Time Warner's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)

Feb.27.13 | About: Time Warner (TWX)

Time Warner Inc. (NYSE:TWX)

February 27, 2013 12:30 pm ET

Executives

John K. Martin - Chief Financial & Administrative Officer

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

All right. Good morning, everybody. In case you weren't here for the last session, I'm Ben Swinburne, Morgan Stanley's media analyst. And thrilled to have to my left from Time Warner, John Martin. John is the CFO for Time Warner, has been since 2005. Over the last 4 years, under John and the team's leadership, Time Warner has increased adjusted earnings by over 20% per year, generated $11 billion in free cash flow, returned $15 billion of capital share to shareholders through dividends and share repurchases, and so we're really excited to have the company here at the conference. John, thanks for being here.

John K. Martin

Nope, thanks for having me.

Question-and-Answer Session

Benjamin Swinburne - Morgan Stanley, Research Division

I guess, one hot topic and certainly in the press and among investors that I wanted to start out with before we get into some of the bigger picture questions is just to ask you if there's any comment you can make about the speculation around timing and Meredith getting together?

John K. Martin

Look, I appreciate the question. As a matter of policy of our company, we don't comment on press speculations. So unfortunately, there's not much I'm going to be able to say on that.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay, no problem. Why don't we hit...

John K. Martin

But we have a lot to talk about on other topics.

Benjamin Swinburne - Morgan Stanley, Research Division

Yes, absolutely. Let's get started. You have talked about and Jeff talked about sort of 4 key drivers of growth for Time Warner over the next several years, the domestic affiliate revs, expansion of international TV, monetization of content and then on the cost side as well. Can you spend some time on those for us, just walk us through the outlook, in particular, for 2013?

John K. Martin

Yes, I think you've mentioned some of the bigger drivers of growth for Time Warner. And I think, looking at it over a multi-year period, the levers that you just discussed should actually not only contribute to earnings growth in 2013, but actually over the next several years. But looking more specifically at 2013, we fully expect that it's going to be a good year for us, another good year for us. Looking at the networks business, on our last earnings call, we said we expect to have a strong adjusted operating income growth at our network's group this year, looking at some of the revenue drivers, starting with subscription revenues. To put some numbers around it, it's about an $8.5 billion revenue stream for us. We expect -- we got continued pricing power there. We expect healthy growth in 2013, and that's ahead of the next affiliate rate cycle that we've discussed, which should result in accelerating affiliate revenue growth at Turner domestically over the next several years. And we're also coming off the strongest domestic subscriber growth here at HBO that we've had in years, where HBO grew almost 2 million units in 2012. If you look at the ad environment, which is about 30% of our network revenues, the ad environment feels pretty good, and that's -- we've got the benefit of a very strong effort for last year, and that's in the midst of a programming refresh at both TBS and TNT. If you look internationally, at our cable networks business, which is including our unconsolidated international subsidiaries, it's about a $3 billion revenue business with about $650 million of operating income for us. We should see an acceleration in operating income growth from our international cable networks in 2013 relative to 2012. And that's really taking advantage of strong secular growth characteristics in Latin America and in areas where we've got less secular growth characteristics in developed countries in Europe. We're looking and we've already taken action to streamline our operations there and really look at costs. So you mentioned costs, which is a mantra at Time Warner. At our cable networks in 2012, overall operating costs only grew 1% and programming costs only grew 2%. We've said -- and really, that 2% last year was on a normalized basis more like 4%. In any given year, we expect programming costs of the networks to go up anywhere between mid-to-high single digits. We see no difference in 2013. All other costs at our networks group are going to grow much, much more slowly than that so we're very confident we should see margin expansion this year at our cable network. So if you look at the studio, where Warner has just completed its second highest profit year in the history of the company in 2012, with a little luck this year, we should have as good or even a better year. The TV production side of this studio, which in 2012, represented 60% of the operating income should have another very strong year. We've got a strong incumbent position, but the shorthand way of describing our TV production businesses, we've got more buyers at higher prices. So we feel good about that. And on the theatrical side of the studio business, we've got high hopes for film releases coming up later this year, which includes the sequel to 300, the reboot of the Superman franchise, called Man of Steel, Gatsby, Pacific Rim, Hangover 3 and another Hobbit movie later this year. So big year theatrically. In the Interactive Games business, we've got another Batman: Arkham release. We should have a better year in '13 than '12. So overall, we should have good, healthy organic growth at our businesses in '13 and same or similar application of capital returns that we've applied in the past, and we're hopeful we have strong execution. We'll have another good year.

