Time Warner (NYSE:TWX) owns TV channels like TNT, TBS, CNN, HBO, magazines like Fortune, People, Time, the movie studio Warner Brothers, and the internet portal AOL.com. Based on our analysis, we estimate that TNT, TBS & CNN combined constitute about 24% of Time Warner's value while Warner Brothers accounts for 23%. We also estimate that HBO alone constitutes 20% of the company's value. This is an interesting result given that HBO's audience is much smaller than the audiences for TNT, TBS and CNN as well as the audiences for Warner Brothers films. HBO's value is driven by the high revenue per subscriber that it charges pay TV operators (like Time Warner Cable (TWC), Comcast (NASDAQ:CMCSA), DirecTV (DTV)) for carrying HBO.
At $7 per subscriber per month, HBO has the highest subscriber fee of any Time Warner channel. TNT, TBS & CNN combined make less than $2 per subscriber per month; however, their US TV household penetration levels are 2x that of HBO (82% vs. 39%). In addition, TNT, TBS & CNN make nearly as much money from advertising sales as subscription fees. Since HBO is a premium channel that subscribers pay directly for, it does not feature significant advertising.
Currently less than 40% of the 112 million US TV households that subscribe to pay TV services also subscribe to HBO; however if that figure were to increase to greater than 45% over the next few years, we believe that HBO would become the most valuable part of Time Warner - more valuable the Time Warner's other channels, film studios and magazines.
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