It’s fun to see Wall Street analysts defend the pay TV oligopoly’s bundled pricing as a model of market capitalism — and a kind of public service. And nobody does it better than Needham and Co analyst Laura Martin, who has some eye-popping estimates this week in her intriguing analysis of what might happen if consumers had the freedom to just pay for the networks they want. She figures that could result in the loss of at least 124 channels, $45B a year of TV ad sales, 1.4M jobs, $20B in annual tax payments, and $117B in market value for media company investors. The big problem: Channels need to reach at least 30M households in order to be measured by Nielsen, and most wouldn’t cross that threshold if they had to compete on their own. That would endanger much of the $56B that national advertisers paid content creators in 2012. To stay even at about 180 channels per subscriber, then, consumers would have pick up the slack — adding the advertisers’ expenditures to the $76B that subscribers paid (60% of which went to content creators with the remainder to distributors). The average annual bill would rise about 75% to $1,260. But that’s a fantasy: The goal of a la carte is to lower consumer payments. Surveys show that consumers want to pay about $30 a month. That leaves too little revenue to sustain the status quo. It costs an average of $280M a year to program an entertainment channel (from $1.1B for TBS to $50M for TV Guide Channel). While at least 124 would have to go, as many as 173 might disappear depending on other assumptions. The economic argument is so lopsided that “we foresee only a remote chance that the TV ecosystem will be unbundled in the U.S.,” Martin says.
Listen to (and share) Episode 59 of our audio podcast Deadline Big Media With David Lieberman. Deadline’s financial editor joins host David Bloom and Jonathan Geller of Deadline’s sibling site BGR.com in talking about the mobile business, starting with the fundamental face-off between Apple and Google over mobile business models. They also talk about the prospects for Samsung, Microsoft and BlackBerry; T-Mobile’s radical new approach to the mobile phone business; a new study suggesting more than half of Internet bandwidth is consumed by just two sites, YouTube and Netflix; and the dubious future of next-generation video game consoles as Sony launches the PS4 today and Microsoft debuts the Xbox One in a week.
Separately, the two Davids pick through the most notable news from this week’s media earnings reports, including MGM’s 2012 gifts that keep giving, CBS and Dish Network doing a dance around the Hopper and Viacom’s debt to Miley Cyrus and some zombies.
Most Wall Street analysts, eager to sell stocks, pull their punches when faced with questions that might lead to uncomfortable conclusions. But Bernstein Research’s Todd Juenger and MoffettNathanson Research’s Michael Nathanson have proven their fearlessness over the years — which is why I was so pleased to see both out this morning with thoughtful reports that reach different conclusions about a key question: How much longer can the go-go period for media stocks last? Shares have been on a tear for the last three years largely because moguls stopped using cash to build empires choosing instead to slim down (as News Corp/Fox did, and Time Warner is doing, by unloading their publishing units and CBS is doing with its billboard ad business) and returning cash to shareholders. Stock buybacks in particular “have been enormous,” Nathanson says, with Viacom cutting the number of outstanding shares by 21% followed by Time Warner (-17%), Discovery (-16%), Scripps Networks (-12%), News Corp/Fox (-12%), CBS (-11%), and Disney (-6%).
