Professional Documents
Culture Documents
MAY 2013
Like any addiction, SVOD feels good until it stops, and causes permanent damage to your health
When large-cap media companies started licensing their library content to the SVOD providers,
it seemed too good to be true: They garnered a new buyer, willing to pay money for content that
was otherwise not being monetized seemingly pure incremental profit
It is becoming increasingly clear that SVOD is indeed too good to be true; media companies
need to keep growing those earnings, which we believe are now at risk; meanwhile, TV ratings
have been permanently impaired, as viewers have been trained to use SVOD
Most at risk: CBS and Viacom; CBS is financially dependent on SVOD (7%+ of operating
income) and has a preponderance of library deals; Viacom suffers from a dependence on kids'
programs (which get cannibalized), a preponderance of library deals and lack of other growth
Least at risk: Disney and Discovery; Disney's SVOD is a tiny percentage of total earnings, and it
has little kids' ad revenue to lose and long-term theatrical SVOD revenue locked in; Discovery's
base business is growing so fast that SVOD will be immaterial by the time it's due for renewal
SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
todd.juenger@bernstein.com
david.beckel@bernstein.com
+1-212-823-3157
+1-212-407-5953
May 13, 2013
Table of Contents
Significant Research Conclusions
Addiction Sets In
11
19
39
59
75
89
111
Index of Exhibits
131
Exhibit 1
Financial Overview
Rating
Target Price
Current Price as of May 10, 2013
52-Week Range
CBS
M
$49.00
$47.75
$30.02-$47.75
DIS
O
$72.00
$67.20
$43.81-$67.20
DISCA
O
$90.00
$78.68
$48.37-$81.03
NWSA
O
$39.00
$33.27
$18.55-$33.29
TWX
M
$63.00
$60.94
$33.76-$61.52
VIAB
U
$64.00
$69.00
$45.28-$69.00
Revenues ($ million)
2012
2013E
2014E
2015E
2016E
2017E
Five-Yr CAGR (2012- 17E)
$14,089
14,970
15,602
16,120
16,879
17,072
3.9%
$42,278
45,602
48,349
53,068
53,732
55,550
5.6%
$4,486
5,597
6,324
6,657
7,246
7,742
11.5%
$33,706
36,764
41,547
43,631
45,865
47,789
7.2%
$28,729
29,324
30,584
31,749
33,017
34,283
3.6%
$13,887
13,763
14,330
14,742
15,195
15,652
2.4%
EBITDA ($ million)
2012
Margin
2013E
Margin
2014E
Margin
2015E
Margin
2016E
Margin
2017E
Margin
Five-Yr CAGR (2012- 17E)
$3,499
25%
$3,754
25%
$4,162
27%
$4,379
27%
$4,600
27%
$4,661
27%
5.9%
$11,477
27%
$12,555
28%
$13,596
28%
$15,375
29%
$15,746
29%
$16,183
29%
7.1%
$2,095
47%
$2,448
44%
$2,829
45%
$2,838
43%
$3,062
42%
$3,146
41%
8.5%
$6,558
19%
$7,145
19%
$8,056
19%
$9,280
21%
$10,345
23%
$11,151
23%
11.2%
$7,106
25%
$7,531
26%
$8,142
27%
$8,606
27%
$9,117
28%
$9,499
28%
6.0%
$4,259
31%
$4,333
31%
$4,558
32%
$4,660
32%
$4,788
32%
$4,904
31%
2.9%
EPS ($)
2012
2013E
2014E
2015E
2016E
2017E
Five-Yr CAGR (2012- 17E)
Shares (million)
Market Cap ($ million)
Net Debt ($ million)
Other Adjust ($ million)
EV ($ million)
$2.55
2.97
3.40
3.74
4.06
4.31
11.0%
631
$30,111
6,480
(118)
$36,473
$3.07
3.41
3.87
4.64
4.84
5.14
10.9%
1,822
$122,434
18,992
0
$141,426
$2.51
3.39
4.42
4.67
5.43
5.95
18.8%
$1.42
1.65
1.95
2.37
2.70
2.95
15.8%
$3.28
3.66
4.24
4.74
5.17
5.55
11.1%
$4.22
4.65
5.30
5.79
6.22
6.60
9.4%
365
$28,696
6,271
(1,105)
$33,862
2,318
$77,217
14,096
(13,062)
$78,250
956
$58,245
18,448
(1,920)
$74,773
493
$34,032
9,086
(276)
$42,842
2012 EV/EBITDA
2013E EV/EBITDA
2014E EV/EBITDA
10.4x
9.7x
8.8x
12.3x
11.3x
10.4x
16.2x
13.8x
12.0x
11.9x
11.0x
9.7x
10.5x
9.9x
9.2x
10.1x
9.9x
9.4x
2012 P/E
2013E P/E
2014E P/E
18.7x
16.1x
14.0x
21.9x
19.7x
17.4x
31.3x
23.2x
17.8x
23.5x
20.2x
17.1x
18.6x
16.6x
14.4x
16.3x
14.8x
13.0x
Note: The stocks are benchmarked against the S&P 500, which had a closing price of 1,633.70 on May 10, 2013.
Source: FactSet, corporate reports and Bernstein estimates and analysis.
Exhibit 2
Est. SVOD
Revenue
Est. SVOD
Op. Inc.
LTM
Revenue
CBS
Viacom
Discovery
Time Warner
News Corp
Disney
Total
$350
225
90
350
300
300
$1,615
$200
170
75
200
170
190
$1,005
$14,089
13,249
4,487
28,729
34,333
42,840
$137,727
LTM Op
Income
$2,983
3,682
1,855
5,918
5,726
9,261
$29,425
% of LTM
Revenue Op Income
2%
2%
2%
1%
1%
1%
1%
7%
5%
4%
3%
3%
2%
3%
Note: Revenue and operating income estimates are for each company's FY12.
Source: Corporate reports and Bernstein estimates and analysis.
In the early days, when SVOD was first being established, the content owners
had all the pricing power. The SVOD services could only exist to the extent the
content owners let them exist. The content owners dictated what programs they
would make available to the services, and how much it would cost. In fact, we
believe negotiations with the SVOD provider generally started with the revenue
number, with an executive of the media company saying something like, "We need
you to pay us $200 million," and then worked backwards from there, to say "Let's
talk about what content needs to be included to get to that number."
We believe the balance of power is now shifting firmly in favor of the SVOD
providers. They have grown up, and they are fighting back. The SVOD providers
have leverage because the content-owning companies are so addicted to SVOD
licensing revenue, that losing it would cause them great harm. And the SVOD
providers have proven they can drop any given content supplier with no noticeable
impact on subscriber satisfaction (for example, Netflix and AETV, or Netflix and
Starz). Furthermore, the SVOD providers have the data that tell them which
programs are being watched and which are not. We believe this means the SVOD
players will be able to break the bundle, and only license the specific programs they
want (rather than being forced to buy everything), which is what seems to be
happening right now, between Netflix and Viacom.
All Kids' Networks Fared Worse in Households With Netflix Except Cartoon
Network, Which Was the Only Major Kids' Network Without Content on Netflix
in 2012
CY12 Ratings y/y
Kids' Network
Netflix
Non-Netflix
Delta
Cartoon Network
Nickelodeon
Disney Channel
Nick Jr.
The HUB
Disney XD
Boomerang
Sprout
Nick Toons
15%
(14%)
(2%)
(14%)
38%
17%
(4%)
10%
(21%)
5%
(12%)
0%
(11%)
44%
23%
5%
20%
(6%)
10%
(2%)
(3%)
(4%)
(6%)
(6%)
(8%)
(10%)
(15%)
Exhibit 4
SVOD Has Been a Significant Driver of Earnings Growth for Most Large-Cap Media
Companies ($ million)
VIAB
% OI
Growth/
SVOD
194%
TWX
72
262
CBS
80
364
22%
NWSA
105
628
17%
DIS
116
1,079
11%
(6)
161
na
DISCA
Source: Company reports and Bernstein estimates and analysis.
27%
Industry-Wide Implications
Exhibit 5
SVOD
Revenue
% of
Total
CBS
Time Warner
Disney
News Corp
Viacom
Discovery
Large Cap Media
$350
350
300
300
225
90
$1,615
11%
11%
10%
10%
7%
3%
52%
$600
420
400
125
$3,120
19%
13%
13%
4%
In terms of its impact on viewing behavior, SVOD has surprisingly not yet
caused a measurable decline in total traditional TV viewing among SVOD
subscribers. But it has changed what they watch on TV. Kids' content and reruns
are the losers; serialized dramas (think: Breaking Bad) are the winners.
It may seem intuitive that SVOD would compete with premium services like
HBO and Showtime for subscribers and viewership. But so far, the opposite is true.
Netflix subscribers over-index on consumption of HBO and Showtime (and hit
broadcast primetime programming, and most flavors of original cable network
programming). In other words, Netflix subscribers (at least the first 28 million of
them) are entertainment junkies; they can't get enough of the stuff.
The generalized implication for TV networks all TV networks is they
will increasingly have to spend more on content to fight for audiences. The shelflife of an original piece of content is getting shorter and shorter, as networks can no
longer rerun the same show forever and expect an audience to show up. Some types
of networks are hit worse than others, namely those that are subject to either the
highest rates of program cost inflation, or those that suffer the most ratings
cannibalization (or both). The networks most likely to suffer are kids' networks and
general entertainment networks.
Company-Specific Implications
Some content companies have much more risk exposure to SVOD than others. The
main determinants are: (1) genres in which the company participates; (2) the
company's dependency on SVOD licensing revenue (i.e., what percentage of
earnings comes from SVOD; (3) how fast other elements of the company's business
are growing; (4) types of content that characterized historical deals (i.e., bulk
nonexclusive baskets of deep library content, or more selective rights to recent
programs); and (5) how much additional (valuable) content the company has
available for future licensing.
The two companies most at risk, based on our assessment, are CBS and
Viacom. Time Warner and News Corp face medium risk. Discovery and Disney
face relatively low risk.
CBS is vulnerable due to its financial dependency. It does not have significant
cannibalization risk. We figure that 7% of CBS's total operating income comes
from SVOD if 60% margins are assumed (10% if 85% margins are assumed). This
dependency is exacerbated by the rest of the company not growing particularly fast.
And it's not only the amount of SVOD revenue but also the type of content being
sold: Much of CBS's SVOD revenue comes from catalog library content, which is
exactly the type we believe the SVOD providers are going to try to cull. To be
clear, this threat isn't imminent. CBS can grow its SVOD revenue in 2013, and it
may even get a boost from a new SVOD entrant in the near term, in our view.
However, we believe any such one-time boost would be ephemeral, and create an
even higher cliff in the future.
Viacom is vulnerable due to its financial dependency and its cannibalization
risk. Of Viacom's total operating income, 4% comes from SVOD. We believe
Viacom is overearning by a factor of 3x relative to its contribution to SVOD
viewership. Viacom's long-term valuation is highly sensitive to the affiliate fee
growth rate, which we see as at risk due to slowing SVOD revenues. SVOD has
been the difference between affiliate fees growing at low-double digits versus highsingle digits. If SVOD revenue were to stop growing and flatten out, affiliate fee
growth rate would be constrained in the high-single digits, and be dragged down
even further if SVOD revenue declines. Moreover, Viacom is more dependent on
kids' TV than any other media company, and kids' TV is the most prone to
cannibalization in SVOD homes.
Time Warner has relatively low financial risk because of SVOD, which is 3%
of total company operating income. The company is also shielded by the fact that
most of its SVOD licensing deals are for recent content (in many cases including
future seasons), which is much less susceptible to being culled by the SVOD
providers. However, Time Warner does face meaningful cannibalization risk,
especially at TNT, TBS and Cartoon Network. Reruns of both acquired and
original programming on TNT and TBS have trended lower in Netflix households
than in non-Netflix households. Perhaps of even greater concern, premiere episodes
of Turner originals have trended lower. Cartoon Network, the last SVOD holdout
among the kids' networks (and the only kids' network trending higher in Netflix
households), recently threw in the towel and signed a Netflix deal.
News Corp's SVOD risk is very similar to Time Warner's. In terms of
financial risk, SVOD is only 3% of News Corp segment operating income, and
most of the SVOD licensing deals are for recent content, in many cases including
future seasons. News Corp's biggest cannibalization risk is at the FX network,
which has seen a significant drop in ratings for Netflix households watching reruns
(-23% versus non-Netflix households).
Discovery faces relatively low SVOD financial risk, despite the fact that we
believe its extensive library deals will be culled in the future, because the rest of its
operations are growing so fast. SVOD earnings contribution peaked at 5% of total
company operating income in 2011, and has been declining in significance ever
since. By 2014, when we believe Discovery's Netflix and Amazon deals renew,
SVOD will only be 2% of operating income. Cannibalization is mixed, and
ultimately a net wash. Ratings for premiere episodes of original content trend
We value each of the companies in our U.S. media coverage using the weighted
average of a discounted cash flow analysis and a relative market multiple valuation.
For our relative multiple valuation, we apply our Q5-Q8 EPS earnings estimate to a
relative PFE multiple selected based on past history, projected growth rates and the
company's ability to generate returns in excess of the cost of capital, all relative to
that of the S&P 500.
Our DCF valuations are conducted on a sum-of-the-parts basis for each major
operating segment of our respective coverage companies, with comparable
company valuation benchmarks used when appropriate and available. Our DCF
model is based on annual cash flow forecasts over an explicit period, combined
with a continuing value component intended to capture the firms value into
perpetuity. Our explicit period assumptions are based on annual projections for
NOPLAT, depreciation, capital expenditures, and working capital. The fair market
value of common equity determined by each of these methods is divided by the
current diluted share count and multiplied by one plus the cost of equity minus the
current dividend yield (1 + Ke - d) to calculate a target share price in 12 months'
time.
We then weight the market multiple component of our valuation 50% and the
DCF 50% in order to establish a weighted average target price.
Risks
Consumer and advertising spend are significant drivers of revenue for most of the
companies in our coverage of U.S. media. The deterioration of economic
conditions could have a material negative impact on revenues and earnings of the
companies in our coverage and on the stocks achieving our target prices. The health
and stability of the video distribution ecosystem is vitally important with respect to
the delivery of our companies' television content. New and innovative platforms
that offer video distribution could potentially disrupt the ecosystem, thereby
jeopardizing the primary distribution partners (cable and satellite) of each of our
companies. Additionally, piracy of content could serve to undermine the
profitability of a product that typically is produced with the expectation of multiple
distribution methods and time horizons for which that product can be monetized.
For all companies, advertising spend is sensitive to economic expectations and
the health and stability of a concentrated number of industries. Our forecast of U.S.
and international ad spending for cable and broadcast networks could vary
significantly from realized results.
In addition to the industry-wide risks, each company has its own factors that
could prevent our target prices from being reached. We discuss each company's
risks in the following paragraphs.
CBS. Ratings for programming aired on CBS's broadcast networks may
deteriorate from the current levels, causing ad revenues, retransmission fees and
future off-network and international syndication value for the content to decline.
Programming costs may increase faster than expected due to increased competition
for creative talent. CBS may not be able to delever effectively, if at all, exposing
the company to increased financial risk and inhibiting the possibility of achieving a
lower cost of capital. Showtime faces competitive threat from SVOD providers
(e.g., Netflix).
10
We favor companies in the U.S. media sector that are poised to benefit the most
from increases in affiliate fees and international growth (both in TV and theatrical)
and have the best programming cost structures. We also prefer companies that are
least exposed to certain negative industry forces, including declining home video
sales, publishing and an overreliance on SVOD.
We rate Disney, News Corp and Discovery outperform. Viacom is rated
underperform, while CBS and Time Warner are rated market-perform.
11
Addiction Sets In
From a Silver Lining to a
Stormy Cloud
As recently as a few years ago, subscription video on demand (SVOD) was a new
and little-known distribution platform, dominated by a single distributor (Netflix)
and used by content providers almost exclusively on an experimental basis. Now,
with tens of millions of subscribers in the United States alone, SVOD as a platform
contributes material amounts of revenue to the major media companies that provide
the content. No longer is SVOD an experiment; it is now becoming as important a
player in the content ecosystem as traditional, linear TV syndication. In some ways
it is more important, because it has been the largest incremental addition to
earnings growth recently.
With very little comprehensive data in existence about SVOD, both on a macro
and micro level, we thought it would be useful for investors to assess the SVOD
environment, estimate the size of the market as a whole, and gauge the amount of
revenue and income SVOD generates for the large-cap media companies in our
coverage universe. To do this, we have pored over company filings and transcripts
in an attempt to provide a comprehensive overview of the SVOD ecosystem as it
exists today. Additionally, we have secured a unique trove of TV ratings data,
which enables us to compare viewing trends over time in homes that use Netflix
versus homes that don't.
With this combination of financial and behavioral data in hand, we have
become concerned that what started as an experiment has turned into a harmful
addiction for the content owners. Revenue and profit that was once a nice little
sweetener is now embedded in the companies' baseline profits. Investors would not
take kindly to those profits going down. To keep feeding that addiction, either the
SVOD end-user market has to keep growing, or the content owners have to fight
each other for their share of the available licensing dollars.
In the meantime, the existence of SVOD creates changes in how consumers
watch TV. The losers (on linear TV) are kids' networks and reruns. The winners are
serialized dramas.
In this chapter, we scope the entire marketplace from an aggregate perspective,
and examine the forces at work driving total industry growth and how it impacts
each part of the value chain. We also look at generalizable learnings about the
impact of SVOD on TV viewership. In the following chapters, we examine the
impact on each of the large-cap media companies.
Supply-Side Economics
Even the very basic question of "How much SVOD revenue is each company
generating?" turns out to be very difficult to answer. Specific deal terms are never
divulged, and even aggregate digital/SVOD revenue is rarely disclosed (usually
only in management commentary).
Further complicating the exercise is revenue recognition, which is horribly
lumpy. Revenue is recognized when the content is delivered to the SVOD provider
and made available to their subscribers. Because most of these deals are for batches
of existing library content, which is delivered mostly in one big batch and made
available to subscribers of the SVOD service immediately, most of the revenue is
usually recognized immediately, causing huge year-over-year gyrations.
By piecing together all the evidence we could gather (mainly trade press
reports and management commentary), we have compiled a database of SVOD
deals, by SVOD provider and by content owner, which is summarized in Exhibit 6.
Company-specific historical timelines are contained in the individual chapters that
follow. We are happy to provide a sortable Excel version on request.
12
Exhibit 6
($ in millions)
CBS
Time Warner
Disney
News Corp
Viacom
Discovery
Total
Est. SVOD
Revenue
$350
350
300
300
225
90
$1,615
TV
Netflix
Movies
Intl
TV
na
(2)
(3)
na
Amazon
Movies
na
(4)
na
Intl
TV
(1)
Hulu
Movies
Hulu Plus
TV
Movies
(1)
na
na
na
na
1 Time Warner provides TV series to Hulu and Hulu + through its CW deal.
2 Movie output deal begins in 2016.
3 Viacom provides current and library films through EPIX.
4 Viacom provides current films only through EPIX; library is provided directly by Paramount.
Note: Revenue estimates are for each company's FY12.
Source: Corporate reports and Bernstein estimates and analysis.
Est. SVOD
Revenue
Est. SVOD
Op. Inc.
LTM
Revenue
CBS
Viacom
Discovery
Time Warner
News Corp
Disney
Total
$350
225
90
350
300
300
$1,615
$200
170
75
200
170
190
$1,005
$14,089
13,249
4,487
28,729
34,333
42,840
$137,727
Note: Revenue and operating income estimates are for each company's FY12.
Source: Corporate reports and Bernstein estimates and analysis.
LTM Op
Income
$2,983
3,682
1,855
5,918
5,726
9,261
$29,425
% of LTM
Revenue Op Income
2%
2%
2%
1%
1%
1%
1%
7%
5%
4%
3%
3%
2%
3%
13
Demand-Side Economics
Occasionally we'll hear a company or investor make the comment, "There is still so
much upside from SVOD. Company XYZ has only licensed X% of its content
library just wait until it licenses the other Y%." We believe that reasoning is
faulty, because the market potential is not a function of how many indiscriminate
hours of content a company may have in its vault. The only content that has value
is content that a distributor is willing to pay for (because viewers want to see it).
We believe the better way to gauge the ultimate potential market size for
SVOD is to start with the end-user demand and then work back down the chain.
We do this for both domestic and international markets.
The first key determinant is the amount of revenue SVOD providers currently
generate. Already we have a very big problem, because there is no precise way to
determine how much of Amazon's Prime service is SVOD-related. Amazon Prime
members pay $80 per year for the Prime service, which includes SVOD service as a
feature. Is the price for the SVOD service $80, $0 or somewhere in between? For
the purpose of our scoping analysis, we avoid the Amazon question by just sizing
the market generically based on a total number of SVOD subs (across all SVOD
providers) multiplied by a certain ARPU.
We present the analysis as a sensitivity grid because different investors will
have different beliefs. Some people believe Netflix alone will have 80 million U.S.
subs. Others believe they have topped out at 28 million (or will go backwards).
Once we determine how much total revenue SVOD providers as a whole will
generate, then we can determine how much of that revenue the providers will invest
in content (i.e., what is their gross margin?), to arrive at a total aggregate SVOD
spend on content. We have chosen a 65% investment rate, based on an assessment
of current streaming providers' financials (see Exhibit 8).
Exhibit 8
Intl
Hulu+
Total
AMZN
Ex-AMZN
(2)
28
$7.99
6
$7.56
2
$7.99
36
$7.91
16
na
Streaming Revenue
Net Ad Revenue
Total Revenue
$2,675
0
$2,675
$574
0
$574
$192
16
$208
$3,441
16
$3,458
na
0
na
1,600
$1,075
40%
500
$74
13%
179
$29
14%
2,279
$1,178
34%
600
na
na
na
($326)
$400
70%
0%
$0
$29
15%
20%
$535
$540
20%
Others
(1)
250
Total
$3,129
1 "Others" includes our estimate of content spending by newer U.S. services such as Streampix, Redbox Instant and Intel, as well as non-U.S.
services.
2 Paid subs are based on current sub levels.
Source: Corporate reports and Bernstein estimates and analysis.
14
Exhibit 9
The Total Demand for Streaming Rights Over the Next 2-3 Years Is Constrained by
SVOD Economics ($ million)
US
International
$4
$5
$6
$7
$8
$9
45
$1,404
$1,755
$2,106
$2,457
$2,808
$3,159
50
$1,560
$1,950
$2,340
$2,730
$3,120
$3,510
65%
Subs (mm's)
55
60
$1,716
$1,872
$2,145
$2,340
$2,574
$2,808
$3,003
$3,276
$3,432
$3,744
$3,861
$4,212
65
$2,028
$2,535
$3,042
$3,549
$4,056
$4,563
70
$2,184
$2,730
$3,276
$3,822
$4,368
$4,914
Monthly ARPU
Monthly ARPU
$4
$5
$6
$7
$8
$9
15.0
$468
$585
$702
$819
$936
$1,053
16.7
$520
$650
$780
$910
$1,040
$1,170
65%
Subs (mm's)
18.3
20.0
$572
$624
$715
$780
$858
$936
$1,001
$1,092
$1,144
$1,248
$1,287
$1,404
21.7
$676
$845
$1,014
$1,183
$1,352
$1,521
23.3
$728
$910
$1,092
$1,274
$1,456
$1,638
Not all of this $3.9 billion will make its way to the large-cap content owners.
Some of it will go to privately held studios and smaller networks. Another portion
will go to foreign content and smaller/independent owners. A bigger, growing part
will be devoted to original content (e.g., House of Cards).
We estimate large-cap media currently earns a little more than half of total
SVOD revenue (see Exhibit 10). If we assume the same percentage of SVOD
revenue stays with large-cap media over time, the companies will earn about $0.4
billion more than they earn today, or about a 25% increase over the next 2-3 years.
If you consider Disney's theatrical deal with Netflix as part of that growth, that only
leaves $0.1 billion of growth for everybody else.
Exhibit 10
SVOD
Revenue
% of
Total
CBS
Time Warner
Disney
News Corp
Viacom
Discovery
Large-Cap Media
$350
350
300
275
188
113
$1,575
11%
11%
10%
9%
6%
4%
50%
$600
420
400
125
$3,120
19%
13%
13%
4%
It's been said so many times that it's trite: Given that there are only so many hours
in a day, people are going to run out of hours to watch video. Internet usage
continues to rise, as does mobile and SVOD usage. Where are people finding the
time to consume all of this media? For the Internet (computer-based and mobile), a
lot of the time spent watching video content is concurrent usage (multi-tasking).
But SVOD viewing seems different, at least compared to traditional TV: One must
encroach on the other, and SVOD is growing, so TV must be declining.
Yet, despite many cries of its demise (including another loud chorus this past
fall), traditional TV viewing stubbornly continues to hang on, even grow. As shown
in Exhibit 11, both HUT levels (Households Using Television) and PUT levels
(Persons Using Television) have been stable over the past three years, with only
minor variations. (We believe the biggest cause of the drop in 2012 was very good
weather in 2012 comping against very bad weather in 2011.)
Exhibit 11
Broadcast
S-T-D
2010
2011
2012
2013
CAGR
15
The Number of Households Using Television and Persons Using Television Have
Been Relatively Stable Since 2010
Persons Using TV (PUT)
Total Day
Prime
Viewers
Viewers
(000's)
y/y %
(000's)
61,455
117,443
62,178
1.2%
118,125
60,609
(2.5%)
115,395
61,376
1.3%
115,320
(0.0%)
y/y %
0.6%
(2.3%)
(0.1%)
(0.6%)
y/y %
(0.2%)
0.4%
0.2%
0.1%
How can we explain the steady levels of TV viewing, amid rising SVOD
usage? One answer: Some SVOD viewing is displacing physical DVD viewing
(which was never in the TV viewing numbers to begin with). It makes logical sense
that early SVOD adopters (and we still are relatively early in the adoption curve)
likely over-indexed on DVD viewing, and they are swapping the new way of
viewing for the old. That would leave TV untouched.
Another explanation is SVOD viewing is taking place in new locations or at
new times that aren't substitutes for traditional TV (so the viewing really is
incremental). The most obvious example is the workplace, where most white collar
professionals have broadband access. (Commuting time is probably not a very
likely explanation, as continuous Wi-Fi access would be clunky and costly.)
And finally, perhaps there really is some increase in total consumption time.
People who really love certain types of TV now have more of it available,
whenever they want.
The fact that HUT and PUT levels haven't dropped off yet doesn't mean they
won't in the future. If SVOD flourishes as some believe it will, then behavior could
start to shift in the future. In fact, such a shift toward SVOD and away from TV
viewing seems inevitable, unless a significant disruption takes place. The only
scenarios we can think of that would throw SVOD consumption into reverse would
be a rise in cable video on demand (VOD)/TV Everywhere to displace SVOD
(which are really the same consumer proposition), or content owners pulling back
their programming from SVOD providers (which at one time we believed was quite
likely and, in fact, the rational course of action for the content owners, but now
seems increasingly improbable).
Even though total traditional TV consumption has remained essentially flat,
that doesn't mean it isn't affected by SVOD. SVOD may not yet have changed how
much traditional TV people consume, but it has changed what they consume.
Certain household profiles are particularly attracted to SVOD namely,
households that love entertainment programming and households with kids.
Moreover, SVOD is a superior delivery device for certain types of content
specifically serialized dramas and kids' programming causing the share of
viewing of those genres to significantly shift to the SVOD mode.
This leaves a different mix of content viewed on traditional TV in those
households: less kids' shows and more in-season serialized dramas. Additionally,
with a viable substitutive option for TV in SVOD, viewers are more likely to
become choosey, watching fewer reruns and "filler TV" in favor of premieres.
16
Our analysis has found that over time traditional TV ratings for kids' networks has
gapped significantly lower in Netflix households when compared to non-Netflix
households (see Exhibit 12). This is true for every kids' network except Cartoon
Network, which was the only kids' network not on Netflix up until early this year
(see Exhibit 13). In 2012, ratings for Cartoon Network were up +15% in Netflix
households versus only +5% in non-Netflix households. Then in January 2013
(after the period we studied), Cartoon Network succumbed and signed a Netflix
deal. We cannot wait to see what happens to Cartoon Network over time, now that
it's joined everyone else on Netflix. If SVOD services continue to grow, this gap
between kids' viewing in Netflix and non-Netflix households will only widen,
causing a bigger and bigger drag on overall TV viewership.
Exhibit 12
1.25
1.20
1.15
1.10
1.05
1.040
1.00
0.985
0.95
0.90
0.85
Non-Netflix Homes
Netflix Homes
Exhibit 13
All Kids' Networks Fared Worse in Households With Netflix Except Cartoon
Network, Which Was the Only Major Kids' Network Without Content on Netflix in
2012
CY12 Ratings y/y
Kids' Network
Netflix
Non-Netflix
Delta
Cartoon Network
Nickelodeon
Disney Channel
Nick Jr.
The HUB
Disney XD
Boomerang
Sprout
Nick Toons
15%
(14%)
(2%)
(14%)
38%
17%
(4%)
10%
(21%)
5%
(12%)
0%
(11%)
44%
23%
5%
20%
(6%)
10%
(2%)
(3%)
(4%)
(6%)
(6%)
(8%)
(10%)
(15%)
17
The danger for content companies will only seem obvious in hindsight. For a
content owner, in any given year, the available SVOD licensing revenue looks
bigger than the projected loss of TV advertising revenue, making it appear like an
economically optimal decision to take the SVOD check(s). But part of why SVOD
licensing revenue will look bigger over time is because traditional TV advertising
will decline over time. Looking out longer term (say, five years later), it may be the
case that half of the TV audience has migrated from a very profitable form of
viewing (the pay-TV bundle) to a much less profitable form of viewing (SVOD).
