Time Warner To Benefit As TNT’s New Programming Boosts Advertising And Subscription Growth

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Time Warner

Time Warner‘s (NYSE:TWX) TNT network has gone through tough times amid declining ratings in the recent past. However, in a nice turn, the network finished Q2 as basic cable’s No.1 network in primetime among total viewers and key adult demographics. [1] The network continued to benefit from strong viewership of Rizzoli & Isles and Major Crimes. Higher ratings translate into higher advertising income as well as licensing and subscription revenues for the content owners. TNT’s advertising as well as subscription revenues have been on an uptrend over the past few years, but a decline in ratings is a cause of concern. Indeed, as we enter the third quarter, TNT’s prime-time viewership has already declined by 16% through July 19 in the 18 to 49 demographic. [2]

In the previous quarter, the company’s management stated that TNT has lost ground with younger viewers as they didn’t take enough creative risk with its programming during the past few years. [3] However, the company has now started addressing this issue and said that there will be new programming for the summer, which should help TNT expand its audience with key male demos. In June, the network came up with two new series – Murder at the First and The Last Ship – both of which were well received and scored high ratings. The Last Ship attracted 7.2 million viewers in Live +3 for the June 22 episode. [1] Earlier this month, the network renewed the series for second season. Given the network’s focus on the younger generation by bringing in more new programming, we expect the ratings to grow. Going forward, this will have a positive impact on Turner’s advertising income.

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How Are TNT’s Advertising And Subscription Revenues Trending?

We estimate that TNT U.S. contributes close to 15% to Time Warner’s stock value. The network derives its revenues primarily from two sources – advertising and subscription. The network’s advertising revenues have been on an uptrend, rising from $873 million in 2008 to $1.14 billion in 2013. [4] We believe this uptrend will continue in the coming years driven by new programming. We estimate advertising revenues will grow to $1.4 billion by 2020, representing an average annual growth rate of 3%.

Subscription revenues have also been on an uptrend in the past few years. The key driver has been continued growth in monthly subscription fees, which increased from $0.93 in 2008 to an estimated $1.24 in 2013. We estimate monthly subscription fee will grow to $1.45 towards the end of the decade. This growth will primarily be driven by annual price increases. Contracts between content companies and pay-TV service providers include prescribed yearly increments for fee per subscriber. These contracts are long-term, spanning across several years. TNT offers good mix of drama and sports and thus appeals to broad segment of viewers. As a result, Pay-TV service providers ensure the availability of TNT in their programming packages. This suggests that the fee increases continues in the future.

Ad Spending Supportive

The advertising market trended well in 2013 and in Q1 2014. Overall U.S. advertising revenues grew by 1.3% in 2013 despite the absence of heavy political spending and the Olympics compared to the prior year. [5] Ad spending increased by 5.7% in Q1 2014 driven by the Sochi Olympics. [6] Television as a medium continues to lead with more than 57% share of the overall advertising market. [7] 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. [8] The overall growth in the advertising market will boost advertising income of ad-supported cable and broadcasting networks. TNT will benefit from the advertising growth as advertising income accounts for more than 40% of the network’s revenues.

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Notes:
  1. TNT Sweeps the Competition as Basic Cable’s #1 Network in Primetime Among Total Viewers and All Key Adult Demos for Q2 2014, The Futon Critic, Jul 1, 2014 [] []
  2. Turner TV Tops Time Warner’s To-Do List, The Wall Street Journal, July 28, 2014 []
  3. Time Warner’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, Apr 30, 2014 []
  4. Time Warner’s SEC Filings []
  5. MAGNA GLOBAL Advertising Forecasts: 2014, Magna Global, Dec 9, 2013 []
  6. Kantar Media Reports U.S. Advertising Expenditures Increased 5.7 Percent In Q1 2014, Aided By Winter Olympics, Kantar Media, Jun 23, 2014 []
  7. TV REMAINS THE REIGNING CHAMP, BUT DISPLAY INTERNET ADS ARE THE MVPS OF 3Q, Nielsen, Jan 27, 2014 []
  8. US TV Ad Market Still Growing More than Digital Video, eMarketer, Jun 12, 2014 []