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Berstein SVOD and Media

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    U.S. Media: Celebrity Rehab SVODMoves from Euphoria to Hangover

    MAY 2013

    Like any addiction, SVOD feels good until it stops, and causes permanent damage to your health

    When large-cap media companies started licensing their library content to the SVOD providers,it seemed too good to be true: They garnered a new buyer, willing to pay money for content thatwas otherwise not being monetized seemingly pure incremental profit

    It is becoming increasingly clear that SVOD is indeed too good to be true; media companiesneed to keep growing those earnings, which we believe are now at risk; meanwhile, TV ratingshave been permanently impaired, as viewers have been trained to use SVOD

    Most at risk: CBS and Viacom; CBS is financially dependent on SVOD (7%+ of operatingincome) and has a preponderance of library deals; Viacom suffers from a dependence on kids'programs (which get cannibalized), a preponderance of library deals and lack of other growth

    Least at risk: Disney and Discovery; Disney's SVOD is a tiny percentage of total earnings, and ith li l kid ' d l d l h i l S O l k d i i '

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 1

    Portfolio Manager's SummarySubscription video on demand (SVOD) has been a significant source ofincremental earnings growth for large-cap media companies during the past fewyears. The major SVOD providers Netflix, Amazon and Hulu+ have pouredsome $1.6 billion of new revenue, in the form of licensing payments that generatevery high margins, into the earnings of the large-cap content companies. Investorsrewarded the media stocks, encouraged by the fact that the companies had a newbuyer, paying money for library content that was not otherwise being monetized.

    But very rarely in life can you have your cake and eat it too; even more rarelydo you get something for nothing. Thus, once the euphoria wears off in the nextfew years, we believe the evolution of SVOD will have one of the most significantnegative effects on large-cap media's growth trajectory. Those incrementalrevenues, which looked so attractive as they were being added, will quickly turnless attractive when they stop growing (or start declining), as we expect. Asviewers have been trained to use SVOD for an increasing amount of their viewing,the damage to linear TV ratings will be lasting, resulting in lower advertisingrevenues and higher programming expense.

    Viewers streaming hours of SVOD content are almost certainly notwatchinghours of something else. Our research confirms that certain types of content,namely kids' programs and reruns, have significantly lower ratings over time inNetflix households than in non-Netflix households. (Other genres, particularlyserialized dramas, have higher ratings in Netflix households, benefiting from acatch-up effect.)

    Historically, TV networks have argued that incremental SVOD licensingrevenues more than offset the decline in ad revenues. We don't disagree basedon a one-year view at historical rates. But we do disagree on a multi-year view,especially if SVOD keeps adding subscribers, and most especially if we are correctthat licensing revenues will start to decline. The irony: For SVOD revenue to keepgrowing, the number of SVOD subs must keep growing, which increases the risk ofcannibalization. Media companies can get hurt in either scenario.

    The SVOD providers have gained significant negotiating leverage against thecontent owners, and they have all the data on which programs are being watchedand which are not. The SVOD services can walk away from any given source ofcontent with no impact on their overall consumer proposition (we would citeNetflix dropping AETV and Netflix losing Starz). Unlike linear pay-TVdistributors, we believe SVOD providers will be able to break the bundle. This is

    no longer hypothetical, as evidenced by Netflix's recent announcement that itwould not be renewing its bulk deal with Viacom.

    The content owners have become addicted and like all those withaddictions, they will become increasingly desperate to feed their habit, until theycrash. The two companies at greatest risk are Viacom and CBS: Viacom because ofits dependence on kids' TV and lack of other growth; CBS because of its highdegree of dependence on SVOD earnings (more than 7% of operating income

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    2 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 3

    Table of ContentsSignificant Research Conclusions 5

    Addiction Sets In 11

    CBS and SVOD Viewers Are Addicted to Each Other 19

    Disney: The Mouse Plays Offense 39

    Discovery: Experimentation Does Not Always Lead to Addiction, If You Can

    Outgrow It 59

    News Corp: All In 75

    Time Warner: Less Near-Term Earnings Risk, More Long-Term CannibalizationRisk 89

    Viacom: Have SVOD Economics Peaked? 111

    Index of Exhibits 131

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    4 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

    Exhibit 1 Financial Overview

    Note:The stocks are benchmarked against the S&P 500, which had a closing price of 1,633.70 on May 10, 2013.

    Source: FactSet, corporate reports and Bernstein estimates and analysis.

