Quick Thoughts: Mixed Media – Conflicting CEO Conference Comments

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–          Last week, cable and media CEOs presented conflicting views of a TV business threatened by on-line alternatives, evidence that assertions of industry solidarity are wishful thinking.

–          Glenn Britt of Time Warner Cable expects to cut poorly rated channels – programming costs have risen 30% in 4 years, 3x faster than CPI – portending increasingly tough fee negotiations.

–          Time Warner Inc.’s Jeff Bewkes doesn’t believe a la carte pricing adds value and wants to stick to bundles, but CBS CEO Les Moonves sees big opportunity in new delivery technologies

–          Meanwhile, Disney gave Netflix exclusive rights to its recent releases, while both TWC and Cablevision snuck through price hikes on residential broadband service.

UBS had itself a barnburner of a media and communications conference last week in New York, with several CEOs making headlines with unusually tough talk.  Contrary to the assertions of industry bulls, the management commentary shows an industry largely aware of constraints on household spending, the audience shift toward on-line video, and their own unaligned incentives.  The longstanding cycle of rising program costs forced onto cable and satellite distributors, who would then force rate increases on their powerless subscribers is broken.  The average monthly video bill is more than 2% of after tax income for the average US household, which has seen real buying power decline and costs for budget priorities like health care and education skyrocket.  Meanwhile, the on-line video business is growing dramatically, stealing viewers and advertising dollars at levels that are starting to become painful to companies dependent on channelized TV distribution.

Time Warner Cable CEO Glenn Britt was first up with a frank message.  Since 2008, TWC’s payments to media companies for channelized programming have risen 30%, double the 15% rise in TWC’s video service ARPU, and triple the 10% overall increase in consumer prices over the four years – circumstances Britt labeled “out of whack”, admonishing that it “can’t continue on that way for another 10 or 20 years.”  Britt threw down the gauntlet to the TV networks, pledging that TWC would drop channels that cost too much or failed command a sufficient audience.  Alternatively, TWC could break the bundle and assign weak channels to optional service tiers.  The prime culprit in rising programming costs are the rights to televise live sports – for example, the new NFL contract that kicks in for 2014 raises the total rights fees from $3.085B today to $4.95B, a nearly 60% increase (Exhibit 1).  The draw of sports is inherent in the nearly $5 per subscriber fees that Disney has been able to negotiate for ESPN, but a very bad deal for consumers indifferent to sports but forced to pay 10% of their basic subscription fees for a channel they don’t watch (Exhibit 2).

Britt’s tough talk comes on the heels of this summer’s stand-off between DirecTV and Viacom, and a similar conflict between Dish and AMC in the fall.  Given the escalation in the cost of programming, and in particular, broadcast rights to live sports, TWC will find active resistance to its quest for lower fees.  Time Warner Inc. (TWX) CEO Jeff Bewkes spoke for the opposition last week, when he suggested that it was not “desirable for consumers to break the bundle” and that going a la carte would have them “giving more for less”.  He was unequivocal in expecting to win “double digit” fee increases for carriage agreements to be negotiated over the next three years, despite the fact that Time Warner is a relatively small player on the TV sports stage.  Obviously, the two sides of the formerly integrated Time Warner have some considerable differences to iron out, and the process is unlikely to be amicable or pretty.

Les Moonves of CBS has a different perspective.  CBS’ economics are driven by its eponymous broadcast flagship, which has not been party to the cable fee explosion.  Moonves joked that, based on ratings, CBS should be worth $7 per sub, a dig at ESPN and its $5 per sub fees.  In reality, CBS is entangled with its over-the-air broadcast affiliate stations, which take small retransmission fees from cable system operators and kick some up to their network partner, reducing their leverage with distributers.  Because the cable fee gravy train is so much less lucrative for the broadcast nets, CBS has been more aggressive in pursuing alternative paths to monetization.  Moonves pronounced “technology is our friend” in touting that there were now 12 different ways for CBS to be paid for its content, including on-line streaming.  CBS reports that more than 7% of its current revenue stream now derives from providing content on-line.  Moonves believes that improving audience measurement techniques to account for the streaming audience and other under counted viewers could boost CBS ratings by 10%.

The other big media news for the week was Disney’s $350 million a year exclusive deal with Netflix to show its theatrical releases in the distribution window previously reserved for premium cable channel Starz.  While Netflix certainly needs to work out how to shoehorn its rising content costs into its $8 a month fee structure, the deal is a huge boon to the streaming content pioneer, which will also see the initial releases for its high stakes investment in original programming next year.  For Disney, the deal gives it a nice bump in an incremental revenue stream, but it also strengthens the hand of the primary champion for cord cutters everywhere.  Given the profit machine that is ESPN, one side of Disney is feeding the dog that is biting it on the other side, but consistent with modern thinking on innovation – see Clay Christensen’s “The Innovator’s Dilemma” – and a hedge toward the growing on-line opportunity.

I have often written of the inevitable erosion of the channelized television model (“Television in 3Q – A Step on the Long road to Nowhere”, “Online Video: Objects in the Mirror May be Closer than they Appear” and “Video Advertising: The Incredible Disappearing Audience”).  The change will come not as a tsunami of cord cutting, but as a steady stream of eyeballs and advertisers shifting their attention to internet video.  Little by little, more households are getting access to services like Netflix, Hulu and YouTube on their connected TVs and tablets.  Individuals are spending more time watching streaming video and less time watching channelized television.  Advertisers are noting the growth in the on-line audience and appreciating the superior ability to target consumers and be sure of their attention.  Rising ad spending and subscriptions are fueling investment in exclusive video content, and this content is poised to lure larger audiences.  The self-reinforcing cycle has been set in motion, and will only accelerate with time.  Traditional media players can either stay in denial or acknowledge and adapt.  Last week’s commentary make it clear that both approaches are in play.

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