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Investment Overview for Time Warner (NYSE:TWX)
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Time Warner is one of the largest media companies in the world. The company makes money through its cable networks, production and distribution of movies and TV shows, and publishing magazines.
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. Additionally, the company also publishes well known magazines such as Time, People, Fortune and others.
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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.
Widespread presence
CNN, TNT and TBS have close to 100 million subscribers each in the U.S. market. Additionally, Time Warner operates about 70 region-specific versions of its popular networks such as Cartoon Network, Turner Classic Movies, TNT, truTV, Boomerang etc. and 57 other regional networks in more than 200 countries globally as of 2011.
High Margins
Cable networks have close to 36% EBITDA margins, which is substantially higher than margins for filmed entertainment and publishing businesses. Furthermore, there is relative stability in these margins due to stable increases in subscription pricing seen historically.
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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.
Online licensing
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.
Trefis Forecast Rationale for Fee per HBO U.S. Subscriber
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${forecast} represents the monthly fee paid by U.S. cable and satellite providers such as Comcast, Time Warner Cable, DirecTV etc. to HBO in order to provide it as a channel to their subscribers.
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${forecast} has increased over the years amounting to about $7.27 per subscriber per month in 2011. We believe this is because most pay-TV service providers enter into multi-year agreements with content owners such as Time Warner with prescribed yearly increases. We expect the growth in ${forecast} to continue.
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Trefis considered the following factors for its forecast
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- Multi-year agreements
- Historical dollar increases in fees per subscriber are strong predictors of future growth.
- 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.
- HBO's appeal
- HBO is unparalleled in terms of its movie content. 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.
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- Pressure from pay-TV companies
- Several recent disputes between pay-TV companies and media companies over carriage fee increment demonstrate tougher stance from pay-TV companies. They argue that it is not in subscribers' best interest to allow the fee increments to continue as per media companies' demands.
- This is likely to keep fee increases in check.
- Competition from other channels and alternative platforms
- Other channels are increasingly bidding for original content and movie rights. Even online streaming companies such as Netflix are introducing original content and bidding for newer movies. This could give HBO some competition in the future as viewers divert away to other networks and platforms.
Back to Company OverviewHow 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:
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