Barclays Analyst: CBS to Outshine Peers

 |  Includes: CBS, DIS, GE, NWS
by: J.P. Hannan

As a follow-up to my December 29, 2008 piece ("Broadcast Networks Weathering the Storm"), Barclays Capital media analyst Anthony DiClemente recently threw his support behind CBS (NYSE: CBS) as the broadcast network to outshine the rest once advertising spending stabilizes.

He also calls Digital Video Recorder ("DVR") usage an "overstated risk" for the broadcast television business which ties into other comments I have made on this site- that investors need to take a step back when looking at the "television" business and realize that it is now two clearly defined sectors- content and distribution.

Some companies, like the broadcast networks, are in both sectors and therefore will do just fine in the digital age- even in the face of DVRs and other time and place shifting devices. However, any broadcaster that does not control their own content faces an increasingly competitive landscape ahead as the over-the-air signal is no longer the "tall wall" or barrier to entry it once was for new competition.

Add in DVR capabilities and internet to television services and local stations are in for a very tough fight ahead as they become just one more platform of distribution for content providers.

According to many reports, the most recorded shows on DVRs are generally broadcast network shows- these shows are in high demand. Ultimately, if the networks can not support the economics of these shows through advertising alone due to time shifting devices, to make up the difference they will simply charge the initial carrier, their affiliate groups, increasing amounts of reverse compensation remain network affiliates.

The local stations will in-turn demand higher retransmission fees for their local signal from the cable operators who have provided the DVR to the customer, and ultimately the end subscriber will pay more for the use of that DVR device either directly or through increased subscriber fees.

In the end, current costs of DVR usage on the industry will come full circle to the consumer.

For broadcasters that do not control their own content (again, the affiliate groups) it is an entirely different matter though as longer term they face being cut out as a middle man should the networks decide to one day go direct to the cable and satellite providers themselves.

There were a number of industry rumors circulating last year about this very point as CBS, Fox (Nasdaq: NWS) and NBC (NYSE: GE) were all selling stations in smaller markets and ABC (NYSE: DIS) was rumored to be contemplating spinning off their whole owned and operated platform.

As such, it would not be unreasonable to think this strategy may already be in play and a threat to local broadcasters.

Unfortunately for the affiliates, the one area where many had proprietary content was in local news operations, but that is becoming an increasingly less profitable business as viewers have numerous other sources to get localized news, sports and weather on demand rather than waiting for "Highlights @ Eleven".

This has lead several local station to announce news sharing arrangements to pool resources that will reduce costs, but ultimately it will mean no differentiation for the local stations resulting in lower ratings and decreased leverage for retransmission fees from cable operators.

Some other highlights of DiClemente's May 29th note follows:

  • Since our 5/15 upgrade, we have received pushback on the viability of the broadcast TV business in view of DVR penetration growth. We believe that TV commercial viewership is not necessarily lower in DVR households.
  • CBS looks best positioned for this year's upfront negotiations, given it is the only broadcast TV network to have grown Y/Y ratings this season.
  • Yesterday's $250M senior note offering combined with the previous $750M offering further solidifies the CBS liquidity profile. Positive comments from Moody's yesterday were encouraging to us.
  • Showtime, TV Syndication, and Outdoor are all CBS-owned assets with few structural concerns. We think those together are worth about $6/share (net of debt). Incremental value for the CBS network, TV stations and Radio imply a higher price.

Disclosures: No positions in any stocks listed above.