Victorious in Blackout, CBS Proving Skeptics of Broadcast Business Wrong

Threats Remain, but 'Medium Isn't Dying, It's Thriving'

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CBS Corp., which last week won higher programming fees from Time Warner Cable after a very public fight, is helping to prove wrong predictions that the broadcast TV business would tank in the near future.

'The Good Wife'
'The Good Wife' Credit: CBS

CEO Leslie Moonves has led broadcasters toward an economic model more like the cable industry's, drawing subscription as well as advertising revenue. Large audiences for "NCIS," "The Big Bang Theory," and National Football League games have given CBS the clout, like ESPN and Fox News, to demand higher fees from pay-TV services such as Time Warner Cable -- while allowing the company to sell digital rights to new distributors such as Amazon.

"People wrongly believed they were dinosaurs," said Brian Wieser, an analyst at Pivotal Research Group who recommends buying CBS stock. "Many had argued the death of television for a very long time. And sentiment around it reflected that. This medium isn't dying, it's thriving."

Retransmission fees at CBS may double to $1 billion by 2016 from an estimated $500 million this year, said Mr. Wieser.

"You have a lot of engines driving real cash flow," Mr. Wieser added. "That's sustainable."

The company also is winning over stockholders by increasing dividends, repurchasing shares and taking steps to get out of the outdoor advertising business, said Edward Atorino, an analyst at Benchmark Co. in New York.

CBS rose 0.9% to $54.05 yesterday in New York trading. The shares have advanced 42% this year, topping the 27% return for the S&P 500 Media Index.

Three years ago, CBS was trading at about $15 a share amid investor concern that shrinking prime-time audiences would erode the broadcast TV business as viewers defected permanently to the web.

As ad sales have been hurt by the audience decline, however, broadcasters such as CBS have developed revenue from those retransmission fees and online services. CBS sold exclusive online subscription rights this year to the hit show "Under the Dome" to in a deal that enables streaming four days after episodes air.

In CBS's negotiations with Time Warner Cable, Mr. Moonves fought successfully to maintain the network's right to sell most of its content to online distributors. That field could expand as Sony Corp., Intel, Apple and Google are seeking to develop pay-TV systems that would deliver traditional TV programming packages over the internet.

"As we look toward the future, it becomes more and more important to have the ability to sell your content to Netflix, to Amazon, Hulu Plus, any other entrants in the field," Mr. Moonves said in a Sept. 4 interview with Bloomberg Television.

To maximize ad revenue, meanwhile, companies are pushing to get viewers counted whether they watch live, later on DVR or online.

TV station owners also have been able to charge pay-TV systems to retransmit their signals, even though they're available to homes for free over government-owned airwaves. Networks like CBS and Fox, now part of Rupert Murdoch's 21st Century Fox, sought the fees for stations they owned, and grabbed a cut of the money going to their affiliates.

'How I Met Your Mother'
'How I Met Your Mother' Credit: CBS

For the industry, retransmission fees are expected to at least double to more than $6 billion by 2018 from $3 billion this year, according to research firm SNL Kagan. In the most recent quarter, CBS reported an 18% gain in affiliate and subscription revenue, which includes the fees. The company didn't specify how much retransmission revenue grew alone. It jumped 62% in the previous period.

"CBS has done one of the best jobs managing the digital transition," Alan Gould, an analyst with Evercore Partners, said in an e-mail.

There are risks remaining, however, including discontent over the current system of wrangling for fee increases from cable and satellite companies.

The month-long stalemate with Time Warner Cable left more than 3 million viewers without access to CBS shows or sports events including U.S. Open Tennis. In the end, the cable company agreed to pay a significant increase for the right to carry CBS, though still below $2 per subscriber per month, according to people with knowledge of the situation who asked not to be identified because the terms are private.

Next up is Walt Disney Co., owner of ESPN and the ABC network, which is discussing renewal of its deal with Dish Network. The current agreement ends this month.

More negotiations that result in protracted outages could lead to government intervention at some point and threaten the broadcasters' ability to charge fees.

During Time Warner Cable's dispute with CBS, Time Warner Cable CEO Glenn Britt called on Congress and the U.S Federal Communications Commission to reassess the 1992 rules that let broadcasters such as CBS to charge cable companies for their signals.

While the FCC didn't take action, the CBS dispute with Time Warner Cable may have planted the seeds for an update of the rules, according to Rich Greenfield, an analyst with BTIG in New York. "The disequilibrium that currently exists is not sustainable," Mr. Greenfield said. "We expect change."

Another potential threat to CBS and its peers comes from Aereo, a startup backed by billionaire Barry Diller that gives users access to broadcast networks over the internet starting at $8 per month. Aereo, which essentially rents the use of tiny antennas located in remote facilities in areas where it is available, pays nothing to broadcasters.

Still, the company today is benefiting from smart scheduling and aggressive negotiating for broadcast rights, said Benchmark's Mr. Atorino.

"If the economy doesn't crater, broadcasting should defy all the skeptics out there," he said. "CBS is not bashful about asking for more money. They're in pretty good shape."

~ Bloomberg News ~

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