For CBS (NYSE:CS), its licensing business is a reasonably important one as it helps CBS shows earn money when they run on the other networks. Additionally there is significant growth potential from streaming licenses to companies such as Netflix (NASDAQ:NFLX), Blockbuster, Amazon (NASDAQ:AMZN) and others, depending upon how this market develops. Based on our current forecast, we estimate that this business constitutes about 16% to CBS’ value. However, this could be a little bigger and CBS’ stock can grow if streaming licensing really picks up in next few years. Below we take a quick look at the potential magnitude of this upside
CBS’ Pay-TV Presence
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The pay-TV market in North America amounted to a little over $70 billion in 2010.  The research firm Digital TV Research expects these to decline slightly over the course of next few years.  Assuming that the pay-TV revenues between U.S. and Canada are split in the proportion of population, we deduce that the pay-TV revenues in the U.S. in 2011 would have been somewhere around $62-$63 billion.
We also estimate that CBS’ pay-TV related revenues (revenues earned from carriage fee, licensing and advertisements through pay-TV medium) stood at around $9.5 billion in 2011. This figure stands at around 15% of total U.S. pay-TV revenues.
Although this is not an accurate metric to calculate, it serves as a decent tool to understand how much CBS can gain from streaming.
Same Presence In Streaming Can Fetch Good Money
Total streaming related revenues stood at around $1 billion in 2011.  Furthermore, the U.S. streaming market is expected to grow at a rate of 30% to 40% per year.  Assuming that CBS’ streaming licensing related revenues can stay at around 15% of the total U.S. streaming revenues, similar to what exists in the pay-TV market, CBS can earn an incremental $1 billion a year in revenues by end our forecast period.
This can push up our forecast for CBS’ TV licensing revenues significantly above our current predictions, thus leading to an upside of about 5% to our price estimate. Therefore, even though the incremental revenues are significant, the potential upside is moderate when seen in context of the company as a whole.
Our price estimate for CBS stands at $33.52, implying close to 10% premium to the market price.Notes:
- North American pay-TV revenues set for $3bn drop, advanced-television.com, Jun 9 2011 [↩] [↩]
- Home-Video Spending Stalls in Fourth Quarter to Cap 2011 Decline, Bloomberg, Jan 10 2012 [↩]
- Netflix Rises Most in Year to Bring 2012 Gain to Over 40%, Businessweek, Jan 10 2012 [↩]