CBS Gains From The Growing Appetite For Streaming Content

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Quick Take

  • CBS announced a multi-year licensing deal with Netflix. Under the deal, Netflix will get access to certain new titles and expand the content available for its subscribers.
  • Netflix has maintained its focus on offering original content and is not shying away from spending more to do so. Licensing television shows to streaming services is a cash cow for content owners such as CBS.

CBS Corporation (NYSE:CBS) has announced a multi-year licensing deal with Netflix (NASDAQ:NFLX) that will add new titles and expand the range of TV content on Netflix’s instant streaming service. [1] CBS has been increasing its reliance on newer revenue sources such as online streaming and retransmission fees as the growth in broadcasting business slows. The latest deal with Netflix is expected to earn incremental licensing revenue for the company and support its margin growth, which is one of key reasons why CBS’ stock has performed well over the last few years. As more people sign up for digital streaming services, content owners such as CBS will continue to mint cash from these sources.

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See our complete analysis for CBS

CBS Extends Its Deal With Netflix

CBS and Netflix recently announced an extension of their multi-year licensing agreement for select CBS library content. Under the revised deal, new titles such as L.A. Complex, 4400, and CSI: NY will be available to Netflix subscribers. Terms of the deal were not disclosed. In addition to the newly added series, the agreement also includes popular CBS series already on Netflix such as Jericho, Medium, and Flashpoint, as well as episodes from some of television’s most iconic franchises, including all generations of the definitive sci-fi series Star Trek and the cult favorite Twin Peaks. ((CBS AND NETFLIX ANNOUNCE EXTENSION OF MULTIYEAR LICENSING AGREEMENT FOR LIBRARY CONTENT IN THE U.S., CBS’ Press Release, Jul 8, 2013))

Netflix’s Focus On Original Content

In its last earnings announcement, Netflix stated that its content advantage was the biggest driver of its U.S. streaming subscriber growth. The company’s domestic streaming subscriber base grew from 21.7 million at the end of 2011 to 27.1 million by the end of 2012. [2] The company has been adding some original and exclusive programming to its streaming library.

Netflix signed a deal with Disney (NYSE:DIS) last year to gain exclusive access to some of its content once the contract between Starz and Disney expires in 2015. (What Are The Implications Of Netflix’s Deal With Disney?, Trefis, Dec  6, 2012)) During the first quarter of 2013, Netflix continued to expand its streaming content through deals with Turner Broadcasting, Warner Brothers Television Group, DreamWorks Animation and Hasbro Studios. Last month, Netflix signed a multi-year deal with DreamWorks Animation, which will give it distribution rights to DreamWorks’ original TV series. [3] It is evident from the growth of Netflix that there is a huge demand for streaming and operators such as Netflix and Amazon (NASDAQ:AMZN) need more and more content for their subscribers, which is giving higher pricing power to content owners such as CBS (read – A Look At Netflix’s Streaming Growth In The U.S.).

The Licensing Business For CBS

Licensing television shows to streaming companies such as Netflix and Amazon is a cash cow for CBS. The licensing business helps content companies earn money when their shows run on other networks. In a recent deal, CBS also licensed its content to Lovefilm in the U.K. and Germany. [4] We estimate that the overall licensing business constitutes about 20% of CBS’ value. CBS shares could grow further if streaming continues to pick up in the coming years.  The company had reported a double-digit growth from the licensing of programming for digital streaming during the Q1 2013. [5] The network’s cable and broadcasting licensing fee has crossed $500 million this year and it aims to reach $1 billion mark by 2017. [6] While CBS’ subscription based revenue model will continue to be a long-term growth driver, we expect the company to benefit more from digital distribution of it content.

Our price estimate for CBS stands at $50, roughly in line with the market price.

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Notes:
  1. CBS AND NETFLIX ANNOUNCE EXTENSION OF MULTIYEAR LICENSING AGREEMENT FOR LIBRARY CONTENT IN THE U.S., CBS’ Press Release, Jul 8, 2013 []
  2. Netflix’s SEC Filings []
  3. Netflix’s DreamWorks Deal Highlights Kids Programming And Helps Fend Off Amazon, Trefis, Jun 18, 2013 []
  4. CBS’ Lovefilm Deal Highlights Its Growing Reliance On Licensing Fees, Trefis, Jul 5, 2013 []
  5. CBS’ SEC Filings []
  6. CBS Gains on Plans for Licensing Fees, Share Repurchases, Bloomberg, Feb 15, 2013 []