At that point, the network can never get the viewers back. When this audience shift
becomes pronounced enough to start impacting affiliate fees as well, then the
economic tradeoff completely breaks down.
Disney is a somewhat special case, given its flagship Disney Channel doesn't
carry advertising and therefore has no ad revenue to lose. (Disney Channel's two
fast-growing siblings do carry advertising. DXD carries traditional 30-second spots,
Disney Jr carries "sponsorships.") A Machiavellian theorist might expect Disney to
gladly drive lots of kids' viewing to SVOD, because such a strategy will hurt
Viacom (and Time Warner) more than it will hurt Disney. Disney must have given
Netflix enough certainty of a continued supply of kids' content for Netflix to be
confident enough to drop its bulk deal with Viacom. That seems true on the
theatrical side as well, where Disney just partnered up with Netflix for a long-term
output deal (starting 2017), including some library titles never before made
available in a SVOD or premium network window.
What's so frustrating is that kids' networks didn't need to become victims of the
SVOD phenomenon. Kids' TV is centralized in the hands of 2.5 players (Disney,
Viacom and a little bit of Time Warner). If those three players had resisted SVOD
from the outset, kids' offerings would never have found their way to SVOD
providers. The content owners could have instead satisfied the needs of their
viewers through TV Everywhere, and gotten paid for the content via affiliate fees
and forced-view advertising, while preserving the pay-TV bundle.
We have characterized this situation as a form of a prisoner's dilemma. If all of
the content owners abstained, they'd all be better off. But if one of the networks
breaks ranks and participates, then the others probably will change their minds and
decide to take advantage of SVOD money, because SVOD migration is going to
hurt results whether they participate or not. (This must be what Cartoon Network
decided when it finally threw in the towel and acquiesced to a Netflix deal.) And
worst fate of all is what is currently happening to Viacom. Viacom helped train
viewers to watch kids' programming on SVOD, and now Viacom is about to be cut
out of a large portion of the licensing fees.
SVOD The Ultimate
Serialized Drama Marketing
Platform
Networks airing returning seasons of serialized dramas have found that SVOD has
exactly the opposite effect from what has been observed on kids' networks. As best
exemplified by AMC Network, overall ratings have trended higher in Netflix
households compared to non-Netflix households. Specific accelerations in the
ratings gap can be traced to the availability of past seasons of hit shows on Netflix,
and the introduction of new seasons of those shows on the traditional network (see
Exhibit 14).
The implication for content owners and networks airing serialized dramas:
They should take every SVOD deal they can get, because they are getting paid, and
SVOD is helping ratings. When this thinking is taken to its full logical conclusion,
it could be argued that SVOD providers should ultimately start getting paid by the
content owners (as marketing/promotion providers), rather than the other way
around. While a logical argument, this isn't likely to happen. After all, in music,
those holding music rights haven't been paying networks to use their songs even
though the marketing/promotion benefit might increase their sales, but instead have
kept demanding license fees.
18
Exhibit 14
2.300
2.100
1.900
1st three
seasons of
Breaking Bad
Available via
Netflix
2.274
2.096
1.700
1.500
1.300
1.100
0.900
0.700
0.500
0.300
1st four
seasons of
Mad Men
Available via
Netflix
Netflix
1st season of
Walking
Dead
Available via
Netflix
Non-Netflix
The data in all of the chapters in this Blackbook come from TiVo's Stop||Watch
service, which relies on an opt-in panel of some 35,000 TiVo subscribers. These
subscribers volunteer to provide information about their households and agree to let
TiVo anonymously associate these household factors to the stream of viewing data
(what we call "set-top box data") collected from their TiVo boxes. All of these
subscribers are "TiVo-owned" subs, meaning they bought their own physical TiVo
box (from Best Buy, for example) and installed it in their house.
For our project, the panelists were asked to indicate whether they subscribed to
the Netflix streaming service and have viewed content from this service, on their
conventional TV set (through their TiVo boxes), in the past month. Based on the
answers to these questions, two cohorts of about 10,000 "streamers" in Netflix
households and about 10,000 "non-streamers" in non-Netflix households were
created. This set of data exists only from 2011 onward, and our period of study for
this Blackbook ended in January 2013.
TiVo set-top box data is collected daily and provides a second-by-second tally
of all viewing that takes place, whether "live" or "timeshifted." The data are
compiled into "TiVo household ratings" (i.e., percentage of the respective universe
watching any given program at any given second), which are able to be summed
across dimensions, such as networks, dayparts, or even specific commercials.
We realize the data are not perfect. Neither the total TiVo subscriber universe,
the Stop||Watch panel, or the specific streamer/non-streamer cohorts are nationally
representative. Even if the demographics were weighted to match the U.S.
population, the data still wouldn't be perfect, because TiVo households have one
thing that makes them very different from most other households they have a
TiVo.
However, these biases become less important when conducting a "pair-wise"
comparison of relative behavior between Netflix and non-Netflix households, as we
are doing. Whatever biases exist are present in both cohorts, presumably more or
less equally. The specific issue in question is the relative differences between the
cohorts.
19
Compared to its large-cap media peers, CBS is the most dependent on SVOD as a
percentage of earnings: 6-7% of operating income, assuming SVOD margins are
60%, and as much as 10%, if SVOD margins are 85%. As we dug into the data, we
discovered CBS perfectly illustrates the short-term upside but long-term risk that
SVOD poses for many content owners.
The cannibalization risk at CBS and its subsidiary Showtime is minimal,
unlike what we've seen at kids' networks. In fact, both CBS and Showtime have
been experiencing higher viewership in Netflix homes compared to non-Netflix
homes, with the increase greatest when CBS and Showtime are airing new
episodes.
That suggests CBS should take all the SVOD deals it can get and we
believe it can get a few more. The network's booked SVOD run-rate thus far in
2013 is slightly lower than in 2012, but we believe CBS will find an SVOD
customer for past seasons of a handful of shows currently airing in its primetime
lineup (as it did with The Good Wife), lifting CBS's 2013 SVOD revenue to a new
record. If a new SVOD company (such as Intel) entered the market, that would be
another source of revenue, but it would only be incremental on a sustained basis to
the extent it brought net incremental paying subscribers into the SVOD universe.
We believe that licensing revenue growth will soon be limited by the amount
of money SVOD players have at their disposal to invest in programming
(especially with increasing amounts funneled to originals, and Netflix soon paying
for the Disney output deal). CBS may have a lot more content it could sell, but we
question the size of the pool of dollars available to pay for the content.
Additionally, we believe the negotiating leverage that content owners have
over SVOD providers is starting to balance out. The networks now need the SVOD
players just as much as the SVOD players need the networks. Losing any of the
SVOD deals would be a major blow that CBS (and its peers) cannot afford. Netflix
and Amazon know this, and can selectively play content owners against each other,
and even back up a threat to drop certain content (like Netflix did with AETV), or
"break the bundle" and buy a smaller amount of content for a smaller amount of
dollars (like Netflix did with Viacom).
The Showtime viewership data in particular, as well as the CBS primetime data
in general, prove to us that Netflix households are not using the SVOD service as a
patchwork substitute for regular TV viewing, or as some kind of cord-cutting
prelude. Instead, they seem to be households that absolutely love entertainment
television and can't get enough of it. They actually watch more entertainment
content on linear TV as a share of their total traditional TV viewing, apparently
siphoning off the less purposeful/engaging viewing hours.
As CBS has become less dependent on advertising revenue. In its new sources of
growth, two revenue lines retransmission fees and digital licensing stand out
as particularly impressive, because they have gone from $0 not that many years
ago, to "hundreds of millions" (each) in 2012. Accordingly, digital licensing has
been a significant contributor to CBS's growth, driving 32% of 2012 revenue
growth and 22% of operating income growth, assuming a 60% margin on SVOD
revenues (see Exhibit 15).
20
Exhibit 16
32%
6.7%
22%
4.6%
15%
2.5%
1.5%
NA
2011
Operating Income
0.0%
2012
Revenue
2010
% of Revenues
2011
2012
% of Operating Income
To achieve these results, CBS has tapped its vast library archives. After some
digging, we have assembled a fairly complete list of the programs CBS has
licensed to Netflix, Amazon and Hulu+ (see Exhibit 17).
Detailed estimates of pricing for each of these titles (season-by-season) with
each SVOD provider is included in the Appendix of this chapter, in Exhibits 35-39,
with the value of deals totaled in Exhibit 40. This bottom-up pricing triangulation
exercise is a critical input for assessing the expected fair price for potential future
deals (on new titles). Some of the notable titles in the CBS library that don't appear
on the SVOD list are highlighted in Exhibit 18.
Exhibit 17
21
CBS Has Licensed Over 7% of Its Library to All the Major SVOD Players in the United
States
Significant Titles
7th Heaven
Accidently, On Purpose
Amazing Race
Andy Griffith
Brotherhood
Charmed
Cheers
CSI: Miami
Dr. Quinn, Medicine Woman
Everybody Hates Chris
Everybody Loves Ray
Family Ties
Flashpoint
Frasier
Ghost Whisperer
Gilligan's Island
Good Wife
Hack
Harper's Island
Hawaii 5-0 (Classic)
I Love Lucy
JAG
Jericho
L Word
Life, Unexpected
MacGyver
Medium
Melrose Place
Mission: Impossible
Next Top Model
Numbr3s
Philly
Sleeper Cell
Star Trek
Star Trek Animated
Star Trek DS9
Star Trek Enterprise
Star Trek Next Gen
Star Trek Voyager
Survivor
Three Rivers
Tudors
Twilight Zone
Twin Peaks
Undercover Boss
United States of Tara
Wings
Legend
All seasons
Partial seasons
Not Available
22
Exhibit 18
Some Notable Holdouts from the CBS Library, Not Yet Licensed to SVOD
Title
Cold Case
Becker
Touched by an Angel
Sister, Sister
Roseanne
Webster
Dynasty
The Love Boat
Happy Days
Laverne and Shirley
Taxi
Gunsmoke
Brady Bunch
Perry Mason
Library
CBS / WB
Paramount
CBS
Paramount
Paramount
Paramount
Spelling
Spelling
Paramount
Paramount
Paramount
CBS
Paramount / ABC
CBS / Fox
Seasons
7
6
9
6
9
6
9
10
11
8
5
20
5
9
Last
Season
2010
2004
2003
1999
1997
1989
1989
1987
1984
1983
1983
1975
1974
1966
National
Syndicators
TNT / ION
REELZ
GMC
GMC / Style
WE / TVL / CMT
None
None
None
HALL / HUB
HUB
None
TVL / ENC
HALL
HALL
Like every other business in the world, CBS has only two ways to continue
growing revenue: price and volume. For SVOD price to grow, the end-market has
to grow, which is a function of the number of subscribers and ARPU. We laid out
scenarios for such growth in the chapter "Addiction Sets In," as we believe
different investors will have different beliefs about subscriber growth rates, ARPUs
and the ultimate size of the SVOD market.
In our view, the SVOD market will grow to around 55-60 million domestic
subs in the next 2-3 years (counting Amazon Prime members as "subs," which is a
whole debate unto itself). Assuming a gross margin of 35%, that translates to total
revenue from SVOD providers growing from $3.1 billion now to $4 billion in the
next 2-3 years. Focusing on just the large-cap media companies in our coverage, we
see SVOD revenue increasing from $1.6 billion to $2 billion equal to 25%
growth (although a big percentage of that is earmarked for the Netflix-Disney
theatrical output deal starting 2017).
The specific mechanisms CBS has at its disposal to capture its share of that
growth include:
Put options with Netflix, and
Opening up prior seasons of shows still being aired on the CBS network.
Exhibit 19 lists recent shows cancelled by CBS that have been subject to a
Netflix put option. One of them stands out as a "hit" title: CSI Miami (although as a
procedural, it's not exactly "perfect" for Netflix, which really thrives on serialized
content, often viewed in binges by people that can't stop watching because they
desperately want to see how the story proceeds). The other titles, shall we say
politely, didn't quite work out as hoped in their broadcast debuts.
Exhibit 19
Season
Debut
Hits
CSI: Miami
10
2002
Duds
Rob
NYC 22
A Gifted Man
The Defenders
1
1
1
1
2012
2012
2011
2010
Title
23
CBS Has Kept Its Current Dramatic Series Off SVOD Services
Current CBS Primetime Lineup
Available
on NFLX?
N
N
N
N
Available
on AMZN?
N
S17-20
S1-3
N
Available
on Hulu +?
N
S1-20
N
N
Time
7:00
8:00
9:00
10:00
60 Minutes
Amazing Race
The Good Wife*
The Mentalist
Producer
CBS News
CBS
CBS
WB
MON
8:00
8:30
9:00
9:30
10:00
Fox
Sony (NA)
WB
WB
CBS
Y
Y
N
N
Y
S1-7
S1-6
N
N
N
N
N
N
N
N
N
N
N
N
N
TUES
8:00 NCIS
9:00 NCIS: LA
10:00 Vegas
CBS
CBS
CBS
Y
Y
Y
N
N
N
N
N
N
N
N
N
WED
CBS
CBS/ABC
CBS
Y
Y
Y
N
N
N
S21-24
N
N
S21-24
N
N
THURS
8:00
8:30
9:00
10:00
WB
WB
WB
CBS
Y
Y
N
Y
N
N
N
N
N
N
N
N
N
N
N
N
FRI
Independent
WB
CBS
Y
Y
Y
N
N
N
S3
N
N
N
N
N
SAT
8:00 Rotates
9:00 Rotates
10:00 48 Hours
CBS News
SUN
Show
Full Ep.
Avail
CBS.com?
Y
Y
Y
Y
*Season 4 of The Good Wife will be available on Amazon shortly before the premiere of Season 5, as will Seasons 1-4 on Hulu+.
Source: cbs.com, Netflix, Hulu, Amazon, imdb.com and Bernstein analysis.
24
Exhibit 21
The Most Likely Opportunity for SVOD Upside for CBS Is Licensing Previous
Seasons of Current Series
Show
Type
Procedural
Procedural
Procedural
Serialized
Seasons
10
8
13
3
Episodes
227
179
273
61
Syndication
CLOO / USA
A&E / ION
USA / CLOO / SPIKE
None
Note: This analysis is representative of a non-exclusive, two-year deal for an SVOD service the size of Netflix.
Source: imdb.com and Bernstein estimates and analysis.
CBS will need to pull one or more of these levers just to keep SVOD growing
in 2013, according to our analysis. We estimate CBS generated $350 million of
revenue from SVOD deals in 2012, but we believe it only has ~$335 million
booked to be recognized in 2013 (see Exhibit 22). We expect CBS will do what's
necessary to boost this year's SVOD revenue: We wouldn't be surprised if there
was another announcement sometime in the not-too-distant future about a new
SVOD deal for past seasons of still-running shows, and/or another put option to
Netflix.
Beyond 2013, however, the path to keep SVOD revenue growing becomes
very hard, in our view. CBS will need significant price increases on its library
deals, as well as additional titles, and maybe new SVOD customers as well (which
can only pay incremental money over time if they generate incremental net
subscribers). As indicated by Netflix's recent announcement that it intends not to
renew Viacom's library deal, a large amount of CBS's SVOD revenue could be at
risk.
Exhibit 22
CBS's Current SVOD Package Leaves the Company Short of Last Year's Total
($ million)
CBS 2013 SVOD Revenue Bridge
Deals Currently In Place
$115
$350
$74
$30
$450
$25
$101
$105
2012
Est.Total
Amazon
Extension /
"Under The
Dome"
Netflix
One-year
Option
Goodwife
(AMZN &
Hulu+)
CW
Deliveries
Hulu +
Unannounced Illustrative
Deals
2013 Total
25
While we question the ability of the SVOD industry to keep delivering growing
revenues to CBS (and others), at least CBS seems to be immune from the other big
SVOD risk cannibalization. We have seen the effects of SVOD cutting both
ways: hurting kids' networks as well as boosting TV ratings of serialized dramas
(namely at AMC Networks).
CBS and Showtime fall into the camp of SVOD boosting ratings. We reach
that conclusion after analyzing our proprietary set of TiVo viewing data, which
provide a comparison of TV viewing among two cohorts of nearly 10,000
households one group with Netflix, the other without.
We first need to establish base levels of viewing. We find CBS indexes
somewhat lower (as a starting point) in absolute viewing in Netflix households
versus non-Netflix households (see Exhibit 23). Showtime is the opposite (which
may be surprising to some). Baseline levels of Showtime viewership are higher in
Netflix households than non-Netflix households (see Exhibit 24). This is yet
another confirmatory point in our growing body of evidence that, to date, Netflix
appeals to households that over-index on entertainment content (they can't get
enough of it), as opposed to a theory of Netflix appealing to households as a
substitute for the traditional pay-TV bundle, as a pathway to cord-cutting.
Despite starting at a lower point, CBS audiences have grown faster in Netflix
households than in non-Netflix households (see Exhibit 25). This suggests that
something about the presence of Netflix in the viewing equation causes people to
shift the proportion of their traditional TV viewing in favor of CBS. We
hypothesize this is a function of viewers in Netflix households becoming more
choosy in what they watch on traditional TV, and gravitating toward hit
programming. We believe it's also a function of a decrease in kids' viewing in
Netflix households, leading to a share increase for other types of viewing.
Exhibit 23
The Baseline Level of CBS Viewing in Netflix Households Tends to Be Lower, Except
in Early Mornings
CBS Ratings By Daypart - Netflix vs. Non-Netflix Homes
(Jan 2011 - Jan 2013)
7.17
6.36
1.81
0.81 0.78
Morning Show
0.88
1.99 2.19
2.12
2.56
2.90
1.10
Daytime
Evening News
Primetime
Netflix Homes
Non-Netflix Homes
Late Shows
Total Day
26
Exhibit 24
0.108
0.094
Total Day
Primetime
Netflix Homes
Non-Netflix Homes
Exhibit 25
1.4
1.307
1.227
1.2
1.0
0.8
Non-Netflix HH
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Jan-12
Feb-12
Dec-11
Oct-11
Nov-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
0.4
Feb-11
0.6
Jan-11
1.6
Netflix HH
The share increase for CBS is remarkably consistent across all dayparts. It's
true for morning (see Exhibit 26), daytime (see Exhibit 27), news (see Exhibit 28),
late night (see Exhibit 29) and primetime (see Exhibit 30).
Drilling more deeply into primetime, a fascinating pattern emerges. The
magnitude of share gains in CBS viewing among Netflix households is higher
during periods of time when CBS is airing new episodes (see Exhibit 31). During
hiatus periods (reruns), the gap closes. This suggests that Netflix households are
more prone to tune in for new shows, with the fluctuating seasonal pattern
indicating they have more options and are choosier.
Exhibit 26
Exhibit 27
Daytime
Non-Netflix Homes
1.124
1.1
1.0
0.9
Netflix Homes
Exhibit 28
Exhibit 29
Late Night
1.6
Non-Netflix Homes
Source: TiVo Stop||Watch and Bernstein analysis.
Netflix Homes
Non-Netflix Homes
Source: TiVo Stop||Watch and Bernstein analysis.
Jan-13
Sep-12
Nov-12
Jul-12
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Jul-11
0.6
Sep-11
0.6
May-11
0.7
Jan-11
0.7
May-12
0.8
Mar-12
0.8
0.98
0.9
Jan-12
0.9
1.08
1.0
Sep-11
1.0
1.1
Nov-11
1.1
1.2
Jul-11
1.2
1.3
May-11
1.3
1.4
Mar-11
1.43
1.35
1.4
Jan-11
1.5
1.5
Mar-11
Jan-13
Netflix Home
News
Nov-12
Jul-12
Non-Netflix Homes
Sep-12
May-12
Jan-12
Mar-12
0.8
0.7
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.8
1.2
Nov-11
1.0
1.285
Jul-11
1.2
1.3
Sep-11
1.345
Jan-11
1.4
1.4
May-11
1.460
1.5
Mar-11
1.6
1.6
Mar-11
1.8
0.6
27
Netflix Homes
28
And Primetime
CBS - Primetime
2.00
Broadcast Season
0.16
1.80
Broadcast
Season
0.14
1.60
0.12
Dec-12
Oct-12
Aug-12
Jun-12
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Netflix Homes
0.00
Feb-11
Non-Netflix Homes
Jan-12
Nov-11
Jul-11
0.02
Sep-11
0.20
May-11
0.04
Jan-11
0.40
Apr-12
0.06
Feb-12
0.60
0.08
Oct-11
0.80
Dec-11
1.00
0.10
Aug-11
1.20
Apr-11
1.29
1.21
Index Spread
1.40
Mar-11
Exhibit 31
Jun-11
Exhibit 30
Relative Ratings for How I Met Your Mother Were Strongly Positive When New
Episodes Aired, But Reversed Course During Periods of Reruns
0.10
4.0
3.5
0.08
3.0
Index Spread
0.06
2.5
0.04
2.0
0.02
1.5
0.00
1.0
0.5
(0.02)
0.0
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Jan-12
Feb-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
-1.0
Mar-11
(0.06)
Feb-11
-0.5
Jan-11
(0.04)
Exhibit 32
29
Note: Index spread is the difference between Netflix and non-Netflix indexed values for each period. Periods with no ratio of new episodes to
reruns are periods in which there are no reruns.
Source: TiVo Stop||Watch and Bernstein analysis.
Exhibit 33
2.4
2.2
2.0
1.8
1.6
1.4
1.24
1.17
1.2
1.0
0.8
Non-Netflix Homes
Source: TiVo Stop||Watch and Bernstein analysis.
Netflix Homes
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
0.4
Jan-11
0.6
30
Exhibit 34
The Show Weeds Over-Indexes in Netflix Homes More Than the Average Showtime
Series for Non-Reruns
Netflix Over-Index Factor
(Jan 2011 - Jan 2013)
1.24
1.21
1.16
1.15
1.13 1.13
New Episodes
Weeds
Note: Index is the ratio of Netflix homes to non-Netflix homes.
Source: TiVo Stop||Watch and Bernstein analysis.
Reruns
All Programs
Showtime (Total)
31
SVOD
Service
Deal
Date
Reported
Amount
SCB
Est
NFLX
09/23/08
ND
ND
NFLX
02/22/11
"Hundreds
of millions"
(possibly
$200mm)
$200mm
for 2 yrs
NFLX
03/20/11
ND
$30mm
AMZN
07/20/11
$100mm
$50-70mm
NFLX Intl
07/27/11
$75mm
$20mm
NFLX
10/09/11
NFLX
10/13/11
NFLX Intl
11/01/12
$40mm
$40mm
$1bn over $100mm to
4yrs to all CBS 20112012
parties
ND
Additional
$40mm
Production /
Distribution Partner
Terms
--Current season episodes of a number of TV shows available the
CBS Television Network
day after airing
--350 episodes of prior seasons
--Two-year, non-exclusive licensing deal, with two additional oneCBS Corporation
year extension options (CBS' option)
--Select TV shows from ~7% of CBS' library; shows already sold
into syndication
--1st delivery in CQ211 ("dozens of hit shows"), 2nd
in CQ112
--Put option, requiring Netflix to carry any cancelled series at an
additional cost, subject to an unspecified cap
--Extension of previous deal (expired in summer 2011)
Showtime
--No longer includes episodes of current original series, reserving
those exclusively for Showtime Anytime
--Older seasons of non-current shows will still be available
--Non-exclusive, 18-mos license
CBS and Showtime
--2,000 episodes from full seasons of 18 series
--Two-year, non-exclusive international licensing agreement for
CBS Corporation
Canada and Latin America
--Current seasons of Select series and past seasons of certain
CBS and Showtime series
--Provides "Broad Range" of CBS library programming
--Put option exercised for CSI: Miami
CBS Corporation
--4-year, non-exclusive output deal for previous seasons of
CW (CBS, TWX)
scripted series
--No in-season episodes
--Netflix licensed 700 hours of previous-season episodes of current
and future programs
--Rights extend 4 years after each series, current or future, ends
its broadcast run on the network
--80% of fees go to producer parent companies (Warners and
CBS), with the remainder going to CW
--Extension of International license agreement to stream select
CBS Corporation
CBS Corp shows in Canada, Latam, UK, Ireland
Hulu +
11/05/12
ND
$25mm
CBS Corporation
AMZN
02/11/13
ND
$5mm
CBS Corporation
AMZN
02/13/13
ND
AMZN /
Hulu+
03/13/13
32
Exhibit 36
CBS: Netflix Domestic Current SVOD Inventory and Estimated Deal Values
232
130
62
275
264
176
HI 5-0
(orig)
25
24
24
24
24
24
24
23
23
24
21
19
279
80
22
177
173
168
97
30
138
249
118
218
210
107
Price/Ep (000)
Price ($mm)
$172
$40
$125
$16
$100
$6
$50
$14
$50
$13
$25
$4
$50
$14
$75
$6
$50
$1
$75
$13
$50
$9
$50
$8
$50
$5
$50
$2
$50
$7
$25
$6
$100
$12
$75
$16
$50
$11
$50
$5
Last Episode
2012
WE /
AMC /
A&E
2011
2011
1993
2004
1989
1980
1969
1975
1994
1999
2001
2004
1991
1964
1968
1998
No
ION
HUB /
GMC
No
No
No
BBCA
No
No
No
No
Syfy
TVL
2010
HALL /
ION /
TNT
CBS
CBS
Distr.
Rights
Par
CBS
Par
Par
Par
Par
Par
Par
Spell
CBS
CBS/
Par
CBS
Spell
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Season 10
Season 11
Season 12
Cable
Syndication
Library
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Price/Ep (000)
Price ($mm)
HALL / HALL /
USA
LIFE
Par
Par
Family
Ties
22
22
24
24
30
28
26
Star
Trek
30
26
24
Missn:
Three Accid
Jericho Wings Imposs MacGy Charm Rivers Purpose Hack
23
6
28
22
22
13
18
22
7
19
25
22
22
18
21
25
20
22
17
26
19
21
24
23
21
21
22
22
21
21
21
22
14
22
19
22
30
149
171
139
173
13
18
40
$50
$2
$25
$4
$25
$4
$50
$7
$50
$9
$50
$1
$25
$0
$50
$2
Philly
22
Harper
Life
Total
Island Unexp Ex-Put
13
13
13
22
13
26
$25
$1
$25
$0
$25
$1
$198
Ghost
Whisp
22
22
18
23
22
Put
CSI:
Miami
24
24
24
25
24
21
25
24
22
19
Exhibit 37
Price/Ep ($000)
Price ($mm)
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Season 10
Season 11
Season 17
Season 18
Season 19
Season 20
Season 21
Season 22
Season 23
Season 24
Price/Ep ($000)
Price ($mm)
60
62
275
264
22
HI 5-0
(Orig)
25
24
24
24
24
24
24
NA
NA
NA
NA
19
188
56
$3
45
$3
23
$6
23
$6
11
$0
23
$4
25
$3
34
$3
34
$6
Three
Rivers
13
Philly
22
Top
Model
Amaz
Race
Undcr
Boss
Surv
Missn:
Jericho Imposs Charm
23
28
22
7
25
NA
25
NA
26
NA
23
NA
NA
NA
22
NA
NA
Family
Ties
22
NA
NA
NA
NA
NA
NA
Best:
Lucy
20
20
30
30
Star Tk
30
26
24
100
80
177
173
168
97
30
138
249
118
23
$4
23
$4
23
$2
23
$1
23
$3
11
$3
45
$5
Hates
Chris
NA
22
22
22
7th
Heav
22
22
22
22
22
22
22
23
22
22
22
JAG
21
NA
NA
NA
NA
NA
NA
NA
NA
NA
66
243
21
17
98
38
57
36
18
29
25
$2
40
$10
50
$1
25
$0
25
$2
75
$3
75
$4
75
$3
50
$1
50
$1
13
12
12
13
12
Quinn
Medic
17
NA
NA
NA
NA
NA
Twil
Zone
36
29
37
NA
36
Andy
Melros
Griffith Nmbr3s Place
32
13
32
31
24
NA
32
24
NA
32
18
NA
32
23
NA
30
16
NA
30
NA
30
BH
90210
22
NA
NA
NA
NA
NA
NA
NA
NA
NA
Loves
Ray
22
25
26
24
25
25
24
23
16
Ghost
Whisp
22
NA
NA
NA
NA
32
22
210
22
34
$1
34
$1
23
$5
23
$0
US
Tara
12
12
12
Sleeper
Cell
B'Hood
10
11
8
10
8
Total
12
11
12
11
30
149
22
13
22
49
46
13
16
15
16
15
62
23
$1
11
$2
23
$0
23
$0
11
$0
30
$1
30
$1
25
$0
30
$2
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Season 10
Season 11
Season 12
CBS: Amazon Prime Current SVOD Inventory and Estimated Deal Value
$99
34
Exhibit 38
Star
Trek
30
26
24
Twil
Zone
36
29
37
18
36
Nmbr3s MacGy
13
22
24
22
24
20
18
19
23
21
16
21
14
I Love
Lucy
35
32
30
30
26
26
Top
Model
13
13
13
Amaz
Race
13
11
11
13
12
12
11
11
12
13
12
11
11
12
11
12
12
11
12
11
Surv
14
232
130
264
176
80
177
173
168
97
30
156
118
139
179
39
234
16
15
16
15
76
Price/Ep (000)
Price ($mm)
$25.8
$6.0
$18.8
$2.4
$7.5
$2.0
$3.8
$0.7
$11.3
$0.9
$11.3
$2.0
$7.5
$1.3
$7.5
$1.3
$7.5
$0.7
$7.5
$0.2
$7.5
$1.2
$15.0
$1.8
$7.5
$1.0
$7.5
$1.3
$7.5
$0.3
$7.5
$1.8
$7.5
$0.6
Last Episode
2012
WE /
AMC /
A&E
CBS
2011
2004
1989
1969
1994
1999
2001
2004
1991
1964
No
HALL /
LIFE
HUB /
GMC
No
BBCA
No
No
No
No
Syfy
CBS
Par
Par
Par
Par
Par
Par
Par
Spell
CBS
2010
HALL /
ION /
TNT
CBS
Cable
Syndication
Library
Tudors
10
10
8
10
38
$30.0
$1.1
Total
$26.6
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Season 10
Season 11
Season 12
Season 13
Season 14
Season 15
Season 16
Season 17
Season 18
Season 19
Season 20
Season 21
Season 22
Season 23
Season 24
Exhibit 39
Completed
Seasons
Available
Length
Total Hours
Primary
Producer(s)
Previous
Seasons First
Available
Last Season
Available End
Date
22
Secret
Circle
22
90210
25
22
22
24
21
Nikita
22
23
16
Vampire
SprNatrl Diaries
22
22
22
22
16
22
22
20
22
22
23
21
Emily
Owens
13
Arrow
19
Beauty &
Beast
16
Carrie
Diaries
13
22
114
41
61
170
86
13
13
19
16
13
All
All
5/6
All
4/5
1/2
2/3
7/8
3/4
0/1
0/1
0/1
0/1
0/1
42
15
CBS /
WB /
ABC
42
131
42
85
42
15
42
80
42
29
42
43
42
119
42
60
42
42
42
42
42
WB
CBS /
WB
CBS /
WB
CBS
CBS /
WB
WB
WB
CBS /
WB
WB
CBS /
WB
WB
CBS
WB
4/17/12
4/4/12
5/14/12
5/10/12
5/15/12
5/14/12
5/18/12
5/18/12
5/10/12
Fall 2013 Fall 2013 Fall 2013 Fall 2013 Fall 2013
NA
NA
NA
NA
NA
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Total
Ringer
22
35
36
Exhibit 40
CBS: Estimated SVOD Revenue and Operating Income by Deal and Quarter
($ million)
2011
Q2
Q3
Q4
2012
Q1
Est.
