Which Cable Networks Are Most Profitable
Hollywood’s cable divisions are driving the bottom line and outpacing movie studios’ profit contributions.
Sumner Redstone should learn how to fist-pump.
The Viacom honcho’s cable-networks division, home to MTV’s raucous ratings magnet Jersey Shore, generated a whopping 97 percent of the conglomerate’s operating profit in 2010, a higher level of cable contribution than at any of its peers.
That’s according to an analysis of company financial statements by The Hollywood Reporter, which found that operating profits at sector giants’ cable-networks divisions posted solid gains last year of 8.2 percent (Viacom) to nearly 30 percent (News Corp.).
Disney and Time Warner remain the industry leaders, posting the highest absolute operating-profit figures from their cable channels. But all of the entertainment conglomerates have been buoyed by strong performances from their cable-networks businesses — which, unlike broadcast TV, are only beginning to benefit from dual revenue streams thanks to retransmission payments.
“With the exception of CBS, the cable networks are by far the largest driver of operating income, value creation and growth at all these companies,” Cowen and Co. analyst Doug Creutz says. “Their importance is only likely to increase given challenging trends in other businesses.”
Here is a look at some of the 2010 cable trends. (NBCUniversal is excluded because it has not consistently broken out its various businesses. Where fiscal years differ from the calendar year, THR calculated figures for calendar 2010 to make results comparable.)
During the 2007-09 period, Disney’s cable-networks operating profit rose 18 percent to $4.3 billion. Last year, it grew nearly another 10 percent. As a result, Disney again topped all conglomerates in cable-networks operating profit and is nearing the $5 billion mark.
Key to the expansion are advertising and affiliate-fee gains at sports giant ESPN and the international Disney Channels. Other key assets in Disney’s cable portfolio include the U.S. Disney Channel, whose expanded original programming helped it record its best-ever fiscal first quarter in terms of total viewers. ABC Family also grew its ratings.
Morgan Stanley analyst Benjamin Swinburne recently raised his earnings estimates for Disney’s current fiscal year, owing to “most notably cable networks, where we expect ESPN to benefit disproportionately from strength in auto ads.”
The company’s cable networks include such strong brands as TBS, which added Conan O’Brien last year but faced ratings challenges, and TNT, which found a new hit in Rizzoli & Isles. And despite attention often focusing on its primetime ratings, where Fox News tends to trounce it, CNN delivered its seventh consecutive year of record profitability in 2010. The Turner networks and HBO posted record profits, helping the networks division reach total operating profit of nearly $4.2 billion, dwarfing the $1.1 billion recorded by TW’s film unit. And TW’s foreign-networks business generated about $500 million in adjusted operating profit in 2010.
“Based on current trends, over the next four years, we expect to double operating profits from our international networks to $1 billion,” TW chairman and CEO Jeff Bewkes says.
Many of Viacom’s cable networks have been on a roll. MTV’s Jersey Shore and Teen Mom regularly outdraw broadcast shows, and BET’s The Game has surprised many.
Comedy Central has added to its strong duo of Jon Stewart and Stephen Colbert with Tosh.0, which outdraws both veterans in key demographics.
Ad revenue at MTV and VH1 dipped slightly in 2010, according to Kantar Media, but Viacom’s overall ad trends returned to growth mode — and affiliate fees also rose. The cable division’s 8.2 percent operating-profit gain in 2010 was at the low end among such conglomerate units, but it helped offset a film decline to push Viacom’s overall operating profit higher.
“Our investment in programming last year was 25 percent higher than it was when I became CEO in 2006, a compounded annual growth rate of about 6 percent,” CEO Philippe Dauman said during a recent earnings call. “At the same time, through disciplined cost controls in every other area of the business, we were able to expand our media networks’ operating margins, even as we operated through a major recession.”
An operating-profit gain of nearly 30 percent in 2010 put News Corp.’s cable division atop all conglomerates in terms of percentage improvement.
Ongoing affiliate-fee and ad growth at Fox News Channel and regional sports networks have been a boon. Ratings at FX were challenged last year, but it has become a fully distributed network with recent carriage deals, and management has predicted ratings will benefit from a stronger movie lineup.
News Corp. deputy chairman, president and COO Chase Carey expects carriage-deal renewals with all major distributors during the coming years to yield “appropriate” fee gains for Fox News. “Assuming a relatively stable advertising environment, this segment should continue delivering at least solid double-digit earnings growth for the next several years,” he told analysts recently.
The company continues to be driven more by its broadcast operations, so the cable-networks business contributed only about a third of CBS’ total operating profit in 2010.
But the cable unit — consisting of Showtime, the recently renamed CBS Sports Channel and the Smithsonian Channel, a joint venture with the Smithsonian Institution — again recorded strong growth. Adjusted operating profit grew nearly 25 percent to cross the half-billion dollar mark in 2010 as rate increases and subscription gains at Showtime outweighed higher marketing and advertising costs, primarily for new original series like The Big C.
Another factor contributing to profit improvements was the lapsing of Showtime movie deals with Viacom, Lionsgate and MGM, which together formed the premium-TV joint venture Epix. That was a positive on the cost side.
Looking at the cable unit this year, CBS CFO Joseph Ianniello said during the company’s most recent earnings call, “We expect to continue to expand our margin in 2011 while investing more in original content, where we retain more rights and thus more profits.”