Benjamin Swinburne - Morgan Stanley, Research Division

Terrific. One of the drivers of the media group of stocks in the last few years and the outperformance we've seen has been the pricing power of the assets. And you mentioned your domestic affiliate renewals. Can you talk about what gives you confidence in your portfolio looking forward as you go through this cycle? And can you include -- another big theme at this conference has been 'TV Everywhere', how that factors into your thought process?

Jeffrey L. Bewkes

Sure. And look, I appreciate the question. We're only growing increasingly confident that we're going to be able to achieve our goals as it relates to affiliate price increases. If you look at the portfolio of Time Warner's cable networks between Turner and HBO, we garner about 20% of all viewing on cable. And if you look at 2012 results, our biggest general entertainment networks, TNT and TBS, TBS finished #1 in adults, 18 to 49 in prime. TNT was #4. If you look at total reach on a total 24-hour household basis, TBS was #1 and TNT was #3. So we occupy lead position in general entertainment cable networks. And if you look at some of the other networks, truTV, which has come sort of out of nowhere to become a bona fide top 10 cable TV network, 11 years ago, we invented a late night programming block on Cartoon Network, called Adult Swim, and completed 2012 as the #1 network delivery of adults 18 to 49. Cartoon Network, I believe, was the only kids network that grew ratings, and even CNN, which continues to have ratings challenges in the United States, it continues to be the place for viewers to go when there's breaking news. So I think we've got a very strong hand moving into the next affiliate renewal cycle. And if you think about our portfolio of networks, I think Turner may be the only programmer that has 4 of the top 15 cable networks and 5 of the top 30. And the overwhelming majority of our affiliate fees are in those top networks. 86% of our affiliate fees are in the top 4 networks. That's really important because we're not protecting ancillary or networks that are weak. So we feel really good. And part of what is underscoring our confidence also is we've completed affiliate rate negotiations with 2 of the top 10 domestic distributors, and we've gotten the ratings increases that we wanted to get and expected to get, and that also underscores our confidence as we look forward.

Benjamin Swinburne - Morgan Stanley, Research Division

Great, and how does -- we had Michael in our office yesterday, talking a lot about 'TV Everywhere', and they just did a News Corp. deal and James was here Monday, talking about how important it is to their business. How does that factor into what you guys are targeting on affiliate fees?

John K. Martin

Thank you. I forgot to answer that part of the question, my apologies. Look, I think, we, at Time Warner, have taken maybe a slightly different approach than some of the other programmers. We've been very supportive of 'TV Everywhere' from the beginning, and we have already granted a broad set of rights to most distributors as it relates to TV Everywhere, not all distributors, but most distributors. And I don't see that as being a big negotiating point on the next round of affiliate negotiations, but rather, I think we would continue to like to see broad-based support from the programming and the distribution industry around 'TV Everywhere' to make video-on-demand as robust as possible because while we've proven technically it's possible and more and more programming is available on a 'TV Everywhere' basis, HBO GO being the single best example of that, there still is an underwhelming amount of consumer awareness and that's the next chapter that has to happen.

Benjamin Swinburne - Morgan Stanley, Research Division

Got it, great. You mentioned a little bit about your outlook for programming investments, but can you talk maybe more about the strategy on content across the networks business, where are you guys spending your money and why?

