HBO (Home Box Office) and TNT are two major cable networks owned by Time Warner (NYSE:TWX). HBO’s operations in the U.S. alone contribute about 20% to Time Warner’s value and TNT’s U.S. operations constitute close to 15%. Given the contribution to Time Warner, these networks are important to understanding the drivers to Time Warner’s stock, and fortunately for the company, both networks have continued to perform well in terms of revenue growth.
Our estimates and our overall value estimate for the company value HBO U.S. at $11 billion and TNT U.S. at close to $8 billion. Clearly, these channels have created a lot of value for the company thanks to their focused offering that has led to sustained appeal to their subscriber base.
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TNT focuses on drama and its original programming includes shows such as Falling Skies, Franklin & Bash, Leverage, while its syndicated shows include Bones, Cold Case, CSI: NY, Las Vegas, Law & Order, Supernatural and more. The channel also covers some sports programming such as NBA games and NASCAR races. Unlike HBO, TNT makes money via subscriptions and advertising. We estimate that the channel earned close to $1.4 billion in subscription revenues and $1.2 billion in advertising revenues in the U.S. in 2011. TNT reaches approximately 95% of the U.S. pay-TV households and charges a fee per subscriber of close to $1.16.
Unlike TNT, HBO, which stands for Home Box Office, is a premium pay-TV service that primarily provides recently released movies and original TV series. As a result, it charges a high fee per subscriber and therefore has low penetration compared to regular cable networks. As of 2011, HBO reached about 38% of the U.S. pay-TV households and charged a fee per subscriber of close to $7.27 per month.
There are no ads on HBO, making it relatively less risky than TNT since ad revenues tend to be volatile during economic downturns. However, HBO is a more discretionary product given the higher fee per subscriber.
Our current price estimate for Time Warner stands at $58, implying a premium of about 30% to the market price.