed cost structures in line with slowing revenue growth, while contending with higher promotion and programming costs," SG Cowen analysts James March, David Murphy and Eric Nanes wrote in research notes last week.

Citing "empirical evidence" that suggests TV viewers with DVRs skip at least 60% of commercials they could potentially view, SG Cowen said TV-station groups that own no programming are most at risk.

The firm said niche cable networks are more equipped to parry the DVR threat to traditional advertising models.

"Better-positioned, in our opinion, are targeted cable networks that own their own programming, have additional revenue streams, relatively low [advertising] CPMs [cost per thousand], enjoy better commercial ratings momentum, and air commercials that are likely viewed more receptively by viewers," SG Cowen wrote.

In addition to downgrading Tribune, Univision, Hearst-Argyle and Gannett, SG Cowen lowered its estimates on Emmis Communications, E.W. Scripps and The New York Times Co.

The firm also criticized media companies for attempting to sweep the threats posed by DVRs under the rug.

"Another major reason we are worried about the future of broadcasters is the lack of a credible plan by management to counter growth in DVRs," SG Cowen wrote in its report. "So far it appears largely limited to an effective denial of a problem, borderline distortion of available research, focus on near-term results and a general lack of vision about how the business is likely to change."

SG Cowen also predicted that broadcasters would ask regulators to help save their ad-supported TV model, but that they'll fail to spur regulation of the DVR industry.

The firm also laid out a timeline with further predictions. These include:

  • By the middle of next year, Time Warner Cable will reach 1 million DVR subscribers. DVRs will be the talk of the broadcast network upfront presentations to advertisers, and repercussions from the annual sales bazaar will spill over to the cable side. Advertisers will compile more information on the impact of DVRs on ad-skipping, and News Corp. will close its acquisition of DirecTV Inc., and possibly increase the company's rollout of DVR-enabled set-tops.

  • By the end of 2004, DVR penetration will reach 6% of U.S. households, posting growth of more than 100% for the year.

  • By mid-year 2005, DVRs will "ruin the broadcast upfront," with 11 million DVRs expected to be operating by the end of that year, penetrating 11% of all households. "To make matters worse, this is not any old 11% of homes but the homes of young, upscale and wealthy viewers, so the impact of these homes could well be magnified," SG Cowen wrote.

Skipping Spots
Source % Ads Skipped By DVR Users
Source: CBS, SG Cowen, CVR Monitor, CNW Market Research, TiVo
SG Cowen60%
DVR Monitor70%
CNW Market Research72%

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