Jeffrey L. Bewkes

Yes, sure. And look, our programming strategy is different for the different networks that we own. To start off with some numbers, we spend about $5 billion a year on programming our networks, and I wanted -- I'll start with mentioning the $5 billion because that's a huge base of programming spend to work with. And if you look at TNT and TBS, it's going to be about continuing to have the right balanced mix of sports, original programming and acquired programming. And I just mentioned, while not everything is working in terms of ratings on -- for the programming that are currently on the networks, broadly speaking, TNT and TBS occupy lead positions in the basic cable network universe. So we think it's working there. And if you look at HBO, where we spend almost $1 billion a year on original programming and another $1 billion a year on acquire a theatrical programming, we just -- I think on the original side, it's hard to argue with the success that HBO has been enjoying. 3 of the top most popular shows ever in the history of the HBO service are currently on the service. We have a tremendous pipeline of projects in development. We have successfully launched a couple of originals even on Cinemax, which is the flanker to HBO, which I don't think people really appreciate the importance of that, and we -- in 2012, we successfully executed an extension of our theatrical output deals with Fox and Universal, together with sister network, Warner Bros., means that into the next decade, HBO has exclusive rights within the pay television window for roughly half of all theatrical output, which is really critically, in our judgments, strategically important. So those are the strategies. In terms of the spending, in any given year, I think I may have mentioned this, we would expect programming costs to grow no more than mid to high single digits. And accompanying that, we continue to expect all other costs at our networks group to grow considerably less than that, and that's what we've been doing. In 2012, our margins at our cable networks group grew by almost 200 basis points. And if you look back further than that, you could see a long history of margin growth. I think over the last 4 years, margins have grown 600 basis points. And actually, over the last decade, margins have grown 1000 basis points. We see that capability of cost control continuing as we move into the future, and that all assumes that we are not starving our networks. We're fully investing in our networks, and that gives us a strong, we think, a strong course to succeed.

Benjamin Swinburne - Morgan Stanley, Research Division

How does sports fit into all that, both on the cost and also on the strategy side?

John K. Martin

Well, sports is really important. Of the $5 billion of programming costs, sports represents almost $1 billion. It's outsized in terms of its cost relative to the hours of programming, but sports garners huge viewership and is a particularly hot area right now in advertising. In fact, our sales process related to the upcoming NCAA March Madness tournament is going terrifically. Inventory is selling very, very quickly. All of our sponsors from a year ago are back with us. We're garnering CPMs that are high single digits. And our strategy in sports is to have enough sports that matter to give us maximum appeal to consumers and distributors, but at the same time, overall, within a fiscally responsible cost envelope. So if you think about the visibility that we have on our sports contracts going forward, we have the NCAA sports contracts going out to 2024. We just extended our major league baseball contract, which we have going out to 2022. The next largest sports deal that's up for renewal is the NBA, but that isn't even up until 2016. So we've got good visibility into the sports that we have, and we feel like we've got the right amount of sports to optimize our affiliate rate play along with our monetization of audiences.

Benjamin Swinburne - Morgan Stanley, Research Division

Right. Just to clarify, you said CPMs, up high single digits from last year on sports...

John K. Martin

Yes, you got it.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Speaking on the advertising theme, and we have heard some stuff from some of your peers at the conference about current ad trends. Any update you can give us on the advertising environment in television in the U.S. right now?

John K. Martin

The ad environment, particularly domestically, feels pretty good right now. I don't think it's changed demonstratively relative to when we announced earnings at the beginning of the month. But right now, scatter pricing is up anywhere from high single digits to low teens, depending on the day part and the network. We're seeing minimal cancellations of upfront commitments. We're seeing particular strength in categories that include food and insurance and pharmaceuticals and tech. Sports is a particular area of strength. So I think it's encouraging, and it's a good start to the year.

Benjamin Swinburne - Morgan Stanley, Research Division

Great, and that's scattered over the upfront?

John K. Martin

Correct.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. You mentioned margin expansion in networks last year and going back over time, as you move towards affiliate renewal cycle, do you expect to see the margin trajectory continue to be solid for you guys?

John K. Martin

Yes. I think, look, our expectation, because you mentioned the affiliate renewal cycle, just to go back and restate what we've said in the past, for the 3 years, including 2014, 2015 and 2016, our expectation is that our Turner networks will have on a compound annual basis, subscription revenue growth in the double digits over that 3-year period, which would be an acceleration in revenue growth relative to what it has been. And so I think going back to the answer that I just gave you, we've demonstrated continuous margin improvement in the face of more modest revenue growth realities. So the acceleration of revenue growth will give us even more opportunity to either make investments or bring it down to increase profits, but it only increases our confidence, as we set on the course of continuous margin improvement.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Why don't we shift from the domestic business back to international, again, which is another big sort of growth opportunity for the industry? We've heard a lot about it this week. Can you give us an overview of your international portfolio and the strategy there, which markets are most attractive and how you continue to grow that business?

