Is Letterman Worth More to CBS than the CW Network?

March 1st, 2011 by Trefis Team
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CBS
CBS

CBS (NYSE:CBS) competes with other media conglomerates like Disney (NYSE:DIS), News Corp. (NASDAQ:NWS), Time Warner (NYSE:TWX) and Viacom (NYSE:VIA) in the media and entertainment business. Our price estimate for CBS stands at $26.34, a roughly 13% premium to market price. CBS has seen improvement in its advertising revenues through general recovery of the ad market and a heightened focus on content quality. We recently discussed this affect of content quality on ad pricing (see article Upping Estimates on CBS on Better Ad Environment).

Certain shows have helped to improve CBS’ ratings. Here we take the opportunity to explore this idea by looking at the stand-alone significance of “The Late Show with David Letterman”. While we’ve previously examined this idea in aggregate, we find it interesting to explore how individual shows, mainly those that viewers readily associate with a broadcast network’s brand, contribute to company-wide ad revenues.

‘The Late Show with David Letterman’ is a late night talk show hosted by David Letterman on CBS. David Letterman hosted a similar show on NBC before moving on to host the CBS show in the early 1990’s. A current agreement will put Letterman in place to continue hosting the show through August 2012. [1]

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See our full analysis and $26.34 price estimate for CBS

Letterman’s Show Drives Notable Ad Revenues

Ad Age reports that Letterman’s late night show generated annual advertisement revenues of around $271 million in 2009. [2] Being a show hosted on a broadcast network, ad monetization is the primary way the show makes money for CBS.

If we take this revenue number as a baseline, and assume the show continues beyond 2012, a back-of-the-envelope calculation would indicate that ad revenue generates roughly 7.5% of CBS Network’s equity value. It is critical to note that CBS Network, by our estimates, constitutes about 15% of CBS’ company-wide stock value, which we peg at $26.34.

To simplify, we can estimate that ad revenues from Letterman’s late night show represent a little over 1% of CBS’ stock value. Not an overwhelmingly large contribution, but still significant for a single show. Notably, the CW Network is accountable for roughly 1% of CBS’ equity value by our estimates. So is Letterman worth more to CBS than the CW Network?

Notes:
  1. Letterman Reaches a Deal With CBS to Extend ‘Late Show’, The New York Times, June 9 2009 [↩]
  2. Ad Age: Letterman’s Late Night Ad Revenue $271 Million; Chelsea Lately’s Nearly Equals The Colbert Report’s, TV by the numbers, Feb 28 2010 [↩]