Ratings Growth And Cable News Dominance Will Boost Fox News’ Subscription Revenues

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21st Century Fox’s (NASDAQ:FOX) Fox News Channel has been the most watched cable news network for 13 straight years. Fox News was the only cable news network to grow in primetime ratings in 2014 while MSNBC was down 20% and CNN down 8% in overall primetime viewership. [1] While higher ratings translate into better advertising revenues for the cable networks, Fox News’ strength is also aiding its subscription growth. Fox News is an immensely popular channel with a loyal audience, which is unlikely to shift to other news networks. Moreover, it is the most trusted news network, according to new polling done by Quinnipiac University. [2] On that note, we discuss below the trends in Fox News’ subscription revenues and our estimates and forecast for the coming years.

We estimate revenues of about $30 billion for 21st Century Fox in 2015, with EPS of $1.69, which is in line with the market consensus of $1.70, compiled by Thomson Reuters. We currently have a $39 price estimate for 21st Century Fox, which is more than 15% ahead of the current market price.

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How Is Fox News’ Subscription Trending?

The cable news networks saw an uptick in primetime viewership last year. The network had the top five programs, including O’ Reilly Factor and The Kelly File, in cable news in both total viewers and the 25-54 demographics. In primetime, Fox News ranked second in total viewers among all ad-supported basic cable networks in 2014. While more viewers tuned into Fox News last year, other news networks saw a decline in primetime ratings. The combined median primetime viewership of the three major news networks – Fox News, CNN and MSNBC – dropped 4% to about 2.85 million. [1] Fox News has benefited from its dominance in cable news and the subscription revenues have grown from  $350 million in 2007 to $1.14 billion in 2014. This is primarily due to a steady growth in monthly fees per subscriber, which has increased from an estimated $0.32 to $0.99 per month during the same period. The network’s penetration among the U.S. pay-TV households has been fairly stable in the range of 90% to 95%, which is very high and translates into more than 95 million subscribers. We expect it to stay above 90% in the forecast years.

Also, we expect this uptrend in monthly subscriber fees to continue in the coming years primarily led by the appeal of the network’s programming and annual price increases. Fox News has been the top cable news channel for several years and it has immensely popular shows such as The O’Reilly Factor. Moreover, contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. Given the appeal of Fox News and its ratings, which were next only to the sports giant ESPN in 2014, it should be able to negotiate even better pricing in the coming years. Accordingly, we estimate the monthly fees per subscriber to be north of $1.20, translating into subscription revenues of around $1.50 billion by the end of our forecast period. An estimated EBITDA margin of 38% for Fox’s cable networks will translate into EBITDA of $565 million, representing 5% of the company-wide EBITDA. The contribution will be even higher if we account for the advertising revenues generated by the network.

Trends In Advertising Marketplace

Higher ratings at Fox’s media networks translate into higher advertising revenues for the company. We do not report separate advertising revenues for each network. Fox’s overall advertising and other revenues have been trending well over the past few years, increasing from $7.55 billion in fiscal 2012 to $8.22 billion in fiscal 2014. [3] We expect this uptrend to continue in the coming years primarily due to an improvement in ad pricing and the appeal of Fox’s content.

Advertisement pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to shell out more money. Television still remains the biggest medium for advertisements and content owners will benefit from this broad level improvement. Television currently accounts for close to 40% of all advertising. While it is expected to drop to 37% by 2017, according to a research by ZenithOptimedia, the decline will be due to spending growth at other platforms and television ad spending will continue to grow by 3% annually until 2017. [4] Fox News should benefit from this broad level improvement.

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Notes:
  1. Fox News Dominates Cable News Ratings in 2014; MSNBC Tumbles, Variety, Dec 30, 2014 [] []
  2. Fox News Has Most Trusted Coverage, Or Not, Quinnipiac University National Poll Finds; Tina Fey, Dennis Miller Top Choices To Replace Stewart, Quinnipiac University, Mar 9, 2015 []
  3. 21st Century Fox’s SEC Filings []
  4. Global adspend forecast to increase by 4.9% in 2015 claims ZenithOptimedia Report, The Drum, Dec 8, 2014 []