John K. Martin

Sure. So in our international cable networks, which is the $3 billion revenue, $650 million operating income business, our strategy is really to be in growth businesses in growth territories, which should -- where we want to gain scale, improve our overall competitive position, and as a result, grow profits. And we continue to believe that international cable networks is arguably the best margin improvement opportunity we have at the company. And if you look at where we're most concentrated, it's in Latin America. It's in Asia and it's in Central and Eastern Europe, Europe more broadly, with a particular emphasis in Central and Eastern Europe. But if you look at Latin America, we've got the greatest scale there. We've got revenues that are approaching $1.5 billion annually. And because we've got great scale there, we're taking advantage of very strong secular growth dynamics in Latin America. And we're starting to approach margins that look like our domestic business. And we've got incremental opportunities to grow and kind of take advantage of the tailwinds that the secular growth dynamics should present. We are going to attempt to launch new networks. In fact, at HBO, we just launched HBO Netherlands. We just launched our first over-the-top HBO service in HBO Nordic. We just announced the launch of the first ever pay television premium television network in India. We are launching 2 new kids networks in Asia. And we have plans to launch new networks in Latin America so we ought to get incremental distribution from our existing networks in a lot of territories, as multichannel households continue to deepen penetration, but we should also get the benefit from launching the networks. In Central and Eastern Europe, we own 49.9% of a company called CME, and CME continues to occupy lead scale positions in a number of countries there. And in developed countries, where we have perhaps less secular growth characteristics, we've announced a series of restructuring initiatives to rationalize our cost base and improve profit growth there. So I think, overall, we see international cable networks as being a strong growth opportunity for us as we go forward.

Benjamin Swinburne - Morgan Stanley, Research Division

Any sense you can give us about your revenue growth expectations for Turner and HBO outside the U.S. and when you think they'll get to your $1 billion OI target?

John K. Martin

Yes, we've had -- I mean, if you go back, and 2012 was a little bit of an anomaly because we faced some pretty big FX headwinds. But if you go back a few years before that, we've been growing our international cable network revenues at almost twice the rate of our domestic. And if you look at -- and that's again dual revenue streams between subscription and advertising. Our subscription revenue growth, normalizing for FX, has been growing double digits annually. And that's largely a function of unit growth, not necessarily pricing growth. In the ad markets, we see optimistic growth scenarios for -- as ad markets mature in a lot of less-developed countries as overall multichannel continues to mature. And so we continue to believe that $1 billion of operating income is in our sights in the future. And whether it happens over the next 2 years or over the next 3 years will be dependent on, in some respects, the macroeconomic environment, but I think it's probably a 2 or 3-year achievable goal.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. I know it's not a huge part of the financial focus of the company right now, but I'd love to hear more about the over-the-top decision you made in the Nordics with HBO, why you guys sort of arrived there and what you think about the opportunity on that, broadening it out beyond that region.