This was the quarter when Facebook left behind memories of its troubled IPO last year: As it reassured investors that it has a strategy to sell ads on mobile platforms, its shares closed Q3 at $50.23 — a 101.9% gain since the end of June. That’s the biggest jump …
Media CEOs don’t run their companies by themselves. Having looked at chiefs whose pay is out of whack, and those who are paid the most, here are others of note: the five best compensated company chairs, COOs, CFOs, and General Counsels as well as 10 other execs with standout compensation. We find that the five highest paid chairs collectively made $106.5M (+4.1% vs. 2011), with the COOs at $136.2M (+7.5%), CFOs at $77.9M (-15.0%), and General Counsels at $42M (+6.4%). Keep some caveats in mind with these results: I looked only at chairs who aren’t also CEOs, and there aren’t that many. (To avoid duplication, I combined the compensation that Sumner Redstone collected at CBS and Viacom, and that Charles Dolan received at Cablevision and AMC Networks.) Also, it’s often hard to define the roles that execs play. For example, Disney and Comcast don’t list a COO and Comcast’s CFO is also the Vice Chairman. So these compensation figures from company proxy statements can help you to see how the media power elite stack up, but only tell part of the story. Finally, remember that the SEC requires companies to provide compensation information for their five top executives. It’s safe to assume that several unlisted execs at big companies were paid more than some listed execs at smaller ones. Here’s how some of media’s top non-CEOs fared in 2012:
Bernstein Research’s Todd Juenger says today that it’s a possibility after CBS unloads its billboard business. It’s widely believed that the company will use the cash it raises for what the analyst calls “a massive buyback” — possibly as much as $8B, or more than a quarter of CBS’ market value. Ordinarily that would be greeted by cheers on Wall Street. Nearly every Big Media company has a huge stock repurchase plan, part of CEOs’ efforts to appease investors who fear that the industry’s glory days will fade in the Internet era. Moguls may not understand digital media, but they know simple math: Earnings per share rise when a company reduces the number of shares. But if CBS takes the strategy to an extreme with a ginormous repurchase, it may be surprised by the Street’s muted response, Juenger warns. Recalling the infamous scene in Happy Days when Fonzie water-skied over a shark — signalling the audience that the show had run out of ideas — he says the company could create “a seminal ‘jump the shark’ moment, triggering media investors to re-evaluate what all these buybacks — at the expense of doing anything else — are really doing for them in the long run.” In CBS’ case, the company would be “still heavily advertising dependent and heavily U.S.-centric.”
It isn’t a la carte but Verizon’s proposal to tie what it pays to carry TV channels to the number of viewers who actually watch is what big media companies might consider “disruptive”, according to the Wall Street Journal. Verizon’s FiOS TV is the nation’s sixth-largest pay-TV provider and has begun negotiations with some smaller companies about basing what Verizon pays on audience size. Under the established industry model, cable and satellite operators pay a monthly per-subscriber fee to carry channels based on the number of homes the channels are available. Verizon’s chief programming negotiator Terry Denson suggests that in many cases “We are paying for a customer who never goes to the channel”.
With apologies to Bill Maher, here’s a New Rule for Big Media CEOs when they decide to raise their dividends or announce a major new stock-repurchase initiative. They have to stop insisting that it’s a sign of confidence and strength in cases where they’re just bribing investors to keep them from fleeing.
This thought struck me in the Q4 earnings season that’s wrapping up. Just about every big company that fell even a little short of Wall Street’s expectations had a new plan to return cash to shareholders. The explanations were consistent. After CBS missed analysts’ revenue and earnings targets, CEO Les Moonves said his accelerated $1B share repurchase reflects “the great confidence we have in our businesses.” At Time Warner — which missed revenue forecasts but beat on earnings — CEO Jeff Bewkes said that it was able to authorize an additional $4B share repurchase and an 11% dividend increase because “we’re at an even stronger position today than we were a year ago.” Then there’s Comcast, which just slightly missed revenue and earnings expectations but raised its dividend by 20% and agreed to repurchase $2B of stock, while announcing that it will pay $16.7B for General Electric’s 49% of NBCUniversal. The moves demonstrate “confidence and optimism in the future of all our businesses,” CEO Brian Roberts said.
They’re right in this sense: Most Big Media companies are part of pay TV oligopolies that still have scandalous power to set and raise prices — mostly by requiring people who want to keep up with the national conversation to pay for dozens of channels that they never watch. Execs also had encouraging reports about current concerns. Generally speaking, ad sales picked up in Q4, and TV viewers returned to the major broadcast networks after the dismal opening weeks of the fall primetime season.
But if executives are so bullish about their companies, then why do they consider it such a great thing to give cash to investors to spend elsewhere? Wouldn’t they demonstrate their faith more persuasively if they used the funds to expand — you know, create jobs — or buy assets in complementary or growing fields? It’s not like we’re still in the depths of the recession when media stocks were such a bargain. CBS shares are more expensive than they’ve been since the end of 2005 when it separated from Viacom. Time Warner’s at a five-year high. And Comcast is at its all-time best. If the investment strategy is to buy assets when the price is high, all I can say is, folks, don’t try this at home.
