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Cashing In On ‘TV Everywhere’

A robust upfront and
the promise of higher affiliate
fees bolstered by authentication
agreements should drive cable
networks forward in the second
quarter and beyond, according
to several analysts.

Authentication, also known
as TV Everywhere, could be a big
driver of affiliate-fee increases. Pioneered
by Time Warner Cable
and Comcast, TV Everywhere
would allow existing cable subscribers
to access select cable programming
online as part of their
cable subscription. So far, TV Everywhere
deals have been sparse,
but they are expected to be a big
part of carriage-renewal agreements
over the coming months,
according to Miller Tabak media
analyst David Joyce.

“The notion that we’re getting
closer to authentication and TV
Everywhere means that a business
model can be salvaged in
the TV world,” Joyce said. “It’s
not ready for primetime yet, but
my understanding from some
executives in the industry is that
they’re ready to roll out authentication
whenever they’re working
through their carriage agreements.”

In a detailed research report
last week, RBC Capital Markets
media analyst David Bank wrote
that although networks may be
giving up some amount of control
over their online destinies
with authentication, the benefit
in higher affiliate fees may
be too good for programmers to
pass up.

Just how much those fees will
grow remains to be seen. But the
addition of authentication in the
mix could soften the blow for
some cable operators, Bank said.

“As the specter of over-thetop
competition looms large at a
time when retransmission consent
is becoming a more powerful
economic force, and cable affiliate
fees are continuing to grow
at double-digit levels, the MSOs
could have their bargaining chip
in the form of TV Everywhere,”
Bank wrote. “We believe that the
content providers would likely be
better off by participating in TV
Everywhere rather than alienating
the MSOs, especially as the
independent over-the-top opportunity
just doesn’t have much to
offer currently.”

While TV Everywhere could
be a boon for the future, Bank
and Joyce both see strong growth
in the June quarter for most of
the cable networks, based on a
stronger ad market (upfront pricing
rose an estimated 20% in the
most recent round) and continued
momentum from ad revenue
increases in the first quarter.

According to both analysts,
Discovery Communications and
Time Warner Inc. are expected
to report a 10% increase in advertising
revenue in the second
quarter. Discovery, which was
the only cable programmer to
report positive ad-sales growth
in 2009, is also expected to announce
either a share buyback
plan or dividend in the relatively
near future, which should help
the stock, according to Bank. Discovery
shares more than doubled
in 2009 and rose another 19% in
the first half of the year.

Bank added that Discovery
“has one of the best growth profiles in the industry, and a potential
announcement of a return of
capital to shareholders in the near
future offers a catalyst.”

Media giant Time Warner
Inc. should be able to build on
first-quarter momentum, as
the company “was likely able
to ‘over-monetize’ soft ratings,”
Bank wrote. He estimated that
overall revenue at the media giant
would rise 4.4% to $6.2 billion
in the quarter, driven by an 8.1%
boost to Media Networks revenue
to $3.1 billion. Segment operating
income also is expected to
rise 6% at Media Networks to $910
million in the period.

The Walt Disney Co. and News
Corp., which also own broadcast
networks in addition to their cable
holdings, should see some
strong growth in the second quarter,
in part fueled by retrans fees,
Bank wrote.

The analysts predicted that Disney’s
overall revenue would rise
nearly 9%, to between $9.3 billion
and $9.4 billion in the fiscal third
quarter ended June 30, with Bank
predicting cable-network revenue
would gain 12.3% to $2.9 billion
and broadcasting revenue would
be up 2.5% to $1.4 million.

At News Corp., which owns Fox
Broadcasting, the analysts predicted
revenue would rise about
5% to between $7.9 billion and
$8.1 billion, fueled by strong increases
in cable and broadcast
network revenue.

Viacom, which was hit hardest
during the ad slump — domestic
advertising revenue was down 6%
in 2009 — is expected to reap the
benefit of stronger upfront and
scatter pricing, Bank wrote. He
expects ad revenue at the MTV
Networks parent to rise 2.5% in
the June quarter to $1.1 billion,
with Media Networks revenue increasing
6% to $2.1 billion. Bank
also believes that Viacom will be
able to return even more capital
to shareholders — he estimates
that given its free-cash-flow generation,
Viacom could return as
much as $2 billion to shareholders
by the end of 2011.

All in all, it points to another
quarter of healthy growth for

“Despite skepticism about the
advertising economy and consumer
entertainment market holding
up given the global macro backdrop,
we don’t think 2Q10 results
will demonstrate any real loss in
momentum,” Bank wrote.