Why Is It Important For CBS To Grow Its Non-Advertising Income?

Media companies such as CBS (NYSE:CBS) rely heavily on advertising, which has seen declines in the past few quarters. The broadcast advertising trends are uneven, as they are driven by various events, such as political campaigns and sporting events. Also, the rapid growth of digital video platforms has led to lower ratings for most networks and this has weighed on ad volumes. Overall ad spending on television is also declining. Accordingly, media networks have increased the amount of ad loads (paid commercial time in shows). While these advertising trends are not favorable for CBS, it has managed to increase its reliance on non-advertising income, which is growing at a faster pace and provides a stable growth outlook. On that note, we discuss below the company’s revenue mix and why is it important for CBS to grow its non-advertising income.

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CBS’ Revenue Mix Shows Increased Reliance On Non-Advertising Income

CBS has managed to lower its reliance on advertising income in the last few years. Advertising accounted for 72% of CBS’ overall revenues in 2007, including the outdoor segment, which was split last year. Even if we exclude the outdoor segment, the contribution was around 66%. Looking at 2014, advertising accounted for 52% of the company’s revenues. The figure has further reduced to 49% in the first nine months of 2015. ^[1] It is evident that CBS has been pushing for growth in non-advertising sources and rightly so. There are fewer viewers of traditional television than ever in recent years. And advertisers are allocating higher budgets towards social media platform, which has seen stellar growth in the past few years.

Similarly, CBS’ affiliate and subscription fees has also seen steady growth due to the rising popularity of its cable networks, especially Showtime. The network has seen subscriber growth even in the recent quarters when other cable networks are losing subscribers due to cord cutting. The segment also includes CBS’ retransmission consent, which it expects to be north of $1 billion next year and $2 billion by 2020. The rise of digital platforms has provided more avenues for media companies to distribute their content. Likewise, CBS benefited from this and it has seen high-single-digit growth in licensing revenues in the past few years. We maintain our view that there is a place for both streaming and television to co-exist in the foreseeable future and, accordingly, we expect this uptrend to continue in the coming years. Also, with more distribution options such as Sony’s Web TV and Dish’s Sling, distribution and licensing revenues can see significant growth in the coming years and offset some of the declines seen on the traditional television front.

Unfavorable Trends In Advertising

The U.S. advertising market trended weak in 2014 despite the improvement in the U.S. macro-economic environment. While the cable networks’ advertising revenues grew by 3% in 2014, the broadcast television declined by 4% (excluding the Olympics). This dismal performance can be attributed to competition from digital media formats, which saw 28% growth in video and a 65% increase in social media ad revenues. ^[2] Ad spending on television declined around 5% in Q2 2015. ^[3] While the primary advantage of advertising on television is its massive reach, online and social media platforms help marketers reach their precise target audiences more cost efficiently. Lowering the return on investment, which is better for marketers, this shift has further weighed on advertising income for media companies. While television still forms the biggest chunk of ad spending (40% currently), this is expected to decline to 38% by 2019, primarily due to growth in ad spending on other platforms.

CBS’ Advertising Revenues Likely To Grow In The Near Term

While the advertising marketplace is not encouraging for media companies, CBS is likely to see growth in the near term. CBS has managed to stay at the top in total viewership with an uptick in ratings in the current quarter, courtesy its NFL coverage. CBS’ Thursday Night Football was up 9% in ratings this year. In Q3 as well, the underlying network saw 8% growth in advertising while it expects Q4 to be even better, primarily due to sports programming. ^[1] CBS certainly benefited from its low upfront sales for the current television season. The network had more units to sell in the scatter market, which is seeing solid growth in pricing amid high viewership. Looking ahead, there is an additional NFL playoff game in Q1 2016. Then CBS will air the Super Bowl, which will likely see low-double-digit growth in pricing for 2016. Lastly, being the most watched network, CBS will absorb a significant chunk of political ad spending amid the Presidential election next year.

Having said that, the changing media landscape, with a shift in viewing habits and increased cord cutting, will eventually weigh on advertising revenues, even for CBS. In such an environment, growing non-advertising income is of immense importance for CBS. Given the trends at CBS’ licensing revenues and growing popularity of Showtime, we believe that the contribution of advertising in CBS’ overall revenue mix will come down to 45% by the end of our forecast period (towards 2022).

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1. CBS’ SEC Filings [↩] [↩]
2. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 [↩]
3. Measured Ad Spending in the U.S. Slips 3.9% in Q2 — Kantar Media, The Wall Street Journal, Sep 16, 2015 [↩]