What Factors Can Drive Growth For CBS’ Advertising Revenues?

CBS (NYSE:CBS) relies heavily on advertising income from its broadcasting networks and local TV stations. Of late, advertisers have been spending more on online and social platforms, thereby reducing television’s share in overall spending. While this has impacted media companies in the past few quarters, we expect CBS to post solid growth in advertising in the near term driven by upcoming events. Ad spending usually follows uneven trends driven by factors such as sports and political events, and this will turn in favor of broadcasting networks in the near term due to the 2016 Olympics and the Presidential election. These events will likely accelerate television ad spending and CBS being the most watched network will benefit more than others. On that note, we discuss below the company’s revenue mix of advertising vs non-advertising and the factors that can bring in advertising growth.

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CBS’ Has Increased Its Reliance On Non-Advertising Income

CBS has managed to lower its reliance on advertising income in the last five years. Advertising accounted for 57% of CBS’ overall revenues in 2010 and an estimated 51% in 2015. The figure below highlights the changes in CBS’ revenue and EBITDA composition since 2010.

CBS has been pushing for growth in non-advertising sources, as there are fewer viewers of traditional television than even in recent years. Accordingly, several media networks are seeing a decline in ratings, which in turn, have impacted the advertising income. Given such a landscape, advertisers are allocating higher budgets towards digital and social media platform, which has seen double-digit growth in the recent years.

These Factors Will Help CBS Post Solid Growth In Advertising Income

Despite the above challenges, there are few positives for CBS, which can bring in advertising growth for the company in the near term. Firstly, CBS continues to be the most watched network for seventh year in a row. CBS managed to post 4% jump in ratings while NBC dropped 11% and Fox a whopping 24% in 2014-15 television season. ^[1] Secondly, the network has an abundance of sports programming to leverage higher ad revenues. CBS will benefit from 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. Super Bowl ads for 2015 were sold at $4.5 million for a 30-second spot by NBC, and the 2016 price could be around $5 million. Broadcasting networks (the big 4 networks) have seen stellar growth of 35% in their advertising income from sports coverage in the last 5 years. For 2014-15 television season, the big four networks generated close to $8.5 billion in sports ad sales, representing 37% of the overall ad revenues. ^[2] In fact, this factor will likely bode well for the broadcasting networks in the coming years and we expect a slight uptick in broadcasting’s share of television ad revenues in the next 3 years.

CBS currently commands 18% market share in broadcast ad spending and if it manages to grow its share to 25% by 2018, it will translate into 1.5x growth in its advertising business value. This is possible with a combination of increased ad pricing, sports coverage and continued growth in ratings. CBS is seeing benefits 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, according to CBS’ management. Also CBS, being the most watched network, will absorb a significant chunk of political ad spending amid the Presidential election next year. The figure below highlights the potential growth in CBS’ advertising business.

However, we take a conservative view in our forecast amid the uncertainties pertaining to television ratings given the rapid subscriber growth on digital platforms such as Netflix and Hulu. Netflix’s international growth has been exceptional so far, and the subscriber base has grown by more than 10 million in the last four quarters. ^[3] As viewers spend more time on Netflix and other digital video platforms, demand for traditional media is likely to be impacted. Having said that, a lot depends on the quality of programming. For instance, despite the recent headwinds from digital platforms, networks such as Showtime and HBO have managed to post subscriber growth even in the recent quarters due to their quality programming, including Homeland and Game of Thrones among others. We currently estimate CBS’ advertising revenues to grow from a little under $7 billion (estimated) to close to $8 billion in 2018. An estimated EBITDA margin of 26% will translate into EBITDA of around $2 billion, representing 46% of the company-wide EBITDA.

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1. Full 2014-15 TV Season Series Rankings: Football & ‘Empire’ Ruled, Deadline, May 21, 2014 [↩]
2. Sports Now Accounts for 37% of Broadcast TV Ad Spending, Ad Age Sep 10, 2015 [↩]
3. Netflix’s SEC Filings [↩]