Poor Ratings Weigh Over Fox’s Broadcasting Operations

21st Century Fox‘s (NASDAQ:FOX) broadcasting operations have struggled due to declining ratings, especially over the past season. The network ended the 2013-14 prime time season at the fourth spot in terms of viewership. ^[1] On the other hand, Comcast’s NBC ranked No.1 in its key demographics for the first time in a decade (See – How Is The Broadcasting Business Trending For NBCUniversal?). Fox’s disappointing performance can be attributed to a decline in the audience for some of its popular shows such as American Idol and Glee. The decline in ratings directly impact advertising revenues, which is bread and butter of broadcasting networks. The impact of lower ratings is already visible in the upfront sales where Fox saw lower volume and moderate gains in ad pricing. However, it must be noted that the impact of these ratings is immaterial on Fox’s stock price as the segment contribution is very low given the lower margins associated with this business. The estimated EBITDA margins for the broadcasting business was 18% in 2013. This is much lower than the margins for Fox’s cable networks, which were 37% during the same period.

We estimate that the broadcasting business contributes around 10% to 21st Century Fox’s value. While it accounts for around 16% of the company’s overall revenues, margins are lower due to high programming and production costs that include distribution costs, sports rights and direct production costs.

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How Are Fox’s Broadcasting Operations Trending?

21st Century Fox operates 28 broadcast television stations in the U.S., including MyNetworkTV. The revenues from these stations have been rangebound over the past few years, amounting to $5.02 billion in 2013.

We expect the figure to grow moderately and be north of $6 billion by the end of our forecast period. The primary reason for our moderate outlook is that the impact of increase in ad pricing will be partially offset by the decline in ratings. Additionally, during the past few years, the cable networks have risen in popularity owing to their focus on specific genres such as comedy, box office and kid’s programming. This has helped them create loyal audience base and consequently, broadcast networks have suffered in terms of viewership. The impact of poor ratings was visible on the 2014-15 season upfront sale. Last month, the company sold its upfront inventory and saw lower volume and marginal increases of 2.5% to 3.5% in the rates. This is much lower than the figures for NBC, which saw around 11% jump in pricing driven by higher ratings. ^[2]

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%, the broadcast TV ad market declined by 5.7%. ^[3] This can be attributed to the absence of heavy political advertisements versus the prior year during Presidential elections. Television as a medium continues to lead with more than 57% share of the overall advertising market. ^[4] We expect a slight uptick in 2014 ad spending primarily due to the U.S. midterm elections. According to 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 and broadcasting networks.

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1. Fox TV network chief to depart after ratings slump, Reuters, May 30, 2014 [↩]
2. TV networks wrap upfront ad sales; NBCUniversal nabs $6 billion, Los Angles Times, Jun 24, 2014 [↩]
3. MAGNA GLOBAL Advertising Forecasts: 2014, Magna Global, Dec 9, 2013 [↩]
4. TV REMAINS THE REIGNING CHAMP, BUT DISPLAY INTERNET ADS ARE THE MVPS OF 3Q, Nielsen, Jan 27, 2014 [↩]
5. US TV Ad Market Still Growing More than Digital Video, eMarketer, Jun 12, 2014 [↩]