Cable networks are a sweet spot in a media industry struggling to find its financial footing. They are driving conglomerates' earnings as well as richly priced deals, and will be a growth vehicle for branded content across all digital platforms.
Whether it is Comcast's bid for 51% ownership of NBC Universal (NYSE:GE) or Scripps Networks Interactive's (NYSE:SSP) 65% control of The Travel Channel, cable networks are commanding mid- to-high-teens earnings multiples at a time when most media values are in flux.
The complex structure of the Travel Channel deal implies around a $1 billion price that is 14 times 2010 earnings, according to Morgan Stanley. Analysts initially estimated that The Travel Channel was worth between $600 million and $700 million. A proposed $30 billion-plus stand-alone NBCU, to include all of Comcast's (NASDAQ:CMCSA) content assets, would rely on cable networks for 75% of its earnings, analysts say.
Cable networks will account for nearly 70% of Time Warner (NYSE:TWX) earnings next year, 60% of Walt Disney's (NYSE:DIS) earnings in 2009 and 40% of News Corp.'s (NASDAQ:NWS) overall operating profit this year, analysts say.
There are many ways that cable networks will be a catalyst for change:
*Cable networks' established dual subscription and advertising revenues, which generally have been recession-proof, inspire new paid content models. ESPN and other cable networks, as well as single programs, command the kind of affinity and relevance for which increasingly selective consumers will pay.
This is no small point considering that the bottom 50% of the U.S. population lacks discretionary income and credit, according to Bernstein Research. That means they are unable to support existing and rising paid-content options, from monthly cable TV and on-demand fees to rising box-office ticket prices and video games.
*Cable networks are structurally positioned to take national viewing shares and ad dollars away from the broadcast networks that will begin tipping the economic scales. In the third quarter, cable networks garnered a 73% share of prime-time adult 18-49 viewers compared to the broadcast networks' 27% -- the widest quarterly share gap on record. There is only 30% between the highest-rated cable networks program, and the lowest-rated broadcast show. That narrowing variance will bring advertising prices in line. As consumer and advertisers continue to fragment, the premiums will shift from the mass broadcasters to specialized niche content that is more relevant to individuals.
*Cable networks' economic power is best illustrated in Scripps Networks Interactive, which was publicly spun off from E.S. Scripps more than a year ago. Closing the gap with its peers between its audience and revenues (from advertising and subscriptions) represents a $300 million incremental opportunity, which would be about a 20% boost to 2012 earnings, according to Goldman Sachs analyst Mark Wienkes. Scripps Networks Interactive converts about 60% of its earnings to free cash flow. That allows it to bring $183 million cash to its new Travel Channel venture with Cox, buy up the 31% Food Network stake owned by bankrupt Tribune Co., and invest in international network joint ventures.
*Cable networks will be a catalyst for robust asset sales and acquisitions. Other cable networks and their owners also have cash resources to consolidate cable networks and other content assets. Scripps Networks Interactive, Discovery Communications (NASDAQ:DISCK), Lions Gate Entertainment (NYSE:LGF), DreamWorks (NASDAQ:DWA) and Sony Pictures Entertainment (NYSE:SNE) are among the content compared identified as potential merger and acquisition targets in 2010, according to UBS.
Consolidation could result in the formation of cable-network super hubs. Time Warner has downsized to cable networks and magazines. It has $7 billion in cash (from the spinoff its cable systems) to acquire more cable content after it jettisons AOL by year's end. Viacom (NYSE:VIA), News Corp., Walt Disney and Liberty Media (LCAPA) also are buyers.
*Cable networks could provide a way out of deteriorating broadcast networks. For instance, a new controlling owner like Comcast could opt to convert the peacock network into several more financially viable cable networks supported by both advertising and subscription revenues. It also could seek to relegate NBC TV's sports, news and entertainment elements to existing NBCU cable properties (such as MSNBC, CNBC and USA). Alternatively, Comcast could sell the NBCTV Network and TV stations could be sold to major NBC affiliated group owners such as Hearst, Gannett, Belo and E.W. Scripps.
*Cable networks are providing a template for more affordable program production and faster, more assured return on investment. With more than 90% of all new prime-time broadcast network series never surviving to a second season and hour-long episodes costing into the millions, cable networks have a better way. USA, TBS, TNT and other cable networks judiciously produce series cycles for particular calendar and audience windows. They are not bound by broadcast network prime-time schedules or seasons. Continuously rerunning original programs on-air generates enough ad revenues to more than cover production costs.
Many cable networks, such as Scripps Networks Interactive, have low and controlled production and talent costs on how-to and other evergreen programming. The result is spending an estimated 25 cents per viewer annually to create programs compared with generating 85 cents per viewer in advertising revenues, according to Wienkes.
*Cable networks whose programs have universal appeal and endless shelf life will continue to experience rapid international growth. This includes food, travel and home improvement, as well as news and sports. Global markets will eventually comprise as much as half of cable network revenues in some cases, analysts say. More than one-third of Discovery's revenues come from global markets. Scripps Networks Interactive, whose cable networks had 26% domestic ratings growth in October, generated less than 5% of its revenues from international sources this year and will be seeking to expand globally.
*Cable networks will be conduits for targeted addressable advertising on cable systems through efforts such as Canoe Ventures. Many cable networks are accelerating their use of addressable advertising, interactive marketing and e-commerce, particularly as television morphs into another Internet-connected screen. Opportunities for this in 2010 will include cable operators' TV Everywhere trial and Apple's (NASDAQ:AAPL) new e-Tablet and iTV rollout.