Margin
60%
Op Inc
$54
20
10
40
20
12
55
20
11
48
60%
60%
60%
12
7
29
45%
NFLX - CW
Total
$30
$181
$40
$228
$35
$205
50%
$18
$119
$100
30
$120
30
$110
30
60%
60%
$66
18
28
35
31
50%
16
60%
Q2
Showtime
Q3
40
40
40
50%
20
1
0
1.6
0.6
1
1
45%
45%
1
0
35
10
40
10
38
10
60%
60%
23
6
3
5
4
10
4
4
$31
4
6
6
12
6
6
$38
3
5
5
11
5
5
$34
50%
50%
50%
50%
50%
50%
2
3
2
5
2
2
$17
60%
Q4
Other International
$40
$50
$45
$323
$373
$348
$95
41
20
$105
46
30
$100
43
25
60%
50%
60%
$60
22
15
Netflix Renewal
CW Deliveries
Gossip Girl (50%)
90
110
100
60%
60
50%
Q3
5
11
17
5
13
20
5
12
18
35%
50%
50%
2
6
9
Q4
CW Deliveries
90210 (100%)
Hart of Dixie (50%)
Vampire Diaries (50%)
Emily Owens (50%)
Beauty and the Beast
Subtotal
8
4
4
3
6
$25
11
5
5
3
8
$32
9
4
5
3
7
$28
50%
50%
50%
50%
50%
5
2
2
1
4
$14
$307
$362
$335
Total
2013
Q1
Q2
Total
Source: Corporate reports and Bernstein estimates and analysis.
$27
$198
$189
37
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$14,089
7,967
2,634
$4,040
2,474
650
$3,525
1,970
672
$3,427
1,790
652
$3,978
2,300
707
$14,970
8,534
2,682
$15,602
8,705
2,735
$16,120
8,951
2,790
$16,879
9,433
2,846
$17,072
9,508
2,903
$3,488
25%
$916
23%
$883
25%
$984
29%
$971
24%
$3,754
25%
$4,162
27%
$4,379
27%
$4,600
27%
$4,661
27%
30
475
0
116
0
112
0
113
0
115
0
456
0
423
0
335
0
294
0
248
$2,983
21%
$800
20%
$771
22%
$871
25%
$856
22%
$3,298
22%
$3,739
24%
$4,044
25%
$4,306
26%
$4,413
26%
396
25
93
2
97
2
95
2
103
2
388
8
463
8
486
8
503
8
536
8
$2,562
$705
$672
$774
$750
$2,902
$3,268
$3,550
$3,795
$3,869
892
35
234
8
235
9
271
17
263
2
1,003
35
1,144
35
1,243
35
1,328
35
1,354
35
1,634
12%
463
11%
428
12%
487
14%
486
12%
1,864
12%
2,089
13%
2,272
14%
2,431
14%
2,480
15%
$1,575
(60)
$443
(20)
$414
(14)
$487
$486
$1,829
$2,089
$2,272
$2,431
$2,480
$2.55
$2.48
$0.75
$0.73
$0.70
$0.68
$0.81
$0.78
$0.81
$0.78
$3.06
$2.97
$3.50
$3.40
$3.85
$3.74
$4.17
$4.06
$4.44
$4.31
642
659
621
638
610
627
604
621
602
619
609
626
597
614
590
607
582
599
558
575
$3,002
3,499
1,682
$2.55
$800
916
463
$0.73
$771
883
428
$0.68
$871
984
487
$0.78
$856
971
486
$0.78
$3,298
3,754
1,864
$2.97
$3,739
4,162
2,089
$3.40
$4,044
4,379
2,272
$3.74
$4,306
4,600
2,431
$4.06
$4,413
4,661
2,480
$4.31
05/10/13
$3,496
913
$0.72
$3,503
963
$0.77
$3,904
1,011
$0.84
$14,933
3,804
$3.05
$15,492
4,042
$3.41
(34)
38
Exhibit 42
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$708
3,137
859
1,016
$409
3,130
569
1,151
$1,369
3,148
595
921
$1,208
3,359
609
860
$1,940
3,779
864
814
$1,940
3,779
864
814
$3,581
3,871
765
828
$4,715
3,968
783
842
$4,853
4,069
811
857
$4,555
4,155
830
870
$5,720
$5,259
$6,033
$6,037
$7,397
$7,397
$9,045
$10,308
$10,590
$10,410
$2,271
1,582
15,082
1,811
$2,215
1,571
15,062
2,004
$2,195
1,593
15,040
1,996
$2,172
1,610
15,018
1,979
$2,158
1,641
14,995
1,977
$2,158
1,641
14,995
1,977
$2,098
1,560
14,916
1,942
$2,132
1,612
14,847
1,906
$2,199
1,688
14,786
1,871
$2,321
1,707
14,731
1,836
$26,466
$26,111
$26,856
$26,815
$28,168
$28,168
$29,561
$30,805
$31,134
$31,005
$2,283
953
687
18
$2,177
856
841
566
$2,041
1,058
952
0
$2,116
1,028
651
0
$2,181
994
915
0
$2,181
994
915
0
$2,226
1,019
937
499
$2,280
1,044
961
0
$2,346
1,071
985
0
$2,397
1,094
1,006
0
$3,941
$4,440
$4,051
$3,795
$4,090
$4,090
$4,680
$4,285
$4,402
$4,496
5,904
965
5,443
5,901
0
6,376
6,467
0
6,826
6,467
0
6,866
7,508
915
5,789
7,508
915
5,789
7,826
937
5,752
8,758
961
5,696
9,200
985
5,682
9,322
1,006
5,567
Total liabilities
$16,253
$16,717
$17,344
$17,128
$18,302
$18,302
$19,196
$19,700
$20,269
$20,391
Total equity
$10,213
$9,394
$9,512
$9,686
$9,866
$9,866
$10,365
$11,105
$10,865
$10,614
$26,466
$26,111
$26,856
$26,815
$28,168
$28,168
$29,561
$30,805
$31,134
$31,005
FY-12A
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$1,574
475
(1,864)
642
$463
116
(40)
71
$827
$610
($254)
(146)
(91)
40
($34)
(9)
(30)
19
($451)
$487
113
(398)
49
$486
115
(526)
37
$1,849
456
(173)
200
$2,089
423
151
172
$2,272
335
(110)
175
$2,431
294
(93)
178
$2,480
248
(136)
180
$251
$112
$2,332
$2,835
$2,672
$2,810
$2,771
($70)
0
0
0
($68)
0
0
0
($79)
0
0
0
($250)
(9)
(30)
19
($285)
0
0
0
($300)
0
0
0
($300)
0
0
0
($315)
0
0
0
($54)
($70)
($68)
($79)
($270)
($285)
($300)
($300)
($315)
($36)
(276)
(1,137)
133
$546
(81)
(1,289)
(8)
$0
(73)
(300)
43
$0
(90)
(300)
46
$1,041
(90)
(300)
49
$1,587
(334)
(2,189)
130
$816
(518)
(1,450)
241
$434
(614)
(1,350)
292
$442
(668)
(2,500)
353
$122
(653)
(2,650)
428
($1,316)
($832)
($330)
($345)
$699
($910)
($1,238)
($2,373)
($2,754)
($940)
($276)
$960
($161)
$733
$414
112
792
42
$1,359
($807)
$1,255
$1,640
$1,134
$138
($297)
39
An overriding theme of our SVOD analysis is that the content owners have become
addicted to digital licensing revenue and earnings. SVOD has become such a
significant part of large-cap media companies' baseline financials that it will be
impossible to walk away without incurring a significant earnings hit. Disney is the
biggest exception to that rule.
We estimate Disney earned $300 million of SVOD licensing revenue in 2012,
placing it behind CBS and Time Warner (at $350 million each), and tied with News
Corp. But for Disney, that amount accounted for just 0.7% of total revenue and 2%
of segment operating income (see Exhibit 43). It was a bigger contributor to overall
growth, accounting for 13% of total revenue growth and 11% of segment operating
income growth (see Exhibit 44). A history of the progression of Disney's SVOD
licensing deals and revenue progression can be found in the Appendix of this
chapter, in Exhibits 72 and 73. A comprehensive list of all Disney titles licensed to
SVOD also is in the Appendix, in Exhibit 74.
40
Exhibit 43
Exhibit 44
2.0%
11%
0.9%
0.7%
0.5%
0.2%
0.0%
2009
1.8% 2.0%
0.3%
2.5%
3.2%
0.1%
2010
% of Revenue
2011
2012
2010
% of Segment OI
2011
% of Revenue Growth
2012
% of Segment OI Growth
To drive SVOD revenue, Disney has licensed more than 1,000 hours of ABC
content more to Netflix than to Amazon, with lots of less successful titles on
Hulu+, as shown in Exhibit 45. Almost none of ABC's current primetime lineup
can be found on SVOD, except for season-to-date episodes of current programs on
Hulu+ (see Exhibit 46).
Exhibit 45
NFLX
321
199
1,015
252
82
1,869
No. of Episodes
AMXN
270
122
217
105
45
759
Hulu+
172
0
472
156
346
1,146
NFLX
321
172
924
221
50
1,687
Hour Equivalents
AMXN
Hulu+
270
172
122
0
217
472
105
156
23
307
737
1,107
Exhibit 46
41
Very Little of ABC's Current Primetime Content Is Also Available on SVOD Services,
Other Than Current Seasons on Hulu+
Primary
Producer
# Full Ep.
Avail
ABC.com
Current
Season
ABC
Ind.
BBC Am.
Sony
Ind.
Ind.
4
2 (All)
10
4
5
5
23
1
16
4
1
6
N
N
N
N
N
N
N
N
N
N
N
N
STD
STD
STD
Last 3
STD
STD
WB
ABC
ABC
Touch./ABC
ABC/LGF
ABC
ABC
ABC
ABC
ABC
ABC
5
5
5
5
5
5
5
5
5
5
3 (All)
1
3
5
9
1
2
6
1
2
2
1
N
N
N
S1-8
N
S1
S1-5
N
S1
S1
N
N
N
N
S1-8
N
N
S1-5
N
N
N
N
Last 5
STD
STD
S1-9TD
STD
STD
STD
STD
STD
STD
STD
FOX/ABC
ABC/Sony
FOX
FOX
ABC
FOX
WB
WB
ABC
5
5
3 (All)
5
5
5
5
5
5
2
3
1
2
1
4
2
4
1
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
STD
Last 3
STD
STD
STD
STD
Last 5
Last 5
STD
Full Seasons
Avail on
Avail on
Netflix?
AMZN?
Avail on
Hulu +?
42
Kids'/Animated Content
Disney / ABC Library
Phineas and Ferb
Good Luck Charlie
The Suite Life/Zach and Cody
The Suite Life on Deck
Hannah Montana
Kick Buttowski
Wizards of Waverly Place
Jessie
Kickin' It
A.N.T. Farm
Pair of Kings
Shake It Up
Duck Tales
Rescue Rangers
School House Rock (ABC)
Marvel
Spider-Man (1967)
Spider-Man (1981)
Spider-Man and His Amazing Friends (1981)
X-Men (1992)
Iron Man (1994)
Spider-Man (1994)
Incredible Hulk (1996)
Silver Surfer (1998)
Spider-Man Unlimited (1999)
X-Men: Evolution (2000)
Spider-Man (2003)
Fantastic Four: World's Greatest Heroes (2006)
Iron Man: Armored Adventures (2008)
Wolverine and X-men (2008)
Spider Woman, Agent of SWORD (2009)
Black Panther (2009)
Super Hero Squad (2009)
Astonishing X-Men: Gifted (2009)
Iron Man: Extremis (2010)
The Avengers: Earth's Mightiest Heroes (2010)
Thor and Loki (2011)
Ultimate Spider-Man (2012)
Source: imdb.com, Netflix, Amazon, Hulu and Bernstein analysis.
Total
Completed
Seasons
Netflix
Amazon
Hulu+
3
3
3
3
4
2
4
1
2
1
3
2
3
1
54 Ep.
1-3
1-3
1-3
1-3
1-4
1-2
1-4
1
1-2
1
1-3
1-2
1-2
1
1
22 Ep.
3
1
3
5
2
5
2
1
1
4
1
1
2
1
1
1
2
1
1
2
1
1
1-3
1
1-3
1-5
1-2
1-5
1-2
1
1
1-4
1
1
1
1
1
1
1-2
1
1
1-2
1
1
1-2
1-2
1-2
1-4
1
1
Exhibit 48
43
With the Exception of Disney XD, Disney's Kids' Channels Have Less Current
Programs Available to Stream on SVOD Services
Percentage of Content on SVOD Services By Kids' Network
69%
72%
61%
0%
Cartoon
Network
54%
54%
55%
Disney
Channel
Teen Nick
Nick Jr
4%
Disney Jr
Nick
Disney XD
Nicktoons
Note: "Percentage of Content" measures the percentage of aired programming of shows (regardless of specific episode overlap) with prior
seasons available on the respective SVOD services, during our period of study (January 2011 through January 2013) and across all
dayparts. SVOD availability is measured as of the report date and does not necessarily correspond with availability during the period each
show's episodes aired.
Source: TiVO Stop||Watch, imdb.com, Netflix, Amazon, Hulu and Bernstein analysis.
We have argued that SVOD licensing revenue is at risk for all the content owners.
Disney is no exception but it is the most protected from a revenue decline. And
if Disney did suffer a revenue decline, it would be almost impossible to detect in its
financial statements.
The fate of kids' content is the most controversial. Ever since our first SVOD
report in April 2012, we have been arguing that the availability of kids' content on
SVOD hurts ratings on traditional kids' TV. That is as true today as it ever was, and
is as true for Disney as it is for Viacom (and everybody else). We believe if Disney
and Viacom could go back in a time machine, and agree not to license their content
to SVOD in the first place, today's kids' TV landscape would be significantly better
for the kids' TV networks. Instead, Disney and Viacom could have worked with the
multichannel video programming distributors (MVPDs) on TV Everywhere
solutions to meet the consumer's desire for on-demand kids' content, while keeping
the whole experience within the pay-tv ecosystem.
Alas, time machines only exist in the animated world of Phineas and Ferb.
Nonetheless, we still would argue from a purely financial point of view that Disney
and Viacom should nip SVOD in the bud and pull their content off of SVOD. But
we also need to take into account the prisoner's dilemma, as all of the prisoners
have acted selfishly and SVOD has won so at this point, it's probably too late to
break ties with SVOD.
Faced with the challenges of the prisoner's dilemma, Disney seems to have
gone on the offense. When it signed the landmark movie studio output deal with
Netflix, Disney also seems to have locked in the kids' TV component (either
formally or informally). While a deal for kids' content will hurt ratings for Disney's
kids' networks, it won't cause much of a direct revenue decline, because the Disney
Channel (the flagship network) doesn't carry much advertising, and Disney's
affiliate fees are largely guaranteed for a long, long time (Disney renewed its
distribution deals in 2012 with seven of its top 10 distributors).
44
The Netflix deal puts huge pressure on Disney's archrival Nickelodeon. The
presence of Disney kids' content on SVOD doesn't only hurt ratings for Disney's
networks, it also hurts ratings for Viacom's kids' networks and more
significantly, it has enabled Netflix to drop its bulk licensing deal for Viacom
content, putting further pressure on Nickelodeon's economics. Netflix has
expressed interest in licensing some specific Viacom programs, but we believe the
revenue bid will be on Netflix's terms and much lower than the old bulk deal.
Viacom can offer an exclusive deal with Amazon, but we don't believe Amazon has
any need to pay a significant price for Viacom's content either.
In terms of ABC content, Disney has licensed very little of its current lineup,
to SVOD or traditional syndication partners. So even if the SVOD providers are
able to cut back on ABC's library content, Disney can replace much (or all) of that
revenue with fresh content available for syndication to both SVOD and traditional
buyers.
Cannibalization ABC
Ratings Are Up, Kids' Ratings
Are Down, ESPN Ratings Are
Unaffected
The impact of SVOD on ABC is consistent with what we have seen for other
networks, notably CBS and Fox. Baseline levels of viewership for ABC are higher
in Netflix homes, compared to non-Netflix homes, across every daypart (see
Exhibit 49). Over time, ABC ratings in Netflix homes trended higher relative to
non-Netflix homes (see Exhibit 50). This trending gap was most pronounced in
morning (see Exhibit 51) and daytime shows (see Exhibit 52), and less so in news
(see Exhibit 53), late night (see Exhibit 54) and primetime (see Exhibit 55).
In primetime, ABC ratings in Netflix homes gapped much higher during the
traditional broadcast season, when the network was airing fresh premiere episodes,
compared to off-season periods of reruns (or reality), as shown Exhibit 56. For
serialized programs, we have seen strong evidence at other networks (such as
AMC) that the availability of prior seasons on SVOD leads to higher ratings on the
linear network. This phenomenon seems to be present for ABC, although to a very
minor degree (see Exhibit 57).
Exhibit 49
3.45
2.70
1.85
2.10
2.65
1.84
1.57
1.40
Morning Show
Daytime
Evening News
Primetime
Netflix Homes
Non-Netflix Homes
2.97
1.75
Late Night
Total Day
Exhibit 50
Despite Being More Popular in Non-Netflix Homes, ABC Network Has Gained Share
in Netflix Homes Over the Course of Our Period of Study
ABC Total Day Index Ratings
1.6
45
1.40
1.4
1.31
1.2
1.0
0.8
0.6
0.4
Non-Netflix Homes
Netflix Homes
Netflix Homes
1.0
0.9
0.8
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
0.6
Jan-12
0.7
Mar-12
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
Mar-11
0.9
1.1
Nov-11
1.0
1.21
1.2
May-11
1.16
1.1
1.33
1.3
Jan-11
1.2
1.33
1.3
Non-Netflix Homes
ABC Daytime
Indexed Ratings
1.4
1.4
0.8
Jul-11
1.5
Indexed Ratings (Jan 2011 = 1)
Exhibit 52
Sep-11
Mar-11
Exhibit 51
Netflix Homes
Exhibit 54
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Exhibit 55
Exhibit 56
Broadcast Season
0.12
1.60
0.10
Jan-13
Sep-12
Nov-12
Jul-12
Mar-12
May-12
Jan-12
Jan-13
Sep-12
Nov-12
Mar-12
Jul-12
Netflix Homes
(0.06)
Nov-11
Non-Netflix Homes
May-12
Jan-12
(0.04)
Nov-11
0.00
Jul-11
(0.02)
Sep-11
0.20
Mar-11
0.00
May-11
0.40
Sep-11
0.02
Jul-11
0.60
0.04
Mar-11
0.80
0.06
May-11
1.00
0.08
Jan-11
1.34
1.28
1.20
Index Spread
1.40
Jan-11
ABC Primetime
Indexed Ratings
1.80
Jan-13
Netflix Homes
Nov-12
Jul-12
0.6
0.4
Jan-13
Sep-12
Nov-12
Jul-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.85
0.8
Sep-12
0.90
May-12
0.95
1.0
Jan-12
1.00
1.2
Mar-12
1.05
1.52
1.4
Nov-11
1.10
1.70
1.6
May-11
1.15
1.21
1.19
1.20
Mar-11
1.25
0.80
1.8
Jul-11
1.30
Sep-11
Jan-11
Exhibit 53
Mar-11
46
Exhibit 57
47
Despite ABC's Serialized Programming Being Made Available for Catch-Up Viewing
on Netflix, Very Little Benefit from Catch-Up Viewing Can Be Detected, Relative to
the Average ABC Program
2012 y/y Ratings
Netflix
Non-Netflix
All Primetime Shows
4%
1%
Delta
2%
Revenge
(7%)
(9%)
2%
Grey's Anatomy
(4%)
(5%)
1%
(13%)
(13%)
0%
Private Practice
(2%)
0%
(2%)
Kids' Programming Is
Indiscriminately Negatively
Affected
Our analysis finds that baseline levels of viewership for kids' networks in general
are higher across the board in Netflix homes (see Exhibit 58). Netflix over-indexes
on families with kids. However, over time, ratings gapped lower in Netflix homes
for every kids' network, except Cartoon Network, which had no content on SVOD
during the period of the study (see Exhibit 59). The specific progression for Disney
Channel and Disney XD can be found in Exhibit 60 and Exhibit 61, respectively.
Exhibit 58
0.33
0.34
0.24
0.15
0.02
0.03
HUB
0.03 0.03
0.03 0.03
Boomerang Nicktoons
Teennick
0.02 0.03
0.06
0.07
Sprout
0.07
Disney XD
Non-Netflix Homes
Source: TiVo Stop||Watch and Bernstein estimates and analysis.
0.09
0.11
Nick Jr.
Netflix Homes
Cartoon
Network
NICK
Disney
Channel
48
Exhibit 59
All Kids' Networks Fared Worse in Households With Netflix in 2012 Except
Cartoon Network, Which Was the Only Major Kids' Network Without Content on
Netflix During That Time
Kids'
Network
Netflix
Non-Netflix
Delta
0%
4%
(3%)
Disney Networks
Disney Channel
Disney XD
(2%)
17%
0%
23%
(3%)
(6%)
15%
(14%)
(14%)
38%
(4%)
10%
(21%)
(17%)
5%
(12%)
(11%)
44%
5%
20%
(6%)
0%
10%
(2%)
(4%)
(6%)
(8%)
(10%)
(15%)
(17%)
1.30
Indexed Ratings (Jan 2011 = 1)
Exhibit 61
Disney XD TD
Indexed Ratings
2.00
1.25
1.20
1.15
1.10
1.10
1.05
1.05
1.00
0.95
0.90
Exhibit 60
1.80
1.60
1.53
1.40
1.24
1.20
1.00
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
Mar-11
May-11
0.80
Jan-11
Jan-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Sep-11
Nov-11
Jul-11
May-11
Jan-11
0.80
Mar-11
0.85
Netflix Homes
There doesn't seem to be any causal link between the specific kids' shows
available on SVOD and their ratings performance. The relative linear viewership
levels are consistent for shows that are available on Netflix, and shows that are not
(see Exhibits 62 and 63).
1.0
0.9
0.8
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Non-Netflix Homes
Nov-11
0.7
0.6
Netflix Homes
0.99
0.96
Jul-11
0.314
0.335
1.1
Sep-11
0.439
1.2
Mar-11
0.412
May-11
Exhibit 63
Jan-11
Exhibit 62
49
Netflix Homes
At the specific program level, the relationship could go either way. For
instance, ratings for Good Luck Charlie have trended higher in Netflix homes,
while ratings for Phineas and Ferb have trended lower (see Exhibits 64 and 65).
Both shows are available on Netflix and are run heavily on the Disney Channel.
Perhaps it's because Good Luck Charlie is live action, versus Phineas and Ferb,
which is animated, or perhaps it's something else specific to the shows themselves,
or perhaps it's random. Nonetheless, across the portfolio of all programs, there is no
discernable ratings difference between kids' programs available on Netflix and
those that are not.
This lack of correlation between titles that are available on Netflix and ratings
for those programs on the linear networks is the main reason we believe Viacom
will be hurt by SVOD nearly equally, whether its programs are on SVOD or not,
and the reason why Disney's offensive move into SVOD looks wise. Our belief was
further confirmed by focus groups we held with mothers in the summer of 2012,
who described viewing decisions as predominately starting from a standpoint of
"what mode are we going to watch" (i.e., SVOD, DVR, VOD, linear), and then
deciding "what specific program are we going to watch."
Non-Netflix Homes
Jan-13
0.4
Nov-12
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Sep-11
Nov-11
Jul-11
May-11
Jan-11
Mar-11
Mar-12
Netflix Homes
0.5
Jul-12
0.9
0.63
0.6
Sep-12
1.0
0.71
0.7
Mar-12
1.0
0.8
May-12
1.1
Jan-12
1.1
0.9
Nov-11
1.12
1.09
1.0
Mar-11
1.2
1.2
0.9
ESPN
1.1
1.3
Non-Netflix Homes
Jul-11
1.3
0.8
Exhibit 65
Sep-11
May-11
Exhibit 64
Jan-11
50
Netflix Homes
ESPN, with mostly live programming, does not participate in SVOD. But that
doesn't mean that it's not affected by SVOD (admittedly modestly). We suspected
baseline viewership levels for ESPN would be lower in Netflix households,
because Netflix households seem to be "entertainment junkies." Turns out that this
seems to be true, but to a very small extent (see Exhibits 66 and 67).
Over time, the introduction of Netflix didn't seem to impact ESPN viewership
in any significant way. There is perhaps some slight evidence that ESPN
viewership gapped higher in non-Netflix homes, but not enough to call it a pattern
and probably not enough to be statistically significant (see Exhibits 68 and 69).
Exhibit 66
Exhibit 67
0.36 0.36
0.77
51
0.12 0.12
0.15 0.15
0.01 0.02
0.02 0.02
ESPN
ESPN2
Netflix Homes
ESPNews
ESPN
Non-Netflix Homes
ESPN2
Netflix Homes
ESPNews
Non-Netflix Homes
Exhibit 68
Exhibit 69
Non-Netflix Homes
Netflix Homes
0.6
0.5
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
0.3
Jan-12
0.4
Sep-11
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
0.0
Jan-11
0.2
0.7
Nov-11
0.4
0.8
Jul-11
0.6
0.9
Mar-11
0.8
1.08
1.04
1.0
Jan-11
1.0
1.1
Indexed Ratings (Jan 2011 = 1)
1.08
1.03
Mar-11
1.2
1.2
May-11
Netflix Homes
52
ABC Family
0.593
2.0
1.5
1.0
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Sep-11
Nov-11
Jul-11
Mar-11
0.5
0.0
Prime
1.47
1.41
May-11
0.228
Total Day
ABC Family
Prime Indexed Ratings
2.5
0.511
0.193
Jan-11
ABCFamily Ratings
(Jan 2011 - Jan 2013)
Exhibit 71
Exhibit 70
Netflix Homes
Disney: Estimated SVOD Revenue and Operating Income by SVOD Service and
Fiscal Year ($ million)
2009
SVOD
Provider
Netflix
Est. SVOD
Revenue
$15
Est.
Margin
65%
Est.
Op Inc.
$10
2010
Movies
Netflix - TV
Total
$15
35
$50
60%
65%
$9
23
$32
2011
Movies
NFLX Domestic
International TV
Total
$25
85
10
$120
60%
65%
65%
$15
55
7
$77
2012
Movies
$55
60%
$33
125
65%
81
75
45
$300
65%
65%
49
29
$192
53
54
Exhibit 73
SVOD
Service
NFLX
Deal
Date
09/23/08
Reported
Amount
ND
SCB
Est.
