Analyst: TV Networks' Leverage Over Pay-TV Operators Is Increasing

LONDON - Lazard Capital Markets analyst Barton Crockett said Tuesday that his firm's latest survey measuring TV network loyalty shows that network owners have increasing leverage over pay-TV operators.

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Networks showing increased loyalty include AMC, CBS, NBC and A&E, he said.

The data suggests networks will have stronger positions in carriage-fee talks and disputes, which have in recent years often led to temporary programming blackouts.

In a report entitled "Survey says power of content is growing," Crockett wrote: "If anything, content's leverage over distributors is strengthening."

He added: "We see this as supportive of a continuation of high single- to low double-digit growth in content fees paid by pay TV distributors, positive for our entertainment coverage group, including "buy"-rated Discovery, Viacom, Time Warner, Disney, News Corp. and CBS."

The joint survey with Clear Voice Research, a follow-up to a poll last summer, asked more than 2,000 U.S. adults about their willingness to cancel or switch pay-TV services if a favored network was dropped.

Overall, the so-called TV Network Loyalty Index found that 41 percent-48 percent of people would cancel or switch their pay TV service if they lost top broadcast networks, up from 38 percent-43 percent last summer. Including broadcast and cable channels, 20 percent of respondents said they would cancel or switch, compared with 19 percent in last year's poll.

The latest survey also found that 35 percent would cancel if they lost the top cable network in total viewer loyalty, ESPN (up from 34 percent), and 29 percent would cancel if they lost second-ranked Discovery Channel (unchanged).

Big gainers in terms of loyalty were led by AMC, which saw an increase of  7 percentage points in people's likelihood to cancel or switch their pay-TV provider if they lost the channel. CBS, NBC and A&E gained 5 percentage points each.

The findings once again highlighted the potential for shifts in carriage fees, Crockett repeated, a conclusion from his research last summer.

"Even though Disney's networks rank among the highest in loyalty, its share of program fees more than reflects that," he wrote. "The opposite is true for CBS, and to a lesser degree for the A&E group, AMC, Discovery, and Scripps." Concluded Crockett: "If the program fee pie were split according to loyalty share, Disney's fees could drop in half, while CBS' fees could grow nearly three-fold, and Discovery's could nearly double."

For now, though, he predicted more fee growth "for almost everyone." With big pay-TV distributors recently reporting high single to low double-digit growth in content costs, Crockett said, "[t]hey will either accept video margin erosion or offset content cost growth with cost controls elsewhere. We do not see them having the power to fully pass on content cost inflation to consumers."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai