How Valuable Is News Corp’s Broadcasting Business?
While there has been a lot going on with News Corp (NASDAQ:NWS) in recent months, its broadcasting network hasn’t garnered much media attention. That’s alright given that this business accounts for just a little over 10% of News Corp’s value as per our estimates. The company’s focus on expanding sports programming and spinning off the declining publishing business is more important from investors’ perspective. Separating its publishing division will allow News Corp to focus more on growing and profitable businesses as well as insulate itself from the bad publicity that its publishing unit received. Its focus on sports programming will strengthen News Corp’s core cable networks business that accounts for almost 60% of its value. So where does broadcasting fit in all this?
News Corp’s Fox Broadcasting is one of the four biggest broadcasting networks in the U.S., with the others being CBS (NYSE:CBS), ABC and NBC. Broadcast networks are important as they telecast some of the popular shows and garner large viewership. Fox Broadcasting Network offers programs such as American Idol, The Simpsons, The X Factor etc., along with some sports programming. Even though the viewership of the broadcast networks has declined over the years, there is an opportunity to grow revenues with improved ad pricing, retransmission fees and content licensing to online video service providers.
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The revenues from the broadcasting division dipped drastically from $5.4 billion in 2008 to $3.8 billion in 2009, as advertisers sharply cut their ad spending. As Fox Broadcasting makes almost all of its money from advertising, the recovery in revenues has followed the general economic improvement. Ad pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers, especially automotive companies, are willing to spend more on advertisements. TV still remains the biggest medium for advertisements, and thus News Corp’s broadcasting business will continue to benefit from this broad improvement.
The phenomenon of cord cutting, which refers to pay-TV subscribers dropping their subscription in favor of alternative methods of viewing, has been a cause of concern for the pay-TV industry. Although this is still not significant, it may not be a worrying matter for the broadcast networks at all. We believe that if customers choose to drop their pay-TV connection, they are likely to resort to a combination of free antenna-based programming in addition to online streaming service such as Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN). Broadcast networks are available through these mediums, and this could continue to support their ad revenues as well.
The essence is that even though the growth prospects are relatively low, broadcasting is still important for News Corp. We currently forecast the broadcasting revenues to reach $5.9 billion by the end of our forecast period. Even if there is stagnation in broadcasting revenues, it shouldn’t be a cause of worry for the investors because the downside is limited. We estimate this business contributes around 2% of News Corp’s value.
Our price estimate for News Corp stands at $28, implying a premium of roughly 5% to the market price.
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