Bernstein Research’s Todd Juenger seems to think so based on his light-hearted, and occasionally acidic, effort this morning to develop awards for media business types who don’t qualify for, say, the Academy Awards. (For example, his “Best Actor” award to the executive with the highest earnings goes to CBS’ Les Moonves who made about $70M in 2011.) The stand-out line, though, summarizes his view about what it takes to be a Big Media CEO: They ”are rewarded mostly for doing nothing but collecting affiliate fees and buying back stock,” he says. “It takes a lot of guts to deviate from that formula, given the safety and reward that can be gained by sticking to it.” Juenger also nails the Alice In Wonderland logic companies use to justify CEOs’ jumbo-sized pay — especially when the compensation shows little correlation to stock performance over the last three years. For instance, he notes that “The top two earners over the three-year time frame, by far, are the CEOs of CBS ($171M) and Viacom ($162M), proving it’s especially lucrative to be a media CEO working for Sumner Redstone when he thinks you’re a ‘genius’ (CBS) or a ‘genius and the wisest man I ever met’ (Viacom).”
The annual event winding down in Las Vegas probably won’t, but it should. Electronics manufacturers filled 1.9M square feet with products including many that could lead Big Media off what TiVo CEO Tom Rogers playfully refers to as the “digital cliff.” Instead of developing strategies to deal with the challenges, most companies “kick the can down the road,” he tells me.
He makes a compelling case. For example, several products likely will lead advertisers to wonder how long they should continue to pay big bucks for TV air time. It isn’t just that viewers can automatically zap a message with a device like Dish Network‘s Hopper with Sling DVR. (Or TiVo, for that matter.) People can simply ignore ads by shifting their attention to a smartphone or tablet computer. Cheap and powerful tablets were ubiquitous at this year’s show — sales will be huge this year — and Nielsen says that 41% of owners use them daily while they watch TV.
Investors are still celebrating the new year after lawmakers in Washington agreed to deficit reduction legislation that will derail a package of spending cuts and tax increases that many economists say could have triggered another recession. Media stocks are largely up today, with Lionsgate hitting an all-time high, and conglomerates including CBS, News Corp and Time Warner touching 52-week highs. The Dow Jones U.S. Media Index is +2.7% in early afternoon trading, ahead of the Dow Jones Industrial Average and Standard and Poor’s 500, which are both +1.7%. Viacom (+5.7%) is a standout among the leading Big Media companies. The increase follows a report this morning from Lazard Capital Markets’ Barton Crockett who says that the entertainment company “should benefit from a sentiment swing” as ratings stabilize at networks including Nickelodeon and MTV. Following Viacom among the industry leaders: News Corp (+3.7%), Time Warner (+3.0%), CBS (+2.8%), Comcast (+2.5%), Discovery (+2.6%), Sony (+2.3%), and Disney (+2.0%). Other big gainers today include LIN TV (+7.2%), National CineMedia (+6.4%), and Martha Stewart Living Omnimedia (+6.1%).
The competition was tough — most media stocks not only appreciated in 2012, they handily beat the benchmark Standard & Poor’s 500 which was up 13.4%. Comcast led the pack of Big Media conglomerates with shares +57.6%, followed by News Corp (+43.0%), CBS (+40.2%), Disney (+32.8%), Time Warner (+32.4%) and Viacom (+16.1%). Sony was the only member of this group to lose ground, falling 37.9% as it struggles to fix its global TV and electronics sales operations. Within the universe of other companies that we track most closely, the biggest winners were Carmike (+118.7%), Lionsgate (+97.1%), AOL (+96.1%), Lin TV (+78.0%), and Sirius XM (+58.8%). The losers: Best Buy (-49.3%), Martha Stewart Living Omnimedia (-44.3%), Sony, Rovi (-37.2%), and Facebook (-30.0% since it went public in May.).