Will cable drive conglomerates' earnings?

Media giants to report first-quarter results in a few weeks

Cable is still king when it comes to driving the revenue and profits of Hollywood's entertainment giants -- and the degree to which they do will become clear as the conglomerates report first-quarter earnings in a few weeks.

Thanks to their dual revenue streams, many cable units held up better than other media businesses during the recession. Plus, several, including the divisions at Time Warner and Viacom, have managed costs closely and shifted money from overhead into program development.

Still, parts of the cable channel universe have faced ratings challenges. A look at where the congloms and their units stand:


TIME WARNER

The cable channel unit -- with such brands as TBS, TNT, Cartoon, HBO and CNN -- edged out the film unit $11.7 billion to $11.1 billion in 2009 revenue after the latter was on top of the conglom's remaining content businesses in 2008. A 3% ad decline was more than offset by 10% in subscription revenue growth, making for an overall networks gain of 5% last year, a good comparison with TW's overall 3% decline.

The networks unit also posted record profit overall as well as for its two major parts, Turner and HBO, which finished 2009 with its highest year-end subscriber count ever. It remained the most profitable TW segment, with operating profit of $3.5 billion, up 14% from a year ago, compared with $1.1 billion for the film division.

But fourth-quarter ad revenue fell 4% because of challenges in the kids segment and tough year-ago comparisons for CNN thanks to the 2008 presidential election. Plus, some new shows on Turner networks TNT and TBS have disappointed.

Investors will focus on if and how quickly that rebound, which Sanford C. Bernstein analyst Michael Nathanson expects "will likely take some time," can materialize.

TW chairman and CEO Jeff Bewkes has predicted ad growth for this year. "We expect our entertainment networks to grow ad revenue for the year, even without a major rebound in rating trends, which we will be working to do as well," he said in February during his latest earnings call. He pointed to international and digital as key growth opportunities for the unit.

In a positive sign, cable-unit ad revenue will be up for the first quarter "despite continued top comparisons at CNN against the Obama inauguration last year," TW CFO John Martin said.


VIACOM


The unit that houses the company's cable networks -- from MTV and VH1 to BET and Comedy Central as well as the "Rock Band" video game franchise -- again brought in the majority of revenue in 2009. Although down 5% because of ratings and the recession, it outperformed a Viacom-wide 7% decrease.

The division saw its operating profit decline 3% amid ad and "Rock Band" weakness, combined with a companywide gain of 15%. But it still threw off slightly more operating profit than Viacom's total of $2.9 billion for the year. The film unit added $236 million, but that was more than offset by a corporate-level operating loss and other negative factors.

Management said in reporting 2009 results it was encouraged by ratings trends at key networks, including BET, which in 2009 had its best year to date, and MTV, which has benefited from the success of "Jersey Shore." Nickelodeon also began the new year strongly: January marked the most-watched month in the network's 30-year history. Plus, Viacom said it has managed to retain and add key advertisers.

Still, U.S. ad revenue has continued to decline for Viacom during recent quarters, though at lower rates, providing potential headaches and a key focus for investors this year.

Management has signaled that it is cautiously optimistic about a continuing ad rebound. Nathanson recently forecast Viacom's U.S. ad revenue to remain flat this year but said that prediction might turn out to be "fairly conservative." Barclays Capital analyst Anthony DiClemente predicted that ad growth will "gradually" return to Viacom, "given a backdrop of improving ratings at MTV."



NEWS CORP.

News Corp.'s fiscal second quarter, which was fourth-quarter 2009, brought record cable operating profit of $604 million, up 35% compared with the year-ago period thanks to continued growth at Fox News and better-than-expected ad trends.

For calendar-year 2009, the cable channel unit grew its bottom line 37% while the overall conglomerate posted a decline. The segment made up 50%-plus of News Corp.'s total operating profit, though it contributed only 20% of revenue.

