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Cable Ratings Trend Impacts Ad Growth

Soft fourth-quarter ratings could impact revenues and earnings of cable programmers Scripps Networks Interactive and Discovery Communications, according to Nomura Securities analyst Michael Nathanson.

Nathanson notes that the connection between ratings changes and revenue growth is usually limited, but that a recent statement by a Scripps Networks executive at an investment conference saying that the company’s booming ad revenue growth would surprisingly decelerate in the fourth quarter because of ratings declines caused the market to sit up and take notice. Scripps Networks’ two biggest channels were both down by double digits among adults 25-54 in the fourth quarter.

The analyst adds that the Scripps comment caused investors to sit up and take notice that flat ratings at Discovery Communications’ two biggest networks reduced the likelihood of the stronger-than-expected financials there also.

Nathanson has lowered his ad revenue and EBITDA estimates for both Scripps Networks and Discovery. More importantly, he says the situation reflects three trends running through the media business.

The first trend is that viewership of cable networks in the aggregate is declining. The second is that DVR use and the adoption of C3 ratings-which do not include commercials skipped in live view but include those watched during DVR playback favors the broadcast networks.

The third trend is that while the national TV ad market is expected to be strong, cable networks will be facing more difficult year-on-year comparisons in the next few quarters. Because cable networks sell more of their commercial inventory in scatter, “we see potentially greater risk to the downside in cable networks that run out of scatter inventory due to ratings downturns vs. those that have gains.”