John K. Martin

Sure. And maybe just beginning with a little context about just the size of HBO's international business. And it's a little confusing, our consolidated figures, because some of the HBO ventures are in consolidated numbers. Some are unconsolidated. So if you just look through the accounting and say, including all the unconsolidated ventures, the international part of HBO's business represents about 25% of HBO's global business. And over the last 10 years, revenue growth there has grown 13%. Operating income growth has been 17% on a compound annual basis. So we've achieved strong growth internationally and we're starting to see an acceleration in growth, particularly with respect to subscriber growth, where I think in 2012 alone, internationally, we grew subscribers about 35%, and we now have more than 70 million subscribers outside of the U.S., which is -- which we're quite pleased with. So if you look at the strategy internationally for HBO, I think it's in 2 buckets, right? There's -- bucket #1 is we operate networks in 60 countries. And in the countries where we operate networks, we're taking the same approach to HBO Go that we're doing in the U.S., which is we're going to launch HBO Go as a complementary authenticated product to our existing subscribers. And so I think as of now, we've launched HBO Go in 10 Latin American countries, 8 European countries. And in 2013, we'll complete the rollout in Europe. We'll add more countries in Latin America, and we'll begin the rollout of HBO Go in Asia. But if you look beyond the 60 countries where HBO operates networks, HBO license -- licenses, excuse me, it's branded programming in another 150 countries around the world, and that's where -- what's kind of interesting is our approach over time in those countries may take one of any number of areas, avenues. So we have big, lucrative HBO-branded programming output deals in countries like the U.K. and Germany and Australia, but there are other countries where it may be more opportunistic for us to launch over-the-top services, and we've selected the Nordic region as the first region to do that. And so I believe it's for EUR 10 a month. It's the first ever opportunity for direct to consumer HBO over-the-top service. It's too early to tell how it's going, but I think what's kind of interesting is that we're going to be looking at all of these various territories almost as test laboratories to try to inform our course of action as we move forward. I mean, we've licensed content directly to Samsung to be preloaded into smart TVs in the Nordic region. In Japan, we've licensed HBO branded programming to Netflix. I mean, you're going to see probably different models on a territory-by-territory basis. But I think it's fair to say that we’re going to move in a direction that we see as being the most lucrative for us.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Why don't we shift over to one of your other big drivers upfront that you talked about, which is content modernization? I think when you were here a couple of years ago, we were coming to the tail end of the Harry Potter run and there was a lot of concern in the market about how you're going to grow the business theatrically post Potter, and you had a great year last year at the studios. Can you talk about the growth prospects for the studios over next couple of years, maybe touching on film and television?

Jeffrey L. Bewkes

Yes, I think -- look, I think the growth prospects are pretty good for Warner Bros. We had about a little over $1 billion, $1.25 billion of operating income last year and 60% of that was our TV production business. If you look out over the next several years, you can see a path to that business growing. And again, shorthand, I think I'm going to mention this earlier, there's more buyers in more territories, but to expand slightly more on that, domestically, the improving economics of the U.S. broadcasters means there's a buoyancy in license fees for the best shows. And virtually, every year, Warner Bros. is the #1 supplier of programming to the U.S. broadcast networks. If you look at the cable network universe, there's more networks that are financially viable bidders for original programming as well as syndicated programming than ever before. If you look at internationally, there continues to be strong growth in existing territories in terms of license fee inflation, but also more and more territories are becoming viable bidders as multichannel and there's a proliferation of channels in the universe. SVOD is clearly adding new money into the ecosystem, and I think Warner has been very thoughtful about how to exploit the SVOD opportunity, and we think that there's a big opportunity ahead on that front so -- and so we see strong opportunities in TV production, and frankly, it's the highest return on capital business we have at the company, and we would love to find even more ways to exploit investing capital in that business. If you look theatrically, you're right, the era of Harry Potter maybe over theatrically, although we're still garnering lucrative license fees for Harry Potter from theme parks, which is going to be an annuity for years and years to come, in addition to subsequent downstream window sales of the Harry Potter films. But again, I think I mentioned a lot of optimism for this year's slate. It was good to see a rebound in the U.S. domestic theatrical market in 2012, where I think where seats were up 7%, and there's been quietly a rationalization in the number of theatrical releases and a revamping towards some of the talent deals. So I think quietly, the economics of the theatrical business are arguably getting better. If you look to the home entertainment business, which has been a challenged business in terms of growth, it was also good to see stability and flatness in overall consumer expenditures in 2012 relative to 2011, and that's ahead of what we would believe is a very viable download-to-own model, which is the whole effort behind UltraViolet, but we are utilizing Windows to try to advantage high-margin opportunities. And we're trying to disadvantage lower margin opportunities. And we're also fully behind Ultraviolet to try to drive greater consumer awareness and frankly, a better consumer experience as it relates to download-to-own models. If you look at our games business, where we're relatively small, but we've got huge franchises in Batman: Arkham, in Mortal Kombat, in LEGO branded games, I think that's going to be a growth business for us. I think we've got opportunities to rationalize costs for studio over time. So I think you have to put all those ingredients together. We've got incremental opportunities in consumer products and licensing and merchandising. I think our full expectation is that the studio business is going to grow over time.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Can you talk a little bit about TV production and syndication? What are the big -- what's the syndication pipeline look like? And can you also talk about the backlog that you guys have now sort of talked about with the Street?

