'Economic Imbalances' report released

Sports programming outperforming, Scripps 'under-earning'

NEW YORK -- The average TV network makes about $1,450 per viewer per year in affiliate fee revenue, with cable channels with sports programming outperforming the average, while pure-play cable TV companies likes Scripps Networks are "under-earning," according to a new report.

In a far-ranging report entitled "Television's Economic Imbalances," Barclays Capital analyst Anthony DiClemente looked at how to determine the economic value of networks amid politicians' calls for new ways to settle carriage fee disputes. Senator John Kerry, for example, has suggested binding arbitration to resolve negotiations between network owners and distributors.

"While the uniqueness of a network and the ardency of its viewers are clearly possible drivers, we believe Nielsen TV ratings are the most quantifiable proxy for a network's affiliate value," DiClemente argued.

As a result, he compared networks' annual affiliate fees revenue for the past three years with their respective viewership to determine networks are over- or under-earning.

The $1,450 figure means that "non-watchers greatly subsidize the watchers," DiClemente said. Walt Disney and News Corp. networks outperform with what the analyst called "the largest premiums" due in part to their ownership of sports-centric networks. Comcast and Cablevision also have "substantial premiums."

Sports clearly leads the way. DiClemente cited SNL Kagan estimates for a 2010 average monthly network subscriber fee of 27 cents, led by ESPN's $4.40 all the way to TV Guide Network's 2 cents.

And he listed NFL Network (649%), ESPN (619%) and Golf Channel (546%) as the networks with the highest percentage of affiliate revenue per viewer versus average revenue per viewer.

As "cable TV networks with sports continue to command disproportionately high affiliate fees relative to their ratings/viewership," DiClemente said this could lead one to argue for future downside risk for Walt Disney's ESPN and its peers. But he argued differently, saying sports is a key differentiator and lever. "ESPN is perceived as a unique network whose absence could trigger a switch in cable provider."

Instead, DiClemente suggested the biggest future downside risk for Time Warner as its cable networks over-index in his data collection. "Affiliate fees at TNT, Headline News and CNN could be at longer-term risk," he argued.

But Scripps Networks Interactive, Discovery Communications and Viacom under-index and therefore "possess the most future upside for their affiliate fee increases," DiClemente concluded.

For Scripps, which is his favorite sector stock, he found that Food Network and HGTV "dramatically under-earn," leaving the firm's channels 55% below what they should make.

What does the $1,450 average cable channel affiliate revenue per viewer per year mean for the outlook for broadcast networks to get retransmission fees?

The big four broadcast TV networks deliver an implied affiliate value of $1.34 (Fox) to $1.51 (NBC) per subscriber per month each when focusing on 18-49 and 25-54 demos, for about $2.9 billion of total annual revenue for the broadcasters, DiClemente calculated.

The figures would amount to $700 million-$750 million for each of Fox's and CBS's owned-and-operated station groups, he said.

CBS Corp. management has projected about $250 million in annual retrans revenue by 2012. DiClemente said Wednesday that this implies 50 cents per subscriber per month, meaning "a substantial discount versus TNT (-51%) and USA (-12%)."

The analyst concluded there is clear retrans upside opportunity. "First, given that the (distribution) industry did not lose any net video subscribers during the recession, we believe the consumer could tolerate further pricing increases," he argued. "Secondly, with gross video margins above 55% for cable distributors, there is room for the distributors to absorb increases."

DiClemente also suggested that small unrated networks may be taken off the air, converted to on-demand channels or pushed to higher digital tiers and forced to accept lower fees.
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