News Corp. deputy chairman, president and COO Chase Carey said in February that the firm's cable channels "have a lot of room left to grow" in the U.S. and internationally.

Some on Wall Street believe that investors underestimate the conglom's cable upside. UBS analyst Michael Morris said "FX and certain regional sports networks are entering a renewed cycle for fee increases that may be underappreciated."


CBS

Financial performance remains mainly driven by broadcast businesses. For 2009, the firm's cable outlets -- namely its Showtime premium networks and CBS College Sports Network -- contributed nearly $1.35 billion in revenue, accounting for a little more than 10% of the $13 billion in total revenue. The unit also was up 7% from 2008, compared with the decline of 7% recorded for the company overall.

Cable-network operating profit of $437 million rose 20% and accounted for a big 43% of the firm's 2009 total of slightly more than $1 billion, though it remained below the $700 million recorded by the CBS network and other entertainment operations.



DISNEY

ESPN turned 30 last year, and it celebrated by again breaking records.

During its fiscal first quarter, the five measured ESPN-branded networks reached 220 million Americans, or 76% of the country, a record. When the Green Bay Packers played the Minnesota Vikings in October, 22 million people watched, setting a record for all of cable television.

Of Disney's five business segments, the Media Networks unit is the only one to have grown revenue in both 2008 and 2009, courtesy of cable. In fact, as cable grew 15% from 2007-09 to $10.6 billion, broadcast dropped 2% to $5.7 billion.

Operating income was more dramatic during that time frame: Cable rose 18% to $4.3 billion, and broadcast tumbled 46% to $505 million.

The success isn't entirely owed to ESPN. Disney Channel is distributed in 160 countries in 33 languages. Last year's "Wizards of Waverly Place: The Movie" was cable's top-rated scripted telecast. Combine that with 2007's "High School Musical 2," and Disney boasts the two most-watched scripted telecasts of all time on cable.

The company also launched its boys-focused Disney XD last year, grew its ABC Family audience by 8% and its SoapNet audience by 2.5 million viewers. The latter's Internet audience swelled by 50%.

So strong is Disney's cable TV business that were it a separately reported entity, it would show more operating income than all other segments combined and more revenue than any of the others except Parks & Resorts.

If there is a wrinkle going forward, Janney Capital Markets analyst Tony Wible said, it's "higher cable programming costs." Indeed, Disney's cable costs last year increased 6%, or $367 million, and broadcasting costs were up only 3%, or $172 million.


NBC UNIVERSAL

Assuming the government approves the Comcast deal with GE, NBC Universal is getting a makeover. When the bulk of NBC Uni's cable networks are combined with the bulk of Comcast's, the entity will become the nation's fourth-biggest owner of national cable channels with a 12.1% share, behind only Disney (20.6%), Time Warner (18.6%) and Viacom (12.2%).

Analysis of an entity that doesn't yet exist probably is a fool's errand, but suffice it to say that the NBC Uni that will emerge might be one beset by money-costing concessions it will have made to appease skeptical lawmakers. And no government official seems more skeptical than the one closest to the TV industry: Sen. Al Franken, the Democrat from Minnesota who once starred on NBC's "Saturday Night Live."

"What I know from my previous career has given me reason to be concerned -- let me rephrase that, very concerned -- about the potential merger of Comcast and NBC Universal," Franken told NBC Uni chief Jeff Zucker and Comcast CEO Brian Roberts last month at a Senate subcommittee hearing.

"While I commend NBCU and Comcast for making voluntary commitments as part of this merger, you'll have to excuse me if I don't just trust their promises," he said.

NBC Uni showed a 4% revenue dip and 30% profit decline during its latest quarter, but the company doesn't break out its cable financials except to boast of highlights.

"Cable ratings and profit growth continue," it said, noting that USA Network has been No. 1 in the ratings for 14 consecutive quarters and Syfy, Bravo and Oxygen are growing profits by double digits.

Georg Szalai reported from New York; Paul Bond reported from Los Angeles.
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