$15mm
Production /
Distr. Partner
Disney-ABC
Television Group
Hulu
04/30/09
Ad Share
Ad Share
Disney-ABC
Television Group
NFLX
08/03/09
ND
$35mm
Disney-ABC
Television Group
NFLX
12/08/10
$150-200mm/yr $100mm in
($50FY11
150k/episode)
Disney-ABC
Television Group
NFLX
10/31/11
$150-200mm/yr $125mm in
FY12
Disney-ABC
Television Group
AMZN
10/31/11
$75-100mm/yr
$75mm in
FY12
Disney-ABC TV
Group
Hulu
11/14/11
Ad Share
Ad Share
Warner Bros. TV
and ABC
LOVEFiLM
01/16/12
ND
$15mm
Disney UK (DIS)
NFLX
09/10/12
Low-Mid 100K /
episode
$20mm/yr
Disney-ABC
Television Group
NFLX
12/04/12
$300mm/yr
>$300mm
Walt Disney
Studios
Terms
--3 Disney Channel shows made available 24 hours after
airing
--500 episodes from Disney's Channel's library in 2009
--Became third network partner on similar terms as Fox
and NBC, likely with more in start-up money
--Deal also included access to some Disney cable shows
and library films
--Previous seasons of various ABC shows
--Continuation of 2008 deal, allowing current season
Disney Channel series to be aired 24 hours after air
--1-yr license, with an option to extend
--New agreement for ABC Network, ABC Studios, Disney
Channel and ABC Family (first time on NFLX) content
--Prior and current (only 15 days after initial telecast)
seasons of certain TV series
--Selection of Disney Channel and ABC Family movies
--Extension of 2010 deal
--Any episodes from new seasons of current series
available 30-days after last episode of season airs
Includes Select New content
--Broad selection of library TV content from ABC Studios,
Disney Channel, ABC Family, Marvel
--Includes prior seasons of select TV series
--Any ABC Network show produced by WBTV can be
digitally distributed the day after airing, with a limit of 5
episodes at a time
--Deal covers shows only in the 2011-2012 and 2012-2013
broadcast seasons
--LOVEFiLM offers ABC TV On Demand
--On-demand streaming access to ABC Studios' library of
network and cable series
--Full seasons of current series available after first run on
UK pay and/or free TV
--Exclusive license for complete first seasons of select
ABC shows
--Deal is for the series Revenge, Once Upon a Time and
Scandal
--Exclusive multi-year agreement, beginning in 2016, for
first-run films in Pay TV window
--Includes direct-to-video titles available in 2013
--Multi-year catalog deal for select films
Source: Various news reports, corporate reports and Bernstein estimates and analysis.
Exhibit 74
55
Still On
Air?
#
Ssns
Netflix
Ep.
Hour
Equiv
AMZN
Ep.
Hour
Equiv
Hulu+
Ep.
Hour
Equiv
ABC Primetime
Grey's Anatomy
Once Upon A Time
Private Practice
Revenge
Scandal
Total
NA
NA
NA
NA
NA
8
1
5
1
1
8
1
5
1
1
16
172
22
98
22
7
321
172
22
98
22
7
321
13
172
98
270
172
98
270
172
172
172
172
NA
NA
NA
NA
NA
6
2
1
1
3
6
2
1
2
11
104
40
10
45
199
104
40
5
23
172
104
18
122
104
18
122
2013
2012
2012
2011
2011
2010
2010
2010
2010
2009
2009
5
8
3
5
6
9
6
4
2
3
4
5
8
3
5
6
9
6
4
2
3
4
55
109
180
48
109
74
182
120
85
22
43
43
1,015
109
180
48
109
74
91
120
85
22
43
43
924
10
97
120
217
97
120
217
6
4
2
3
23
180
120
85
44
43
472
180
120
85
44
43
472
2006
2002
1996
1994
5
4
5
4
5
4
4
13
105
84
63
252
105
84
32
221
105
105
105
105
4
4
84
72
156
84
72
156
One/Two-Season Wonders
The River
GCB
Missing
Jane By Design
Detroit 1-8-7
No Ordinary Family
Off the Map
Flashforward
My Generation
Reaper
Dirty Sexy Money
Samantha Who?
Eli Stone
October Road
Day Break
Commander in Chief
The Job
Sports Night
My So Called Life
Equal Justice
Total
2012
2012
2012
2012
2011
2011
2011
2010
2010
2009
2009
2009
2009
2008
2007
2006
2002
2000
1995
1991
1
1
1
1
1
1
1
1
1
1
2
2
2
2
1
1
2
2
1
2
2
2
18
19
45
82
18
10
23
50
45
45
23
23
1
1
1
1
1
1
1
1
1
2
2
2
2
1
1
2
1
2
24
8
10
10
18
20
3
22
8
18
23
33
26
26
13
18
45
19
26
346
8
10
10
18
20
3
22
8
18
23
17
26
26
13
18
23
19
26
307
56
FY-12A
Q1-13A
Q2-13A
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$42,278
$11,341
$10,554
$11,904
$11,803
$45,602
$48,349
$53,068
$53,732
$55,550
33,415
(1,987)
627
9,249
(514)
110
8,359
(550)
185
8,835
(552)
225
9,402
(559)
210
35,952
(2,175)
730
37,584
(2,005)
825
40,581
(2,023)
866
40,968
(2,073)
909
42,438
(2,117)
955
$11,477
27%
$2,716
24%
$2,930
28%
$3,846
32%
$3,171
27%
$12,555
28%
$13,596
28%
$15,375
29%
$15,746
29%
$16,183
29%
1,987
100
514
0
550
61
552
10
559
10
2,175
81
2,005
40
2,023
40
2,073
40
2,117
40
$9,390
22%
$2,202
19%
$2,319
22%
$3,284
28%
$2,601
22%
$10,300
23%
$11,550
24%
$13,313
25%
$13,633
25%
$14,026
25%
369
(239)
72
102
$2,028
54
(10)
$2,275
55
(25)
$10,015
204
(85)
$11,431
347
(85)
$13,051
338
(85)
$13,380
370
(85)
$9,260
Income taxes
(3,087)
(590)
(654)
(1,123)
(885)
(3,251)
(3,944)
(4,502)
(4,616)
(4,741)
Net income
Less: NI attributable to noncontrolling interests
$6,173
(491)
$1,438
(56)
$1,621
(108)
$2,131
(221)
$1,680
(158)
$6,763
(543)
$7,488
(587)
$8,548
(633)
$8,764
(684)
$9,001
(739)
$5,682
13%
$1,382
12%
$1,513
14%
$1,910
16%
$1,522
13%
$6,220
14%
$6,901
14%
$7,915
15%
$8,080
15%
$8,262
15%
$3.17
$3.13
$0.78
$0.77
$0.84
$0.83
$1.06
$1.05
$0.85
$0.85
$3.48
$3.44
$3.93
$3.89
$4.71
$4.66
$4.92
$4.86
$5.22
$5.16
1,794
1,818
1,777
1,800
1,804
1,825
1,794
1,815
1,781
1,802
1,789
1,810
1,755
1,776
1,679
1,700
1,642
1,663
1,581
1,602
$3.07
$0.79
$0.79
$1.05
$0.84
$3.41
$3.87
$4.64
$4.84
$5.14
05/10/13
$11,754
3,709
$1.05
$11,658
3,063
$0.85
$45,214
12,365
$3.48
$48,009
13,570
$3.94
$2,565
243
42
Pre-tax income
Consensus Estimates as of
Revenue
EBITDA
Pro Forma EPS (diluted)
$3,254
61
(25)
$13,742
Exhibit 76
57
Q1-13A
Q2-13A
Q3-13E
Q4-13E
FY-13E
FY-14E
$3,387
6,540
1,537
676
1,569
$3,207
7,315
1,440
864
1,496
$3,952
7,154
1,403
905
1,589
$3,840
6,389
1,356
714
1,472
$6,420
7,159
1,450
708
1,466
$6,420
7,159
1,450
708
1,466
$5,429
7,564
1,555
748
1,506
$13,709
$14,322
$15,003
$13,771
$17,204
$17,204
4,541
2,723
21,512
30,125
2,288
4,811
2,622
21,671
34,965
2,251
4,895
2,566
21,650
34,921
2,323
4,904
2,791
21,740
34,905
2,857
5,016
3,001
21,817
34,888
2,833
5,016
3,001
21,817
34,888
2,833
$74,898
$80,642
$81,358
$80,968
$84,760
$6,393
3,614
2,806
$6,767
4,815
2,916
$6,325
3,556
3,572
$6,213
282
3,333
$12,813
$14,498
$13,453
10,697
9,430
12,633
10,141
13,381
10,380
$32,940
$37,272
39,759
2,199
41,016
2,354
FY-15E
FY-16E
FY-17E
$9,349
8,313
1,701
822
1,580
$10,471
8,307
1,724
822
1,580
$10,294
8,685
1,817
859
1,617
$16,803
$21,766
$22,903
$23,273
5,318
3,826
22,075
35,011
2,993
5,837
4,692
22,322
35,136
3,289
5,911
5,601
22,519
35,265
3,287
6,110
6,556
22,673
35,394
3,437
$84,760
$86,026
$93,043
$95,486
$97,443
$6,985
282
3,305
$6,985
282
3,305
$7,366
500
3,492
$7,828
380
3,837
$8,003
500
3,835
$8,335
500
4,009
$9,828
$10,572
$10,572
$11,357
$12,045
$12,337
$12,844
16,655
9,867
18,712
10,110
18,712
10,110
18,893
10,882
22,683
11,950
23,118
12,410
23,775
13,042
$37,214
$36,350
$39,394
$39,394
$41,133
$46,678
$47,866
$49,661
42,089
2,055
42,562
2,055
43,310
2,055
43,310
2,055
42,839
2,055
44,310
2,055
45,566
2,055
45,727
2,055
Total equity
$41,958
$43,370
$44,144
$44,617
$45,365
$45,365
$44,894
$46,365
$47,621
$47,782
$74,898
$80,642
$81,358
$80,968
$84,760
$84,760
$86,026
$93,043
$95,486
$97,443
FY-12A
Q1-13A
Q2-13A
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$6,173
1,987
(1,091)
897
$1,438
514
(434)
(374)
$1,621
550
279
(290)
$2,131
552
(368)
(35)
$1,680
559
69
(111)
$6,870
2,175
(454)
(810)
$7,489
2,005
229
(311)
$7,966
$1,144
$2,160
$2,279
$2,198
$7,781
$9,412
$10,199
$10,959
$10,907
($3,784)
(1,088)
113
($4,759)
($545)
(2,265)
345
($2,465)
($574)
(45)
94
($525)
($575)
(50)
0
($625)
($570)
(50)
0
($620)
($2,264)
(2,410)
439
($4,235)
($2,086)
(300)
0
($2,386)
($2,095)
(300)
0
($2,395)
($2,099)
(300)
0
($2,399)
($2,100)
(300)
0
($2,400)
$424
(1,076)
(3,015)
682
$3,255
(1,300)
(1,044)
225
($410)
(24)
(850)
458
$0
0
(2,148)
381
$2,057
0
(1,452)
398
$4,902
(1,324)
(5,494)
1,463
$400
(1,773)
(7,874)
1,231
$3,670
(2,108)
(6,800)
1,354
$555
(2,483)
(7,000)
1,489
$656
(2,778)
(8,200)
1,638
($2,985)
$1,136
($826)
($1,767)
$1,003
($454)
($8,017)
($3,884)
($7,438)
($8,685)
($112)
$2,580
$3,920
$1,122
$222
($185)
$809
$3,092
($991)
$8,548
2,023
176
(548)
$8,764
2,073
260
(137)
$9,001
2,117
83
(293)
($177)
58
59
Discovery suffers from both concerns we have about SVOD. One is that the
company's licensing revenue will eventually go down, as it has licensed much more
content than can possibly be valuable to the SVOD providers. The other is that
viewership will be cannibalized, particularly reruns, although ratings of premiere
episodes of hit Discovery Channel and TLC shows can be helped in Netflix homes
(take the case of Mad Men).
However, the good news for Discovery investors is that the network is growing
its way out of any potential problem. Discovery's SVOD deals don't renew until
2014, and by that time they will be insignificant to the company's earnings
progress. In addition, Discovery still has dry powder in the form of TV Everywhere
rights, which could potentially offset some or all of any SVOD decline.
For most of the major content owners, SVOD has constituted a growing
percentage of earnings and was a major driver of 2012 earnings growth. That is not
the case for Discovery (see Exhibit 77). Discovery's big burst of SVOD revenue
came in 2011, when it signed its first licensing deal with Netflix in the fourth
quarter of that year. The majority of the revenue from that Netflix deal was
recognized immediately, as is required by financial reporting rules, when each
particular piece of content is made available to subscribers of the service. As
additional content becomes available over time, more revenue will be recognized.
In 2012, Discovery followed the Netflix deal with a similar agreement with
Amazon, for about half the amount of revenue. (Because Amazon is a smaller
service, all of the content owners get less revenue from it.) Those are the only two
major SVOD deals Discovery has done to date. Details about Discovery's SVOD
deals and the impact on revenue and operating income can be found in the
Appendix of this chapter, in Exhibits 92 and 93.
As a result, Discovery's revenue from SVOD was less in 2012 than in 2011,
causing a drag on 2012 earnings growth (see Exhibit 78), in contrast to all other the
large-cap media companies, which saw a big gain from SVOD in 2012. Discovery
has an option to extend the Netflix deal for one more year, so its revenue from
SVOD in 2013 should be about the same as in 2012.
Despite the drag from SVOD, Discovery's 2012 operating income still grew
9.5% year-over-year. Organic growth was even faster than that: If SVOD were
taken out of both 2011 and 2012, operating income growth in 2012 would have
been 10.3%.
Assuming the Amazon deal was a two-year deal (nobody knows for sure), then
both the Amazon and Netflix deals will come due for renewal in 2014. We are
skeptical whether Discovery will be able to get as much SVOD licensing revenue at
that point, even if it wants to. In the first round of deals, nobody knew what the
content was worth (or what the cannibalization effects would be), and the SVOD
providers needed to seed their services with as much content as possible.
We believe the nature of the negotiations probably started with a dollar amount
and worked backwards. Discovery management could have said something like,
"We need you to pay us $50 million per year. Let's figure out how much content we
need to get to that figure." The calculation probably comes out to be a lot of content
we figure about 3,000 hours, as summarized in Exhibit 79. Comprehensive title-
60
by-title lists for Discovery are provided in the Appendix of this chapter, in Exhibits
94-99).
Exhibit 77
Exhibit 78
$307
4.9%
4.2%
$161
2.4%
0.2%
2.0%
$77
$6
0.4%
($6)
2010
2011
% of Revenue
2012
2010
% of Adjusted OI
SVOD OI Growth
Exhibit 79
2011
2012
Documentary/Special
Average
Age (yrs)(1)
# Series
# Episodes
28
213
3.8
25
194
4.0
Channel
Discovery Channel
SVOD
Netflix
Amazon
TLC
Netflix
Amazon
22
20
936
871
2.4
2.6
6
4
43
49
4.3
3.9
Animal Planet
Netflix
Amazon
18
16
370
307
2.8
3.1
12
11
120
138
3.7
3.7
ID
Netflix
Amazon
18
14
316
246
2.2
2.5
6
6
52
55
3.6
3.6
Military Channel
Netflix
Amazon
3
3
38
38
3.9
3.9
20
20
106
110
5.0
4.7
Total
Netflix
Amazon
98
87
2,585
2,374
2.6
2.8
72
66
534
546
4.1
4.1
1 Age of series measured from the last episode of the last season available.
Note: Episodes from the former Planet Green, the Science Channel and 3 Net are also available on SVOD services, but the aggregate content
available is immaterial to the whole.
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
61
A lot has changed since the Netflix and Amazon deals were signed. The SVOD
players now have lots of data on which content actually gets watched (and more
importantly, which doesn't). We would be very surprised if all 3,000 hours of
Discovery content were being consumed in large quantities by SVOD subscribers;
we would be surprised if half of it was. Like so many things in life, the 80/20 rule
probably applies.
Therefore, we believe the SVOD providers will want to reduce the content they
license from Discovery, so they can reduce their license fees, just like they did for
Viacom. However, a reduction of SVOD revenue is of much less concern for
Discovery than other media companies. That's because Discovery has much less to
lose: Its base business is growing so much faster than those of its peers, and unlike
the other media companies, Discovery has not actively chased incremental SVOD
deals to prop up reported 2012 growth. Discovery's dependence on SVOD has
already been shrinking, and will continue to get smaller and smaller over time.
SVOD was 5% of Discovery's operating income in 2011 and 4% in 2012, and we
estimate it will be 3% in 2013.
Thus, although we believe Discovery is at risk of having its SVOD revenue cut
in 2014 from its run-rate levels, the loss would not cause much of an impact on
2014 earnings. Even if SVOD revenue were cut in half, we estimate it would only
decrease EPS by $0.08, which is a decline of 2%, and EPS year-over-year growth
would slow from 28% to 26% (see Exhibit 80).
A slowdown in SVOD revenues are even less of a factor for Discovery's
earnings profile than those numbers suggest. That's because Discovery could offset
some or all of the loss of SVOD by opening up TV Everywhere rights. So far,
Discovery hasn't done any TV Everywhere deals unlike Disney, which has deals
for WatchESPN and WatchDisneyChannel with at least seven of the top 10 pay-TV
distributors, or unlike Viacom, which has included TV Everywhere rights in every
recent distribution agreement.
Why has Discovery not done any TV Everywhere deals? The company says no
distributor has offered to pay it enough to make a deal worthwhile. Skeptics would
say that's because nobody is interested. We find that hard to believe, at least for hit
programs at Discovery's top four networks, just based on the evidence of the strong
and growing ratings. But if SVOD revenues declined significantly, we are quite
sure Discovery could find willing partners to strike a TV Everywhere deal
somewhere between the bid/ask.
Exhibit 80
SVOD
OI
% of
2014 OI
Total
2014 OI
Growth
EPS
2014 EPS
Growth
50%
$43
1.7%
12%
$4.27
26%
75%
$64
2.5%
13%
$4.31
27%
100%
$85
3.3%
14%
$4.35
28%
125%
$106
4.0%
15%
$4.39
30%
150%
$128
4.8%
16%
$4.43
31%
Note: Assumes run-rate SVOD revenue of $100 million and operating income of $85 million similar to amounts recognized in 2012.
Source: Corporate reports and Bernstein estimates and analysis.
62
Most of Discovery's Cable Networks Over-Index in Netflix Homes, But Not to a Large
Degree
Discovery Communications Total Day Ratings
(Jan 2011 - Jan 2013)
0.22
0.23 0.24
0.23
0.13
0.11
0.04
0.03 0.03
0.03 0.03
Military
Destination
America
0.05
0.08 0.09
0.09 0.09
Animal
Planet
ID
0.05 0.05
HUB
OWN
Non-Netflix Homes
Science
TLC
Discovery
Netflix Homes
Exhibit 83
Non-Netflix Homes
Netflix Homes
0.2
Non-Netflix Homes
Jan-13
0.4
Nov-12
Jan-13
Sep-12
Nov-12
Jul-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
0.4
Jan-11
0.5
0.6
Jul-12
0.6
0.8
Sep-12
0.7
May-12
0.83
0.8
1.08
0.99
1.0
Jan-12
0.9
1.2
Mar-12
0.93
Nov-11
1.0
1.4
Jul-11
1.1
1.6
Sep-11
1.2
May-11
1.3
1.8
Jan-11
Mar-11
1.4
Mar-11
Exhibit 82
Netflix Homes
Netflix Homes
1.0
0.95
0.91
0.9
0.8
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
0.6
Jan-12
0.7
Mar-12
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
Mar-11
0.7
1.1
Nov-11
0.8
1.2
May-11
0.93
0.90
0.9
1.3
Jan-11
1.0
1.1
Non-Netflix Homes
TLC Primetime
Indexed Ratings
1.4
1.2
0.6
Jul-11
1.3
Indexed Ratings (Jan 2011 = 1)
Exhibit 85
Sep-11
Mar-11
Exhibit 84
63
Netflix Homes
To test our hypothesis that Netflix is having a bigger impact on reruns than
premieres, we looked at specific hit programs on the Discovery Channel and TLC
that are also available on Netflix. Our findings strongly confirmed our conclusion
(see Exhibits 86 and 87). We found:
Premiere episodes of hit programs on both channels had higher ratings in Netflix
homes (similar to the "Mad Men effect," where catch-up viewing on SVOD
provides an increase to linear TV ratings).
Reruns of hit programs have lower ratings in Netflix homes. (Why watch reruns
when you have SVOD?)
So should Discovery be happy or sad about SVOD? We believe the company
should be indifferent. Primetime, premiere episodes have the highest CPMs, and
their ratings seem to be helped by the fact that previous seasons are available on
Netflix. In contrast, reruns make up many more hours on the network, and the
ratings for reruns are lower in Netflix households which nets out to lower
reported overall ratings for the networks. But the mix of revenue could go either
way (and probably washes out).
It's not clear whether Discovery can do anything to reduce the rerun
cannibalization. The episodes on SVOD are almost always different (older) than
the rerun episodes being shown on air (Discovery has decided on an "18-month
rule," where content must be at least 18 months old before it considers putting the
show on an SVOD service). So it's not a direct substitution. (Nor do we believe the
consumer behavior is that linearly logical, anyway.) Lower ratings for reruns may
just be a fact of life in a world where SVOD exists which is why we believe,
over time, programming expenses will go up for all networks, or the networks will
just have to accept lower ratings, because the shelf life of original content is getting
shorter and shorter.
64
Exhibit 86
Delta
All Episodes
Gold Rush
Auction Kings
All DSCH Shows
Mythbusters
American Chopper
Deadliest Catch
Dirty Jobs
(13%)
(38%)
(1%)
(16%)
72%
4%
(0%)
(14%)
(38%)
1%
(11%)
76%
10%
8%
1%
(0%)
(2%)
(4%)
(5%)
(7%)
(9%)
Premieres (Non-Reruns)
American Chopper
Dirty Jobs
Auction Kings
Mythbusters
Gold Rush
All DSCH Shows
Deadliest Catch
(11%)
(15%)
(13%)
(6%)
2%
(7%)
(28%)
(16%)
(16%)
(14%)
(4%)
4%
(5%)
(24%)
5%
1%
1%
(2%)
(2%)
(2%)
(4%)
Reruns
Gold Rush
Auction Kings
All DSCH Shows
American Chopper
Mythbusters
Deadliest Catch
Dirty Jobs
(23%)
(34%)
(5%)
31%
(16%)
(10%)
(16%)
(28%)
(33%)
(4%)
34%
(10%)
(2%)
(1%)
5%
(1%)
(2%)
(3%)
(6%)
(7%)
(15%)
Exhibit 87
Delta
All Episodes
Extreme Couponing
All TLC Shows
Toddlers & Tiaras
Say Yes to the Dress
Cake Boss
(35%)
(5%)
(26%)
(5%)
5%
(41%)
(5%)
(25%)
(3%)
12%
6%
1%
(1%)
(1%)
(7%)
Premieres (Non-reruns)
Extreme Couponing
Toddlers & Tiaras
Say Yes to the Dress
All TLC Shows
Cake Boss
(39%)
(11%)
4%
(13%)
6%
(44%)
(12%)
4%
(12%)
8%
5%
1%
(1%)
(1%)
(3%)
Reruns
Extreme Couponing
All TLC Shows
Say Yes to the Dress
Toddlers & Tiaras
Cake Boss
(37%)
(6%)
(8%)
(26%)
(11%)
(42%)
(7%)
(7%)
(24%)
(7%)
5%
1%
(1%)
(2%)
(4%)
Exhibit 88
Exhibit 89
2.5
1.5
1.4
1.3
1.2
1.19
1.13
1.1
1.0
0.9
0.8
1.6
Indexed Ratings (Jan 2011 = 1)
65
2.0
1.5
1.38
1.21
1.0
0.5
Non-Netflix Homes
Non-Netflix Homes
Jan-13
Sep-12
Nov-12
Jul-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
Netflix Homes
Mar-11
0.0
Jan-13
Sep-12
Nov-12
Jul-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.6
Mar-11
0.7
Netflix Homes
Exhibit 90
Exhibit 91
2.1
2.5
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
0.0
Jan-12
0.5
Nov-11
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Jan-11
0.7
Sep-11
0.9
1.0
Jul-11
1.1
May-11
1.3
1.5
Jan-11
1.5
2.20
2.12
2.0
Mar-11
1.7
1.81
Mar-11
2.00
1.9
0.5
Netflix Homes
66
SVOD
Service
NFLX
Deal
Date
09/21/11
SCB
Estimate
$100mm
AMZN
03/14/12
$50mm
Terms
--Renewal and expansion of relationship
--2 year (option for 3rd), non-exclusive license for prior-year seasons of select series
and specials
--All content is 18-months or older
--License covers prior seasons of various series and specials from variety of
channels
--Also includes content from 25-yr programming library
--Deal length not disclosed, presumed 18 or 24 months
--All content is 18-months or older
Exhibit 93
Est. SVOD
Revenue
Est.
Margin
Op Inc.
2010
$7
85%
$6
2011
98
85%
83
2012
91
85%
77
2013 (E)
82
85%
69
Exhibit 94
Reality Series
Man Woman Wild
Sons of Guns
Swamp Loggers
Surviving the Cut
Deadliest Catch
Hogs Gone Wild
Out of the Wild: Venezuela
South Beach Classics
Man vs. Wild
Flying Wild Alaska
American Loggers
Dirty Jobs
Gold Rush
Kidnap & Rescue
Black Ops Bros.
Auction Kings
Ghost Lab
Mythbusters
Storm Chasers
Beyond Survival
The Colony
Dual Survival
Construction Intervention
Solving History
American Chopper
Lobstermen
Out of Egypt
One Way Out
Out of the Wild: Alaska Exp
The Detonators
Wreckreaction Nation
Treasure Quest
Prototype This
Survivorman
Weapon Masters
Smash Lab
Medicine Men Go Wild
Total Episodes
67
Netflix
# of
Seasons Episodes
2
22
2
32
3
33
2
12
7
103
1
9
1
8
Partial
4
6
58
1
10
3
30
6 (partials)
91
1
11
1 (partial)
3
2
12
1
20
2
26
9 (partials)
109
3
27
1 (partial)
9
2
20
1
10
1
8
1
7
6
115
1 (partial)
6
1
6
1
11
1
8
1
12
1
13
1
11
1
13
3
22
1
10
2
20
1
4
925
Amazon
Last
Aired
01/19/12
01/18/12
01/10/12
08/26/11
07/26/11
06/05/11
04/07/11
04/06/11
03/24/11
03/18/11
03/08/11
03/01/11
02/18/11
02/12/11
02/02/11
02/01/11
01/22/11
12/22/10
12/01/10
10/22/10
09/28/10
08/20/10
06/04/10
03/03/10
02/11/10
09/28/09
08/24/09
07/08/09
06/09/09
06/02/09
03/31/09
03/26/09
03/26/09
12/19/08
11/14/08
09/18/08
12/12/08
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
# of
Seasons
1
1
2
1
7
1
1
6
1
3
4
1
2
1
2
9
4
1
2
1
1
1
S4-6
1
1
1
1
1
1
1
1
3
1
2
Episodes
10
16
20
6
103
9
8
58
10
30
108
11
12
20
26
169
31
10
20
10
8
7
76
8
6
11
8
12
13
11
13
22
10
20
912
Last
Aired
09/24/10
03/30/11
12/10/10
09/21/10
07/26/11
06/05/11
04/07/11
03/24/11
03/18/11
03/08/11
11/24/09
02/18/11
02/02/11
02/01/11
01/22/11
12/22/10
12/01/10
10/29/10
09/28/10
08/20/10
06/04/10
03/03/10
02/11/10
10/12/09
08/24/09
07/08/09
06/09/09
06/02/09
03/31/09
03/26/09
03/26/09
12/19/08
11/14/08
09/18/08
Return
Status
68
Exhibit 95
Documentaries/Specials
Marley Africa Road Trip
Shark Week
How Stuff Works
Submarine: Hidden Hunter
Monsters Resurrected
Atlas: Uncovering Earth
How the Universe Works
Two Weeks in Hell
Into the Universe
Prehistoric
Cosmic Collisions
Everest: Beyond the Limit
Clash of the Dinosaurs
Raging Planet
Natures Deadliest
The Science of Sex Appeal
Prehistoric Disasters
Who Was Jesus
Extreme Bodies
Toughest Race on Earth
Feeding Frenzy
Colossal Squid
When We Left Earth
Fearless Planet
After the Catch
Discovery Atlas
Extreme Survival Pack
Extreme Engineering
Total Episodes
Netflix
# of
Seasons
1
Various
2
1
1
1
1
1
1
1
1
3
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Various
Episodes
6
46
17
4
6
5
8
2
3
6
3
19
4
8
4
1
4
3
4
6
3
2
6
6
4
4
4
25
213
Amazon
Last
Aired
11/01/11
08/04/11
05/08/11
12/10/10
10/01/10
09/12/10
05/24/10
05/14/10
05/02/10
02/28/10
01/10/10
12/30/09
12/13/09
10/04/09
09/10/09
06/30/09
06/28/09
04/05/09
03/15/09
11/21/08
11/09/08
08/31/08
06/22/08
12/16/07
06/19/07
10/23/06
04/14/06
11/23/05
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
# of
Seasons
Various
1
1
1
1
1
1
1
1
1
3
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Various
Episodes
46
5
4
6
5
8
2
3
6
3
19
4
8
4
4
3
4
6
3
2
6
6
4
4
4
25
194
Last
Aired
08/04/11
01/29/09
12/10/10
10/01/10
09/12/10
05/24/10
05/14/10
05/02/10
02/28/10
01/10/10
12/30/09
12/13/09
10/04/09
09/10/09
06/28/09
04/05/09
03/15/09
11/21/08
11/09/08
08/31/08
06/22/08
12/16/07
06/19/07
10/23/06
04/14/06
11/23/05
Exhibit 96
Reality Series
Toddlers & Tiaras
Extreme Couponing
SYTD: Randy Knows Best
SYTD: Atlanta
LA Ink
My Strange Addiction
NY Ink
Cake Boss
Sister Wives
Jon & Kate Plus Eight
Hoarding
DC Cupcakes
Sarah Palin's Alaska
BBQ Pitmasters
Say Yes to the Dress
Mall Cops
Addicted
Street Customs
King of the Crown
Miami Ink
Overhaulin'
Take Home Chef
Total Episodes
Documentaries/Specials
Freaky Eaters
Kennedy's Home Movies
Strange Sex
Best Food Ever
Wedded to Perfection
Urban Legends
Eyewitness to Jesus
Total Episodes
69
Total
Seasons
6
4
3
5
4
4
2
5
4
7
4
3
1
4
6
1
1
2
1
6
5
2
# of
Seasons
5 (partial)
2
2
2
4
2
1
4 (partial)
2 (Partial)
6 (partial)
2
2 (Partial)
1
2
5
1
1
2
1
6
5
2
2
1
2
1
1
Episodes
66
24
8
30
84
20
8
71
18
125
27
18
9
14
78
12
6
22
7
80
74
135
936
14
1
16
5
6
1
43
Amazon
Last
Aired
01/25/12
11/23/11
10/21/11
09/30/11
09/15/11
08/07/11
07/21/11
06/27/11
06/05/11
05/02/11
04/20/11
04/08/11
01/09/11
09/23/10
07/30/10
07/08/10
04/21/10
11/19/09
11/06/09
08/21/08
06/26/08
03/07/08
06/30/11
06/30/11
05/22/11
07/31/10
5/3/2010
04/01/98
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
# of
Seasons
5 (partial)
2
2
3
1
4 (partial)
2 (Partial)
6 (partial)
2
2 (Partial)
1
2
5
1
1
2
1
6
5
2
2
1
1
4
Episodes
66
8
30
63
8
69
19
124
27
20
9
14
78
12
6
22
7
80
74
135
871
16
5
6
22
49
Last
Aired
01/25/12
10/21/11
09/30/11
04/29/10
07/21/11
04/11/11
06/05/11
05/02/11
04/20/11
12/02/11
01/09/11
09/23/10
07/30/10
07/08/10
04/21/10
11/19/09
11/06/09
08/21/08
06/26/08
03/07/08
05/22/11
07/31/10
5/3/2010
11/01/04
Return
Status
?
