Growth Themes - The Rising Value of Media Content

This second installment of our series on growth themes is particularly timely. On August 2nd, Time Warner Cable (TWC) stopped airing CBS and its various networks, including Showtime, in three major metropolitan markets including Los Angeles, New York, and Dallas. While the details of the dispute are somewhat technical and still not resolved, at issue is the value of the content that CBS produces. Redwood believes that CBS has the upper hand as content is more valuable than distribution. We believe that viewers are more concerned about watching the NFL, March Madness or Homeland than the provider of the content. As a result, the value of quality media content will continue to rise, driven by scarcity of supply, new competitive business models in distribution, and burgeoning international interest in American entertainment.

Retransmission and Reverse Compensation

Retransmission fees are paid by cable operators to broadcast networks for the right to carry their channels. Reverse compensation is paid by the operators of television stations to their affiliated broadcast networks for the right to affiliate with the broadcaster, and to carry their primetime content. According to SNL Kagan, total retransmission and reverse compensation for CBS, NBC, Fox, and ABC is expected to reach $1.3B in 2015, from just $23M in 2010, which represents a 224% compound annual growth rate. These are high-margin revenue dollars given the lack of incremental costs associated with the payments. The size of this revenue opportunity highlights the value that content creators bring to the media ecosystem.

Subscription Video on Demand (SVOD)

SVOD providers, such as Netflix, Amazon Prime and Hulu, have built large memberships and command significant viewing minutes. In fact, Netflix accounts for a staggering 32% of nightly internet traffic in the U.S. SVOD providers have emerged as primary new buyers of shows and movies from content owners and creators. For example, CBS recently signed a deal with Amazon’s Prime service to air episodes of their new drama “Under the Dome” shortly after the episode airs live on their broadcast network. Deals like these are a new revenue stream for content creators, who historically gave their content to cable operators in exchange for a share of the advertising revenue that their shows generated. Prior to the emergence of SVOD providers, old shows were either sold in syndication to a cable network or left to gather dust on a library shelf. Today, CBS and others have sold streaming rights to much of their content libraries to new SVOD providers, generating new, high-margin dollars of revenue.

International Distribution

The international appetite for U.S. content has also inflected positively. Companies like Discovery Communications, which owns 162 stations globally including the Discovery Channel, TLC, Investigation Discovery, and the Military Channel, as well as a partial stake in OWN (the Oprah Winfrey Network), have built significant subscriber bases abroad. Discovery claims to reach more than two billion subscribers in 223 countries and territories. International markets benefit from less mature pay-TV industries, relative under-investment by advertisers in TV advertising, and secular growth in the number of subscribers as emerging middle classes drive TV purchases and cable subscribers. This outsized international growth is reflected in Discovery’s 2012 currency-neutral international growth rates: advertising was up 18%, distribution fees grew 15%, and viewership expanded 25%. International demand for U.S. content has also led to an explosion in the number of movie theatres and in ticket sales, especially in countries like Russia and China.

While TWC and CBS are likely to continue their standoff for several days or weeks, the opportunity for content owners to capitalize on these industry trends by monetizing their assets more effectively is significant, and in the early stages. Continued innovation in technologies and business models will make Media a dynamic industry for years to come.

Disclosure: Some Redwood clients own the following companies, CBS, LGF, DISCA, and CMCSA (NBC) as of 8/30/2013. No Redwood clients own any of the following companies, DIS (ABC), FOXA (FOX), TWC, AMZN, and NFLX as of 8/30/2013.

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