CBS: Does Network TV Have A Future?

| About: CBS Corporation (CBS)


CBS has some of the characteristics of a classic value stock.

CBS is not a value play because its TTM revenue and free cash flow are falling.

Unlike Disney’s ABC or Comcast’s NBC, CBS lacks the resources to produce programs that might succeed on streaming video.

CBS’s $275 million gamble on Thursday Night Football has not paid off with higher ratings.

CBS has advertising commitments for only 75% of its commercials for the fall season.

Is an old-school broadcast TV network like CBS (NYSE:CBS) a classic value investment or a dinosaur doomed to extinction? Recent ratings and advertising revenue figures indicate that CBS is a dinosaur saddled with an obsolete business model and not a value play.

On some level, CBS does look like a classic value play-an unfashionable company in a declining industry that still makes a lot of money. CBS reported a quarterly profit margin of 13.77% and a diluted EPS ratio of 3.104 on June 30, 2014. CBS also reported a TTM revenue of $14.59 billion on the same date.

Yet other financials indicate that it might not be able to maintain those numbers much longer. In December 2013, CBS reported a TTM revenue figure of $14.95 billion; that figure fell to $14.59 billion in June. CBS's June 2014 TTM revenue was still ahead of that for June 2013, $14.37 billion, yet there has been a noticeable revenue slide at the network for the past several months.

Where's the Cash at CBS?

An even more bothersome figure is CBS's free cash flow. In March 2014, CBS reported a free cash flow of $465 million that had fallen to $90 million by June. In June 2013, CBS reported a free cash flow of $430 million. CBS bulls might say the company is investing the money for a turnaround; a cynic might say CBS is burning through its cash.

That could be a real problem because some of CBS's competitors have a lot of cash. Walt Disney (NYSE:DIS), which owns ABC, reported a free cash flow of $2.047 billion on June 30, 2014. Comcast (NASDAQ:CMCSA), which owns NBC, reported a cash flow of $1.003 billion on June 30, 2014. To be fair, Comcast and Disney have lots of other businesses; CBS basically does just TV and radio.

CBS Admits that 25% of its Advertising is Unsold

CBS's business model of concentrating on broadcast could be obsolete. Broadcast basically has just one revenue stream, advertising. That revenue stream is drying up; CBS reported that its revenue fell by 14% in the second quarter.

CBS's volume of advance advertising commitments has fallen by 4% to 5%, President and CEO Leslie Moonves admitted at a Goldman Sachs conference on Sept. 10, 2014. Variety estimated that CBS had only sold 74% to 75% of its advertising inventory for the upcoming fall season in mid-September. Historically, the network has sold 79% of its advertising inventory before the fall season.

This means that 25% to 26% of CBS's advertising was unsold at the beginning of the fall season. If this gets repeated next year, CBS's advertising revenue could be 10% lower. It is hard to see how the network could keep operating with 30% of its advertising slots empty. The network will have to cut back on programming or slash something like the news division to avoid losses.

Thursday Football Not Helping CBS Ratings

The network had been hoping that Thursday Night Football, for which it paid the National Football League $275 million, would bring in some new ratings. That doesn't seem to be happening; news reports indicate that Thursday Night Football's ratings dropped by 42% in its first two weeks on the air. The program premiered with 20.4 million viewers on Sept. 11, but only received 9.24 million viewers on Sept. 18.

The ratings collapse for Thursday Night Football and the unsold advertising inventory demonstrate that CBS's business model, which was to buy programming designed to attract large audiences to impress advertisers, is no longer working. That's because it cannot attract large audiences and the advertisers are not impressed by the numbers.

One of the few moats CBS had around its core business has been breached. Sports no longer provide a guaranteed audience or ad revenue.

Network TV Dying Faster Than We Think

The loss of sports viewers could be fatal for CBS because the number of live primetime TV viewers has shrunk by 13% since 2010, media analyst Michael Nathanson of MoffettNathanson Research estimated. Nathanson also estimated that the age of the average TV viewer increased by 6% over the past five years.

One potential solution would be to create content that will sell well through online platforms, such as Netflix (NASDAQ:NFLX). The problem there is that CBS's shows like NCIS and CSI are designed to appeal to a mass audience, not niche markets. The biggest successes in streaming video are those programs that attract a small, but compulsive fan base: people that are willing to pay for an entire season of a show. Think House of Cards rather than Hawaii Five-O.

The problem is that the kind of programming that sells well on streaming video often drives away older television viewers, CBS's core audience, which leads to lower ratings and lower advertising prices. CBS is in a lose-lose situation; the programming that is most marketable online is not marketable on broadcast and vice versa.

ABC, which has Disney's resources backing it, can afford to produce and air a low ratings show that sells well on streaming video. ABC's Agents of SHIELD, which is based on an old Marvel comic book, seems to be doing just that. CBS, which needs to maintain a certain level of ratings, cannot afford to take such risks.

The situation is made worse by the Thursday Night Football ratings collapse. Big-time professional sports were one of the few network TV programs that attracted a large younger audience. That does not seem to be happening anymore, largely because young men are watching football on streaming video rather than broadcast TV.

CBS faces what could be an impossible task in the years ahead if it wants to survive. The network will have to completely reinvent its business model while trying to retain its core audience.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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