John K. Martin

Yes,, let's start with the backlog if we can, and because I think it's an important metric and an important indicator of the health of the business, and for anyone that isn't aware of what backlog means, what backlog means is essentially contracts and commitments for the future sales of television and film products. It's principally television, and it's kind of off balance sheet in a sense that these are contractual commitments that haven't yet made their way through the income statement. And we ended 2012 with our backlog at about $6 billion, which is an all-time record for Warner Bros. And if you look back 5 years, I think it's up almost 50% relative to what backlog was 5 years ago. So that will just give you a sense of the volume of business that Warners has been writing that will eventually make its way through the income statement. If you look at the pipeline of shows in traditional syndication, we've already sold the middle in 2013. We've sold Mike & Molly in 2014. We've sold 2 Broke Girls in 2015. There's going to be future syndication sales of Big Bang Theory, obviously, and some of the other even older shows at Warners that still hold up and do well in syndication. And if you look at the dramas, we've got a number of dramas that are still performing well on broadcasts, whether it's persons of interest and revolution, and they're rebalancing the monetization of our dramas through either SVOD outlets versus traditional syndication. So the pipeline looks healthy, and our overall current production remains at very healthy levels.

Benjamin Swinburne - Morgan Stanley, Research Division

You mentioned the backlog growth and certainly, part of that is SVOD, the Netflix and Amazons, Googles of the world. How big was that business last year and what are your expectations for '13 and beyond for the SVOD revenue?

John K. Martin

Sure. So SVOD revenue recognition at Warner Bros. last year was about $350 million, which I don't know how that compares to what peers is. It's probably at the top end in terms of business that's been written and recognized. And that, as a technical point, doesn't include revenue that's recognized at the CW Network, where we own 50% of it. So in totality, actually, the business was more than that. About half of that $350 million, because these are multiple year deals, about half of that automatically flows into 2013. In fact, a little bit more than half of that. So that business is already written and it's going to appear in this year. In addition, we've already announced this year new deals with Amazon, new deals with Netflix, and we are -- we remain in constructive discussions with those SVOD providers, as well as what appears to be increasing competition in that arena from the likes of Streampix and Verizon and Redbox and increasing number of suppliers outside of the U.S. So it feels like this is going to be a sustainable very healthy business, and because we've got the largest and deepest library and current production slate, we should get at least our fair share of whatever that market turns out to be.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. I want to ask you a question that you've been getting different flavors of probably over the last several years, which is, how do you balance at the Time Warner corporate level the risks around these new platforms of the ecosystem which drive a lot of earnings and also monetizing content and taking advantage of them?

John K. Martin

Well, it's something that we've thought a lot about internally. In fact, I think we took a more cautious approach initially, but I think we're all very, very comfortable with how we're approaching these new opportunities right now, and if you -- I mean, put in its simplest form, we look at the assets that we own and we try to manage them to maximize the lifetime value of those assets. And so the question is, is the new platforms, like SVOD providers, is that somehow cannibalizing or taking away from our other revenue streams, and right now, it doesn't feel like that's happening. And if you think about just the size of -- take Netflix as one example. It's not big enough in and of itself to alter the ecosystem of the multichannel universe. I think the most recent quarter represents probably 3% of all viewing. It's just not that big. The other thing that I think is undeniable is that it's added a tremendous amount of new money into the ecosystem, and we're estimating that aggregate SVOD dollars are approaching $3 billion a year. So the question is, is $3 billion of new money coming in cannibalizing in some other revenue stream $3 billion worth of business, and the answer is not even close. So then you look and say, "Okay, well is it somehow promoting chord cutting?" Well, that doesn't appear to be happening. And when you look at the -- particularly in the U.S., the domestic multichannel household universe has remained relatively flat, admittedly at big mature levels, but it's been relatively flat when Netflix has gone from 0 subscribers to more than 20 million subscribers. So that doesn't appear to be happening. And then you say, "Okay, well, if it's not resulting in chord cutting, is it resulting in chord shaving or are people downsizing their packages and bundles in -- because they're getting a cheaper alternative form of video entertainment?" And we would think one of the first places you might see that would be HBO, and yet, HBO just had arguably its best year in years in 2012. So I think it's much more likely that SVOD providers are playing a complementary -- they're filling in a complementary space within the video ecosystem and net-net, it's additive to the economics.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Let me ask you 2 more questions, then we'll try to squeeze one in, in our remaining time from the audience if there is one. One is on your cost point that you made earlier about focusing, and it's a mantra of the firm to focus on efficiencies. What are the things you're doing? What are the things you're doing at the corporate and at the division level to drive those efficiencies right now?

