OnScreen Summit: Analyst: Stronger Housing, Economy Will Drive Cable

Reif Cohen Sees Subscriber Improvement in Second Half of Year
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New York – Bank of America Merrill Lynch media analyst Jessica Reif Cohen said a rebound in the housing market could help kickstart the economy and spell much  better days for cable companies in 2013.

At the Multichannel News/B&C OnScreen Summit Thursday, Reif Cohen stopped short of predicting that cable operators will cross into positive video subscriber growth next year, but said that losses that have plagued the industry for years will continue to decline.

“We haven’t had the benefit of housing growth in years,” Reif Cohen said. “That will be a huge positive for the pay TV industry in general and cable specifically.”

The analyst said that overall Bank of America Merrill Lynch is bullish on the overall economy – the promise of renewed housing growth, continued low interest rates and a strong banking sector should translate into overall gains, especially in the second half of the year.

High programming costs will continue to divide operators and content providers, Reif Cohen said, adding that average retransmission consent fees will continue to rise.

“This round of contracts will end at $1 [per subscriber per month], the next round will start at $1.50 or $2,” Reif Cohen said. “There is no doubt that retrans costs are going up.”

She added that with the advent of reverse compensation – where affiliate stations pay the networks a portion of their retrans fees, will only drive the price up higher.

While programming has been a sore point for many operators – earlier this week Time Warner Cable chairman and CEO Glenn Britt said he would costly drop channels that don’t perform – Reif Cohen said some other networks that have been receiving low fees are due for a raise.

She pointed to Discovery Communications, which will start its next round of renewal negotiations at the end of this year and continuing over the next several years. Networks in the Discovery stable like TLC, Discovery Channel, Animal Planet have been generating high ratings with shows like Here Comes Honey Boo-Boo, Gold Rush, and Too Cute.

“They deserve a higher fee,” Reif Cohen said of those networks, adding that mid-tier networks like ID: Investigation Discovery, Science and Military and even lower tier channels are gaining traction and viewers.

“Discovery is in a completely different place than they were six or seven years ago,” Reif Cohen said.

But in areas like sports programming, distributors are beginning to fight back by educating customers on the high costs of carrying certain networks.  Reif Cohen said that next year, DirecTV is expected to begin itemizing its customer bills, breaking out the charges for each regional sports network it carries.

The deal market should also rebound next year, with several deals expected. Reif Cohen added that already Cablevision has singled out its Optimum West division – the former Bresnan Communications – for sale, and other distributors and content providers are expected to enter the fray over time.

“In the next couple of years we should see a lot of activity,” Reif Cohen said. “Balance sheets, in 30 years, have never been stronger.” She added that opportunities include larger companies snapping up smaller companies as well as media giants separating out and even selling specific assets.

Reif Cohen also was bullish on The Walt Disney Co.’s recent agreement to license its studio output to Netflix, beginning in 2016. That deal, estimated to be worth $350 million for Disney, was a win-win for both companies, she said. Netflix benefits by getting access to extremely compelling content and Disney and arguably other studios benefit because another deep-pocketed buyer has entered the picture.

As far as individual companies in the sector go, Reif Cohen touted Comcast as “the strongest of the strong,” dominating not just in distribution with 22 million customers, but with content through its NBC Universal unit. Time Warner Cable, while smaller, provides strong shareholder returns and is undervalued in Reif Cohen’s opinion; Cablevision “has the potential to surprise more than any other company.”

On the content side, she said News Corp. is “innovative” and “always sees around corners”; Disney should benefit from strong growth at its theme parks and on the content side with its recent purchase of Lucasfilms; and Time Warner Inc. has strong cable channels like TNT and TBS and is making inroads in turning around news juggernaut CNN, with the recent hire of former NBC chief Jeff Zucker to head up the channel.

“CNN is a brand that must be restored,” Reif Cohen said. “There is a lot of opportunity for them there.”