    CBS DIS DISCA NWSA TWX VIAB

    Rating M O O O M U

    Target Price $49.00 $72.00 $90.00 $39.00 $63.00 $64.00Current Price as of May 10, 2013 $47.75 $67.20 $78.68 $33.27 $60.94 $69.00

    52-Week Range $30.02-$47.75 $43.81-$67.20 $48.37-$81.03 $18.55-$33.29 $33.76-$61.52 $45.28-$69.00

    Revenues ($ million)

    2012 $14,089 $42,278 $4,486 $33,706 $28,729 $13,887

    2013E 14,970 45,602 5,597 36,764 29,324 13,763

    2014E 15,602 48,349 6,324 41,547 30,584 14,330

    2015E 16,120 53,068 6,657 43,631 31,749 14,742

    2016E 16,879 53,732 7,246 45,865 33,017 15,195

    2017E 17,072 55,550 7,742 47,789 34,283 15,652

    Five-Yr CAGR (2012- 17E) 3.9% 5.6% 11.5% 7.2% 3.6% 2.4%

    EBITDA ($ million)

    2012 $3,499 $11,477 $2,095 $6,558 $7,106 $4,259

    Margin 25% 27% 47% 19% 25% 31%

    2013E $3,754 $12,555 $2,448 $7,145 $7,531 $4,333

    Margin 25% 28% 44% 19% 26% 31%

    2014E $4,162 $13,596 $2,829 $8,056 $8,142 $4,558

    Margin 27% 28% 45% 19% 27% 32%

    2015E $4,379 $15,375 $2,838 $9,280 $8,606 $4,660

    Margin 27% 29% 43% 21% 27% 32%

    2016E $4,600 $15,746 $3,062 $10,345 $9,117 $4,788

    Margin 27% 29% 42% 23% 28% 32%2017E $4,661 $16,183 $3,146 $11,151 $9,499 $4,904

    Margin 27% 29% 41% 23% 28% 31%

    Five-Yr CAGR (2012- 17E) 5.9% 7.1% 8.5% 11.2% 6.0% 2.9%

    EPS ($)

    2012 $2.55 $3.07 $2.51 $1.42 $3.28 $4.22

    2013E 2.97 3.41 3.39 1.65 3.66 4.65

    2014E 3.40 3.87 4.42 1.95 4.24 5.30

    2015E 3.74 4.64 4.67 2.37 4.74 5.79

    2016E 4.06 4.84 5.43 2.70 5.17 6.22

    2017E 4.31 5.14 5.95 2.95 5.55 6.60

    Five-Yr CAGR (2012- 17E) 11.0% 10.9% 18.8% 15.8% 11.1% 9.4%

    Shares (million) 631 1,822 365 2,318 956 493

    Market Cap ($ million) $30,111 $122,434 $28,696 $77,217 $58,245 $34,032

    Net Debt ($ million) 6,480 18,992 6,271 14,096 18,448 9,086

    Other Adjust ($ million) (118) 0 (1,105) (13,062) (1,920) (276)

    EV ($ million) $36,473 $141,426 $33,862 $78,250 $74,773 $42,842

    2012 EV/EBITDA 10.4x 12.3x 16.2x 11.9x 10.5x 10.1x

    2013E EV/EBITDA 9.7x 11.3x 13.8x 11.0x 9.9x 9.9x

    2014E EV/EBITDA 8.8x 10.4x 12.0x 9.7x 9.2x 9.4x

    2012 P/E 18.7x 21.9x 31.3x 23.5x 18.6x 16.3x

    2013E P/E 16.1x 19.7x 23.2x 20.2x 16.6x 14.8x

    2014E P/E 14.0x 17.4x 17.8x 17.1x 14.4x 13.0x

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 5

    Significant Research ConclusionsLarge-cap media companies' enthusiasm for signing subscription video on demand(SVOD) licensing deals with the likes of Netflix, Amazon and Hulu+ is reaching afever pitch. Even Time Warner, originally the leading voice against irrationalSVOD exuberance, has joined the chorus, now reaping some ~$350 million inannual digital licensing revenues. Like it or not, these revenues are now embeddedinto the baseline economics of the media companies and for some of them,losing those revenues would be materially bad to earnings.

    If the single biggest thing media companies and their investors are addicted tois share buybacks, then the second biggest thing is SVOD licensing revenue.SVOD looks like manna from heaven: library content that was sitting unused, nowbeing monetized (see Exhibit 2).

    When viewed that way, SVOD appears to be a purely incremental contributorto earnings, flowing through at very high margins. That feels good on the way up,but not so much on the way down. And we believe the licensing revenue is poisedto decline, while cannibalization of viewership will grow.

    Exhibit 2 SVOD as a Percentage of Revenue and Operating Income, by Company

    Note:Revenue and operating income estimates are for each company's FY12.

    Source: Corporate reports and Bernstein estimates and analysis.

    In the early days, when SVOD was first being established, the content ownershad all the pricing power. The SVOD services could only exist to the extent thecontent owners let them exist. The content owners dictated what programs theywould make available to the services, and how much it would cost. In fact, webelieve negotiations with the SVOD provider generally started with the revenue

    number, with an executive of the media company saying something like, "We needyou to pay us $200 million," and then worked backwards from there, to say "Let'stalk about what content needs to be included to get to that number."

