Time Warner: Turner Networks Will See Continued Growth In International Markets Despite The Rise of Digital Video Platforms

September 24th, 2015 by Trefis Team
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Time Warner

Time Warner’s (NYSE:TWX) cable networks have seen phenomenal growth in the international markets over the past few years, primarily driven by the success of its programming at Turner Networks. The division we label as International & Other, includes several international networks as well as a number of smaller domestic channels, such as truTV and Cartoon Network. These networks generate revenue primarily from advertising and subscription fees. Time Warner has been focused on bringing more original programming and some of the shows on these smaller networks have also been successful. Earlier in April this year, Turner Networks inked a content deal with Hulu, which included video-on-demand (VoD) rights to past as well as some future series for Cartoon Network, along with larger networks including TNT, Adult Swim and TBS. [1]

Owing to the above factors, the segment revenues have grown at an average annual rate of over 14% in the last 5 years and we expect them to continue to grow, albeit at a slower pace, given the growth of digital platforms.  These have put a downward pressure on advertising revenues in the past few quarters. Having said that, the segment is likely to see high single-digit revenue growth led by Turner’s international operations, in our view. If, however, the growth rate slows down further to low-single-digits, amid a rapid transition of viewers to digital platforms, it will result in a 5% downside to our current price estimate for Time Warner. Now given that the segment also includes international operations, it is unlikely to see negative growth soon as the trends seen on digital video platforms has currently impacted primarily the U.S. market.  We believe it may take some time for it to have a significant impact on advertising revenues in other international markets. Furthermore, some of these losses in international markets, as and when they arise, will be offset by growth in content licensing revenues to digital platforms.

See our complete analysis for Time Warner

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Segment Growth Was Led By International Expansion In Past And It Is Likely To Continue This Trajectory

Turner has been expanding some of its popular cable networks in international markets.  These include TNT and CNN, along with smaller networks including Cartoon Network. Turner brands reach into more than 200 countries and this expansion has fueled the segment growth in the past. The segment’s subscription revenues grew from around $575 million in 2009 to $1.55 billion in 2014. Similarly, advertising revenues also grew from $1.4 billion to $2.3 billion during the same period, according to our estimates. The company has been investing in international markets to consolidate its media networks.

Now, the U.S. media landscape is changing, with the rapid growth of alternative video platforms such as Netflix (NASDAQ:NFLX).  As a result a decline in traditional television viewership has caused massive ratings declines for many networks. Time Warner’s smaller cable networks and international networks’ advertising has also been impacted by this phenomenon and the growth rate has slowed down to mid-single-digits in the last 2 years. However, the infrastructure for services such as Netflix is not currently available in all markets. In many emerging nations, including India and Brazil, the average Internet speed is much lower (less than 3 MBPS) than required (5 MBPS) for streaming high-definition content. [2] While Netflix and other streaming operators are expanding rapidly, so far it has not been able to make a big dent on international advertising revenues for media companies and it will take some time before the necessary infrastructure has improved sufficiently in such markets.

Moreover, television continues to dominate ad spending in the U.S., with close to a 40% share in advertising, despite the rapid growth seen in digital and social media. While television’s share is expected to drop to 38% of the market by 2019, it will be due to increased spending on other platforms as television by itself will still continue to grow in the low-single-digits, according to a research by MagnaGlobal. [3] Turner’s cable networks should therefore continue to see steady growth in the coming years. Accordingly, we estimate segment subscription revenues to be north of $2.5 billion and advertising revenues to be over $3.5 billion by the end of our forecast period (towards 2022). An estimated EBITDA margin of 38% will translate into EBITDA of over $2.3 billion, representing close to 20% of the company-wide EBITDA.

However, there could be a potential downside of over 5% to our price estimate if the segment’s subscription revenues remain under $2 billion and advertising revenues are under $3 billion by the end of our forecast period. This is possible if the cord-cutting phenomenon intensifies and more viewers shift to digital platforms, thereby weighing on advertising and subscription revenues of Turner’s smaller networks in the U.S. Also, if the transition to the digital platform is sooner than expected in international markets, it could be a drag on international operations as well. We maintain our view that there is a place for both streaming and traditional television to co-exist for the foreseeable future and there will always be demand for good content. Accordingly, media companies should be focused on bringing in more original programming. Last year, Turner stated that it will double its investment into original programming for TNT and TBS from $500 million in 2014 to $1 billion by 2018, which is a step in right direction, in our view (also see – Why Media Companies Should Not License More Content To Netflix?).

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Notes:
  1. Hulu Pacts With Turner for Exclusive Rights to Cartoon, Adult Swim, TNT, TBS Shows, Variety, Apr 23, 2015 [↩]
  2. Internet Connection Speed Recommendations, Netflix [↩]
  3. Global Advertising To Grow 4.8% In 2015, According To Magna Global, MediaPost, Dec 8, 2014 [↩]