How Will Showtime’s Streaming Service Impact CBS’ Performance?

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CBS Corporation’s (NYSE:CBS) Showtime recently announced the launch date of its over-the-top streaming service called Showtime. The service is set to launch on July 12th, the same day the network’s popular shows Masters of Sex and Ray Donovan premiere for the next season. It will initially be offered on Apple (NASDAQ:APPL) devices for $10.99 per month. The service will include Showtime’s past, present and future series in addition to its lineup of movies, documentaries and sports programming. [1] While the streaming service is a step in the right direction and targets the broadband-only subscribers, the network may face some pressure on the pay-TV front in the coming years. On that note, we discuss below how this new streaming service will impact CBS.

We currently estimate revenues of about $14.35 billion for CBS in 2015 with EPS of $3.60, which is in line with the market consensus of $3.60, compiled by Thomson Reuters. We currently have an $58 price estimate for CBS, which is slightly lower than the current market price of $60 per share.

See our complete analysis for CBS

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Showtime Follows The Footsteps of HBO Amid Rising Demand For Streaming

Showtime is a premium channel with a subscriber base of around 27 million in the U.S. While the network has achieved consistent growth in subscribers over the past few years, it decided to go over-the-top last year and reach out to the broadband-only subscribers. This move was largely expected after Time Warner’s (NYSE:TWX) HBO announced a similar service in the U.S. market. Moreover, a change in viewing habits and the higher penetration of smartphones (75% currently) and the Internet are forcing some of the media and pay-TV companies to think beyond their traditional offerings and come out with advanced products and services to cater to the rising demand for alternative video platforms and over-the-top services. Video platforms such as Netflix (NASDAQ:NFLX) have already seen a rapid subscriber growth over the past few years. Netflix’s subscriber base grew from a little under 22 million in 2011 to more than 40 million subscribers currently. [2] In this changing environment, the challenge for the media industry at large is to make the content accessible in and out of the home. The penetration of these premium networks among the U.S. pay-TV households is low and it makes sense to offer the service on a standalone basis. For instance, someone who has subscribed only to broadband services and would like to watch boxing or movies, can subscribe to the Showtime or HBO streaming service for one-fifth the cost of a basic pay-TV bundle.

However, going over-the-top as a standalone service could trim the existing subscriber base of the network on the traditional television. Someone opting for a streaming service for its advantages of mobility may decide to opt out from Showtime subscription from pay-TV operator and this is something the networks wouldn’t want. The primary target for such services are the millennial viewers who prefer to access the content in and out of home and on multiple devices, the cord-cutters and cord-nevers, and finally the broadband-only subscribers. It must be noted that there are 10 million households with broadband-only subscribers in the U.S. and many more who are not subscribed to the Showtime network as part of their pay-TV bundle. The network rightly sees immense opportunity to reach out to these homes and even if it is able to tap 7.5 million overall streaming subscribers in the long run with pricing at $11 a month, it will translate into annual revenues of around $1 billion, which is close to half of its current income from the cable networks business. Assuming current EBITDA margins of 48% (estimated) for CBS’ cable networks, it will translate into EBITDA of close to $500 million. The company’s overall EBITDA in 2014 stood at $3.88 billion.

We believe this is a step in right direction from Showtime’s point of view. Showtime is a premium channel with a massive demand for its content, which is evident in the success of its original programming such as Homeland, Masters of Sex and Ray Donovan. And it can attract more viewers with these sorts of offerings. Moreover, such services are also a response to a looming change in viewing habits.  To judge the future of television, one can see that there will be a place for streaming to co-exist with pay-TV and Showtime is positioning itself rightly to offer the content on multiple platforms.

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Notes:
  1. SHOWTIME TO OFFER STAND-ALONE SERVICE OVER THE INTERNET, CBS Press Release, June 4, 2015 []
  2. Netflix’s SEC Filings []