    We believe the balance of power is now shifting firmly in favor of the SVODproviders. They have grown up, and they are fighting back. The SVOD providershave leverage because the content-owning companies are so addicted to SVODlicensing revenue, that losing it would cause them great harm. And the SVOD

    ($ in millions) Est. SVOD Est. SVOD LTM LTM Op % of LTM

    Revenue Op. Inc. Revenue Income Revenue Op Income

    CBS $350 $200 $14,089 $2,983 2% 7%

    Viacom 225 170 13,249 3,682 2% 5%

    Discovery 90 75 4,487 1,855 2% 4%

    Time Warner 350 200 28,729 5,918 1% 3%

    News Corp 300 170 34,333 5,726 1% 3%

    Disney 300 190 42,840 9,261 1% 2%

    Total $1,615 $1,005 $137,727 $29,425 1% 3%

    SVOD: Sheep With a GoldenFleece, or a Wolf in Sheep'sClothing?

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    Meanwhile, the introduction of SVOD services into viewers' living rooms isfundamentally changing the way people consume video content. There issignificant ratings cannibalization risk to the TV networks, which may not be easilyapparent. A hint of things to come can be found in kids' programming, where our

    analysis has found that over time traditional TV ratings have gapped significantlylower in Netflix households when compared to non-Netflix households. This is truefor every kids' network except Cartoon Network, which was the only kids'network not on Netflix up until early this year (see Exhibit 3).

    The networks that are doing well in the TV ratings easily dismisscannibalization fears. Disney executives may say something like, "SVOD isn't aproblem for us. Look at the ratings growth and share gains of our kids' networks."But we would counter: "How much higher would the ratings have been if it hadn'tbeen for SVOD?"

    Networks that are struggling find it easy to blame bigger culprits. A Viacomexecutive may make the case, "SVOD can only be blamed for a small amount ofour ratings problems. The real problem is viewing that takes place on unmeasureddevices." We would counter: "The SVOD impact is bigger than managementindicates and more importantly, if allowed to, it will compound and grow biggerand bigger over time."

    With the risks not yet apparent, the fervor of deal-making continues, boostingnear-term quarterly results for the big media companies. As shown in Exhibit 4,contribution from SVOD licensing fees was a significant driver of total operatingincome growth in FY12 for almost all of the large-cap media companies (in fact, in

    Viacom's case, growth from SVOD actually exceeded the growth of the rest of thecompany). And every year that goes on, those revenues and earnings get embeddedmore deeply into baseline results, painting these companies into a corner where it'sharder and harder to unwind these deals, even if they wanted to.

    Exhibit 3 All Kids' Networks Fared Worse in Households With Netflix Except CartoonNetwork, Which Was the Only Major Kids' Network Without Content on Netflixin 2012

    Source: TiVo Stop||Watch and Bernstein estimates and analysis.

    Exhibit 4 SVOD Has Been a Significant Driver of Earnings Growth for Most Large-Cap MediaCompanies ($ million)

    CY12 Ratings y/y

    Kids' Network Netflix Non-Netflix Delta

    Cartoon Network 15% 5% 10%

    Nickelodeon (14%) (12%) (2%)

    Disney Channel (2%) 0% (3%)

    Nick Jr. (14%) (11%) (4%)

    The HUB 38% 44% (6%)

    Disney XD 17% 23% (6%)

    Boomerang (4%) 5% (8%)

    Sprout 10% 20% (10%)

    Nick Toons (21%) (6%) (15%)

    % OI

    FY12 $ Growth in: Growth/

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 7

    We estimate the current aggregate content spend by SVOD providers globally isabout $3 billion, with $1.6 billion directed to the large-cap media companies (seeExhibit 5). The profit from this revenue represents anywhere from 2% of totalcompany operating income (Disney) to 7% (CBS).

    As SVOD matures, the licensing revenue potential is determined by thenumber of SVOD subscribers and their ARPUs (which determines revenue to theSVOD providers), multiplied by a gross margin (i.e., how much of that revenue theSVOD providers are willing to re-invest in content). If subscribers and ARPUsgrow, then the market potential grows (but the cannibalization risk also grows). Weestimate that the total content investment by SVOD players will increase to about$3.9 billion over the next few years, with an incremental $400 million flowing tolarge-cap media, assuming large-cap media companies hold their share.

    Of course, some $300 million of that is already earmarked for Disney'stheatrical output deal with Netflix. We also believe the SVOD providers will directan increasing proportion of that investment toward original proprietary content(think:House of Cards).

    Exhibit 5 Total SVOD Revenue Estimates by Studio/Source

    Note:Revenue estimates are based on FY12 activity.

    Source: Corporate reports and Bernstein estimates and analysis.

    In terms of its impact on viewing behavior, SVOD has surprisingly not yetcaused a measurable decline in total traditional TV viewing among SVODsubscribers. But it has changed what they watch on TV. Kids' content and rerunsare the losers; serialized dramas (think:Breaking Bad) are the winners.

    It may seem intuitive that SVOD would compete with premium services likeHBO and Showtime for subscribers and viewership. But so far, the opposite is true.

    Netflix subscribers over-index on consumption of HBO and Showtime (and hitbroadcast primetime programming, and most flavors of original cable networkprogramming). In other words, Netflix subscribers (at least the first 28 million ofthem) are entertainment junkies; they can't get enough of the stuff.

