Is now the time to reassess how cable franchise rights are valued? Given the changing industry, many valuation analysts are reconsidering the level of protection these rights actually provide for cable companies and how to update their methodologies to best capture the potential change in value.
Cable-franchise rights generally result from agreements companies have with local and state governments that allow them to operate a cable business within a specified geographic area. In the past, valuation analysts relied on two methodologies to value cablefranchise rights: the Multiperiod Excess Earnings Methodology and the Greenfield Approach.
Recently, however, some valuation firms are coming to the view that cable franchise rights are no longer exclusive legal arrangements. Not only are telecom companies and satellite companies permitted to enter the cable space, but the entrance of Internet video, with Web connections fast enough to deliver high-quality picture and sound, is also threatening cable’s long-term hold on the living room.
The industry is now seeing a trend towards unbundling of television programming as many families are coming to the conclusion that they don’t watch enough shows on cable TV to justify the expense. Various Internet companies are now offering to unravel the bundle and sell it piecemeal by channel or even by individual show. This is similar to the way the Internet reduced the cost of newspapers or the way Napster and Apple forced music labels to sell their songs for 99 cents per track.
The subscription-based streaming-media model offered by Netflix, is one of the challengers to traditional bundling. In the third-quarter of 2012, when Comcast reported losing more than 117,000 subscribers, Netflix announced that it had picked up over 2 million new subscribers during the same period. In fact, since its inception in 1997, the company has amassed more subscribers than any other provider in the United States.
Competition for market share isn’t slowing:
• Recent Web startup, Aereo, taps public antennas to bring programming to subscribers’ homes for as little as $10 per month.
• YouTube, now the world’s largest video website, recently announced a plan to let some users charge a monthly subscription to their channels.
• Amazon has also invested millions into internet-delivered television, believing it will be the future battleground for America’s attention.
Changing consumer habits such as these have even made Nielsen adjust how its television ratings are calculated. In addition to the traditional television set, tablets are now considered in Nielsen ratings and the company has pledged to measure TV viewership on iPads and other mobile devices in the future.
Cable-franchise rights were once measured based on protected income streams but are now potentially lesser-valued assets that are more properly quantified based on the administrative and legal cost associated with securing such rights.
As the industry continues to evolve, other intangible assets, such as customer relationships and technological capabilities are beginning to take on greater measures of importance.
Tom Mannion is a senior manager in the valuation-services practice of BDO Consulting.