Comcast’s Cable Networks Are Trending Well As Distribution Revenues Continue To Grow

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Comcast‘s (NASDAQ:CMCSA) cable networks include USA Network, CNBC, Syfy, MSNBC, Bravo, Oxygen, mun2, CNBC World, Chiller, Sleuth and Universal HD. The networks derive revenue primarily from two sources, distribution of programming and advertising. Distribution accounts for more than 50% of cable networks revenues. Both, distribution and advertising have been trending well for the company over the past few years. NBCUniversal has been focused on original programming, thereby providing a boost to the ratings for its networks in the past. However, 2014 has been tough for the media industry at large, as ratings were softer at many networks. USA Network in 2014 has seen ratings drop of more than 30% in some of its popular shows such as While Collars in 18-49 demographic. [1] Going forward, we believe that the company’s focus on original programming and new content will drive the ratings upwards. We also expect advertising marketplace to improve in the coming months primarily due to an increase in political spending amid midterm elections.

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How Is Cable Networks Business Trending?

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Cable networks segment is a part of NBCUniversal, which contributes close to 25% of Comcast’s value, according to our estimates. While the cable networks contribute close to 40% to NBCUniversal’s revenues, it contributes more than 70% to its profits given the high margins. Cable networks distribution revenues have increased from $4.21 billion in 2011 to $4.6 billion in 2012 and $4.91 billion in 2013. [2] The company earns distribution revenue from its agreements with multichannel video providers depending on the number of subscribers for the networks. This also includes subscription fees for the networks. The rise in distribution revenues can be attributed to increases in the contractual rates as per the agreement. We expect these revenues to continue to grow at this pace and be north of $8 billion by end of the decade driven by continued growth in contractual rates.

Advertising revenues have also increased from $3.15 billion to $3.39 billion in 2012 and $3.54 billion in 2013. [2] The growth in advertising can primarily be attributed to higher pricing and increase in volume of units sold. Ad pricing in turn is dependent on the ratings at the networks. While ratings have been softer in 2014, we expect them to improve given the company’s focus on original programming. Higher ratings will translate into higher ad pricing. Earlier this year, the company sold the upfront inventory for its cable and broadcasting networks. Unlike other media companies, NBCUniversal bundles its advertisement inventory for its cable and broadcasting networks. The company has got orders worth $6 billion in advertisements for the 2014-15 season. [3] This represents an 11% increase over last year’s upfront sales. We estimate advertising revenues to grow in the coming years and be north of $5 billion by end of the decade. This will translate into cable networks revenues of over $13 billion by 2020. An estimated EBITDA margin of 42% will translate into more than $5 billion in cable networks EBITDA by 2020.

How Is Advertising Marketplace Trending?

The U.S. advertising market trended well in 2013, despite the absence of the Olympics or high political spending. While the overall U.S. advertising revenues grew by 1.3% in 2013, the cable TV grew by 4.4%. [4] Television as a medium continues to lead with more than 57% share of the overall advertising market. We expect a slight uptick in 2014 advertisement spending primarily due to the U.S. midterm elections. According to a research by eMarketer, the 2014 TV ad market will grow 3.3% to $68.54 billion and to $78.64 billion by 2018. [5] The overall growth in the advertising market will boost advertising income of ad supported cable networks.

 

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Notes:
  1. USA Network TV Show Ratings, TV Series Finale, Aug 28, 2014 []
  2. Comcast’s SEC Filings [] []
  3. TV networks wrap upfront ad sales; NBCUniversal nabs $6 billion, Los Angles Times, Jun 24, 2014 []
  4. MAGNA GLOBAL Advertising Forecasts: 2014, Magna Global, Dec 9, 2013 []
  5. US TV Ad Market Still Growing More than Digital Video, eMarketer, Jun 12, 2014 []