    The generalized implication for TV networks all TV networks is theywill increasingly have to spend more on content to fight for audiences. The shelf-life of an original piece of content is getting shorter and shorter as networks can no

    ($ in millions) SVOD % of

    Revenue Total

    CBS $350 11%

    Time Warner 350 11%

    Disney 300 10%

    News Corp 300 10%Viacom 225 7%

    Discovery 90 3%

    Large Cap Media $1,615 52%

    Other Major Movie Studios $600 19%

    Independent Studios/Other 420 13%

    NBCU 400 13%

    Other Independent Networks 125 4%

    Total SVOD Revenue $3,120

    Industry-Wide Implications

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    Some content companies have much more risk exposure to SVOD than others. Themain determinants are: (1) genres in which the company participates; (2) thecompany's dependency on SVOD licensing revenue (i.e., what percentage ofearnings comes from SVOD; (3) how fast other elements of the company's business

    are growing; (4) types of content that characterized historical deals (i.e., bulknonexclusive baskets of deep library content, or more selective rights to recentprograms); and (5) how much additional (valuable) content the company hasavailable for future licensing.

    The two companies most at risk, based on our assessment, are CBS andViacom. Time Warner and News Corp face medium risk. Discovery and Disneyface relatively low risk.

    CBSis vulnerable due to its financial dependency. It does not have significantcannibalization risk. We figure that 7% of CBS's total operating income comesfrom SVOD if 60% margins are assumed (10% if 85% margins are assumed). This

    dependency is exacerbated by the rest of the company not growing particularly fast.And it's not only the amount of SVOD revenue but also the type of content beingsold: Much of CBS's SVOD revenue comes from catalog library content, which isexactly the type we believe the SVOD providers are going to try to cull. To beclear, this threat isn't imminent. CBS can grow its SVOD revenue in 2013, and itmay even get a boost from a new SVOD entrant in the near term, in our view.However, we believe any such one-time boost would be ephemeral, and create aneven higher cliff in the future.

    Viacom is vulnerable due to its financial dependency and its cannibalization

    risk. Of Viacom's total operating income, 4% comes from SVOD. We believeViacom is overearning by a factor of 3x relative to its contribution to SVODviewership. Viacom's long-term valuation is highly sensitive to the affiliate feegrowth rate, which we see as at risk due to slowing SVOD revenues. SVOD hasbeen the difference between affiliate fees growing at low-double digits versus high-single digits. If SVOD revenue were to stop growing and flatten out, affiliate feegrowth rate would be constrained in the high-single digits, and be dragged downeven further if SVOD revenue declines. Moreover, Viacom is more dependent onkids' TV than any other media company, and kids' TV is the most prone to

    cannibalization in SVOD homes.Time Warnerhas relatively low financial risk because of SVOD, which is 3%of total company operating income. The company is also shielded by the fact thatmost of its SVOD licensing deals are for recent content (in many cases includingfuture seasons), which is much less susceptible to being culled by the SVODproviders. However, Time Warner does face meaningful cannibalization risk,especially at TNT, TBS and Cartoon Network. Reruns of both acquired andoriginal programming on TNT and TBS have trended lower in Netflix householdsthan in non-Netflix households. Perhaps of even greater concern, premiere episodesof Turner originals have trended lower. Cartoon Network, the last SVOD holdout

    among the kids' networks (and the only kids' network trending higher in Netflixhouseholds), recently threw in the towel and signed a Netflix deal.

    News Corp's SVOD risk is very similar to Time Warner's. In terms offinancial risk, SVOD is only 3% of News Corp segment operating income, andmost of the SVOD licensing deals are for recent content, in many cases includingfuture seasons. News Corp's biggest cannibalization risk is at the FX network,which has seen a significant drop in ratings for Netflix households watching reruns

    Company-Specific Implications

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 9

    higher in Netflix households than in non-Netflix households, while ratings forreruns trend lower.

    Disneyfaces the lowest SVOD risk. SVOD is only 2% of company operatingincome, and the company has already locked in a long-term theatrical output deal

    with Netflix beginning in 2016. Cannibalization is highest at the kids' networks andABC Family. But because Disney's kids networks have little ad revenue andaffiliate fees have recently been locked in for many years to come, there is verylittle financial ramification from SVOD.

    We value each of the companies in our U.S. media coverage using the weightedaverage of a discounted cash flow analysis and a relative market multiple valuation.For our relative multiple valuation, we apply our Q5-Q8 EPS earnings estimate to arelative PFE multiple selected based on past history, projected growth rates and the

    company's ability to generate returns in excess of the cost of capital, all relative tothat of the S&P 500.

    Our DCF valuations are conducted on a sum-of-the-parts basis for each majoroperating segment of our respective coverage companies, with comparablecompany valuation benchmarks used when appropriate and available. Our DCFmodel is based on annual cash flow forecasts over an explicit period, combinedwith a continuing value component intended to capture the firms value intoperpetuity. Our explicit period assumptions are based on annual projections forNOPLAT, depreciation, capital expenditures, and working capital. The fair market

    value of common equity determined by each of these methods is divided by thecurrent diluted share count and multiplied by one plus the cost of equity minus thecurrent dividend yield (1 + Ke - d) to calculate a target share price in 12 months'time.

