Beware Free Content: Analyst


Media Metrics founder and managing director Laura Martin pulled few punches during a panel discussion at last week’s The Independent Show, telling network executives bent on providing more and more of their content online for free that they are effectively killing their businesses.

Martin, a longtime media analyst who was once a fixture on panels at cable shows, said that while industry online initiatives like TV Everywhere and Disney’s plans to create a subscription-based Web site for its online content are all well and good, programmers themselves should pay attention to what is paying their bills.

“The 27-year-olds [who run] content companies have run amok,” Martin said. “It costs $3 billion a year for CBS to program primetime. … They get 10 million unique visitors a month on Hulu, but you know why? Because it’s $6 billion worth of content they’re putting on there for free.”

Martin added that programmers should instead concentrate on creating compelling content specifically for the Web.

“We’re hoping over time that the content owners see the error of their ways and come back behind an authentication model or a pay-for-play model for the Internet so that they don’t undermine what we think is the golden goose, which is the cable television model,” Martin said.

Martin had even less optimism for the broadcast model — she predicted that in 10 years, the four major broadcast networks would be solely cable networks. Television stations, she added, are coming off a poor first half of the year but the second half — which will be compared against last year’s strong political advertising — are about to have a “horrible” second half, she said.

Miller Tabak media analyst David Joyce, Martin’s counterpart on the July 28 panel, took a less alarmist stance. While he agreed that TV stations are in for a rough time, he said other issues such as what happens to network affiliates in such a scenario and how local issues like news are addressed could keep the broadcast networks from going all cable anytime soon.

“I just don’t see how that is going to get rectified,” Joyce said.

Joyce was optimistic about cable valuations, however, pointing to a recent private equity deal — the recapitalization of Grande Communications, a San Marcos, Texas overbuilder, by ABRY Partners for an estimated $250 million.

The deal values Grande, which has about 147,000 subscribers, at about 6.5 times forward-looking cash flow. That is slightly ahead of current public cable-company multiples, which Joyce estimated were between 4.5 times and 6 times forward- looking cash-flow.

“It is definitely a positive,” Joyce said, adding that the public markets often look to private deals for a cue for valuations. “It’s not what it was like last year. And it is an indication that private equity is ready to lead the dash” once the economy rebounds.

And though that could mean a resurgence in the deal market down the road, Martin believes that M&A will come to a standstill for another reason — the current presidential administration.

“This administration won’t approve consolidation in big markets,” Martin said.

Martin also had a word of caution for small operators about the Obama administration’s Broadband Technology Opportunities Program, the $7.2 billion initiative to help fund broadband expansion into small and rural communities. The current administration has imposed some heavy requirements on other bailouts of the banking industry, the analyst said, and the auto industry, and there is no reason to believe the same couldn’t happen for cable.

“They feel they have the right to be very invasive,” Martin warned.

She added that small operators that do decide to participate in the program should do so through separate entities tied to the specific project.

“I wouldn’t put the assets you have built at risk,” she said. “… Lose the thing they gave you the money for.”