John K. Martin

Well, I think our divisions have done an amazing job over the last 5 years of managing their cost base. And I think over the last 5 years, our aggregate expense level at Time Warner is virtually flat, and that's a lot of hard work because in that flat expense base, our strategic investments in TV production, film production and TV network programming, those costs have been going up mid to high single digits. So that means everything else has been declining, and it has, and there have been any number of initiatives that have been in place to try to reallocate dollars, improve efficiency, and I think everywhere, the execution has been quite good. Now we have to keep that going, and we do have any number of initiatives in place, both at the divisional level, but also more and more at the enterprise level, looking at functional support areas, whether it's IT, HR, finance, real estate, looking at areas where the spend in aggregate is in the billions of dollars and looking across the enterprise and trying to ask ourselves whether we can be more efficient with that spend, and there are any number of initiatives in progress that could lead over the next several years to hundreds of millions of dollars of annual savings. So it's hard work, but this is also stuff that a lot of other companies have done and they've done successfully. And so I don't think there's a huge amount of execution risks surrounding that. So I think, overall, just expense management is something that we're -- it's something we're going to be living with and we're going to continue to try to free-up less productive capital in order to make investments and more productive capital.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. I'll ask one more and then if you do have a question, raise your hand and wait for a microphone to come over. At the beginning of our conversation, we've talked about returning capital to shareholders. It's been a big part of the Time Warner story. Last year, I think $3 billion in buybacks, $1 billion in dividends. What are your expectations for '13 and beyond and how should shareholders be thinking about your strategy?

John K. Martin

I think the best indicator of what we're going to do going forward is how we've conducted ourselves over the last 4 or 5 years. In other words, a number of years ago, we decided to take a balanced approach towards capital deployment, and we continue to believe that, that balanced approach is what we should be doing as capital managers, and so we fully invest organically in our businesses. We make acquisitions where we think we can be value additive. And over the last 5 years, we've made almost 20 acquisitions, but the aggregate dollars of capital deployed is only around $2.5 billion, which is a fraction of what our free cash flow generation was over that time period. So while we'll continue to look to gain scale, particularly outside of the U.S. through acquisitions, we don't see anything that's terrifically big, frankly. So we have pretty meaningful dividend commitment that -- where we've increased our dividend the last 4 years in a row, at double-digit annual increases each year. So that commitment continues, and we have no intention of backing off of that. We continue to like to believe that the dividend can grow in correlation with overall business growth. And then, frankly, above and beyond that, we have had a meaningful commitment to stock buybacks and we pay a lot of attention to the price of our stock. We think the stock at our current levels remains very attractive, and we're going to continue to implement our share repurchase program. We just received a new authorization from our board of $4 billion. The governor of that is going to be a 2.5x leverage ratio, which is our long-term target, and we're kind of at that level now, but we expect this year to grow earnings and generate healthy levels of free cash, and we think there's going to be excess capacity to execute on an ongoing buyback.

Benjamin Swinburne - Morgan Stanley, Research Division

Terrific. Well, we're actually out of time, and if I ask a question from the audience, I will catch on fire. So I'm going to go ahead and thank you, John. We covered a lot. Thank you, everybody, for joining us.

John K. Martin

Well, I appreciate it. Thank you for your interest. Thanks for coming. So thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!