?
70
Exhibit 97
Reality Series
I Shouldn't Be Alive
Confessions: Animal Hoarding
Tanked
Pit Boss
Whale Wars
River Monsters
I'm Alive
The Haunted
Fatal Attractions
Freak Encounters
Lost Tapes
Last American Cowboy
Mad Man of the Sea
Wild Recon
Superfetch
Jockeys
Meerkat Manor
Jeff Corwin Experience
Total Episodes
Documentaries/Specials
Taking on Tyson
I, Predator
Infested
Weird True & Freaky
Safari
Into the Pride
Night
Untamed and Uncut
Dark Days in Monkey City
Grizzly Man Diaries
After the Attack
Animal Face Off
Total Episodes
Total
Seasons
6
3
4
6
5
4
2
3
3
1
3
1
1
1
1
2
4
3
# of
Seasons
S3-5
3 (partial)
1
4
4
3
2
3
1
1
3
1
1
1
1
2
S4
2
NA
NA
2
3
NA
NA
NA
3
NA
NA
NA
NA
1
1
1
S2-3
1
1
1
3
1
1
1
1
Episodes
32
21
6
34
41
20
23
26
13
16
34
8
6
10
20
19
13
28
370
6
6
3
38
4
5
20
17
4
8
6
3
120
Amazon
Last
Aired
09/30/11
09/21/11
09/16/11
08/27/11
08/12/11
05/30/11
05/28/11
05/13/11
03/11/11
12/21/10
11/08/10
08/02/10
04/06/10
03/09/10
12/05/09
10/02/09
08/22/08
08/25/02
# of
Seasons
S3-4
2
1
3
3
3
2
1
3
1
1
1
1
2
S4
2
04/04/11
02/17/11
01/09/11
11/23/10
7/6/2010
09/03/09
08/14/09
04/05/09
02/01/09
09/26/08
04/08/08
4/4/2004
1
1
1
3
1
1
1
3
1
1
1
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
Episodes
32
16
6
28
33
20
20
13
34
8
6
10
20
20
13
28
307
6
6
3
64
4
5
20
17
4
6
3
138
Last
Aired
02/16/11
03/25/11
09/16/11
03/26/11
09/06/10
05/30/11
12/10/10
03/11/11
11/08/10
08/02/10
04/06/10
03/09/10
12/05/09
10/02/09
08/22/08
08/25/02
04/04/11
02/17/11
01/09/11
11/23/10
7/6/2010
09/03/09
08/14/09
04/05/09
02/01/09
04/08/08
4/4/2004
Return
Status
?
?
?
?
?
?
Exhibit 98
Reality/Dramatic Series
Disappeared
Wicked Attraction
I Married a Mobster
Behind Mansion Walls
Nightmare Next Door
Cold Blood
Sins and Secrets
Stolen Voices
Stalked
I Almost Got Away With It
Deadly Women
The Will
Who the Bleep Did I Marrry
Hookers Saved the Strip
Solved
The Shift
Foresincs: You Decide
Real Interrogations
Total Episodes
Documentary Series
James Ellroy's LA
Hardcover Mysteries
Solved: Extreme Forensics
Prison Wives
Best Evidence
Sensing Murder
Total Episodes
71
Total
Seasons
6
5
2
2
4
8
3
3
3
5
6
3
3
1
3
2
1
1
# of
Seasons
4
4
1
1
2
S3-4
1
1 (partial)
1
2
S2-4
1 (partial)
1
1
S2-3
2
1 (partial)
1
NA
NA
NA
NA
NA
NA
1
1
1
1
1
1
Episodes
53
52
10
13
13
13
6
6
6
26
35
6
12
3
19
25
5
13
316
3
8
13
13
5
10
52
Amazon
Last
Aired
01/02/12
10/27/11
09/14/11
08/29/11
07/21/11
05/25/11
03/24/11
02/28/11
02/28/11
01/18/11
12/23/10
12/22/10
11/03/10
10/22/10
08/30/10
08/04/10
08/31/09
10/21/08
# of
Seasons
3
3
1
1
1
2
S2-4
1
1
S2-3
2
1 (partial)
1
02/02/11
11/29/10
07/19/10
04/24/10
04/06/07
07/21/07
1
1
1
1
1
1
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
Episodes
39
39
6
12
6
26
35
12
3
19
25
5
13
246
6
8
13
13
5
10
55
Last
Aired
03/28/11
10/14/10
02/10/11
03/24/11
03/14/11
02/28/11
01/18/11
12/23/10
11/03/10
10/22/10
08/30/10
08/04/10
08/31/09
10/21/08
04/18/11
11/29/10
07/19/10
04/24/10
04/06/07
07/21/07
Return
Status
72
Exhibit 99
Reality Series
Mission Demolition
Special Ops Mission
Future Weapons
Total Episodes
Documentary Series
Greatest Tank Battles
Toughest Miliary Jobs
Modern Sniper
Science of War
Ultimate Weapons
Tank Overhaul
Top Sniper
Battle Tech
Showdown Air Combat
In the Line of Duty
Quest for Sunken Warships
My War Diary
Weaponology
Combat Zone
Top Tens
First Command
Elite Forces
Total Episodes
Total
Seasons
1
1
3
2
NA
NA
NA
NA
NA
2
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
# of
Seasons
1
1
3
1
1
1
1
1
1
2
1
1
1
1
1
1
1
1
1
Episodes
3
6
29
38
10
4
4
3
6
4
4
7
9
4
12
13
13
8
3
2
106
Amazon
Last
Aired
02/02/10
09/17/09
04/24/08
03/09/11
06/03/10
02/25/10
12/19/09
06/30/09
04/01/09
03/24/09
10/12/08
05/26/08
11/14/07
08/25/07
04/02/07
03/26/07
03/05/07
06/30/05
04/05/02
Source: Netflix, Amazon, imdb.com, corporate reports and Bernstein estimates and analysis.
# of
Seasons
1
1
3
1
1
1
1
1
1
2
1
1
1
1
1
1
1
1
Episodes
3
6
29
38
10
4
4
3
6
4
4
6
7
6
4
12
13
13
8
6
110
Last
Aired
02/02/10
09/17/09
04/24/08
03/09/11
06/03/10
02/25/10
12/19/09
06/30/09
04/01/09
03/24/09
08/03/08
10/12/08
05/26/08
11/14/07
08/25/07
04/02/07
03/26/07
03/05/07
01/03/03
Return
Status
73
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
Revenues
Cost of Revenues
SG&A
Add: Launch Incentive Amort. (from Rev)
$4,486
1,218
1,290
20
$1,156
342
367
5
$1,508
446
392
4
$1,388
432
396
4
$1,545
449
433
4
$5,597
1,668
1,588
17
$6,324
1,815
1,757
12
$6,657
1,946
1,927
8
$7,246
2,090
2,136
8
$7,742
2,235
2,393
8
EBITDA
Margin %
$1,998
45%
$452
39%
$675
45%
$565
41%
$667
43%
$2,358
42%
$2,765
44%
$2,792
42%
$3,028
42%
$3,122
40%
20
117
6
0
5
32
1
0
4
32
0
0
4
33
0
0
4
33
0
0
17
130
1
0
12
117
0
0
8
118
0
0
8
117
0
0
8
116
0
0
$1,855
41%
$414
36%
$638
42%
$528
38%
$630
41%
$2,210
39%
$2,636
42%
$2,666
40%
$2,904
40%
$2,999
39%
248
89
68
(31)
80
(8)
80
(13)
77
(18)
304
(71)
309
(44)
346
(65)
343
(75)
355
(96)
$1,518
$377
$567
$461
$571
$1,977
$2,371
$2,384
$2,637
562
146
215
171
211
744
817
787
844
849
$956
$231
$352
$291
$360
$1,233
$1,554
$1,597
$1,793
$1,891
0
0
0
0
0
1
0
0
0
1
0
1
0
1
0
1
0
1
(11)
2
$2,740
$943
21%
$231
20%
$352
23%
$290
21%
$360
23%
$1,232
22%
$1,553
25%
$1,596
24%
$1,792
25%
$1,890
24%
$2.54
$2.51
$0.64
$0.63
$0.97
$0.96
$0.81
$0.80
$1.02
$1.01
$3.43
$3.39
$4.47
$4.42
$4.73
$4.67
$5.50
$5.43
$6.02
$5.95
376
380
363
367
363
367
358
362
353
357
359
363
347
351
338
342
326
330
314
318
$2,095
$2.51
$498
$0.57
$685
$0.96
$581
$0.80
$683
$1.01
$2,448
$3.34
$2,829
$4.42
$2,838
$4.67
$3,062
$5.43
$3,146
$5.95
$1,394
602
$0.83
$1,547
690
$1.00
$5,572
2,450
$3.36
$6,197
2,759
$4.27
05/10/13
$1,469
653
$0.89
74
Exhibit 101
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
Assets
Cash & equivalents
Accounts receivable
Inventory, net
Other current assets
$1,201
1,130
122
277
$2,360
1,148
127
378
$1,898
1,508
147
307
$1,834
1,392
138
324
$1,569
1,313
157
335
$1,569
1,313
157
335
$2,777
1,428
171
358
$2,984
1,527
183
378
$3,400
1,638
193
400
$3,637
1,761
207
424
$2,730
$4,013
$3,861
$3,688
$3,375
$3,375
$4,734
$5,071
$5,631
$6,029
388
1,555
1,095
7,010
152
377
1,583
1,105
7,181
162
374
1,483
1,105
7,175
181
368
1,560
1,105
7,170
200
365
1,362
1,105
7,164
196
365
1,362
1,105
7,164
196
377
1,471
1,105
7,142
213
396
1,566
1,105
7,120
228
427
1,672
1,105
7,097
244
464
1,755
1,105
7,075
262
$12,930
$14,421
$14,178
$14,091
$13,566
$13,566
$15,043
$15,485
$16,176
$16,691
$792
123
31
$979
100
22
$856
131
22
$867
172
22
$1,020
158
22
$1,020
158
22
$1,109
172
0
$1,186
184
850
$1,272
198
0
$1,367
212
0
$946
$1,101
$1,010
$1,061
$1,200
$1,200
$1,281
$2,220
$1,469
$1,579
5,212
479
6,407
671
6,407
612
6,407
626
5,874
604
5,874
604
6,913
637
6,130
667
7,571
699
7,806
734
$6,637
$8,179
$8,029
$8,094
$7,678
$7,678
$8,830
$9,017
$9,739
$10,120
6,291
2
6,207
35
6,114
35
5,963
35
5,854
35
5,854
35
6,177
35
6,434
35
6,401
35
6,536
35
PPE, net
Non-current Inventory, net
Investments
Goodwill & intangibles
Other non-current assets
Total Assets
Liabilities
Accounts payable & accrued liabilities
Deferred revenue
Short term debt
Current liabilities
Long term debt
Other LT liabilities
Total liabilities
Discovery Stockholders' Equity
Noncontrolling interests
Total equity
Liabilities & Equity
$6,293
$6,242
$6,149
$5,998
$5,889
$5,889
$6,212
$6,469
$6,436
$6,571
$12,930
$14,421
$14,178
$14,091
$13,566
$13,566
$15,043
$15,485
$16,176
$16,691
FY-12A
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$945
117
865
(1,045)
228
$231
32
231
(538)
175
$352
32
322
(703)
41
$291
33
319
(245)
47
$360
33
314
184
(115)
$1,233
130
1,186
(1,302)
148
$1,554
117
1,287
(1,439)
181
$1,597
118
1,382
(1,512)
196
$1,793
117
1,470
(1,613)
216
$1,891
116
1,573
(1,701)
240
$1,110
$131
$44
$444
$775
$1,395
$1,699
$1,782
$1,982
$2,118
($77)
(536)
(30)
($26)
(85)
(39)
($18)
(5)
0
($17)
(5)
0
($19)
(5)
0
($80)
(100)
(39)
($87)
(20)
0
($95)
(20)
0
($105)
(20)
0
($110)
(20)
0
($643)
($150)
($23)
($22)
($24)
($219)
($107)
($115)
($125)
($130)
$959
0
(1,380)
116
$1,175
0
0
7
$0
(40)
(467)
24
$0
(40)
(467)
20
($533)
(40)
(467)
24
$642
(120)
(1,400)
75
$1,017
(160)
(1,350)
109
$67
(160)
(1,500)
132
$591
(240)
(1,950)
159
$235
(240)
(1,950)
204
($305)
$1,182
($483)
($486)
($1,016)
($803)
($384)
($1,460)
($1,440)
($1,751)
$162
$1,163
0
($462)
0
($65)
0
($264)
$372
$1,208
$206
$417
$237
75
News Corp generated about $300 million in SVOD licensing revenue in FY12, up
from slightly more than $100 million in FY11 (details are in the Appendix of this
chapter, in Exhibit 118). This level of SVOD revenue ranks among the highest of
large-cap media (trailing CBS and Time Warner, which each generate ~$350
million). While the SVOD was responsible for contributing 17% of News Corp's
FY12 operating income growth, it remains less than 1% of News Corp revenues
and 3% of segment operating income (see Exhibits 102 and 103).
To generate SVOD revenue, News Corp has licensed an enormous amount of
content. The full title-by-title list, by SVOD provider and era, can be found in the
Appendix of this chapter, in Exhibits 119-121.
News Corp has some 2,500 hours on Netflix, and nearly 2,000 hours each on
Amazon and Hulu+ (see Exhibit 104). The content ranges from the very old library
to seasons of programs still on air. In fact, nearly the entire primetime Fox lineup
(except for The Simpsons, performance reality and sports) can be found online,
76
both current and past seasons (see Exhibit 105). In addition, virtually all of your old
Fox favorites from 15 years ago can be found on Hulu+. On the one hand, it is not
surprising to find that Hulu+ would license any content that News Corp wanted it
to. On the other hand, is it somewhat surprising to find so much older content on
Hulu+ (which is generally considered a service that focuses on more current
content).
Because News Corp has licensed practically every piece of content that could
possibly be licensed, future revenue growth is limited to pricing, which would be a
function of SVOD sub growth, and to future seasons/new shows. With mostly
everything already licensed, some of it will surely get dropped, as SVOD providers
get more negotiating power and more usage data. Admittedly, Hulu+ won't drop
anything as long as News Corp is a major owner. But the dollars coming from
Hulu+, with about 3 million paid subscribers, is much less than from Netflix and
Amazon, and most of it is on an ad share basis. To some extent Hulu's profits are
inter-company, as News Corp also recognizes its share of Hulu's losses.
Exhibit 102
Exhibit 103
3.0%
1.2%
0.9%
17%
13%
0.4%
9%
0.3%
1% 2%
0.1%
2010
2011
% of Revenue
2011
% of Revenue Growth
% of Segment OI
Exhibit 104
2010
2012
2012
% of Segment OI Growth
NFLX
621
# Episodes
AMZN
66
Hulu +
293
NFLX
420
Hour Equivalents
AMZN
Hulu +
66
153
869
363
557
234
538
556
265
477
495
217
762
718
399
508
616
355
488
488
1,262
431
431
1,150
157
14
112
138
14
98
3,435
2,205
2,331
2,530
1,856
1,972
Exhibit 105
Current
Primetime Lineup
Scripted
American Dad
Ben and Kate
Bob's Burgers
Bones
Family Guy
Fringe
Glee
New Girl
Raising Hope
The Cleveland Show
The Following
The Mindy Project
The Mob Doctor
The Simpsons
Touch
77
Virtually the Entire Fox Primetime Lineup Can Be Found on the Major SVOD Services
Primary
Producer
# Full Ep.
Avail
Fox.com
Current
Season
Avail on
Netflix?
Avail on
AMZN?
Avail on
Hulu +?
Not Avail
On SVOD
Fox
Fox
Fox
Fox
Fox
WB
Fox
Fox
Fox
Fox
WB
Universal
Sony
Fox
Fox
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
9
1
3
8
11
5
4
2
3
4
1
1
1
24
2
S1-6
N
S1
S1-7
S1-9
N
S1-3
N
S1-2
S1-3
in 2013
N
N
N
S1
N
N
N
N
N
S1-4
S1-3
N
N
N
N
N
N
N
N
S1-6 + S9 TD
S1 TD
S3 TD
S8 TD
S1-9 + S11 TD
Last 5 Ep
S4 TD
S2 TD
S3 TD
S4 TD
S1 TD
S1 TD
S1 TD
Last 5 Ep
S1 + S2 TD
S7-8
NA
S2
NA
S10
Full S5
NA
S1
NA
NA
NA
NA
NA
All Seasons
NA
Fox
Fox
Ind.
Ind.
Ind.
Ind.
Fox
Ind.
NA
4
4
6
33
3
NA
NA
12
25
11
1
5
3
9
2
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
Last 4 Ep
S1-10 + S11 TD
S1 TD
S3-4 + S5 TD
S3 TD
N
N
All Seasons
All Seasons
NA
NA
S1-2
S1-2
All Seasons
All Seasons
Non-Scripted
Americal Idol
COPS
Hell's Kitchen
Hotel Hell
Kitchen Nightmares (US)
Masterchef
So You Think/Dance
The X Factor
Additional pressure on revenues will come from News Corp no longer being
able to double-dip (i.e., license the same content to both traditional as well as
digital syndication). An example of double-dipping is Glee, which is licensed to
both Oxygen as well as all three major SVOD services (Netflix, Amazon and
Hulu+). Double-dipping will be increasingly rare, as traditional syndication
partners will no longer accept it. We would not expect Fox to be able to do this
with New Girl or Modern Family, for example.
To some extent, traditional syndicators will have to bid up prices to lock up the
digital rights (which the buying network will sometimes want to utilize for TV
Everywhere). The thinking is that the buyer should pay more, as it is purchasing
more rights. However, it's unlikely the increased traditional syndication price will
often be equal to or higher than double-dipping.
SVOD Subscribers Love Fox,
Especially Premiere Episodes
As consistently is the case for other entertainment networks, the baseline viewing
levels for Fox Broadcast are higher among Netflix households compared to nonNetflix households with the unsurprising exceptions of sports and Sunday
morning news (see Exhibits 106 and 107).
To test for cannibalization, we analyze this relationship over time to see if
there is a divergence. For Fox, there has not been any evidence of cannibalization
(see Exhibit 108). When focusing on very specific time periods, we do find that
ratings in Netflix households gap highest versus non-Netflix households when there
is greater intensity of premiere episodes (see Exhibit 109). Netflix households love
high-quality entertainment TV, and when there's more of it on the linear networks,
they watch relatively more (and, as we will see for FX, when there's less of it on the
linear network, they watch less).
78
Exhibit 106
Exhibit 107
6.27
9.2
6.03
5.76
8.1
7.7
6.3
6.2 6.5
Total
Reality
5.8
8.4
3.48 3.39
4.1
4.0 3.9
3.0
0.80 0.64
Primetime
Non-Netflix Homes
Animation Sports
Netflix Homes
Non-Netflix Homes
Live
Drama
Action
Comedy
Netflix Homes
Exhibit 108
Exhibit 109
Netflix Homes
120%
0.05
100%
0.04
80%
0.03
60%
0.02
40%
0.01
20%
0.00
0%
Aug-12
0.06
Apr-12
Jan-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Non-Netflix Homes
Mar-12
Nov-11
Jul-11
Sep-11
Mar-11
0.3
May-11
0.5
140%
Jun-12
0.7
160%
0.07
Feb-12
0.9
0.08
Oct-11
1.01
0.98
180%
Dec-11
1.1
0.09
Aug-11
1.3
Apr-11
1.5
Jan-11
1.7
Jun-11
Feb-11
Oct-12
Dec-12
Sunday
News
79
Baseline levels of viewership for News Corp's cable networks are about the same in
Netflix versus non-Netflix households except for FX (which is higher in Netflix
households) and Fox News (which is significantly lower in Netflix households), as
shown in Exhibit 111.
Exhibit 111
0.45
0.35
0.26
0.22
0.08
0.02
0.02
0.03
0.08
0.02
Fox Business
Nat Geo
Non-Netflix Homes
FX
Netflix Homes
Fox News
80
Exhibit 113
FX Primetime Ratings
By Genre
Indexed Ratings (Jan 2011 = 1)
3.19
Non-Netlfix Homes
2.0
1.5
1.0
Movie
Delta
2%
2%
Total
(6%)
(8%)
2%
Sports
(10%)
(12%)
1%
Syndicated Comedy
(23%)
(24%)
1%
(17%)
(18%)
1%
(27%)
(5%)
(23%)
Jan-13
Nov-12
Jul-12
Sep-12
Netflix Homes
May-12
Jan-12
Non-Netflix Homes
Netflix Homes
Mar-12
Nov-11
Sep-11
Rerun
OP
Jul-11
Fresh
OP
May-11
0.5
Exhibit 114
2.5
Jan-11
Movies
3.03
2.85
3.0
0.46 0.51
FX Primetime
Indexed Ratings
3.5
3.94
Synd.
Com.
Mar-11
Exhibit 112
81
We're not sure FX can do anything about its rerun dilemma. We don't believe
it's a function of licensing decisions. In fact, we believe licensing prior seasons of
original series is helpful in driving higher ratings for premiere episodes (the "catchup" effect). Those prior seasons on SVOD are generally not the same episodes as
the reruns being shown on the linear network (which are most often current season
episodes).
We believe the lower rerun viewership in Netflix homes is a function of the
increased choice available in SVOD homes. Why would someone with SVOD ever
watch a rerun?
We have argued this decreased shelf-life of original content (i.e., decreased
value of reruns) will worsen over time, forcing networks to choose between two
negatives: (1) increase the number of hours of original content, or (2) accept lower
ratings. Increasingly, we believe cable networks will "give up" on daytime ratings,
focus on primetime, and increase original programming investment.
National Geographic seems to have benefitted to some degree from the
decision to avoid SVOD. We could not find much National Geographic content
readily available on SVOD, and ratings for National Geographic have gapped
higher in Netflix homes over time (see Exhibit 115). Coincidence? Maybe.
At Fox News, baseline levels of viewing are significantly lower (22% lower) in
Netflix households than non-Netflix households (see Exhibit 111). As much as
these households love entertainment programming, they seem to be equally
disinterested in 24-hour cable news, especially Fox News' brand of it. But from a
low baseline, viewership in Netflix households grew more strongly for all cable
news networks (see Exhibit 116), including Fox News (see Exhibit 117).
National Geographic Has Gapped Higher in Netflix Homes Over Time
Nat Geo Total Day
Indexed Ratings
1.1
1.0
1.00
0.9
0.89
0.8
0.7
Jan-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Non-Netflix Homes
Mar-12
Nov-11
Jul-11
Mar-11
0.5
May-11
0.6
Jan-11
1.2
Sep-11
Exhibit 115
Netflix Homes
Exhibit 117
Delta
MSNBC
55%
40%
14%
1.8
FNC
18%
11%
6%
1.7
CNN
(3%)
(4%)
1%
1.6
1.5
1.4
1.3
1.23
1.19
1.2
1.1
1.0
Non-Netflix Homes
Source : TiVo Stop||Watch and Bernstein analysis.
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Nov-11
0.8
Jul-11
0.9
Sep-11
Mar-11
News
Network
May-11
Exhibit 116
Jan-11
82
Netflix Homes
83
2010
News Corp: Estimated SVOD Revenue and Operating Income by SVOD Service and
Fiscal Year ($ million)
SVOD
Est. SVOD
Provider
Revenue
Margin
Income
$20
55%
$11
10
60%
Netflix - TV
Netflix - Film
Total
2011
$30
Netflix - TV
Netflix - Film
Total
2012
Operating
$17
$90
55%
20
60%
$50
12
$110
$62
Amazon - Domestic TV
$130
55%
$72
Netflix - Domestic TV
100
55%
55
40
55%
22
30
60%
AMZN/NFLX Film
Total
18
$300
$167
Exhibit 119
SVOD
Service
Hulu
Deal
Date
June 2007
Reported
Amount
Ad Share
SCB
Est. Value
Ad Share
Hulu
June 2009
Ad Share
Ad Share
NFLX
04/09/10
ND
$30mm
Production /
Distribution Partner
Twentieth Century Fox,
NBCUniversal
Terms
--Two-year guarantee of exclusive third-party access to
networks' programming
--Networks' contributed $50mm each in ad dollars to be spent on
each respective network and $30mm in start-up money
NFLX
04/01/11
$100 to
$125mm
$230mm in
Hulu
06/22/11
Ad Share
Ad Share
Hulu +
06/22/11
Mostly Ad
Share
Ad Share/ Sub
Fees
Immaterial
AMZN
09/26/11
$50-$75mm
AMZN
12/09/11
$50-$75mm
NFLX Intl
05/09/12
ND
LOVEFiLM
06/25/12
ND
$140mm in
FY12 for both
Deals
TCF TV Distribution
<$50mm in
FY12 for both
Intl Deals
Source: Various news reports, corporate reports and Bernstein estimates and analysis.
84
Exhibit 120
Fox Primetime
American Dad
Bob's Burgers
Bones
Family Guy
Glee
Raising Hope
The Cleveland Show
Touch
Total
Still On
Air?
#
Ssns
NA
NA
NA
NA
NA
NA
NA
NA
8
2
7
10
3
2
3
1
Ended
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Still On
Air?
#
Ssns
2
3
6
6
7
3
13
3
5
4
2
4
3
Ended
2012
2011
2010
2010
2010
2010
2009
2009
2008
Still On
Air?
#
Ssns
2
3
8
2
2
3
4
4
7
Netflix
Ep.
Hour
Equiv
AMZN
Ep.
Hour
Equiv
Hulu+
Ep.
Hour
Equiv
6
1
7
9
3
2
3
1
32
115
13
140
166
66
44
65
12
621
58
7
140
83
66
22
33
12
420
66
66
66
66
1
16
115
166
12
293
58
83
12
153
Netflix
1
3
5
6
7
13
2
4
2
2
3
3
51
Ep.
12
36
81
111
160
259
27
53
26
26
32
46
869
Hour
Equiv
12
18
81
56
80
130
14
53
26
26
16
46
557
AMZN
1
3
13
21
Ep.
12
39
259
53
363
Hour
Equiv
12
39
130
53
234
Hulu+
Ep.
Hour
Equiv
Netflix
2
3
8
2
2
3
4
4
28
Ep.
23
48
193
26
26
46
96
80
538
Hour
Equiv
23
48
193
13
26
46
48
80
477
AMZN
8
2
2
3
4
4
7
30
Ep.
193
26
26
46
96
80
89
556
Hour
Equiv
193
13
26
46
48
80
89
495
Hulu+
4
4
7
15
Ep.
96
80
89
265
Hour
Equiv
48
80
89
217
Breakout Kings
Lie To Me
24
Better Off Ted
Dollhouse
Saving Grace
My Name Is Earl
Prison Break
The Shield (co-prod w/Sony)
Total
Exhibit 121
85
The Loop
Arrested Development
Malcolm in the Middle
Stacked
That 70's Show
The Bernie Mac Show
NYPD Blue
Angel
The Practice
Buffy the Vampire Slayer
Total
Ended
2007
2006
2006
2006
2006
2006
2005
2004
2004
2003
Still On
Air?
