Time Warner’s TNT And TBS’ Advertising Income Will See Slower Growth Amid Softer Ratings And Weaker Markets

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Time Warner’s (NYSE:TWX) TNT and TBS networks have gone through tough times amid declining ratings in the recent past. The recent NCAA tournament fueled the network ratings, driving the company for the week ended March 22 to the top network among total viewers in primetime. [1] However, overall ratings for most of the cable networks are down and this will impact the upfront ad sales. Lower ratings translate into lower advertising income for the content owners. Given the ratings trend, ad spending on upfront sales for 2015-16 television season could decline by 7%, according to a research by Magna Global. [2] The decline in ratings can be attributed to a combination of growth in alternative video platforms and changes in the measurement methodology used by Nielsen. Adding to the woes of cable networks, the overall ad spending is moving away from television to digital platforms. On that note, we discuss below the impact of the softer ratings and unfavorable advertising marketplace on Turner’s TNT and TBS network.

We estimate revenues of about $29 billion for Time Warner in 2015 with EPS of $4.48, which is slightly lower than the market consensus of $4.66, compiled by Thomson Reuters. We currently have an $91 price estimate for Time Warner, which is more than 5% ahead of the current market price of $85.

See our complete analysis for Time Warner

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TNT And TBS’ Advertising Income Has Trended Well In Past

We estimate that TNT and TBS U.S. contribute close to 20% to Time Warner’s stock value. The networks derive revenues primarily from two sources – advertising and subscription. Advertising revenues have been on an uptrend for both the networks. TNT’s estimated advertising income grew from $875 million in 2008 to $1.14 billion in 2013. However, the figure declined 5% to $1.09 billion in 2014. Similarly, TBS’ advertising income grew from $437 million in 2007 to $564 million in 2013 but declined 4% in 2014 to $541 million, according to our estimates.  The decline in 2014 was on account of lower ratings, which led to a 6% drop in ad commitment during upfront ad sales. [2] The situation hasn’t improved since then. The primary reason for ratings decline is an increased viewership on alternative video platforms such as Netflix, Amazon Prime, Hulu among others. The decline can partly be attributed to changes in Nielsen’s measuring methods, according to Moffett Research. [3]

Unfavorable Trends In The Advertising Marketplace

The U.S. advertising market trended weak in 2014, despite the improvement in the U.S. macro-economic environment. Television advertising revenues grew 4.8% for the year, much lower than Magna Global’s spring estimates of 8.6%. The cable networks advertising revenues grew only by 3% in 2014. This dismal performance can be attributed to the competition from digital media formats, which saw a 28% growth in video and 65% jump in social media ad revenues. [4]

Magna Global expects a softer 2015 for overall U.S. advertising market and a 1.4% decline in television advertising. Looking at TNT and TBS’ advertisement revenues, we don’t expect any significant growth from the current levels of $1.65 billion and estimate them to grow at a lower single-digit rate to around $2 billion by the end of our forecast period. The positive growth rate forecast can be attributed to a combination of higher pricing, the lower reliance of cable networks on upfront sales and a slight improvement in viewership. If the advertisers are not willing to shell out much money in upfront sales, the cable networks can hold their inventory for the scatter market. (In the scatter market, ad time is bought closer to air date.)  While it can be risky to hold higher ad inventory for scatter market, it may help in getting higher prices depending on the popularity of a program. This further leads to the fact that it is very important for content owners to stay focused on bringing in new content and original programming. Even for TNT, some of the shows have done well in the recent past. Turner has been trying to bring in new programming and came up with new shows in 2014 such as Murder in the First and The Last Ship, both of which were well received by the audience and scored high ratings. [5] Unfortunately, Nielsen as of now takes into account only the traditional television ratings in its calculations and the media houses are furious about that and rightly so. If there were a better mechanism to know the viewership trends on digital platforms, they could accordingly negotiate the licensing revenues, which may help them offset the declines in advertising income on the traditional television.

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Notes:
  1. TNT, TBS Slam Dunk Weekly Cable Ratings, Multichannel, March 23, 2015 []
  2. Changing TV Landscape Colors ‘Upfront’ Ad Sales Outlook, The Wall Street Journal, March 25, 2015 [] []
  3. TV ratings see double-digit declines for fifth straight month, New York Post, March 13, 2015 []
  4. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 []
  5. NT 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 []