Emerging Stability in TV Network and Cable and Satellite Business Models?

By Steve Birenberg  OCT 10, 2012 3:00 PM

Programming disputes and cord-cutting fears feed concerns, but long-term deals are being struck that add stability and visibility for programmers and distributors.


While Wall Street has bid up shares of national TV network owners and cable companies, worries about the television business model have remained high. Concerns fall mostly into two buckets. First, there are rising programming expenses for cable and satellite operators as retransmission and affiliate fees increase rapidly. Second, cord-cutting concerns remain, partly driven by rising cable and satellite bills due to higher programming costs. Related to cord cutting is the risk that new services and devices provide an opportunity to bypass cable and satellite with a sufficient package of program choices.

The stream of non-stop affiliate fee disputes between networks owners and multichannel pay TV distributors gets a lot of attention and heightens these concerns. What gets less notice is that these disputes are usually quickly resolved with long-term deals.  Also getting less attention are the long-term deals struck without dispute and threat of or actual lost signals.

In the past week, three large deals were struck.  Gannett (NYSE:GCI) and Dish Network (NASDAQ:DISH) agreed to a long-term carriage agreement for Gannett’s stable of local TV stations after a several hour blackout and a series of aggressively worded press releases.  Getting less attention was an agreement between Disney (NYSE:DIS) and Cablevision (NYSE:CVC) on a long-term deal. Today, CBS (NYSE:CBS) and DirecTV (NASDAQ:DTV) announced a long-term deal.

Besides locking in traditional terms related to affiliate and retransmission fees, recent deals have two other important components: The contracts are long-term , often stretching five to ten years, and the deals include digital rights related to TV Everywhere. Taken together, what is emerging is greater stability in revenues and expenses throughout the television business model with the added benefit of helping TV Everywhere improve the competitive position of cable and satellite multichannel subscriptions. This second factor is important since TV Everywhere creates both a firewall against cord cutting and increases the value of a multichannel subscription to current subscribers. The string of long-term deals began in the summer of 2012 when CBS and Comcast (NASDAQ:CMCSA) struck a 10-year carriage deal.  Comcast has completed several more long-term deals, probably spurred partly by the economics and regulatory restrictions of its acquisition of NBC Universal. CBS also has been a regular player in new carriage deals including agreements reached without public acrimony with Cablevision and AT&T (NYSE:T).  A quick Google search also found deals between Scripps Networks Interactive (NYSE:SNI) and Comcast, Viacom (NASDAQ:VIA) and DirecTV, Hearst and Time Warner Cable (NYSE:TWC), and Comcast and Disney. 

Some of these deals were reached after signals were blacked out and some were completed without publicity. Regardless, the bottom line is that over the past couple of years, a trend and template for longer-term deals has emerged. With another set of agreements needing to be renegotiated in the next twelve months, what is going to emerge is a much more stable environment for network owners, multichannel distributors, and, importantly, cable and satellite subscribers.

By locking in long-term deals, networks owners can more easily invest in new programming and distributors can build marketing plans and product bundles. TV Everywhere rights allow networks owners to better monetize their content investments through carriage fees and advertising sales. Cable and satellite distributors' control of their subscribers improves by improving the value proposition of video subscriptions. Maybe just as significant, less and less quality content is available to over-the-top content providers like Netflix (NASDAQ:NFLX) and Amazon Prime (NASDAQ:AMZN).

I do not mean to be a Pollyanna about the threats to the television business driven by technological advance. However, I believe the benefit of the recent spate of carriage agreements is being ignored.  Stability and predictability are worth a lot to investors and reflected through higher valuations of stocks on earnings and cash flow.  In a fragile global economic environment, anything that increases investor confidence is good news.
This column was previously published by SNL Kagan on www.snl.com.

Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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