#
Ssns
2
3
7
2
8
5
12
5
8
7
Ended
2002
2002
2002
2001
2000
1999
1997
1996
1993
1993
1991
1986
1971
1970
1968
1968
Still On
Air?
#
Ssns
5
3
9
6
4
8
2
4
4
6
5
5
3
2
3
4
Ended
2012
2011
2011
2011
2011
2011
2011
2010
2010
2010
2010
2010
2010
2008
2008
2008
2007
2007
2006
2006
2003
Still On
Air?
#
Ssns
1
1
1
1
1
0
0
1
1
1
1
1
1
1
0
1
1
1
0
1
1
Netflix
3
7
8
5
7
35
Ep.
53
151
200
104
110
144
762
Hour
Equiv
27
76
100
52
110
144
508
AMZN
3
7
12
5
7
34
Ep.
53
151
260
110
144
718
Hour
Equiv
27
76
260
110
144
616
Hulu+
2
3
5
3
7
21
Ep.
17
53
19
110
56
144
399
Hour
Equiv
9
27
10
110
56
144
355
Netflix
5
3
9
23
Ep.
111
61
202
114
488
Hour
Equiv
111
61
202
57
431
AMZN
5
3
9
23
Ep.
111
61
202
114
488
Hour
Equiv
111
61
202
57
431
Hulu+
5
3
9
4
4
8
2
2
4
5
1
2
2
3
2
56
Ep.
111
61
202
89
82
176
41
44
97
103
22
38
51
84
61
1,262
Hour
Equiv
111
61
202
45
82
176
41
44
49
103
22
19
51
84
61
1,150
Netflix
1
1
1
1
1
1
1
1
1
1
1
1
12
Ep.
13
13
13
13
13
13
13
13
6
13
20
14
157
Hour
Equiv
7
13
13
13
7
13
7
13
6
13
20
14
138
AMZN
1
1
Ep.
14
14
Hour
Equiv
14
14
Hulu+
1
1
1
1
1
1
1
1
1
10
Ep.
13
9
10
6
13
18
13
13
14
112
Hour
Equiv
13
5
10
3
7
18
13
13
14
98
Ally McBeal
Roswell
X-Files
Reba
The Pretender
Silk Stalkings
Murder One
Picket Fences
Doogie Howser
Wonder Years
21 Jump Street
The Fall Guy
Nanny and the Professor
Land of the Giants
Lost in Space
Voyage to Bottom/Sea
Total
One/Partial Season Wonders
The Finder
Friends with Benefits
Lights Out
Terra Nova
The Chicago Code
The Playboy Club
Traffic Light
Persons Unknown
Sons of Tucson
Terriers
The Deep End
The Gates
The Good Guys
Back to You
K-Ville
Unhitched
Journeyman
Standoff
Kitchen Confidential
Vanished
Firefly
Total
86
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$9,665
5,971
1,836
$36,764
22,802
6,817
$41,547
25,597
7,894
$43,631
26,061
8,290
$45,865
26,805
8,714
$47,789
27,557
9,080
$1,719
18%
$1,858
19%
$7,145
19%
$8,056
19%
$9,280
21%
$10,345
23%
$11,151
23%
310
65
357
56
354
5
1,321
278
1,404
20
1,460
20
1,514
20
1,568
20
$1,226
15%
$1,515
16%
$1,306
14%
$1,499
16%
$5,546
15%
$6,633
16%
$7,800
18%
$8,811
19%
$9,564
20%
236
(190)
(1,375)
229
(174)
(1,400)
244
(157)
(2,431)
$2,212
$2,555
$2,860
$3,650
$1,489
$10,554
$6,421
$7,508
$8,524
805
259
402
741
447
1,849
1,798
2,102
2,387
2,603
$1,407
$2,296
$2,458
$2,909
$1,042
$8,705
$4,623
$5,406
$6,137
$6,692
0
228
0
63
0
77
0
55
0
66
0
261
0
261
0
261
0
261
0
261
$1,179
3%
$2,233
27%
$2,381
25%
$2,854
30%
$976
10%
$8,444
23%
$4,362
10%
$5,145
12%
$5,876
13%
$6,431
13%
$0.47
$0.47
$0.94
$0.94
$1.02
$1.01
$1.22
$1.22
$0.42
$0.42
$3.60
$3.60
$1.94
$1.94
$2.36
$2.37
$2.69
$2.70
$2.94
$2.94
2,499
2,504
2,369
2,370
2,343
2,346
2,333
2,330
2,330
2,327
2,344
2,343
2,246
2,243
2,176
2,173
2,182
2,179
2,188
2,185
$3,522
$1.42
$1,012
$0.43
$1,037
$0.44
$834
$0.36
$980
$0.42
$3,863
$1.65
$4,376
$1.95
$5,158
$2.37
$5,890
$2.70
$6,446
$2.95
$36,396
7,244
$1.64
$39,265
8,099
$1.93
Revenues
Operating Expenses
SG&A
EBITDA
Margin %
Depreciation and Amortization
Restructuring & Impairment
Operating Income
Margin %
Interest Expense, Net
Equity In the Losses (Earnings) of Investees
Other Losses (Gains), net
Pre-tax income
Provision for Income Taxes
Net Income From Continuing Ops
Discontinued Operations, net
Net Income (Loss) attributable to NCI
Net Income Attributable to News Corp.
Margin %
Q1-13A
Q2-13A
Q3-13A
$33,706
20,785
6,363
$8,136
4,848
1,610
$9,425
5,869
1,666
$9,538
6,114
1,705
$6,558
19%
$1,678
21%
$1,890
20%
1,179
3,005
300
152
$2,374
7%
899
(730)
(7)
Consensus Estimates as of
Revenue
EBITDA
Pro Forma EPS (diluted)
Q4-13E
238
(228)
0
05/10/13
$9,354
1,837
$0.41
947
(749)
(5,206)
979
(767)
0
1,072
(779)
0
1,076
(789)
0
1,066
(797)
0
$9,295
Exhibit 123
87
Q1-13A
Q2-13A
Q3-13A
$9,626
6,608
2,595
619
$12,007
6,634
2,856
770
$7,806
7,760
3,282
896
$9,324
7,136
3,476
857
$8,871
7,630
2,775
580
$8,871
7,630
2,775
580
$19,448
$22,267
$19,744
$20,793
$19,856
5,814
4,596
4,968
20,307
1,530
5,830
4,835
4,725
20,318
1,701
5,857
5,024
7,441
23,024
1,655
5,984
5,002
6,622
28,470
1,619
6,133
5,185
6,850
28,420
1,575
$56,663
$59,676
$62,745
$68,490
$5,405
1,691
2,248
273
$5,615
1,862
2,295
273
$5,260
1,899
2,828
273
$9,617
$10,045
15,182
6,679
16,184
6,670
$31,478
24,684
501
Total equity
Liabilities & Equity
Assets
Cash & equivalents
Accounts receivable
Inventory, net
Other current assets
Total Current Assets
PPE, net
Non-current Inventory, net
Investments
Goodwill & intangibles
Other non-current assets
Total Assets
Liabilities
Accounts payable & Accrued Expenses
Participant's Share and Residuals
Program Rights Obligations & Def Rev
Short term debt
Current liabilities
Long term debt
Other LT liabilities
Total liabilities
News Corp.'s Stockholder's Equity
Noncontrolling interests
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$8,288
8,200
2,990
623
$14,007
8,594
3,117
653
$19,814
9,044
3,247
687
$26,511
9,423
3,371
716
$19,856
$20,101
$26,371
$32,792
$40,021
6,133
5,185
6,850
28,420
1,575
6,300
5,817
7,617
28,229
1,603
6,453
6,108
8,396
28,046
1,623
6,582
6,421
9,185
27,883
1,646
6,674
6,690
9,982
27,753
1,665
$68,018
$68,018
$69,667
$76,998
$84,509
$92,786
$6,030
1,915
2,951
157
$6,246
2,025
2,648
282
$6,246
2,025
2,648
282
$6,687
2,177
2,742
500
$6,847
2,281
2,874
380
$7,103
2,401
3,025
500
$7,340
2,501
3,152
500
$10,260
$11,053
$11,201
$11,201
$12,107
$12,382
$13,029
$13,493
16,184
7,296
16,317
7,871
16,192
6,926
16,192
6,926
17,224
7,456
19,109
7,744
20,190
8,045
21,803
8,318
$32,899
$33,740
$35,241
$34,319
$34,319
$36,787
$39,234
$41,264
$43,614
26,264
513
28,152
853
30,064
3,185
30,514
3,185
30,514
3,185
29,696
3,185
34,579
3,185
40,061
3,185
45,987
3,185
$25,185
$26,777
$29,005
$33,249
$33,699
$33,699
$32,881
$37,764
$43,246
$49,172
$56,663
$59,676
$62,745
$68,490
$68,018
$68,018
$69,667
$76,998
$84,509
$92,786
FY-12A
Q1-13A
Q2-13A
Q3-13A
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$1,407
1,179
88
(981)
2,097
$2,296
300
21
(395)
(1,512)
$2,458
310
23
(1,244)
(1,286)
$2,909
357
23
1,086
(2,583)
$1,042
354
39
(615)
(228)
$8,705
1,321
106
(1,168)
(5,609)
$4,623
1,404
160
(431)
(767)
$5,406
1,460
173
(352)
(779)
$6,137
1,514
186
(309)
(789)
$6,692
1,568
199
(281)
(797)
$3,790
$710
$261
$1,792
$592
$3,355
$4,988
$5,907
$6,740
$7,381
($176)
(227)
69
1,795
($194)
(2,603)
(679)
19
($257)
84
(8)
793
($453)
0
0
0
($1,080)
(2,746)
(618)
2,607
($1,380)
0
0
0
($1,430)
0
0
0
($1,480)
0
0
0
($1,530)
0
0
0
($3,457)
$612
($453)
($1,837)
($1,380)
($1,430)
($1,480)
($1,530)
($236)
(245)
(557)
19
($464)
(87)
(400)
92
$0
(233)
(400)
41
$288
(617)
(2,234)
272
$1,250
(442)
(5,000)
0
$1,765
(523)
0
0
$1,202
(655)
0
0
$1,612
(766)
0
0
($1,019)
($859)
($592)
($2,291)
($4,192)
$1,242
$547
$846
$5,720
$5,807
$6,697
($939)
(542)
(4)
64
($1,421)
($35)
(593)
(4,589)
102
$1,461
$988
(52)
(877)
120
($5,115)
$179
(308)
31
($3,054)
$2,381
14
($4,201)
(27)
$1,518
0
($453)
18
($755)
0
($584)
88
89
Time Warner generated ~$350 million of revenue from digital licensing in 2012,
almost as much as CBS, which is the most dependent on SVOD revenue among the
large-cap media companies in our coverage. Time Warner's heavy usage is
somewhat ironic because in the early days of SVOD, the company was the voice of
caution, warning content suppliers not to allow SVOD services to de-value their
content. Time Warner has less earnings exposure to SVOD than CBS, about 3% of
operating income (compared to CBS at 7%), but SVOD still accounted for a large
amount of its operating income growth in 2012 at 27%.
Cannibalization is a bigger issue for Time Warner than declining SVOD
revenue, in our view. Netflix households tend to have higher absolute viewing
levels for Turner (except for TNT) and HBO than non-Netflix households.
However, Netflix households have been watching relatively less TNT and TBS
over time, suggesting cannibalization is creeping in. Time Warner faces a vicious
circle: In order for digital licensing revenue to keep growing, SVOD services must
keep growing but the more SVOD services grow, the bigger cannibalization
becomes.
Whether SVOD services grow or not, we strongly believe the negotiating
balance between content owners and online providers has evened out, which should
dampen content owners' pricing power as content owners now need SVOD just
as much as SVOD needs any particular piece of content. At the same time, the ROI
for original content investment at TNT and TBS will get increasingly lower, at least
in terms of conventional advertising economics. However, these originals can be
good candidates for SVOD licensing, thereby improving the economics.
In the kids' space, Time Warner had been the only major player to withhold
content from SVOD and its kids' networks were the only ones with ratings
trending higher in Netflix households than non-Netflix households. Alas, Cartoon
Network and Adult Swim just broke that embargo and struck a Netflix deal
providing a great experiment for us to observe whether ratings start to decline
disproportionally in Netflix households.
At HBO counter to the original intuition of many (including ourselves), and
as we observed for Showtime viewership is higher in Netflix households, on an
absolute basis and a relative basis over time. Households clearly are not making a
choice between a premium network and SVOD. They are entertainment junkies
who can't get enough of their favorite entertainment content, and the presence of
Netflix seems to further concentrate that preference (rather than cannibalize).
A slowing SVOD revenue stream and cannibalization risks are not major red
flags for Time Warner in this year or next, according to our analysis. However,
they will become an increasingly heavy weight for the company (as well as most
other large cap media companies), in our view.
In the early days of SVOD, Time Warner was the de facto voice of reason/caution
on behalf of the content owners. CEO Jeff Bewkes once said, "Don't let SVOD
services, at $8/month, cheapen the perceived value of your content." Perhaps Time
Warner inherited this perception just because CEO Bewkes was so quotable. More
likely it was because of Time Warner's assets: Warner Bros. is among the biggest
syndicators, with one of the largest theatrical and TV libraries, while HBO was
90
considered the obvious victim of an SVOD world (which turned out to be not true,
at least so far).
My, how times have changed. Time Warner generated an estimated $350
million of digital licensing revenue in 2012, battling CBS for the title of "most
digital licensing revenue." But Time Warner is a much larger entity than CBS.
Digital licensing represented only ~1% of total Time Warner revenue and ~3% of
operating income in 2012 (see Exhibit 124), assuming a very conservative 55%
gross margin on SVOD sales. Much of the content is fully amortized, or at least set
up on an amortization schedule that didn't include SVOD. So, the only real
incremental cost is participations. A history of Time Warner's SVOD licensing in
detail, including our estimates of deal-by-deal and title-by-title revenues, is
presented in the Appendix of this chapter, in Exhibits 153-158.
While small in magnitude, SVOD has been the incremental sweetener driving
much of Time Warner's earnings growth. In 2012, digital licensing contributed 27%
of operating income growth (see Exhibit 125).
To keep that revenue stream growing in 2013, Time Warner will need to cut a
few more deals. We estimate it has about $190 million of digital licensing on the
books for 2013, needing another $160 million to be flat with 2012 (see Exhibit
126).
Time Warner has plenty of potential TV show candidates to offer for sale (see
Exhibit 127). Encouragingly, the list matches well with the type of content that
seems to perform best on SVOD (besides kids' programming): mostly dramas,
many of them serialized, some with a degree of cult-like following.
Exhibit 124
Exhibit 125
3.2%
2.1%
14%
1.2%
1.1%
6.7%
0.8%
7.4%
6%
0.4%
NA
2010
2011
% of Revenues
2012
% of Adjusted OI
2010*
Revenue
2011
2012
91
Time Warner Does Not Have Far to Go to Surpass 2013 SVOD Revenue Levels
Time Warner 2013 SVOD Revenue Bridge
$350
$161
$350
Unann.
Deals
Flat
SVOD
Revenue
$25
$62
Est. Value of
Deals Announced Since 2013
2012 Est.
Total
Netflix
Dom. TV
Netflix
Intl TV
Amazon/
Other
Netflix
Slate
Deal
TOON/
ADSM Deal
Exhibit 127
Seasons
Season
Serialized Series
ER
The O.C.
15
4
2009
2007
2
2
2
1
1
2
2012
2011
2011
2013
2010
2011
Long-running Sitcom
Drew Carey Show
Growing Pains
Murphy Brown
9
7
10
2004
1992
1998
92
Exhibit 128
Signficant Titles
Falling Skies
Longmire
Pretty Little Liars
Revolution
The Following
The Lying Game
666 Park Ave
Fringe
Alcatraz
Chuck
Political Animals
The Closer
The Whole Truth
Dark Blue
Rubicon
Pushing Daisies
Terminator: SCC
Studio 60
West Wing
Excl
Excl - NYA
Excl
Excl - NYA
Excl - NYA
Excl
Excl - NYA
Excl - NYA
Excl
Series
End Date
Still On
Still On
Still On
Still On
Still On
Still On
2013
2013
2012
2012
2012
2012
2011
2010
2010
2009
2009
2007
2006
Original
Network
TNT
A&E
ABCF
NBC
FOX
ABC
ABC
FOX
FOX
NBC
USA
TNT
ABC
TNT
AMC
ABC
FOX
NBC
NBC
Over time, however, SVOD revenue growth will not be determined by supply;
rather, it will be determined by demand. SVOD providers will only pay more if: (1)
the content owners have a significant advantage in negotiating leverage, and/or (2)
SVOD subscribers and/or ARPU continue to grow. We believe the days of content
owners, even one as strong as Time Warner, having all the leverage over SVOD
pricing is over. The content owners now need SVOD just as badly as SVOD needs
the content owners and the SVOD providers know it. Additionally, unlike the
traditional pay-TV distributors (MVPDs), the SVOD providers can unbundle. They
can pick and choose, and they have the data to underlie their decisions.
If SVOD subscribers continue to grow, we believe that will result in higher and
higher content licensing fees. Of course, that's a double-edged sword for Time
Warner, because increased SVOD subscribers means an increased threat of
cannibalization, which we believe is a more serious risk than slowing SVOD
revenues.
Growth at What Price
Exhibit 129
93
Netflix Homes Over-Index to Each of Time Warner's Cable Networks, Except TNT
Time Warner's Cable Network Ratings
(Jan 2011 - Jan 2013)
1.12
1.04
0.57
0.53
0.40
0.28
TNT (Prime)
TBS (Prime)
0.33
0.24
Adult Swim
Cartoon Network
Netflix Homes
Non-Netflix Homes
0.22 0.22
0.22 0.21
TruTV (Prime)
TNT
Exhibit 130
Netflix Homes Watch as Much or More of All Types of TNT Content, With the
Exception of Fresh Original Programs
Comparative Ratings By Genre
8.336
7.152
1.041 1.124
Originals - Fresh
All Genres
0.777 0.747
Live Sports
Netflix Homes
0.535 0.553
0.469 0.465
0.375 0.344
Movies
94
This phenomenon can be seen clearly by plotting the ratings gap over time (see
Exhibit 131 and Exhibit 132). TNT concentrates its original programming during
the summer season. Many top cable networks have pursued such a strategy, to gain
audience share while the broadcast networks are on their summer hiatus. (That
hiatus, by the way, isn't what it used to be. All the broadcast networks are now
programming originals year-round, although the summer is still filled with many
more hours of cheap reality fare.)
Exhibit 131
TNT's Netflix and Non-Netflix Ratings Having Trended in Step, But Netflix Homes
Tend to Drag During Fresh Content Cycles
TNT Primetime Indexed Ratings
3.50
3.00
2.50
2.00
1.50
1.00
0.622
0.546
0.50
0.00
Non-Netflix Homes
Netflix Homes
0.15
0.8
0.10
0.6
0.05
0.4
0.00
0.2
(0.05)
0.0
(0.10)
-0.2
(0.15)
-0.4
Correlation = -.82
(0.20)
-0.6
Exhibit 132
95
0.458
0.452
Prod.
Studio
Orig.
Network
Still
Running?
On
Netflix?
WB
WB
DW / TNT
WB
Sony
WB
ABC
Fox
WB
WB
Sony
WB
Ind.
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
TNT
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
Beg 2014
No
No
No
No
No
No
No
No
No
Yes
No
No
Fox
ABC
CBS
NBCU
WB
WB
Ind.
Fox
ABC
CBS
NBC
CBS
TNT
TNT
Yes
Yes
Yes
No
Yes
No
No
Yes
No
No
Yes
No
No
No
Non-Netflix Homes
TBS
0.501
Exhibit 134
96
Primetime Ratings at TBS Are Up for Both Groups, But Non-Netflix Homes Have
Pulled Ahead Since September 2011
TBS Primetime Indexed Ratings
3.0
2.83
2.72
2.5
2.0
1.5
1.0
0.5
0.0
Non-Netflix Homes
Netflix Homes
Exhibit 136
1.59
1.46
0.77
0.70
0.59 0.58
0.57 0.53
0.30 0.26
0.14 0.12
Live Sports
Syndicated
Comedies
Originals - Fresh
Netflix Homes
All Genres
Non-Netflix Homes
Movies
Originals - Repeats
97
For original programming, the pattern at TBS looks exactly like it did for TNT.
Exhibits 137 and 138 show that non-Netflix homes were much more likely to tune
in during debuts of TBS originals.
4.0
3.5
Exhibit 138
Class of 2012
Debuts
3.0
2.5
2.0
1.5
1.0
0.3
0.2
0.1
0.0
(0.1)
-1
(0.2)
-3
(0.3)
-5
(0.4)
0.5
-7
(0.5)
0.0
(0.6)
Non-Netflix Homes
Netflix Homes
Rerun Ratio
4.5
Exhibit 137
-9
Rerun Ratio
For syndicated programming, the story gets either really interesting or really
coincidental. Exhibit 139 shows the sizable, growing ratings gap between Netflix
and non-Netflix homes for this programming. During primetime, TBS only ran
three syndicated programs during our study period: The Office, Family Guy and Big
Bang Theory (see Exhibit 140). But it ran a lot of episodes of those three shows.
And all three of those shows have higher baseline ratings in Netflix households
than non-Netflix households (see Exhibit 141).
Here's where it gets really interesting. Two of those three shows The Office
and Family Guy are also available on Netflix. For those two shows, TBS ratings
in Netflix households gapped lower than in non-Netflix households (see Exhibits
142 and 143). Is this because Netflix households don't want to watch a rerun of The
Office, when they could watch any episode they ever want, commercial free, on
Netflix at any time? Or, is it just a coincidence? In contrast, Big Bang, which is not
available on Netflix, saw its TBS ratings gap higher in Netflix households (see
Exhibit 144). Is this because people that can't watch a program on Netflix are more
likely to watch it when it comes on linear TBS (or in local broadcast syndication)?
Honestly, three programs (with huge sample sizes) aren't enough to draw a
firm conclusion. But it's an awfully suspicious coincidence that availability on
Netflix affected TBS viewership.
98
Exhibit 139
Ratings for Primetime Syndicated Comedies at TBS Have Grown at a Faster Rate in
Non-Netflix Homes
TBS Primetime Syndicated Comedy
Indexed Ratings
3.08
3.0
2.63
2.5
2.0
1.5
1.0
Netflix Homes
Exhibit 140
Prod.
Studio
Orig.
Network
Still
Running?
On
Netflix?
Ind.
ABC
T. Perry
WB
T. Perry
Ind.
T. Perry
Sony
WB
Ind.
TBS
TBS
TBS
TBS
TBS
TBS
TBS
TBS
TBS
TBS
Yes
Yes
Yes - OWN
No
No
Yes
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
Syndicated Comedies
Family Guy
Big Bang Theory
The Office
TCF
WB
NBC
Fox
CBS
NBC
Yes
Yes
Yes
Yes
No
Yes
Jan-13
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
Apr-12
Non-Netflix Homes
May-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
Apr-11
May-11
Mar-11
0.0
Feb-11
0.5
Jan-11
3.5
Exhibit 142
Relative
Index
The Office
0.46
0.37
1.25x
Family Guy
0.43
0.36
1.21x
1.20
1.16
1.04x
1.2
Indexed Ratings (Jan 2011 = 1)
Exhibit 141
99
1.1
1.04
1.0
0.9
0.90
0.8
0.7
0.6
Non-Netflix Homes
Netflix Homes
Exhibit 143
Exhibit 144
3.0
1.4
1.42
1.3
1.28
1.2
1.1
1.0
0.9
0.8
1.5
2.5
2.12
2.0
1.5
1.0
0.5
0.7
0.0
0.6
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Netflix Homes
100
HBO
When SVOD was first being conceived, it seemed intuitively obvious that the
premium cable networks were at risk. And among them, HBO appeared to have the
most to lose. Surely there would be some households that would look at the choice
between HBO for $16/month and Netflix at $8/month and choose Netflix. SVOD,
after all, was held up by many as the centerpiece of a cord-cutting or cord-shaving
solution.
As it turns out, intuitive thinking was completely backwards.
Our data have consistently shown that Netflix households over-index on HBO
and Showtime, both in absolute ratings (which can be interpreted as a proxy for the
propensity to subscribe) and viewership over time. We believe this is proof-positive
that Netflix homes (at least the first 28 million of them) are not cord-shavers or
cost-conscious choosers rather, they are entertainment enthusiasts who can't get
enough of the stuff. And there's more great stuff than ever to enjoy.
The supporting facts are laid out as follows. Exhibit 145 shows the overindexing for HBO among Netflix households, for all types of HBO content,
especially originals. Exhibit 146 shows the viewing trends have stayed consistent
over time. Exhibit 147 shows there may be a slight seasonal effect, where Netflix
homes over-index on HBO during the spring/summer broadcast hiatus, which can
also be correlated to some degree back to our TNT and TBS data. What are Netflix
households watching more of during the spring/summer? The answer: HBO. All
the while, non-Netflix households are watching more TNT and TBS originals.
Exhibit 145
0.81
0.71
0.30 0.32
Originals
Movies
Non-Netflix Homes
Source: TiVO Stop||Watch and Bernstein analysis.
All Programs
Netflix Homes
Exhibit 146
3.0
0.35
0.30
2.5
0.25
2.0
0.20
1.5
1.0
0.89
0.79
0.5
Index Spread
Exhibit 147
101
0.15
0.10
0.05
0.00
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Netflix Homes
Jun-11
(0.15)
Apr-11
Jan-13
Nov-12
Jul-12
(0.10)
Feb-11
Non-Netflix Homes
Sep-12
May-12
Jan-12
Mar-12
Sep-11
Nov-11
Jul-11
May-11
Jan-11
Mar-11
(0.05)
0.0
Cartoon Network
The SVOD story at Cartoon Network is just getting started. As they say in the
business, "stay tuned." Until recently, Cartoon Network had been the only major
kids' network without any content on SVOD. And it was the only kids' network that
gapped to higher ratings in Netflix homes (see Exhibit 148). Every single other
kids' network was down in Netflix households leading us to believe the pattern
is more than just a coincidence. The trend over time for both Cartoon Network and
Adult Swim is shown in Exhibits 149 and 150, respectively.
Exhibit 148
All Kids' Networks Fared Worse in Households With Netflix Except Cartoon
Network, Which Was the Only Major Kids' Network Without Content on Netflix During
the Period of Study
Kids'
Network
Non-Netflix
Delta
Cartoon Network
15%
5%
10%
Nickelodeon
(14%)
(12%)
(2%)
Disney Channel
(2%)
0%
(3%)
Nick Jr.
(14%)
(11%)
(4%)
The HUB
38%
44%
(6%)
Disney XD
17%
23%
(6%)
Boomerang
(4%)
5%
(8%)
Sprout
10%
20%
(10%)
Nick Toons
(21%)
(6%)
(15%)
Teennick
(17%)
0%
(17%)
Exhibit 150
Netflix Homes
0.85
Non-Netflix Homes
Jan-13
Sep-12
0.75
Nov-12
0.80
Jul-12
Jan-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
Mar-11
May-11
Jan-11
0.9
0.93
0.90
May-12
1.0
0.95
Jan-12
1.1
1.00
Mar-12
1.2
1.05
Nov-11
1.29
1.10
Jul-11
1.3
1.10
May-11
1.4
1.44
Non-Netflix Homes
Adult Swim
Indexed Ratings
1.15
1.5
0.8
Sep-11
1.6
Indexed Ratings (Jan 2011 = 1)
Jan-11
Exhibit 149
Mar-11
102
Netflix Homes
Thank you, Cartoon Network, for setting up a perfect case study. We look
forward to reporting back over time on the viewership trends.
We don't know anyone at this point who still denies that SVOD hurts ratings
for linear kids' networks. The argument now is all about the relative tradeoff: How
much is SVOD hurting ratings, and how much does that translate to ad revenue,
versus how much licensing revenue can be generated?
We don't disagree that on a one-year view, the licensing revenue gained from
SVOD probably offsets the ad revenue lost. However, we do believe that over
several years, if left on its current course, SVOD will result in a bad end-game for
the kids' networks: They will reach a point where a sizable portion of their audience
has been encouraged to move to a platform with inferior economics, the networks
won't be able to get them back, and the SVOD providers will have all the
bargaining power (the first signs of this dynamic are playing currently playing out
between Netflix and Viacom). SVODs now have significant bargaining leverage,
with a credible threat, especially as both Netflix and Amazon have embarked on
their own original kids' animated programming.
We looked at CNN (and all the news networks), but didn't find any differences
between Netflix and non-Netflix households which is a finding in itself. The
time series plot of viewership between Netflix and non-Netflix cohorts is so similar
that it's basically impossible to see the two separate lines on the graph; they
essentially move as one (see Exhibit 151). Perhaps the most important finding,
however, is that there has been a gap in favor of Netflix homes at the other
major cable news networks in 2012 versus 2011 (Exhibit 152).
CNN
Exhibit 151
2.0
103
Exhibit 152
News
Network
1.8
Delta
MSNBC
55%
40%
14%
FNC
18%
11%
6%
CNN
(3%)
(4%)
1%
1.6
1.4
1.27
1.16
1.2
1.0
0.8
0.6
Non-Netflix Homes
Netflix Homes
104
SVOD
Service
NFLX
Deal
Date
01/06/10
NFLX
07/15/10
NFLX
10/13/11
LOVEFiLM
11/17/11
Reported
Amount
ND
SCB
Est.