    We then weight the market multiple component of our valuation 50% and theDCF 50% in order to establish a weighted average target price.

    Consumer and advertising spend are significant drivers of revenue for most of thecompanies in our coverage of U.S. media. The deterioration of economic

    conditions could have a material negative impact on revenues and earnings of thecompanies in our coverage and on the stocks achieving our target prices. The healthand stability of the video distribution ecosystem is vitally important with respect tothe delivery of our companies' television content. New and innovative platformsthat offer video distribution could potentially disrupt the ecosystem, therebyjeopardizing the primary distribution partners (cable and satellite) of each of ourcompanies. Additionally, piracy of content could serve to undermine theprofitability of a product that typically is produced with the expectation of multipledistribution methods and time horizons for which that product can be monetized.

    For all companies, advertising spend is sensitive to economic expectations andthe health and stability of a concentrated number of industries. Our forecast of U.S.and international ad spending for cable and broadcast networks could varysignificantly from realized results.

    In addition to the industry-wide risks, each company has its own factors thatcould prevent our target prices from being reached. We discuss each company'srisks in the following paragraphs.

    Valuation Methodology

    Risks

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    Discovery. Discovery may have trouble acquiring or producing low-costcontent or leveraging its content across multiple platforms and geographies. Anincreasing reliance on international markets (especially Continental Europe and theUnited Kingdom) presents unique risks, including increased exposure to volatile

    economic conditions and varying regulatory regimes and content copyrightprotections. The ability to increase affiliate fees may be negatively affected byDiscovery's lack of a network with dominant ratings. JV partners may limitDiscovery's ability to take action to improve performance, or they may exit theventures that are not performing adequately.

    Disney. Disney may be unable to continue its pace of affiliate fee increases atits cable networks due to financial constraints on the part of buyers or increasedregulatory oversight. The slate of capital projects may fail to create a return oninvestment commensurate with the alternative uses of capital (such as sharebuybacks or dividends), or the market may fail to realize the value of these

    investments for a period longer than we anticipate. The TV and film productionunits may fail to deliver content that either succeeds on its own merit, or can beexploited through Disney's Consumer Products, Parks and Resorts, and InteractiveMedia divisions. Global economic conditions may worsen, affecting advertisingrevenue at the cable and broadcast networks as well as consumer demand for theConsumer Products and Parks and Resorts divisions. Capital intensity and highfixed costs at the Parks division limit Disney's flexibility to reduce costs/committedcapital in response to worsening economic conditions. Any negativity surroundingthe Disney brand would resonate throughout all business lines.

    News Corp.Ratings for programming aired on FOX's broadcast networks maydeteriorate from the current levels, causing ad revenues, retransmission fees andfuture off-network and international syndication value for the content to decline.News Corp may be unable to realize positive value for the cash it has on hand iffuture investments are value-destructive. Negative regulatory backlash and publicperception from the News International scandal could be contagious across otherNews Corp divisions and produce negative unintended consequences. Thepublishing business has been in decline and may never stabilize or recover. Thesatellite pay TV operations in Italy and Germany expose the company to country-

    specific risks.Time Warner. At Time Warner, the film unit may fail to produce futurefranchise hits, on which it has depended heavily in the past, which wouldnegatively impact profitability for that unit. The networks may find theircompetitive positions untenable, resulting in either a loss of viewers, increasedproduction costs, or both. Publishing has been in decline for years and couldbecome value-destructive. HBO faces competitive threat from SVOD providers(e.g., Netflix).

    Viacom. Viacom may experience a significant increase in ratings at itsflagship networks. International demand for Viacom's content and cable channels

    may exceed that of our forecasts. Additional digital licensing partners may go tomarket with content licensed from Viacom, or current SVOD partners maysignificantly expand current distribution arrangements. Paramount may producefuture franchise hits, which it has done with regularity in the past, which wouldpositively impact profitability for that unit.

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    Addiction Sets In

    As recently as a few years ago, subscription video on demand (SVOD) was a newand little-known distribution platform, dominated by a single distributor (Netflix)and used by content providers almost exclusively on an experimental basis. Now,with tens of millions of subscribers in the United States alone, SVOD as a platformcontributes material amounts of revenue to the major media companies that providethe content. No longer is SVOD an experiment; it is now becoming as important aplayer in the content ecosystem as traditional, linear TV syndication. In some ways

    it is more important, because it has been the largest incremental addition toearnings growth recently.

    With very little comprehensive data in existence about SVOD, both on a macroand micro level, we thought it would be useful for investors to assess the SVODenvironment, estimate the size of the market as a whole, and gauge the amount ofrevenue and income SVOD generates for the large-cap media companies in ourcoverage universe. To do this, we have pored over company filings and transcriptsin an attempt to provide a comprehensive overview of the SVOD ecosystem as itexists today. Additionally, we have secured a unique trove of TV ratings data,which enables us to compare viewing trends over time in homes that use Netflixversus homes that don't.

