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Investment Overview for Time Warner (NYSE:TWX)
Below are key drivers of Time Warner's value that present opportunities for upside or downside to the current Trefis price estimate:
HBO Subscription Revenue
- Fee per HBO U.S. Subscriber: Fee per HBO U.S. Subscriber has increased from $6.1 to an estimated $7.3 between 2010 and 2015. This can be attributed to a combination of HBO's appeal and multi-year contracts with pay-TV operators. Contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. These contracts are long-term, spanning across several years. Moreover, HBO is unparalleled in terms of its movie content and its original programming, which include hits such as Game of Thrones. Given that it charges a very high fee subscriber, it is able to afford such premium content. Despite increasing subscriber fees, HBO has been able to maintain and grow its subscriber base, indicating sustained demand for this premium channel. Going forward, it appears that the uptrend will continue driven by the same factors. In case, the growth is much higher given the demand for its content, we believe there could be a potential upside of more than 10% to the Trefis price estimate. This is assuming that Fee per HBO U.S. subscriber doubles to north of $14 by end of the Trefis forecast period. However, a sluggish demand and stiff competition in the media industry could pressurize Fee per HBO U.S. Subscriber and pose a 10% downside to the Trefis price estimate. This scenario would occur if Fee per HBO U.S. Subscriber falls under $6 range by the end of the forecast period in 2023.
International Subscription & Advertising
International And Other Revenues: Time Warner's International And Other Revenues comprises of advertising and subscription revenues. The segment revenues have accelerated at an average annual rate of over 9% in the past five years. This can be attributed to the company's international expansion. By the end of 2015, Time Warner distributed its content through various networks in more than 200 countries around the world. We expect both advertising and subscription revenues to continue to grow driven by the availability of more content internationally. We estimate International And Other Revenues to increase to $4.5 billion by the end of the forecast period. There could be an upside of over 10% to the Trefis price estimate if the International And Other Revenues continue to grow at at a high rate and be north of $7 billion. On the other hand, the stiff competition in the media industry could lead to a decline in growth rate for the company's international revenues. If the segment revenue remains rangebound around $3 billion, it could pose a 5% downside risk to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Time Warner at the top of the page.
Time Warner is one of the largest media companies in the world. The company makes money through its cable networks and production and distribution of movies and TV shows.
Time Warner's primary cable networks include HBO, TNT, TBS, CNN, and Cartoon network. The company charges a carriage fee from cable and satellite operators for providing its cable channels to their subscribers. It also sells advertising slots on its networks to advertisers such as telecom, automotive and consumer goods companies.
Time Warner produces movies under the Warner Bros. & New Line Cinemas brands and distributes them via box office, DVDs, Blu-Rays and licensing.
In the second quarter of 2014, Time Warner had split off its publishing assets and Time Inc. is now listed as a separate entity on NYSE (ticker - TIME).
Cable networks, other than HBO, constitute a large portion of Time Warner's value. These networks include TNT, CNN, TBS and several other networks spanning the U.S. and international markets.
CNN, TNT and TBS have over 90 million subscribers each in the U.S. market. Additionally, Time Warner operates several region-specific versions of its popular networks such as Cartoon Network, Turner Classic Movies, TNT, truTV and Boomerang among others and other regional networks in more than 200 countries globally as of 2015.
Cable networks have close to 39% EBITDA margins, which is substantially higher than margins for filmed entertainment businesses. Furthermore, there is relative stability in these margins due to stable increases in subscription pricing seen historically.
HBO's New Streaming Service
HBO launched its over the top streaming service - HBO Now - in April 2015. This service includes HBO’s past, present and future series in addition to its lineup of Hollywood movies. It is priced at around $15 per month. Given a change in viewing habits and audience shifting from traditional television to digital platforms, HBO decided to go over-the-top. CBS and Showtime also followed suit and launched their respective streaming services in 2015. This is an ongoing trend and so far it has not resulted in any significant drop in HBO subscribers on traditional television. HBO as well as Showtime are premium networks and are eyeing the 10 million broadband-only subscribers in the U.S., along with other 70 million homes that haven't subscribed to the network. By the end of 2015, HBO had 0.8 million streaming subscribers.
Increasing pay-TV competition
Increasing competition among pay-TV providers such as Comcast, Time Warner, DirecTV, AT&T and Verizon is favorable for media companies. In such a scenario, Viacom can gain negotiating power in discussions regarding the pricing of subscription fees for its programming content.
Increasing disputes with pay-TV service providers
Even though competition among pay-TV companies is increasing, they cannot continue bidding up subscription prices for channels. In order to protect consumers, pay-TV providers are increasingly taking a stand against media companies, leading to frequent channel blackouts.
With growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. This is helping them recoup some of the lost revenues from declining DVD sales.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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