$10's of MM's
Production /
Distribution Partner
WB Home
Entertainment
Terms
--Renewed and expanded license for WB streaming content
--Adds to the selection of direct to video and catalog movies available
to be streamed
--Part of 28-day DVD rental pact
--Expansion of existing streaming content agreement
WB Home
$20mm for
$20mm for
Entertainment
Nip/Tuck
Nip/Tuck; $5--Extends existing license for catalog movies through 2011
10mm for library
--Adds slate of catalog TV shows for 1-year with 4-year exclusive deal
shows
for Nip/Tuck
$1bn over 4yrs to $200mm to TWX
--4-year, non-exclusive output deal for previous seasons of scripted
CW
all parties
series
in 2011-2012
--No in-season episodes
--Netflix licensed 700 hours of previous-season episodes of current
and future programs
--Rights extend 4 years after each series, current or future, ends its
broadcast run on the network
--80% of fees go to producer parent companies (Warners and CBS),
with the remainder going to CW
ND
$10's of MM's WB UK, Ireland & Spain --Multi-year, exclusive "second pay TV window" in the UK for Warner
Brothers Films
--Deal does not affect BSkyB's rights to show films on its service,
which begin 6 months after cinematic debut and last for 1 year
--BskyB maintains rights to back-catalogue titles for an undisclosed
period of time
--Also provides access to Warnerfilms, a 24-hour WB-SVOD service
NFLX
02/01/12
ND
$10's of MM's
NFLX
06/11/12
Low-Mid Hundred
$000's per
episode
$350K/episode
AMZN
07/20/12
$20-$30mm
$40mm
WB Domestic TV
Distribution
NFLX Intl
11/16/12,
11/29/12
ND
$35mm in 2013
for TV
$10's of MM's for
Pay 2 window in
CA
WB Intl TV
Distribution
AMZN
12/17/12
ND
NFLX
01/07/13
Hundreds of
millions
$40mm in 2012;
$300K/episode
for "Falling
Skies" going
forward
Warner Bros.
Domestic TV & TNT
$55mm in 2013; Warner Bros. Television --Exclusive SVOD license agreement for complete previous seasons
$400k/episode
group
of certain serialized dramas debuting in 2012-2013 broadcast season
and seasoned shows
--Agreement covers slate of 8 shows and potential future shows
--Shows can still be made available through traditional syndication
windows, electronic sell-through and on catch-up basis for recently
aired episodes
NFLX
01/15/13
Hundreds of
millions
$30mm for
TOON/ADSM
Turner / Warner Bros. --Beginning March 30th, exclusive license for complete previous
TV
seasons of animated and live-action programming from Cartoon
Network, WB Animation and Adult Swim
--Exclusive license for seasons 1&2 of Dallas, beginning in January
2014
Source: Various news reports, corporate reports and Bernstein estimates and analysis.
Exhibit 154
Cost per
Episode
($000)
Termtr:
SCC
9
22
Nip/
Tuck
13
16
15
15
22
19
Non-Exclusive
31
22
64
100
47
40
16
10
13
15
78
87
West
Wing
22
22
22
23
22
22
22
155
$50
$50
$50
$200
$350
$350
$400
$400
$400
$400
$400
$75
$125
$100
Revol
16
TBD
Exhibit 155
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Total
Time Warner: Amazon Domestic Current SVOD Inventory and Estimated Values
Dark
Blue
10
10
Alcatraz
13
Whole
Truth
13
20
13
13
Studio
60
22
Pushing
Daisies
9
NA
Terminator
SCC
9
22
22
31
Chuck
13
22
19
24
13
Fringe
20
23
22
22
22
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Time Warner: Netflix Domestic Current SVOD Inventory and Estimated Values
105
106
Exhibit 156
Completed
Seasons
Available
Length
Total Hours
Primary
Producer(s)
Previous
Seasons First
Available
Last Season
Available End
Date
Gossip
Girl
18
25
22
22
24
10
Secret
Circle
22
22
121
22
114
All
All
5/6
All
42
15
CBS /
WB /
ABC
42
131
42
85
WB
CBS /
WB
90210
25
22
22
24
21
4/4/12
5/14/12
Cult
13
Emily
Owens
13
Arrow
19
Beauty &
Beast
16
Carrie
Diaries
13
86
13
13
19
16
13
7/8
3/4
0/1
0/1
0/1
0/1
0/1
42
43
42
119
42
60
42
42
42
42
42
WB
WB
CBS /
WB
WB
CBS /
WB
WB
CBS
WB
Nikita
22
23
16
SprNatrl
22
22
16
22
22
22
23
21
41
61
170
4/5
1/2
2/3
42
15
42
80
42
29
CBS /
WB
CBS
CBS /
WB
4/17/12
Hart of
Dixie
22
19
5/10/12
5/15/12
Vampire
Diaries
22
22
22
20
5/14/12
5/18/12
5/18/12
5/10/12
Fall 2013 Fall 2013 Fall 2013 Fall 2013 Fall 2013
NA
NA
NA
NA
NA
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
Total
One Tree
Hill
22
23
22
21
18
24
22
22
13
187
Ringer
22
Exhibit 157
Price Per
Episode
($000)
Ben
10
13
13
13
12
Regular
Show
13
27
38
Johnny
Bravo
13
22
20
14
Green
Lantern
26
Robot
Chicken
21
20
20
20
20
20
104
51
78
69
26
121
Aqua
Force
18
24
13
13
9
10
12
10
10
119
$113
$101
$107
$96
$101
$36
$38
Boondk
15
15
15
Children's
Hospital
10
12
14
14
45
50
$56
$34
Season 1
Season 2
Season 3
Season 4
Season 5
Season 6
Season 7
Season 8
Season 9
107
108
Exhibit 158
Time Warner: Estimated SVOD Revenue and Operating Income by Deal and Fiscal
Year
Estimated SVOD Revenue
Low
High
Midpoint
Est.
Margin
Op Inc
2010
Netflix TV content
Intl/Other TV
Movies - Domestic & Intl
Total
$20
10
60
$90
$30
10
70
$110
$25
10
65
$100
55%
55%
60%
$14
6
39
$58
2011
$100
39
81
$220
$110
40
81
$230
$105
39
81
$225
50%
55%
60%
$53
21
49
$123
2012
$95
14
8
77
13
138
$345
$99
16
8
79
13
139
$355
$97
15
8
78
13
138
$350
50%
55%
55%
55%
55%
60%
$49
8
4
43
7
83
$195
2013
$50
15
30
8
0
$47
14
25
7
10
50%
55%
55%
55%
55%
$24
8
14
4
6
60
35
$199
55
30
$189
45%
75%
$25
23
$102
109
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$28,729
15,934
6,333
(644)
$6,939
3,750
1,620
(157)
$7,024
3,888
1,553
0
$7,034
3,675
1,421
0
$8,326
4,463
1,579
0
$29,324
15,776
6,173
(157)
$30,584
16,239
6,203
0
$31,749
16,810
6,333
0
$33,017
17,432
6,469
0
$34,283
18,161
6,623
0
$7,106
25%
$1,726
25%
$1,583
23%
$1,938
28%
$2,284
27%
$7,531
26%
$8,142
27%
$8,606
27%
$9,117
28%
$9,499
28%
892
305
9
217
107
8
214
5
0
219
5
0
225
5
0
875
122
8
822
20
0
792
20
0
782
20
0
773
20
0
$5,918
20%
$1,410
20%
$1,364
20%
$1,714
20%
$2,055
20%
$6,542
20%
$7,300
20%
$7,794
20%
$8,315
20%
$8,705
20%
1,253
123
290
72
308
20
309
26
310
24
1,217
142
1,288
132
1,323
122
1,364
112
1,418
102
$4,542
$1,048
$1,036
$1,378
$1,721
$5,183
$5,880
$6,348
$6,839
$7,185
1,526
382
326
486
601
1,794
2,058
2,222
2,394
2,515
$3,016
$666
$710
$892
$1,120
$3,389
$3,822
$4,126
$4,445
$4,671
(3)
Q1-13A
Q2-13E
(1)
Q3-13E
(1)
Q4-13E
(1)
(3)
(4)
(4)
(4)
(4)
$3,019
11%
$666
10%
$711
10%
$893
13%
$1,121
13%
$3,392
12%
$3,826
13%
$4,130
13%
$4,449
13%
$4,675
14%
$3.16
$3.10
$0.71
$0.70
$0.77
$0.75
$0.97
$0.95
$1.23
$1.20
$3.67
$3.58
$4.34
$4.23
$4.85
$4.72
$5.30
$5.16
$5.69
$5.53
954
976
933
956
929
952
920
943
911
934
923
947
881
904
851
875
839
863
822
845
$6,126
3,203
$3.28
$1,440
731
$0.76
$1,369
715
$0.75
$1,719
896
$0.95
$2,060
1,125
$1.20
$6,587
3,467
$3.66
$7,320
3,839
$4.24
$7,814
4,143
$4.74
$8,335
4,462
$5.17
$8,725
4,688
$5.55
05/10/13
$7,110
1,594
1,372
714
$0.76
$7,071
1,921
1,693
893
$0.95
$8,452
2,292
2,057
1,126
$1.22
$29,549
7,444
6,569
3,463
$3.69
$30,856
8,103
7,205
3,870
$4.28
110
Exhibit 160
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
Assets
Cash & equivalents
Accounts receivable
Inventory, net
Other current assets
$2,841
7,385
2,060
1,002
$2,493
7,095
1,987
1,049
$2,328
6,677
2,045
1,056
$2,367
6,373
2,165
1,057
$2,435
7,532
2,113
1,167
$2,435
7,532
2,113
1,167
$3,336
7,822
2,216
1,194
$4,153
8,091
2,714
1,220
$5,220
8,378
2,908
1,246
$6,293
8,668
3,107
1,274
$13,288
$12,624
$12,106
$11,962
$13,246
$13,246
$14,569
$16,178
$17,751
$19,342
3,942
6,785
2,047
40,196
2,046
3,769
6,252
1,920
40,084
2,298
3,801
6,350
1,974
40,031
1,897
3,828
7,088
2,086
39,977
1,899
3,886
6,958
2,088
39,924
2,248
3,886
6,958
2,088
39,924
2,248
4,029
7,282
2,168
39,709
2,335
4,247
8,224
2,243
39,499
2,415
4,495
8,894
2,322
39,294
2,501
4,771
9,497
2,403
39,094
2,587
$68,304
$66,947
$66,159
$66,840
$68,350
$68,350
$70,092
$72,805
$75,256
$77,694
$8,069
1,011
749
$6,922
932
316
$6,790
1,037
316
$7,274
1,079
316
$8,229
1,031
316
$8,229
1,031
316
$8,547
1,071
0
$8,841
1,108
1,000
$9,154
1,147
0
$9,471
1,187
0
$9,829
$8,170
$8,143
$8,669
$9,576
$9,576
$9,617
$10,948
$10,301
$10,657
19,122
9,475
19,125
9,660
19,125
8,962
19,125
9,004
19,265
9,111
19,265
9,111
20,354
9,477
20,514
9,824
22,792
10,187
23,747
10,553
$38,426
$36,955
$36,231
$36,799
$37,953
$37,953
$39,449
$41,287
$43,279
$44,958
29,877
1
29,991
1
29,927
1
30,041
1
30,396
1
30,396
1
30,641
1
31,517
1
31,976
1
32,735
1
Total equity
$29,878
$29,992
$29,928
$30,042
$30,397
$30,397
$30,642
$31,518
$31,977
$32,736
$68,304
$66,947
$66,159
$66,840
$68,350
$68,350
$70,092
$72,805
$75,256
$77,694
FY-12A
Q1-13A
Q2-13E
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
PPE, net
Non-current Inventory, net
Investments
Goodwill & intangibles
Other non-current assets
Total Assets
Liabilities
Accounts payable & Accrued Liabilities
Deferred Revenue
Short term debt
Current liabilities
Long term debt
Other LT liabilities
Total liabilities
Time Warner Stockholder's Equity
Noncontrolling interests
$3,016
892
7,210
(8,069)
427
$666
217
1,792
(2,575)
575
$710
214
1,860
(1,929)
102
$892
219
1,621
(1,642)
126
$1,120
225
1,884
(1,973)
(230)
$3,389
875
7,157
(8,120)
573
$3,822
822
7,419
(7,628)
506
$4,126
792
7,706
(8,943)
514
$4,445
782
8,006
(8,653)
523
$4,671
773
8,261
(8,845)
533
$3,476
$675
$957
$1,217
$1,026
$3,875
$4,941
$4,196
$5,104
$5,394
($643)
(668)
65
($85)
(62)
138
($193)
0
(54)
($193)
0
(112)
($229)
0
(2)
($700)
0
(30)
($750)
0
(80)
($800)
0
(75)
($825)
0
(79)
($850)
0
(80)
($1,246)
($9)
($247)
($305)
($230)
($730)
($830)
($875)
($904)
($930)
$342
(1,011)
(3,272)
1,110
($434)
(273)
(672)
311
$0
(266)
(625)
15
$0
(263)
(625)
17
$140
(261)
(625)
17
($294)
(1,062)
(2,547)
360
$773
(1,206)
(3,150)
374
$1,160
(1,576)
(2,500)
411
$1,278
(2,363)
(2,500)
452
$956
(2,342)
(2,500)
498
($2,831)
($1,068)
($876)
($871)
($728)
($3,543)
($3,209)
($2,505)
($3,133)
($3,389)
0
($601)
0
($402)
0
($165)
$40
$68
0
($398)
$902
$816
$1,067
$1,074
111
As we come to the end of this Blackbook, we hope our point that SVOD hurts
ratings for kids' TV networks is settled with quantified trends. If there was any
doubt, we prove it again, ad nauseum, in this chapter, using Viacom as an example.
The debate, we believe, has moved on to posing the question, "Does the
licensing revenue more than offset the lost advertising revenue?" The networks
believe the answer is "yes." We agree taking on a one-year view. However, we
believe the economics have peaked. Going forward, cannibalization will get worse,
and licensing fees will eventually come down, creating an offset to any hoped-for
return to ad revenue growth at Viacom.
Viacom lost $1 billion in gross revenue year-over-year in FY12 (year ended
September 2012). The only two revenue streams to grow were linear affiliate fees
and digital licensing. The bull case for this stock is based on a significant
acceleration in earnings when advertising revenue growth swings from negative to
positive. Our bearish view has been predicated on skepticism regarding the degree
and permanence of that return to advertising growth, partly because of the
headwind SVOD is putting on kids' ratings. Now it appears that digital licensing
revenue streams are the next to go south, spoiling any hypothetical turnaround.
Cannibalization at Viacom (and other large-cap content providers) should
increase as penetration and usage of SVOD increases. Licensing fees will stall, and
eventually go down, as negotiating power has firmly shifted to the SVOD services
especially for Viacom, which we believe is currently over-earning from SVOD.
The company also has undercut its bargaining position, by making its content
available on every conceivable digital platform.
Supporting our view, Netflix recently disclosed that it will not renew Viacom's
bulk content deal, which was set to expire in second-quarter CY13, instead opting
to license select titles only, thereby breaking the bundle. It will be interesting to see
which titles Netflix chooses to continue licensing, with hints that the ones kept will
only be the most popular from the previous deal.
Viacom has been signing a lot of SVOD licensing deals (a full history is included
in the Appendix of this chapter, in Exhibits 193 and 194). SVOD revenue and
earnings have grown accordingly, and now represent a significant portion of
Viacom's operating income (reaching 4.4% in FY12), as shown in Exhibit 161.
This pattern is not different from the other large-cap media companies. What makes
Viacom particularly vulnerable going forward, in our view, is the degree to which
total company growth depends on continued SVOD growth, and Viacom's sizable
exposure to the kids' genre, which is most subject to SVOD cannibalization.
In FY12, we estimate Viacom's operating income from SVOD licensing grew
$91 million year-over-year, while total operating income only grew $47 million
(see Exhibit 162). In other words, while SVOD earnings grew $91 million,
everything else combined declined $44 million. From a revenue perspective,
Viacom revenue declined ~$1 billion in FY12. The only two revenue streams that
grew were (linear) affiliate fees and digital licensing (see Exhibit 163).
SVOD revenue was the (big) swing factor that prevented year-over-year
earnings growth from turning into a decline in FY12. This underscores why
Viacom has felt it had no choice but to continue these deals, and defend them
vigorously.
112
Exhibit 161
Exhibit 162
$485
4.4%
$446
2.0%
1.6%
0.9%
0.5%
0.1%
$16
$14
$91
$47
0.7%
0.3%
2009
$49
($103)
2010
2011
% of Revenues
2009
2012
% of Adjusted OI
Exhibit 163
2010
SVOD OI Growth
2011
2012
Viacom's Revenue Growth in FY12 Came Exclusively from SVOD and Linear Affiliate
Fees
Viacom Revenue Waterfall ($ in million)
$15,068
SVOD
($865 )
($241)
($228 )
Home
Ent.
$28
($80 )
TV
Other
($23 )
$277
$14,014
Linear
Aff
Fees
2012
Revenue,
ex-Elims
$94
($15 )
TV
Film
License Other,
Fees ex-SVOD
(Film)
SVOD
Film
SVOD
TV
113
Compounding matters, SVOD impacts the affiliate fee growth line, the
trajectory of which is crucial to Viacom's valuation (like most media companies,
Viacom records SVOD revenue in the affiliate fee line). SVOD has been the reason
affiliate fees have been growing at low-double digits, rather than high-single digits.
Exhibit 164 shows the sensitivity of the total affiliate fee growth rate, relative
to how much SVOD licensing revenue Viacom is able to generate (as a percentage
of FY12 licensing revenue), and the baseline run-rate of traditional linear affiliate
fees. The analysis highlights that:
If future SVOD revenue is flat compared to FY12, we estimate affiliate fee
growth will slow from low-double digits to high-single digits.
If future SVOD revenue declines, affiliate fee growth slows dramatically more.
The relative impact of SVOD on total affiliate fees declines somewhat over time,
due to the compounding growth of the base business (assuming baseline linear
fees continue to grow at high-single digits).
Exhibit 164
9.6%
8%
9%
10%
11%
12%
0%
3.1%
4.1%
5.1%
6.0%
7.0%
50%
5.4%
6.3%
7.3%
8.3%
9.2%
100%
7.6%
8.6%
9.6%
10.5%
11.5%
125%
8.8%
9.7%
10.7%
11.6%
12.6%
150%
9.9%
10.8%
11.8%
12.8%
13.7%
200%
12.1%
13.1%
14.0%
15.0%
16.0%
Not too long ago, we subscribed to a view that the content owners held all the
power in the negotiations with the SVOD players, which couldn't exist without
networks like Viacom. Viacom could say to Amazon (or whomever), "Here's the
content we will make available to you, and here's what you need to pay for it." And
the SVOD services would say, "Thank you very much."
Those days are clearly over. The content owners have enabled the SVOD
players to survive infancy. Now the SVOD players are big enough and strong
enough to fight back. They are smart enough to see how dependent the content
owners have become on the SVOD revenue stream (some more than others), and
the negotiating power that gives them. On top of that, the SVOD players have all
the data on exactly which content is being watched (and which is not), and
therefore how much any piece of content is worth to them.
There is a growing body of evidence supporting the theory that SVOD players
are not dependent on any one particular piece of content. Netflix lost big blocks of
content from both Starz and AETN, with no discernable impact on subscriber
growth. And as SVOD players ramp up their own original production, certainly
their appetite for acquired programming will diminish to some degree.
114
We believe Viacom will be the first among the large-cap media companies to
see SVOD revenue stall or decline based on three factors specific to it:
It is over-earning on current deals.
Its growth is particularly dependent on SVOD.
It has been the most promiscuous in making content available on all digital
platforms (why would SVOD providers pay a premium for access to content that
is widely available elsewhere?).
This theory was confirmed when Netflix announced it will not be renewing its
content deal with Viacom, which was set to expire in second-quarter CY13. Netflix
did indicate it would like to continue licensing content from Viacom, but on a much
more limited basis (known as "breaking the bundle"). We will find out the extent to
which titles and licensing revenue were cut when either a new deal is struck, or
Viacom reports third-quarter FY13 results.
We are not at all surprised by this development. As we suspected, Netflix
didn't need or want all of Viacom's content, and as rational actors in this situation it
would prefer to pay less, not more. At the bargaining table, Viacom likely argued,
"Netflix subs are way up since the last deal. Our fees should go up accordingly."
Netflix likely countered, "The amount we're paying you relative to the amount of
consumption of your content is out of whack, and there is a lot of your content not
being watched at all. And a lot of your stuff is available elsewhere. We only want
this small subset of your content, for which we'll pay you a per title rate increase
commensurate with sub growth" (which would likely net out to a decrease in total
revenue to Viacom).
SVOD A Parent's Best
Friend, and a Kids' TV
Advertising Exec's Worst
Nightmare
SVOD is a killer app for families. Find any parent with Netflix or Amazon Prime
and ask them about it (we did), they'll tell you (they did). The quantitative evidence
backs up the anecdotal findings: Homes that elect to subscribe to SVOD services
over-index on kids' viewing (see Exhibit 165). In other words, the SVOD services
(at least, Netflix for sure) over-index on families with kids.
Exhibit 165
0.33
0.34
0.24
0.15
0.02
0.03
HUB
0.03 0.03
0.03 0.03
Boomerang Nicktoons
Teennick
0.02 0.03
0.06
0.07
Sprout
0.07
Disney XD
Non-Netflix Homes
Source: TiVo Stop||Watch and Bernstein estimates and analysis.
0.09
0.11
Nick Jr.
Netflix Homes
Cartoon
Network
NICK
Disney
Channel
115
But, in homes with SVOD, ratings for those kids' networks gap significantly
lower over time, when compared with homes that don't have SVOD (see Exhibit
166). We've published similar data before; it always has been the same. What we
find so striking about the latest iteration are Cartoon Network's results. During the
period of the study (January 2011 through January 2013), Cartoon Network was the
only major kids' network that didn't have any content on Netflix and it was the
only kids' network with ratings that were higher in Netflix homes than in nonNetflix homes. Coincidence? Unlikely. We'll see how that changes in the future,
now that Cartoon Network succumbed and agreed to a deal with Netflix (in January
2013).
Exhibit 166
All the Kids' Networks of Viacom Fared Worse in Households With Netflix Except
Cartoon Network, Which Was the Only Major Kids' Network Without Content on
Netflix During the Reporting Period
Kids'
Network
Non-Netflix
Delta
(13%)
(8%)
(5%)
Nickelodeon
(14%)
(12%)
(2%)
Nick Jr.
(14%)
(11%)
(4%)
Nick Toons
(21%)
(6%)
(15%)
Teennick
(17%)
0%
(17%)
15%
5%
10%
Disney Channel
(2%)
0%
(3%)
The HUB
38%
44%
(6%)
Disney XD
17%
23%
(6%)
Boomerang
(4%)
5%
(8%)
Sprout
10%
20%
(10%)
The ratings for Viacom's kids' networks (Nickelodeon family of four networks)
were down 5% combined. Ratings were hurt the worst at Teennick (-17%) and
Nicktoons (-15%). Flagship Nickelodeon was only down -2%. Exhibits 167-171
show the trend plotted over time, for the full Viacom basket of kids' networks
(weighted), and then each network one-by-one. The shape of the relationship
between Netflix and non-Netflix homes is consistent throughout (the absolute
width of the gap is larger for some than others).
116
Exhibit 167
1.1
1.0
0.9
0.83
0.8
0.72
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
Mar-11
0.6
May-11
0.7
Jan-11
1.2
Netflix Homes
Note: Networks in the Viacom kids' composite include Nick, Nick Jr., Nicktoons and Teennick.
Source: TiVO Stop||Watch and Bernstein analysis.
1.0
0.9
0.81
0.8
0.76
0.7
1.5
1.1
1.4
1.3
1.2
1.1
1.0
1.00
0.9
0.8
0.74
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
0.6
Jan-11
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Sep-11
Nov-11
Jul-11
Mar-11
0.6
May-11
0.7
Jan-11
1.2
Exhibit 169
Jan-13
Exhibit 168
Netflix Homes
0.6
Non-Netflix Homes
Netflix Homes
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
Mar-11
0.4
0.60
May-12
0.60
0.84
0.8
Jan-12
0.6
1.0
Mar-12
0.76
0.7
1.2
Nov-11
0.8
1.4
Jul-11
0.9
1.6
Sep-11
1.0
Jan-11
1.1
1.2
0.5
And Teennick
1.8
1.3
Indexed Ratings (Jan 2011 = 1)
Exhibit 171
May-11
Mar-11
Exhibit 170
117
Netflix Homes
It is no secret that Viacom has not been stingy with the content it has been
willing to license to SVOD providers. We compared programs currently airing on
the Nickelodeon networks versus programs available on SVOD, and confirmed
there is a large overlap (see Exhibit 172). Roughly 60% of programs airing on
Nickelodeon can also be found on SVOD. The overlap is even greater for
Nicktoons (~70%), and slightly lower for Nick Jr. and Teen Nick (~55% for each).
For reference, the full library of Viacom's kids' programs available on SVOD is
provided in Exhibit 173.
Exhibit 172
% of Total
NFLX
NFLX + AMZN
Total
On NFLX
NFLX + AMZN
Nicktoons
21,696
21,738
30,238
72%
72%
Nick
12,218
12,350
20,213
60%
61%
Nick Jr
11,218
16,713
30,403
37%
55%
Teen Nick
15,831
15,831
29,153
54%
54%
Note: "# Episodes" refers to the number of episodes aired during our period of study (January 2011 through January 2013) across all dayparts.
"% of Total" measures the percentage of aired programming of shows (regardless of specific episode overlap) with prior seasons available
on the respective SVOD services. SVOD availability is measured as of the report date and does not necessarily correspond with
availability during the period each show's episodes aired.
Source: TiVO Stop||Watch, imdb.com, Netflix, Amazon and Bernstein analysis.
118
Exhibit 173
Nick Shows
Wild Thornberry's
Ren and Stimpy
Degrassi
Spongebob
Rugrats
Dora the Explorer
The Fairly OddParents
Little Bill
Go Diego Go!
Blue's Clues
iCarly
All Grown Up
Hey Arnold!
Hey Dude!
Little Bear
Winx
Victorious
Yo Gabba Gabba
The Backyardigans
Drake and Josh
Rocko's Modern Life
The Angry Beavers
Aaaah! Real Monsters
Catdog
Avatar
Fresh Beat Band
Wonder Pets
Total
Seasons
92 ep
52 ep
12
10
10
8
8
8
7
7
6
5
5
5
5
5
4
4
4
4
4
4
4
4
3
3
3
Netflix
36 ep
1-5
4-9
1-4
1
1-4
1-5
1-2
1-5
1-5
1
1-4
1-4
1-4
1-3
1-4
1-3
1-2
1-3
Amazon
76 ep
24 ep
1-5
1-3
1-3
1-3
V1-5
1-2
1-2
1-2
1-2
1-2
1-2
1-3
1-3
1
1-2
Hulu+
(# of Ep)
5
4
Nick Shows
Danny Phantom
Jimmy Neutron
Ned's Declassified
True Jackson, VP
Gullah Gullah Island
Big Time Rush
House of Anubis
H20
Fanboy and Chum Chum
TUFF Puppy
Invader Zim
Back at the Barnyard
The Mighty B!
The Troop
Oswald
Ni Hao, Kai-Lin
Kung Fu Panda: Legends
Penguins of Mad
Supah Ninjas
Dance Academy
Slide
Teenage Mutant
Marvin Marvin
Robot and Monster
See Dad Run
Wendell & Vinnie
Total
Seasons
3
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2
1
In S1
In S1
In S1
In S1
In S1
Netflix
1-3
1-3
1-3
1-2
1-3
1
1
1-2
1-2
1-2
1
1-2
1
Amazon
V1
1
1
1
Hulu+
(# of Ep)
5
5
S1-3
5
5
5
5
5
S1
4
8
5
5
2
This huge degree of overlap raises the question: When a kids' program is
available on SVOD, does it specifically hurt that programs' ratings on TV? In other
words: Do viewers seem to be making a specific substitution? (Specifically, why
watch Dora on TV, when I can watch it on Amazon anytime I want?)
The answer is the kids don't seem to think along the lines of specific
substitutions. We could find no discernable difference between Netflix and nonNetflix ratings, either in aggregate (see Exhibit 174 and Exhibit 175), or for the
specific flagship franchises SpongeBob and Dora (see Exhibit 176 and Exhibit 177,
respectively).
This is consistent with our study of Disney's programming and our focus group
conversations with moms, which we conducted in the summer of 2012. Most moms
describe a viewing decision process for kids that starts with the context (How long
will we be watching? Will a parent be in the room? What mood are we in?), rather
than starting deductively from a specific title (I want to watch Diego, when does he
come on Nick Jr.?).
The fact that specific availability of kids' titles on SVOD does not correlate
with ratings decreases for those programs on the linear network is why we believe
losing the Netflix deal won't bail Viacom out on the ratings front. It is also why we
disagree with the theory that losing the Netflix deal ultimately may be good
medicine for Viacom. Viacom's ratings will likely suffer with or without its content
on SVOD services.
119
We believe Viacom faces a prisoner's dilemma and with all the other kids'
content on Netflix, Viacom's ratings are going to suffer regardless of what content
stays on or is pulled from SVOD (i.e., if all the other prisoners take the deal, you
should take it also, if you can). It is an especially cruel fate for Viacom, since it
played such a large part in training parents and kids to use SVOD, and now is being
cut out of a large share of the licensing revenue (while still suffering the ratings
impact).
