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Big-Picture Takeaways From the Deutsche Bank 2012 Media & Telecom Conference

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Right on the heels of an another earnings season Deustche Bank hosted a media and communications conference -- and things look bullish for the industry.

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In many ways the timing is not ideal for an investment conference when every presenting company has hosted a conference call within the previous 30 days. No meaningful updates about the pace of business. No updated guidance. On the other hand, it is refreshing to focus on the big picture and not worry so much about what happens tomorrow, next week, next month, or next quarter. This was my mindset as I traveled to the lovely Breakers Hotel in Palm Beach for the Deutsche Bank 2012 Media & Telecom Conference. Kudos to Doug Mitchelson, Matt Chesler, and Brett Feldman for lining up a great list of speakers and conducting excellent fireside chats. Deutsche Bank (DB) has a great lineup of analyst in media and communications.

I have several big-picture takeaways from the conference. First, national TV advertising has improved but visibility is low. I feel more strongly than ever that my thesis of a normalization in US TV advertising after the huge bounce off the cyclical low is correct. A rising tide no longer lifts all boats. Confidence from CBS's (CBS) Les Moonves, News Corporations' (NWSA) Chase Carey, and Discovery Communications' (DISCA) David Zaslav, whose companies are ratings leaders, makes sense. Less confidence from Time Warner (TWC), Viacom (VIA), and Scripps Interactive (SSP), where ratings challenges remain, also makes sense. Investors should stick with the ratings winners. They are in position to capture scatter premiums as ratings laggards give up volume with make goods.

In addition, ratings leaders are less susceptible to a long-term trend of rising programming costs. CBS barley has to replace any of its schedule next season and might have flat programming expense in 2012. The shift of cable networks to original programming is a long-term trend that increases their own spend and also pressures broadcasters to keep investing. The normalization of the ad market, putting ratings performance front and center for financial success, also puts upward pressure on programming expense. Finally, the maturity of US multichannel households, exacerbated by lack of household formation, makes the battle for affiliate and retransmission fees fierce. Management teams must make their networks stand out and be in demand by consumers.

There is a school of thought that several years of increased program expense growth will raise the bar of absolute dollars to a level at which the growth in spending will moderate back to mid single-digits from high single to low double-digits. I think investors should operate on the assumption that program expense growth will stay elevated permanently. Competition is tougher. Payoff from digital and international revenue streams is higher. Home video will never recover. Ratings winners face less margin pressure. Another reason to stick with the winners.

A recent column of mine speculated that multichannel TV providers may be entering a period of détente (see Is a Bullish Detente Brewing Among Multichannel TV Service Providers?). They face immense pressure from rising affiliate and retransmission fees. They also still face long-term challenges from over-the-top video, cord cutters, and cord shavers with extra pressure from below-trend economic growth and lack of household formation. DirecTV (DTV) indicated on its earnings call less focus on new subscribers and more retention spending. Dish Network (DISH) might be backing away from its aggressive price discounting. At the conference, Comcast's (CMCSA) Neil Smit indicated that the company is focused on innovation as it competes more with technology companies. Time Warner Cable continues to cause a little trouble with its aggressive low-end pricing, the latest being usage-based broadband pricing. However, the company talks in terms of giving customers what they want and holding its customers. After the conference, I think more strongly that a less directly competitive and promotional environment is emerging for multichannel TV providers. This is bullish for the entire industry. Comcast and Charter Communications (CHTR) remain my favorite stocks.

Beyond the major players mentioned above, among individual companies I came away intrigued by Cumulus Media (CMLS) as a long idea and Pandora Media (P) as a short. Cumulus is a simple debt reduction story. If radio operating income can just hold constant for several years, debt reduction will be substantial with the bulk of the value transferring directly to shareholders. Pandora has a hugely popular service that is still growing its users and the time they spend listening. However, I see competition rising and the path to monetization lengthening.

This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
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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