Don’t be surprised if at least one of the Big Four broadcast networks is sold or dismantled in the next 24 months.
They are failing business models whose brand value is meaningful mostly to strained local TV station affiliates, many of whom are also fighting to survive.
TV tethered broadcasting has been reduced to one of the least financially viable media options in the digital age. The once dominant Big 4 TV networks remain advertising dependent even as they continue losing an average annual 6.5 percent of audience. Consumers of all ages increasingly bypass appointment television to view video on mobile Internet devices whenever they want.
Earlier this week, Walt Disney Co. (NYSE:DIS) denied reports it is in advanced discussions to sell its ABC TV Network to private equity investors. The insight came from a corporate communications secretary arrested by the FBI and securities regulators for trying to sell insider information to investors.
Analysts estimate the ABC TV Network is valued at upwards of $5 billion. Disney Chairman and CEO Bob Iger, who rose through the ABC TV station and network ranks, has not ruled out a possible sale. Disney’s more than $7 billion in annual earnings is mostly dependent on its cable networks and the ESPN franchise. All of its broadcasting assets contribute only $600 million, according to analysts.
While the ABC insider scheme is strange, the notion of Big 4 media owners shedding their outdated, dead-weight broadcast TV network businesses is not.
As evidenced in the most recently reported quarter, the broadcast networks and even their historically lucrative owned TV stations are a drag on overall media company earnings and, at best, marginally profitable. The NBC and Fox networks are expected to post losses this year.
I have predicted since late last year that Comcast (NASDAQ:CMCSA), the leading domestic cable operator, cannot economically justify its creeping takeover of NBC Universal without eliminating or radically altering the struggling NBC TV network business. Comcast has proposed taking a controlling 51% stake in NBCU for $6 billion with plans to acquire General Electric’s (NYSE:GE) remaining ownership stake over time.
Media conglomerates have been hedging their bets against broadcasting for years by buying and developing general interest and niche cable networks that have become profit centers, generating more than half of all earnings. Ad-supported cable networks collectively thrive on $25 billion in annual affiliate fees, or double national broadcast advertising revenues, according to Barclay’s Capital analyst Anthony DiClemente.
Meanwhile, ABC, NBC, CBS (NYSE:CBS) and Fox (NASDAQ:NWS) are clawing their way back from a 20 percent decline in upfront advertising during last year’s recession without hope of resuming substantive organic growth in a fragmented media market. Efforts to build an online pay wall around network TV programs on Hulu.com and TV.com have failed. Even online, the broadcast TV networks lack the interactive magic to play in digital media’s social and e-commerce sweet spots.
The demise of the Big Four TV networks is a delicate matter for media giants who still must answer to advertisers and station affiliates bound by the system for more than half a century. Despite Comcast executives’ stated intentions to preserve the business, they have a clean break and financial imperative to innovatively reshape NBCU’s content parts, making NBC TV’s radical change or sale inevitable.
Potential buyers for the NBC TV network and its 10 owned TV stations (in the top 25 markets) could include major NBC affiliated television groups owners such as Hearst-Argyle (HTV), Gannett (NYSE:GCI), Belo (NYSE:BLC), and E.W. Scripps (NYSE:SSP). The NBC TV Network and its owned TV stations are valued at about $6 billion of the NBC Universal’s overall $35 billion value, according to analysts.
Comcast also could convert parts of NBC TV into one or more cable networks supported by both subscriber and advertiser dollars, leaving a less costly broadcast hub of news, live events and sports to interface with TV stations.
Broadcasting is only 15% of NBCU’s profit mix even though it generates 36% of the company’s overall revenues, according to Bernstein Research. It underscores broadcaster networks’ costly programming and operating costs compared to Internet rivals. NBC, ABC, CBS and Fox each spend between $2 billion and $3 billion annually on program production. Less than 90% of newly produced prime time series survive to a second season.
It is why ABC, CBS, NBC and Fox have been rifling their owned and affiliated TV station retransmission fees in a short-term revenue generating tactic. But even that option will be challenged as cable operators come under their own financial pressures from new digital distributors.
That makes a smaller pure-play media players such as CBS, to whom the broadcast network is central, a potential acquisition target. The overall risk is that as broadcast TV network valuations plummet, so will the value of their big media owners..
Needham analyst Laura Martin estimates $160 billion in advertising spending and more than $800 billion in corporate enterprise value are at stake for media players as values shift from traditional media to online, mobile and social media.
As it is, the Big Four network owners have held on too long to ever fully recoup.