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Still Worried About Cord Cutting? Premium Networks Add 2.2 Million Subscribers

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TV viewing data shows that despite online viewing, Americans are spending more time than ever watching TV.

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It is 80 degrees in Chicago. Disney (DIS) loses another $200 million on Mars. Cable network zombies are getting broadcast ratings, while a broadcasting queen continues to struggle with cable ratings. A small studio is about to satisfy its hunger to become a big boy.

Premium cable networks are adding subs less than a year after their death knell was being discussed when they were losing subs. Four teams from Ohio are in the Sweet Sixteen. Maybe it is just the third month of the quarter when times are slow. Or maybe the world has tilted a little off its axis.

Yes, it is true. It's been in the 70s in Chicago for most of March, and today the forecast is for mid-80s. Windows open, riding my bike to work, shorts, sandals, golf. I'm not sure what to make of it, but for investment purposes I will not dwell on it.

Disney, on the other hand, is certainly dwelling on its decision to produce Mars-themed movies. After the close on Monday, the company announced it would take a $200 million write-off for John Carter. Just a year ago, Disney took a large write-off for Mars Needs Moms. Disney is trading down a little over 1% in a weak market but remains within a few percent of a multiyear high.

The write-off is bad news but was widely expected for a few months. In addition, movies are well down the line in importance to Disney's financial profile, behind ESPN and theme parks.

The only curious thing about the write-off is that Disney's target for its quarterly studio operating loss is more than $200 million below analyst estimates. This suggests some other businesses within the studio are underperforming. I still do not think it matters to the Disney investment thesis, but that is not stopping the business media from reporting endlessly on the topic.

AMC Networks (AMCX) reported good earnings last week but a little below sky-high expectations. The stock traded down initially but stabilized. A programming write-off and excellent but not blow-out advertising growth contributed to the slight disappointment. Fortunately for AMC investors, March Madness brings some wins as well. The season finale of The Walking Dead scored 9 million viewers.

According to Multichannel News, season two was the most-watched cable drama in history among adults and men in the 19-34, 18-49, and 25-54 demos. This should translate into higher ad sales for the March quarter and whichever quarter season three is shown in. In addition, AMC is set up well for its next round of affiliate fee negotiations.

And the madness just might continue for AMC. Mad Men returns for its fifth season this Sunday, and expectations for a huge rating are high. Will ad men outdraw zombie men?

AMC's success with The Walking Dead also adds to the debate over the impact of Netflix (NFLX). On the one hand, time spent watching Netflix is time spent not watching cable and broadcast networks. On the other hand, the huge step in the show's second season (ratings up 32%) certainly owes much to the ability of viewers to discover the show on Netflix and catch up long after season one aired.

A curious thing about TV viewing data is that despite over-the-top and online viewing, Americans are spending more time than ever watching TV. For now, my "couch potato" thesis seems to be wearing well. Despite all the technological advances and Wall Street worries, change comes slowly. And some change can even be positive for the TV industry.

One change, however, is shifting Oprah Winfrey's brand from broadcast to cable. Rosie O'Donnell's show, one of the networks most high-profile, has been canceled. At the same time, news of layoffs of over 30 people hit the trade press. This is a marginal negative for Discovery Communications (DISCA), but similar to Disney, OWN is not a driver of the company's financial results. For several months, I have viewed OWN as an upside option for Discovery.

I would not bet against Oprah, who is not going to let her legacy be a failed cable TV network bearing her name. Look for Oprah to appear more often on the network. When she does, the ratings are excellent.

The Hunger Games debuts Friday, and Lions Gate (LGF) shares have doubled in the last few months. I missed this one despite having read the books and understanding their popularity. Lions Gate has a history of missing numbers and reporting confusing results, so I ignored the hype. Big mistake. A reminder to be flexible in your investment views, especially on a shorter-term perspective.

In another blow to the cord-cutting fears, premium networks added over 2.2 million subscribers in the fourth quarter against a gain of just 300,000 multichannel subs. All the premium networks added viewers. It was just last year when Time Warner (TWC) shares were continually under pressure due to declining subs at HBO.

Original programming and the positive side of Netflix mentioned above in relation to AMC are probably helping premium networks. The couch potato thesis strikes again! Change in TV comes slowly.

The lesson of March Madness – your expectations of the TV business are about as volatile as your NCAA brackets. Don't be too dogmatic when considering either.

This column was previously published by SNL Kagan on www.snl.com.
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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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