Because kids' lives are so different on weekdays versus weekends, we also
explored whether ratings gaps were different by day of week. We found, somewhat
counter to our original intuition, that the gap in Netflix homes is highest on
weekdays versus weekends (see Exhibits 178-180). Apparently, during the week,
kids' viewing time is less flexible and the use of SVOD is relatively higher (that
makes sense for adults, but we had not expected to see it for kids).
Nick
0.76
Non-Netflix Homes
Jan-13
Sep-12
Nov-12
Jul-12
0.6
May-12
0.7
Jan-12
Non-Netflix Homes
0.83
0.8
Mar-12
Netflix Homes
0.9
Nov-11
0.020
1.0
Jul-11
0.028
1.1
Sep-11
0.338
1.2
May-11
0.417
Jan-11
Exhibit 175
Mar-11
Exhibit 174
Netflix Homes
0.97
0.9
0.78
Netflix Homes
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
0.7
0.5
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.65
1.1
Mar-12
0.70
1.3
Nov-11
0.75
1.5
Jul-11
0.82
0.78
0.80
1.7
Sep-11
0.85
1.9
May-11
0.90
0.95
Non-Netflix Homes
2.1
1.00
Mar-11
1.05
0.60
Exhibit 177
Jan-11
Exhibit 176
Mar-11
120
Netflix Homes
Note: Dora episodes were available on Netflix during the entire period
of study. Additional episodes were added in May 2011. There
are currently four seasons available out of eight.
Exhibit 178
Nickelodeon Performed Worse in Netflix Homes on a Relative Basis Both During the
Week and on Weekends
Nick Ratings
2011
2012
Y/Y
Weekends
Netflix Homes
Non-Netflix
Spread
0.50
0.40
0.46
0.37
(7.4%)
(6.7%)
(0.7%)
Weekdays
Netflix Homes
Non-Netflix
Spread
0.42
0.33
0.35
0.28
(16.5%)
(13.7%)
(2.9%)
Netflix Homes
1.0
0.9
0.83
0.8
0.76
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Non-Netflix Homes
Mar-12
0.6
Jul-11
0.7
May-11
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.7
1.1
Jan-11
0.80
0.76
0.8
0.9
Mar-11
1.0
NICK Weekend
Indexed Ratings
1.2
1.1
Non-Netflix Homes
Nov-11
NICK Weekday
Indexed Ratings
1.2
0.6
Exhibit 180
Sep-11
Mar-11
Exhibit 179
121
Netflix Homes
Viacom is, of course, a lot more than just Nickelodeon. Content from the other
flagships, MTV and Comedy Central, has also been part of the SVOD licensing
deals. And ratings at these networks have not been great, either. Is SVOD to
blame? Our data suggests the answer is "no."
That's good news for Viacom. The bad news, we believe, is that viewership of
this content on SVOD may be very low. That makes it very likely that such content
will be trimmed in the upcoming Netflix deal.
Just like for kids' content, Netflix households over-index in MTV and Comedy
Central viewership. Both have higher baseline ratings in Netflix homes than in nonNetflix homes (see Exhibit 181 and Exhibit 182). Comedy Central has much higher
baseline ratings in Netflix homes, some ~50% higher than in non-Netflix homes.
But unlike for kids' programs, there is no discernable difference in MTV's and
Comedy Central's ratings trends between Netflix and non-Netflix homes over time
(see Exhibit 183 and Exhibit 184). That is despite the fact that there is, once again,
a huge overlap between programs delivered on air and programs available on
SVOD (see Exhibit 185). Some 65% of programs currently airing on Comedy
Central and on MTV in primetime are available on SVOD. For reference, a full list
of MTV and Comedy Central programs available on SVOD is provided in Exhibit
186 and Exhibit 187, respectively. Take a close look at these lists we believe
lots of these titles will disappear from Netflix services in June 2013.
122
Exhibit 181
Exhibit 182
MTV Ratings
(Jan 2011 - Jan 2013)
1.46x
0.349
0.655
0.308
1.52x
0.519
0.448
0.342
0.135
All Shows
Prime (8pm-12am)
Netflix Homes
Non-Netflix Homes
Netflix Homes
Exhibit 183
Exhibit 184
Non-Netflix Homes
Netflix Homes
1.0
0.80
0.75
Jul-12
May-12
Jan-12
Non-Netflix Homes
Mar-12
0.8
0.6
Jan-13
Nov-12
Jul-12
Sep-12
Mar-12
May-12
Jan-12
Sep-11
Nov-11
Jul-11
May-11
Jan-11
0.6
1.2
Nov-11
0.72
0.71
1.4
Jul-11
0.8
1.6
Jan-11
1.0
1.8
Mar-11
1.2
1.4
0.4
2.0
Sep-11
Mar-11
1.6
May-11
Jan-13
Non-Netflix Homes
Nov-12
Total Day
Sep-12
0.113
Netflix Homes
Exhibit 185
123
Both MTV and Comedy Central Make the Majority of Their Primetime Series Available
on SVOD
# Episodes Of Shows Also On
% of Total
NFLX
+ AMZN
+ Hulu +
Total
NFLX
+ AMZN
+ Hulu +
1,845
1,845
1,852
2,827
65%
65%
66%
MTV Primetime
1,352
1,720
2,031
3,182
42%
54%
64%
5,891
7,198
8,226
18,326
32%
39%
45%
Note: "# Episodes" refers to the number of episodes aired during our period of study (January 2011 through January 2013) across all dayparts.
"% of Total" measures the % of aired programming of shows (regardless of specific episode overlap) with prior seasons available on the
respective SVOD services. SVOD availability is measured as of the report date and does not necessarily correspond with availability
during the period each show's episodes aired.
Source: TiVO Stop||Watch, imdb.com, Netflix, Amazon and Bernstein analysis.
Exhibit 186
Real World
RW/RR Challenge
Punk'd
Beavis and Butt-head
Jersey Shore
The Hills
Run's House
Celebrity Deathmatch
Viva La Bam
Daria
Fantasy Factory
Teen Mom
Teen Mom 2
Wildboyz
16 and Pregnant
Teen Wolf
Netflix
40 Ep
1-4
1-6
1-3
1-2
4
1-2
Amazon
4 Sn
18-19
1-3
1-4
1-2
1-5
1-5
1-2
1-2
Hulu+
9 Sn
16-21
1-8
1-2
1-4
1-3
5-6
1-5
1-4
1-3
1
1-3
Laugna Beach
Bully Beatdown
The State
Awkward
Hard Times of RJ Berger
The Buried Life
The City
Death Valley
Good Vibes
Skins
Catfish
Buckwild
Washington Heights
Wake brothers
Engaged and underage
Status Updates
Total
Sns
3
3
3
2
2
2
2
1
1
1
1
1
1
1
1
1
Netflix
1
1-2
1-2
1-2
1-2
1
1
1
Amazon
1-2
1
Hulu+
1
1-2
1-4
1-2
1-2
1
1
1
1
1
1
1
124
Exhibit 187
Daily Show
South Park
Colbert Report
Reno 911!
Kenny vs. Spenny
Workaholics
Chappelle's Show
Drawn Together
Sarah Silverman Program
Strangers with Candy
Crank Yankers
Upright Citizens Brigade
Ugly Americans
Nick Swardson's Pretend Time
Important Things/Dmitri
John Oliver's Stand-up
Jeff Dunham Show
Jon Benjamin Has a Van
The Bensen Interruption
Chocolate News
Kroll Show
The Jeselnik Offensive
Stella
Total
Seasons
18
16
9
6
6
3
3
3
3
3
3
3
2
2
2
2
1
1
1
1
1
1
1
Netflix
1-15
1-6
1
1
1-3
1-3
1-3
1
1-2
1-2
1-2
1
1
1
Amazon
1-3
1-3
1-3
1-3
1-2
Hulu+
(# of Ep)
11 ep
1-16
12 ep
1-6
1-3
1-3
1-3
1-3
1-3
10 Ep
1-2
1-2
1
1
1
At Viacom's other networks, the general trend is similarly benign except for TV
Land (a little) and Nick-at-Nite (a lot). All the Viacom networks tend to have a
higher baseline level of popularity in Netflix homes compared to non-Netflix
homes, except for TV Land (see Exhibit 188).
Nick-at-Nite has gapped significantly lower in Netflix homes (see Exhibit
189). This trend seems very logical, considering the programming on Nick-at-Nite.
Even for viewers who love that stuff, if you have Netflix why would you ever
watch Nick-at-Nite (especially during times when Viacom jams even more
advertising load than normal into the schedule, which has been a frequent practice
over the past 12+ months)?
The trends for Viacom's other portfolio networks have been essentially flat,
with the slight exception of TV Land, which seems to be opening up a small
negative gap in Netflix homes (see Exhibits 190-192). While every little bit
matters, none of this is significant to Viacom's revenues, nor is there anything
Viacom can do about it. These networks are more general victims of a world that
includes SVOD (which is a secularly negative factor against them).
Exhibit 188
125
0.22
0.20
0.20
0.19
0.12
0.11
Nick-at-Night
Spike
TV Land
Non-Netflix Homes
VH1
Netflix Homes
1.1
0.9
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-13
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Sep-11
Nov-11
Jul-11
May-11
Jan-11
Sep-12
Netflix Homes
Jan-12
0.7
0.5
Non-Netflix Homes
1.32
1.3
Mar-12
0.8
1.62
1.5
Sep-11
1.0
1.7
Nov-11
1.2
1.9
Jul-11
1.4
2.1
May-11
1.50
Mar-11
1.6
0.6
2.3
1.89
1.8
Jan-11
2.0
Exhibit 190
Mar-11
Exhibit 189
Netflix Homes
Netflix Homes
1.0
0.8
0.64
0.60
0.6
0.4
Non-Netflix Homes
Jan-13
Nov-12
Jul-12
Sep-12
May-12
0.0
Jan-12
0.2
Mar-12
Jan-13
Sep-12
Nov-12
Jul-12
May-12
Jan-12
Mar-12
Nov-11
Jul-11
Sep-11
May-11
Jan-11
0.6
1.2
Jul-11
0.8
1.4
May-11
1.0
1.25
1.2
Mar-11
1.40
1.4
VH1 Primetime
Indexed Ratings
1.6
1.6
Non-Netflix Homes
Sep-11
1.8
0.4
Exhibit 192
Nov-11
Jan-11
Exhibit 191
Mar-11
126
Netflix Homes
127
SVOD
Service
Hulu
Deal
Date
06/10/08
SCB
Estimate
Ad Share
Production /
Distribution Partner
Viacom
NFLX
04/06/09
$20mm
MTV Networks
NFLX
05/22/10
$25mm
Hulu
02/02/11
Ad Share
$40-$50mm
guaranteed
Viacom
Hulu +
02/02/11
NFLX Intl
03/28/11
$10-15mm/yr
Viacom
NFLX
05/22/11
$100mm
Paramount
Viacom
AMZN
02/08/12
$50mm
Viacom
AMZN
Hulu
05/23/12
10/09/12
ND
Ad Share
Paramount
Viacom
Hulu +
10/09/12
Fee ($25mm)
and Ad Share
Viacom
Viacom
Terms
--Current full episodes and clips of The Daily Show and Colbert
Report
--Previous seaons of South Park and Nickelodeon series
--More than 300 Nick episodes in total, including shows from The N
--Undisclosed and unannounced additions to Netflix
--Additions included shows like Jersey Shore, The Hills, Sarah
Silverman and others from Comedy Central and VH-1
--Current full episodes and clips of The Daily Show and Colbert
Report (also available on Hulu Plus) return after nearly a year from
being dropped
--Deal goes "into 2012"
--Variety of shows from Comedy Central, MTV, BET, VH1, Spike TV,
and TV Land "into 2012"
--Current programs available 21 days after air
--2,000 episodes from Viacom's library
--5-year Canadian Deal, exclusive subscription TV rights to first-run
films
--Over 350 new movies
--Expansion of previous deal w/MTV Networks
License agreement covers "thousands of episodes" of TV shows
from MTV, Comedy Central, Nickelodeon, TV Land, Spike, VH1 ,BET,
CMT and Logo
--3-yr agreement to license "hundreds" of movies
--Extension of previous deal for Stewart and Colbert for 2 years
--2-yr Extension of previous deal; adding Nickelodeon programming
21 days after airing (five most recent episodes only) and content from
Tr3
--Library content selection reduced from 2,000 to 1,500 episodes
Exhibit 194
Viacom: Estimated SVOD Revenue and Operating Income by SVOD Provider and
Genre and Fiscal Year ($ million)
Estimated SVOD Revenue
Low
High
Midpoint
$15
$20
$18
Est.
Margin
80%
Op Inc
$14
2009
Domestic TV
2010
Domestic TV
International TV
Movies - Dom & Intl
Total
$22
0
15
$37
$27
0
20
$47
$25
0
18
$42
80%
80%
60%
$20
0
11
$30
2011
Domestic TV
International TV
Movies - Dom & Intl
Total
$70
2
20
$92
$84
7
25
$116
$77
5
23
$104
80%
80%
60%
$62
4
14
$79
2012
Domestic TV
International TV
Movies - Dom & Intl
Total
$120
45
45
$210
$130
55
55
$240
$125
50
50
$225
80%
80%
60%
$100
40
30
$170
128
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$13,887
6,993
2,757
(122)
$3,314
1,763
697
(31)
$3,135
1,539
689
(29)
$3,622
1,778
690
(36)
$3,693
1,703
698
(31)
$13,763
6,783
2,774
(127)
$14,330
7,066
2,836
(131)
$14,742
7,319
2,898
(135)
$15,195
7,584
2,962
(139)
$15,652
7,864
3,027
(143)
$4,259
31%
$885
27%
$936
30%
$1,190
33%
$1,322
36%
$4,333
31%
$4,558
32%
$4,660
32%
$4,788
32%
$4,904
31%
236
0
122
57
0
31
60
0
29
55
0
36
56
0
31
229
0
127
209
0
131
209
0
135
202
0
139
196
0
143
$3,901
28%
$797
24%
$847
27%
$1,099
30%
$1,234
33%
$3,977
29%
$4,218
29%
$4,316
29%
$4,447
29%
$4,565
29%
417
(12)
26
Q1-13A
110
(24)
(7)
Q2-13A
110
(16)
6
Q3-13E
111
(15)
0
Q4-13E
112
(5)
0
443
(60)
(1)
479
(60)
8
452
(60)
8
460
(60)
8
468
(60)
8
$3,470
$718
$747
$1,003
$1,127
$3,595
$3,791
$3,916
$4,040
1,085
236
258
351
394
1,239
1,289
1,331
1,373
1,411
$2,385
17%
$482
15%
$489
16%
$652
18%
$733
20%
$2,355
17%
$2,502
17%
$2,585
18%
$2,666
18%
$2,739
17%
(364)
(40)
(3)
(9)
(3)
(8)
0
(13)
0
(6)
(6)
(36)
0
(37)
0
(37)
0
(37)
$4,149
0
(37)
$1,981
$470
$478
$639
$727
$2,313
$2,465
$2,548
$2,629
$2,702
$3.73
$3.69
$4.36
$0.94
$0.92
$0.93
$0.97
$0.96
$0.96
$1.32
$1.30
$1.30
$1.53
$1.50
$1.50
$4.74
$4.66
$4.68
$5.40
$5.30
$5.30
$5.90
$5.79
$5.79
$6.34
$6.22
$6.22
$6.74
$6.60
$6.60
531
538
502
509
492
500
483
491
475
484
488
496
457
465
432
440
415
423
401
409
$3,901
2,264
$4.22
$797
461
$0.91
$847
481
$0.96
$1,099
639
$1.30
$1,234
727
$1.50
$3,977
2,307
$4.65
$4,218
2,465
$5.30
$4,316
2,548
$5.79
$4,447
2,629
$6.22
$4,565
2,702
$6.60
05/10/13
$3,580
1,154
1,096
645
$1.31
$3,724
1,298
1,246
730
$1.53
$13,767
4,249
3,992
2,325
$4.70
$14,374
4,539
4,270
2,500
$5.45
Consensus Estimates as of
Revenue
EBITDA
Operating Income
Net Income
Pro Forma EPS (diluted)
Exhibit 196
129
Q1-13A
Q2-13A
$848
2,533
832
640
$671
2,602
797
553
$1,260
2,545
755
734
$1,179
2,885
913
409
$1,134
2,781
914
638
$1,134
2,781
914
638
$821
2,879
946
659
$1,101
2,946
968
673
$1,874
3,027
994
690
$2,760
3,108
1,021
707
$4,853
$4,623
$5,294
$5,386
$5,467
$5,467
$5,305
$5,687
$6,584
$7,597
1,068
4,205
11,373
751
1,046
4,105
11,389
734
1,023
4,033
11,353
735
1,026
4,603
11,338
849
1,029
4,445
11,324
1,341
1,029
4,445
11,324
1,341
1,022
4,587
11,291
1,371
1,016
4,723
11,268
1,392
1,030
4,866
11,243
1,417
1,058
4,931
11,218
1,443
$22,250
$21,897
$22,438
$23,203
$23,604
$23,604
$23,576
$24,085
$25,139
$26,245
$1,198
989
799
18
826
$1,106
1,166
798
18
634
$1,075
839
837
18
761
$1,329
1,160
812
18
745
$1,315
1,086
877
18
826
$1,315
1,086
877
18
826
$1,362
1,124
908
600
907
$1,393
1,150
929
250
939
$1,431
1,182
955
918
961
$1,470
1,214
980
200
987
$3,830
$3,722
$3,530
$4,064
$4,123
$4,123
$4,901
$4,661
$5,446
$4,851
8,131
533
642
1,675
8,371
378
571
1,699
8,915
540
516
2,060
8,915
485
726
2,187
9,082
585
705
2,267
9,082
585
705
2,267
8,517
606
730
2,325
9,071
620
747
2,364
8,657
637
767
2,412
9,608
654
788
2,460
$14,811
$14,741
$15,561
$16,377
$16,762
$16,762
$17,078
$17,462
$17,919
$18,361
7,448
(9)
7,165
(9)
6,889
(12)
Q3-13E
6,838
(12)
Q4-13E
6,855
(12)
FY-13E
6,855
(12)
FY-14E
6,509
(12)
FY-15E
6,634
(12)
FY-16E
7,232
(12)
FY-17E
7,896
(12)
$7,439
$7,156
$6,877
$6,826
$6,843
$6,843
$6,497
$6,622
$7,220
$7,884
$22,250
$21,897
$22,438
$23,203
$23,604
$23,604
$23,576
$24,085
$25,139
$26,245
FY-12A
Q1-13A
Q2-13A
Q3-13E
Q4-13E
FY-13E
FY-14E
FY-15E
FY-16E
FY-17E
$2,385
236
4,380
(4,589)
86
$482
57
1,022
(1,032)
40
$489
60
983
(1,221)
413
$652
55
1,115
(1,157)
36
$733
56
1,198
(963)
(444)
$2,355
229
4,318
(4,373)
45
$2,502
209
4,442
(4,466)
131
$2,585
209
4,601
(4,680)
135
$2,666
202
4,768
(4,859)
139
$2,739
196
4,945
(4,952)
143
$2,498
$569
$724
$701
$580
$2,574
$2,818
$2,850
$2,916
$3,070
($154)
(18)
($36)
(10)
($31)
22
($44)
0
($44)
0
($155)
12
($170)
0
($180)
0
($190)
0
($200)
0
($172)
($46)
($9)
($44)
($44)
($143)
($170)
($180)
($190)
($200)
$801
(554)
(2,809)
149
$242
(277)
(700)
40
$542
0
(698)
57
$0
(134)
(700)
95
$167
(144)
(700)
97
$951
(555)
(2,798)
289
$17
(575)
(2,800)
396
$204
(630)
(2,400)
436
$255
(687)
(2,000)
480
$233
(744)
(2,000)
527
($2,413)
($695)
($99)
($739)
($580)
($2,113)
($2,962)
($2,390)
($1,953)
($1,984)
0
(2)
0
(5)
0
(27)
($89)
($177)
$589
0
0
($81)
0
0
($45)
0
(32)
$286
0
0
($313)
0
0
0
0
0
0
$280
$773
$886
130
131
Index of Exhibits
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Financial Overview
SVOD as a Percentage of Revenue and Operating Income, by
Company
All Kids' Networks Fared Worse in Households With Netflix
Except Cartoon Network, Which Was the Only Major Kids'
Network Without Content on Netflix in 2012
SVOD Has Been a Significant Driver of Earnings Growth for Most
Large-Cap Media Companies ($ million)
Total SVOD Revenue Estimates by Studio/Source
All Large-Cap Media Companies Generate Significant SVOD
Revenue
SVOD as a Percentage of Revenue and Operating Income, by
Company
Estimates for SVOD Provider Economics
The Total Demand for Streaming Rights Over the Next 2-3 Years Is
Constrained by SVOD Economics ($ million)
Total SVOD Revenue Estimates by Studio/Source
The Number of Households Using Television and Persons Using
Television Have Been Relatively Stable Since 2010
Households With Netflix Streaming Have Consistently Watched Less
Kids' Programming Than Households Without Netflix Streaming
Since January 2011
All Kids' Networks Fared Worse in Households With Netflix
Except Cartoon Network, Which Was the Only Major Kids'
Network Without Content on Netflix in 2012
For Serialized Dramas, Placing Programming on Netflix Can
Improve Linear TV Ratings
SVOD Has Been a Strong Contributor to CBS's Revenue and
Operating Income Growth
SVOD Is Becoming a Meaningful Share of CBS's Revenue and
Operating Income (Assumes 60% Gross Margin)
CBS Has Licensed Over 7% of Its Library to All the Major SVOD
Players in the United States
Some Notable Holdouts from the CBS Library, Not Yet Licensed to
SVOD
Netflix Put Options Treasure Trove or Garbage Can?
CBS Has Kept Its Current Dramatic Series Off SVOD Services
The Most Likely Opportunity for SVOD Upside for CBS Is
Licensing Previous Seasons of Current Series
CBS's Current SVOD Package Leaves the Company Short of Last
Year's Total ($ million)
The Baseline Level of CBS Viewing in Netflix Households Tends to
Be Lower, Except in Early Mornings
The Baseline Level of Showtime Viewing Is Higher in Netflix
Households
4
5
6
6
7
12
12
13
14
14
15
16
16
18
20
20
21
22
22
23
24
24
25
26
132
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
26
27
27
27
27
28
28
29
29
30
31
32
33
34
35
36
37
38
40
40
40
41
42
43
44
45
45
45
46
46
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
133
46
46
47
47
48
48
48
49
49
50
50
51
51
51
51
52
52
53
54
55
56
57
60
60
60
61
134
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
62
62
62
63
63
64
64
65
65
65
65
66
66
67
68
69
70
71
72
73
74
76
76
76
77
78
78
78
78
110
111
112
113
114
115
116
117
118
119
120
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
135
79
79
80
80
80
81
82
82
83
83
84
86
87
90
90
91
91
92
93
93
94
94
95
95
96
96
97
97
136
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
98
98
99
99
99
99
100
101
101
101
102
102
103
103
104
105
105
106
107
108
109
110
112
112
112
113
114
115
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
137
116
116
116
117
117
117
118
119
119
120
120
120
121
121
122
122
122
122
123
123
124
125
125
125
126
126
127
138
194
195
196
127
128
129
139
Disclosure Appendix
VALUATION METHODOLOGY
We value each of the companies in our U.S. media coverage using the weighted average of a discounted cash flow analysis and a
relative market multiple valuation. For our relative multiple valuation, we apply our Q5-Q8 EPS earnings estimate to a relative PFE
multiple selected based on past history, projected growth rates and the company's ability to generate returns in excess of the cost of
capital, all relative to that of the S&P 500.
Our DCF valuations are conducted on a sum-of-the-parts basis for each major operating segment of our respective coverage
companies, with comparable company valuation benchmarks used when appropriate and available. Our DCF model is based on
annual cash flow forecasts over an explicit period, combined with a continuing value component intended to capture the firms value
into perpetuity. Our explicit period assumptions are based on annual projections for NOPLAT, depreciation, capital expenditures,
and working capital. The fair market value of common equity determined by each of these methods is divided by the current diluted
share count and multiplied by one plus the cost of equity minus the current dividend yield (1 + Ke - d) to calculate a target share
price in 12 months' time.
We then weight the market multiple component of our valuation 50% and the DCF 50% in order to establish a weighted average
target price.
RISKS
Consumer and advertising spend are significant drivers of revenue for most of the companies in our coverage of U.S. media. The
deterioration of economic conditions could have a material negative impact on revenues and earnings of the companies in our
coverage and on the stocks achieving our target prices. The health and stability of the video distribution ecosystem is vitally
important with respect to the delivery of our companies' television content. New and innovative platforms that offer video distribution
could potentially disrupt the ecosystem, thereby jeopardizing the primary distribution partners (cable and satellite) of each of our
companies. Additionally, piracy of content could serve to undermine the profitability of a product that typically is produced with the
expectation of multiple distribution methods and time horizons for which that product can be monetized.
For all companies, advertising spend is sensitive to economic expectations and the health and stability of a concentrated number of
industries. Our forecast of U.S. and international ad spending for cable and broadcast networks could vary significantly from realized
results.
In addition to the industry-wide risks, each company has its own factors that could prevent our target prices from being reached. We
discuss each company's risks in the following paragraphs.
CBS. Ratings for programming aired on CBS's broadcast networks may deteriorate from the current levels, causing ad revenues,
retransmission fees and future off-network and international syndication value for the content to decline. Programming costs may
increase faster than expected due to increased competition for creative talent. CBS may not be able to delever effectively, if at all,
exposing the company to increased financial risk and inhibiting the possibility of achieving a lower cost of capital. Showtime faces
competitive threat from SVOD providers (e.g., Netflix).
Discovery. Discovery may have trouble acquiring or producing low-cost content or leveraging its content across multiple platforms
and geographies. An increasing reliance on international markets (especially Continental Europe and the United Kingdom) presents
unique risks, including increased exposure to volatile economic conditions and varying regulatory regimes and content copyright
protections. The ability to increase affiliate fees may be negatively affected by Discovery's lack of a network with dominant ratings.
JV partners may limit Discovery's ability to take action to improve performance, or they may exit the ventures that are not performing
adequately.
Disney. Disney may be unable to continue its pace of affiliate fee increases at its cable networks due to financial constraints on the
part of buyers or increased regulatory oversight. The slate of capital projects may fail to create a return on investment
commensurate with the alternative uses of capital (such as share buybacks or dividends), or the market may fail to realize the value
of these investments for a period longer than we anticipate. The TV and film production units may fail to deliver content that either
succeeds on its own merit, or can be exploited through Disney's Consumer Products, Parks and Resorts, and Interactive Media
divisions. Global economic conditions may worsen, affecting advertising revenue at the cable and broadcast networks as well as
consumer demand for the Consumer Products and Parks and Resorts divisions. Capital intensity and high fixed costs at the Parks
division limit Disney's flexibility to reduce costs/committed capital in response to worsening economic conditions. Any negativity
surrounding the Disney brand would resonate throughout all business lines.
News Corp. Ratings for programming aired on FOX's broadcast networks may deteriorate from the current levels, causing ad
revenues, retransmission fees and future off-network and international syndication value for the content to decline. News Corp may
be unable to realize positive value for the cash it has on hand if future investments are value-destructive. Negative regulatory
backlash and public perception from the News International scandal could be contagious across other News Corp divisions and
produce negative unintended consequences. The publishing business has been in decline and may never stabilize or recover. The
satellite pay TV operations in Italy and Germany expose the company to country-specific risks.
Time Warner. At Time Warner, the film unit may fail to produce future franchise hits, on which it has depended heavily in the past,
which would negatively impact profitability for that unit. The networks may find their competitive positions untenable, resulting in
either a loss of viewers, increased production costs, or both. Publishing has been in decline for years and could become valuedestructive. HBO faces competitive threat from SVOD providers (e.g., Netflix).
Viacom. Viacom may experience a significant increase in ratings at its flagship networks. International demand for Viacom's content
and cable channels may exceed that of our forecasts. Additional digital licensing partners may go to market with content licensed
140
from Viacom, or current SVOD partners may significantly expand current distribution arrangements. Paramount may produce future
franchise hits, which it has done with regularity in the past, which would positively impact profitability for that unit.
References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong
Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd.
which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C,
collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account
penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or
contributions to, generating investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on
the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for
Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets
exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (exJapan) exchanges - unless otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 05/10/2013, Bernstein's ratings were distributed as follows: Outperform - 37.5% (0.9% banking clients) ; Market-Perform 50.2% (0.3% banking clients); Underperform - 12.3% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers
in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services
within the last twelve (12) months.
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common
stock of the following companies VIAB / Viacom Inc.
12-Month Rating History as of 05/12/2013
Ticker Rating Changes
CBS M (IC) 02/28/12
DIS
O (IC) 02/28/12
DISCA O (IC) 02/28/12
NWSA O (RC) 01/10/13 M (IC) 02/28/12
TWX M (RC) 06/11/12 U (IC) 02/28/12
VIAB U (RC) 10/10/12 M (IC) 02/28/12
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated
Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
141
142
OTHER DISCLOSURES
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rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any
valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.
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143
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CERTIFICATIONS
I/(we), Todd Juenger, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect
my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or
will be, directly or indirectly, related to the specific recommendations or views in this publication.
Approved By: NK
Copyright 2013, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of
AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication,
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This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax
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