    With this combination of financial and behavioral data in hand, we havebecome concerned that what started as an experiment has turned into a harmfuladdiction for the content owners. Revenue and profit that was once a nice littlesweetener is now embedded in the companies' baseline profits. Investors would nottake kindly to those profits going down. To keep feeding that addiction, either theSVOD end-user market has to keep growing, or the content owners have to fighteach other for their share of the available licensing dollars.

    In the meantime, the existence of SVOD creates changes in how consumers

    watch TV. The losers (on linear TV) are kids' networks and reruns. The winners areserialized dramas.

    In this chapter, we scope the entire marketplace from an aggregate perspective,and examine the forces at work driving total industry growth and how it impactseach part of the value chain. We also look at generalizable learnings about theimpact of SVOD on TV viewership. In the following chapters, we examine theimpact on each of the large-cap media companies.

    Even the very basic question of "How much SVOD revenue is each companygenerating?" turns out to be very difficult to answer. Specific deal terms are neverdivulged, and even aggregate digital/SVOD revenue is rarely disclosed (usuallyonly in management commentary).

    Further complicating the exercise is revenue recognition, which is horriblylumpy. Revenue is recognized when the content is delivered to the SVOD providerand made available to their subscribers. Because most of these deals are for batches

    f i i lib hi h i d li d l i bi b h d d

    From a Silver Lining to aStormy Cloud

    Supply-Side Economics

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    12 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

    Exhibit 6 All Large-Cap Media Companies Generate Significant SVOD Revenue

    1 Time Warner provides TV series to Hulu and Hulu + through its CW deal.

    2 Movie output deal begins in 2016.

    3 Viacom provides current and library films through EPIX.

    4 Viacom provides current films only through EPIX; library is provided directly by Paramount.

    Note:Revenue estimates are for each company's FY12.

    Source: Corporate reports and Bernstein estimates and analysis.

    We draw a few key observations from the data.

    All the major media conglomerates are engaged in SVOD deals. There are noholdouts. Even Scripps Networks, the longest holdout, recently gave in.

    Time Warner, which was originally the voice of caution, warning that the SVODmodel devalued content, is now among the very largest suppliers of SVODcontent.

    To date, exclusivity is rare. Every major content company has deals with bothNetflix and Amazon and, except for Discovery, with Hulu and Hulu+. Within themedia conglomerates, there are some specific exclusive deals with one SVODprovider or another.

    We estimate that the large-cap companies in our coverage generate ~$1.6billion in revenue from SVOD providers. While $1.6 billion of revenue is relativelyinsignificant when compared to the aggregate revenues of these giant companies,the amount becomes more material when compared to earnings, as these revenues

    are generally thought of as purely "incremental," flowing through at very highmargins. The companies with the highest percentage of operating income derivedfrom SVOD are CBS, Viacom and Discovery with 7%, 5%, and 4%, respectively,according to our analysis (see Exhibit 7).

    Exhibit 7 SVOD as a Percentage of Revenue and Operating Income, by Company

    ($ in millions) Est. SVOD Netflix Amazon Hulu Hulu Plus

    Revenue TV Movies Intl TV Movies Intl TV Movies TV Movies

    CBS $350 na na na na

    Time Warner 350

    Disney 300

    News Corp 300

    Viacom 225

    Discovery 90 na na na na

    Total $1,615

    ($ in millions) Est. SVOD Est. SVOD LTM LTM Op % of LTM

    Revenue Op. Inc. Revenue Income Revenue Op Income

    CBS $350 $200 $14,089 $2,983 2% 7%

    Viacom 225 170 13,249 3,682 2% 5%

    Discovery 90 75 4,487 1,855 2% 4%

    Time Warner 350 200 28,729 5,918 1% 3%

    News Corp 300 170 34,333 5,726 1% 3%

    Disney 300 190 42,840 9,261 1% 2%

    Total $1,615 $1,005 $137,727 $29,425 1% 3%

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 13

    Occasionally we'll hear a company or investor make the comment, "There is still somuch upside from SVOD. Company XYZ has only licensed X% of its contentlibrary just wait until it licenses the other Y%." We believe that reasoning isfaulty, because the market potential is not a function of how many indiscriminate

    hours of content a company may have in its vault. The only content that has valueis content that a distributor is willing to pay for (because viewers want to see it).We believe the better way to gauge the ultimate potential market size for

    SVOD is to start with the end-user demand and then work back down the chain.We do this for both domestic and international markets.

    The first key determinant is the amount of revenue SVOD providers currentlygenerate. Already we have a very big problem, because there is no precise way todetermine how much of Amazon's Prime service is SVOD-related. Amazon Primemembers pay $80 per year for the Prime service, which includes SVOD service as afeature. Is the price for the SVOD service $80, $0 or somewhere in between? For

    the purpose of our scoping analysis, we avoid the Amazon question by just sizingthe market generically based on a total number of SVOD subs (across all SVODproviders) multiplied by a certain ARPU.

    We present the analysis as a sensitivity grid because different investors willhave different beliefs. Some people believe Netflix alone will have 80 million U.S.subs. Others believe they have topped out at 28 million (or will go backwards).

