The fourth quarter is expected to be a strong one for cable programmers, with analysts predicting a continued robust advertising market coupled with a 60% rise in retransmission-consent and reverse-compensation fees for top broadcasters.
Major cable programmers and broadcasters are expected to release their calendar fourth-quarter results in the next several weeks. Analysts are encouraged by what has been a strong market for both cable and broadcast advertising.
In a research report last week, Morgan Stanley media analysts Ben Swinburne predicted that national TV ads would grow at a 5% to 6% clip in the current quarter, with broadcasters benefitting from the upcoming Winter Olympic Games. In addition, local TV ad revenue should grow in the high single digits, helped along by midterm elections.
“For all the concern that 4Q scatter softness is the beginning of the end, we note that 2013 ad spend growth on TV came in 250 basis points better than expected led by the broadcasters,” Swinburne wrote. “This, despite U.S. online video ad spending reaching $3 billion, up 30% year over year.”
He added that the robust growth is expected to continue, with mid-single digit advertising revenue growth for national TV in 2014, and online video revenue predicted to reach about $1 billion for the major TV networks for the full year.
On the cable network side, ISI Group media analysts Vijay Jayant and David Joyce wrote in a Jan. 21 research report that viewership for the quarter was flat on average — half of the top 10 networks were up and half were down in primetime ratings.
BROADCAST AD CHALLENGES
For the programmers most exposed to broadcast — CBS and Fox — there were challenges, the analysts wrote, as season-to-date network viewership fell 4% each, and their local TV stations had no political advertising spending to compare to 2012. That forced the analysts to revise their earlier estimates of mid-to-high-single-digit advertising growth down to the mid-single-digit range.
“That said, most of the stocks in the group should continue to work due to a solid macroeconomic backdrop, healthy capital returns and an improving international market for increased pay TV penetration and content sales,” Joyce and Jayant wrote.
A bright spot for broadcasters continues to be retransmission consent, which is expected to continue its upward trajectory, according to Swinburne, despite threats to the model from potential consolidation among cable operators and over-the-top service Aereo. In a research note, Swinburne noted that even the largest multichannel video distributor — Comcast, with about 22 million customers across the country — is experiencing 10% content-cost growth.
As far as the future of Aereo, which should be decided by the U.S. Supreme Court in the coming months, Swinburne wrote that whether the service is determined to violate broadcast copyrights or not, the 1992 Cable Act “continues to require all regulated MVPDs to obtain retransmission consent to rebroadcast network signals.”
Swinburne estimated that retrans revenue will grow by about 60% on average in the calendar fourth quarter, with Fox leading the charge with an estimated 95% increase. The Walt Disney Co.’s ABC is expected to place second with a 64% increase and CBS, a pioneer in cash for retransmission consent, should rise by 10%. NBCUniversal, which has been late to the cash-for-retrans game, is not expected to have a material increase in fees in the fourth quarter, but that should change in 2014, when a flurry of renewals is expected to hike rates by 96% to 110% for the next four quarters.
AEREO AND RETRANS RISK
Jayant and Joyce however warned that an unfavorable Aereo ruling could put that retrans revenue at risk for some broadcasters, adding that it could lead to an abandonment of the broadcast model all together, especially for networks that have come to heavily depend on retrans. For example, Jayant and Joyce estimated that retrans accounted for about 11.7% of CBS’s total cash flow in 2013, but will make up almost 24% of total cash flow by the end of 2016.
“In short, if broadcasters lose this case, not only will the highly-viewed sporting events move to pay television, but many broadcasters could contemplate converting to a cable network,” the analysts wrote.
For the cable networks, Joyce and Jayant estimated that domestic ad growth would range from about 3% for Time Warner Inc. in the period to 8% for Scripps Networks Interactive. Affiliate-fee growth is expected to range from 8.7% for Time Warner to as much as 15% for Fox, according to Jayant and Joyce.
Encouraged by a strong cable and broadcast ad market, analysts are optimistic about what Q4 holds for programmers.