Time Warner’s CNN Will See A Steady Growth In Subscription And Advertising Revenues In The Coming Years

Time Warner‘s (NYSE:TWX) CNN news network ended 2014 at the second spot in primetime ratings. However, it was down 3% in viewership as compared to 2013. CNN’s performance was much better than MSNBC, which saw a 17% drop in primetime viewership. Fox News continued to dominate at the top spot for thirteen years in a row and it was up 2% in primetime viewership. It was for the first time since 2008 that CNN beat MSNBC in the primetime demo. While it was ahead of MSNBC, CNN’s ratings were at an all time low in primetime total viewers. CNN was not alone to see a drop in ratings. MSNBC also dropped 18% in total day viewing while Fox News was down 4%. ^[1]

It must be noted that higher ratings translate into better advertising revenues for cable networks such as CNN and Fox News. CNN generates revenues from both advertising slots sold to advertisers, as well as subscription fees collected from pay-TV service providers. In this note, we discuss below the trends in CNN’s subscription and advertising revenues and the factors that are driving growth for the news network.

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CNN’s Revenue Growth Likely To Continue In The Coming Years

We estimate that CNN contributes close to 7% to Time Warner’s value. The network has high penetration of over 90% of the U.S. pay-TV households market and it charges an estimated $0.62 monthly subscriber fees from the pay-TV operators, translating into subscription revenues of $725 million in 2014. Subscription fees have been growing steadily over the past few years. It has increased from a little under $0.50 in 2008 to an estimated $0.62 in 2014. Looking at the network’s advertising revenues, they have also been on an uptrend, growing from $460 million in 2008 to over $550 million in 2014. We expect this growth to continue in the coming years and subscription fee to be around $0.80 and advertising revenues to be around $700 million by the end of our forecast period. This will translate into revenues of $1.65 billion and an estimated EBITDA margin of 40% will translate into EBITDA of over $650 million by end of the decade.

The growth in subscription pricing will be led by the network’s appeal and the annual price increases. Historical dollar increases in fees per subscriber are strong predictors of future growth. 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. Also, CNN has a strong appeal to many viewers and it has historically been associated with unbiased, prompt reporting and for adopting a centrist view. Even though the network is ranked below Fox News, viewers turn to CNN for an in-depth coverage of an event. Accordingly, CNN’s subscription fee will continue to grow steadily in the coming years.

Ad pricing has also picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to spend more on advertisements. Television still remains the biggest medium for advertisements and thus CNN should benefit from this broad level improvement. Moreover, CNN has the youngest audience in cable news, with a median age of 58, compared to 61 for MSNBC and 68 for Fox News. ^[1] This may appeal more to the advertisers.

Jeff Zucker has been the president for CNN for two years now and he has been trying to bring in more of the opinion based programming and less newscasts on the network to boost its ratings. However, it is noticed that CNN’s viewership increases at the time of major events such as missing Malaysian Airlines plane last year, as people prefer CNN to other news network for an in-depth coverage. Given these trends, we wonder if it would make sense for CNN to bring in more shows. Also, the network’s strong gains over MSNBC in 2014 were a result of its coverage on news events and not its reality shows. ^[1] While CNN should continue to see higher ratings during events, it will be interesting to see if Mr.Zucker’s efforts of introducing more opinion based programming pays off in the coming years.

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1. 2014 Cable News Ratings: CNN Beats MSNBC in Primetime Demo, Fox Still #1, Media ITE, Dec 30, 2014 [↩] [↩] [↩]