    Once we determine how much total revenue SVOD providers as a whole willgenerate, then we can determine how much of that revenue the providers will investin content (i.e., what is their gross margin?), to arrive at a total aggregate SVOD

    spend on content. We have chosen a 65% investment rate, based on an assessmentof current streaming providers' financials (see Exhibit 8).

    Exhibit 8 Estimates for SVOD Provider Economics

    1 "Others" includes our estimate of content spending by newer U.S. services such as Streampix, Redbox Instant and Intel, as well as non-U.S.services.

    2 Paid subs are based on current sub levels.

    Source: Corporate reports and Bernstein estimates and analysis.

    Addi th i t ti l d d ti k t d ith t ti l

    (in millions, except per sub data)

    NFLX Total AMZN

    Domestic Intl Hulu+ Ex-AMZN Dom & Intl Others(1)

    Total

    Paid Subs (mm's)(2)

    28 6 2 36 16

    Average Fees $7.99 $7.56 $7.99 $7.91 na

    Streaming Revenue $2,675 $574 $192 $3,441 naNet Ad Revenue 0 0 16 16 0

    Total Revenue $2,675 $574 $208 $3,458 na

    Streaming Content Costs 1,600 500 179 2,279 600 250 $3,129

    Gross Profit $1,075 $74 $29 $1,178 na

    Gross Margin 40% 13% 14% 34% na

    Segment EBIT Margin 20% na 0%

    EBIT $535 ($326) $0

    Other Operating Costs $540 $400 $29

    Other Op Costs as % of Sales 20% 70% 15%

    Demand-Side Economics

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    14 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

    Exhibit 9 The Total Demand for Streaming Rights Over the Next 2-3 Years Is Constrained bySVOD Economics ($ million)

    Source: Bernstein estimates and analysis.

    Not all of this $3.9 billion will make its way to the large-cap content owners.Some of it will go to privately held studios and smaller networks. Another portionwill go to foreign content and smaller/independent owners. A bigger, growing partwill be devoted to original content (e.g.,House of Cards).

    We estimate large-cap media currently earns a little more than half of totalSVOD revenue (see Exhibit 10). If we assume the same percentage of SVODrevenue stays with large-cap media over time, the companies will earn about $0.4billion more than they earn today, or about a 25% increase over the next 2-3 years.If you consider Disney's theatrical deal with Netflix as part of that growth, that only

    leaves $0.1 billion of growth for everybody else.

    Exhibit 10 Total SVOD Revenue Estimates by Studio/Source

    Note:Revenue estimates are based on FY12 activity.

    Source: Corporate reports and Bernstein estimates and analysis.

    It's been said so many times that it's trite: Given that there are only so many hoursin a day, people are going to run out of hours to watch video. Internet usagecontinues to rise, as does mobile and SVOD usage. Where are people finding thetime to consume all of this media? For the Internet (computer-based and mobile) a

    US International

    Content Cost (% of Rev): 65% Content Cost (% of Rev): 65%

    Subs (mm's) Subs (mm's)

    45 50 55 60 65 70 15.0 16.7 18.3 20.0 21.7 23.3

    $4 $1,404 $1,560 $1,716 $1,872 $2,028 $2,184 $4 $468 $520 $572 $624 $676 $728

    $5 $1,755 $1,950 $2,145 $2,340 $2,535 $2,730 $5 $585 $650 $715 $780 $845 $910

    $6 $2,106 $2,340 $2,574 $2,808 $3,042 $3,276 $6 $702 $780 $858 $936 $1,014 $1,092

    $7 $2,457 $2,730 $3,003 $3,276 $3,549 $3,822 $7 $819 $910 $1,001 $1,092 $1,183 $1,274

    $8 $2,808 $3,120 $3,432 $3,744 $4,056 $4,368 $8 $936 $1,040 $1,144 $1,248 $1,352 $1,456

    $9 $3,159 $3,510 $3,861 $4,212 $4,563 $4,914 $9 $1,053 $1,170 $1,287 $1,404 $1,521 $1,638MonthlyARPU

    MonthlyARPU

    ($ in millions) SVOD % of

    Revenue Total

    CBS $350 11%

    Time Warner 350 11%

    Disney 300 10%

    News Corp 275 9%

    Viacom 188 6%

    Discovery 113 4%

    Large-Cap Media $1,575 50%

    Other Major Movie Studios $600 19%

    Independent Studios/Other 420 13%

    NBCU 400 13%

    Other Independent Networks 125 4%

    Total SVOD Revenue $3,120

    Is the SVOD RevenueIncremental?

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 15

    Exhibit 11 The Number of Households Using Television and Persons Using Television HaveBeen Relatively Stable Since 2010

    Source: Nielsen and Bernstein analysis.

    How can we explain the steady levels of TV viewing, amid rising SVODusage? One answer: Some SVOD viewing is displacing physical DVD viewing(which was never in the TV viewing numbers to begin with). It makes logical sensethat early SVOD adopters (and we still are relatively early in the adoption curve)likely over-indexed on DVD viewing, and they are swapping the new way ofviewing for the old. That would leave TV untouched.

    Another explanation is SVOD viewing is taking place in new locations or atnew times that aren't substitutes for traditional TV (so the viewing really isincremental). The most obvious example is the workplace, where most white collarprofessionals have broadband access. (Commuting time is probably not a verylikely explanation, as continuous Wi-Fi access would be clunky and costly.)

    And finally, perhaps there really is some increase in total consumption time.People who really love certain types of TV now have more of it available,whenever they want.

    The fact that HUT and PUT levels haven't dropped off yet doesn't mean theywon't in the future. If SVOD flourishes as some believe it will, then behavior couldstart to shift in the future. In fact, such a shift toward SVOD and away from TVviewing seems inevitable, unless a significant disruption takes place. The onlyscenarios we can think of that would throw SVOD consumption into reverse would

    be a rise in cable video on demand (VOD)/TV Everywhere to displace SVOD(which are really the same consumer proposition), or content owners pulling backtheir programming from SVOD providers (which at one time we believed was quitelikely and, in fact, the rational course of action for the content owners, but nowseems increasingly improbable).

    Even though total traditional TV consumption has remained essentially flat,that doesn't mean it isn't affected by SVOD. SVOD may not yet have changed howmuch traditional TV people consume, but it has changed what they consume.Certain household profiles are particularly attracted to SVOD namely,

    households that love entertainment programming and households with kids.Moreover, SVOD is a superior delivery device for certain types of content specifically serialized dramas and kids' programming causing the share ofviewing of those genres to significantly shift to the SVOD mode.

    This leaves a different mix of content viewed on traditional TV in thosehouseholds: less kids' shows and more in-season serialized dramas. Additionally,with a viable substitutive option for TV in SVOD, viewers are more likely to

    Persons Using TV (PUT) Households Using TV (HUT)

    Total Day Prime Total Day Prime

    Broadcast Viewers Viewers HH's HH'sS-T-D (000's) y/y % (000's) y/y % (000's) y/y % (000's) y/y %

    2010 61,455 117,443 41,277 70,615

    2011 62,178 1.2% 118,125 0.6% 41,402 0.3% 70,442 (0.2%)

    2012 60,609 (2.5%) 115,395 (2.3%) 41,818 1.0% 70,757 0.4%

    2013 61,376 1.3% 115,320 (0.1%) 42,107 0.7% 70,866 0.2%

    CAGR (0.0%) (0.6%) 0.7% 0.1%

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    Our analysis has found that over time traditional TV ratings for kids' networks hasgapped significantly lower in Netflix households when compared to non-Netflixhouseholds (see Exhibit 12). This is true for everykids' network except CartoonNetwork, which was the onlykids' network not on Netflix up until early this year(see Exhibit 13). In 2012, ratings for Cartoon Network were up +15% in Netflixhouseholds versus only +5% in non-Netflix households. Then in January 2013(after the period we studied), Cartoon Network succumbed and signed a Netflixdeal. We cannot wait to see what happens to Cartoon Network over time, now thatit's joined everyone else on Netflix. If SVOD services continue to grow, this gapbetween kids' viewing in Netflix and non-Netflix households will only widen,causing a bigger and bigger drag on overall TV viewership.

    Exhibit 12 Households With Netflix Streaming Have Consistently Watched Less Kids'Programming Than Households Without Netflix Streaming Since January 2011

    Source: TiVo Stop||Watch and Bernstein estimates and analysis.

    Exhibit 13 All Kids' Networks Fared Worse in Households With Netflix Except CartoonNetwork, Which Was the Only Major Kids' Network Without Content on Netflix in2012

    1.040

    0.985

    0.85

    0.90

    0.95

    1.00

    1.05

    1.10

    1.15

    1.20

    1.25

    IndexedRatin

    gValue(Jan2011=1)

    Kids' Channels Indexed Ratings

    Non-Netflix Homes Netflix Homes

    CY12 Ratings y/y

    Kids' Network Netflix Non-Netflix Delta

    Cartoon Network 15% 5% 10%

    Nickelodeon (14%) (12%) (2%)

    Disney Channel (2%) 0% (3%)

    Nick Jr. (14%) (11%) (4%)

    The HUB 38% 44% (6%)

    Disney XD 17% 23% (6%)

    SVOD The Ultimate Kids'Viewing Platform

    U S M C R SVOD M E H 17

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 17

    The danger for content companies will only seem obvious in hindsight. For acontent owner, in any given year, the available SVOD licensing revenue looksbigger than the projected loss of TV advertising revenue, making it appear like aneconomically optimal decision to take the SVOD check(s). But part of why SVODlicensing revenue will look bigger over time is because traditional TV advertisingwill decline over time. Looking out longer term (say, five years later), it may be thecase that half of the TV audience has migrated from a very profitable form ofviewing (the pay-TV bundle) to a much less profitable form of viewing (SVOD).At that point, the network can never get the viewers back. When this audience shiftbecomes pronounced enough to start impacting affiliate fees as well, then theeconomic tradeoff completely breaks down.

    Disney is a somewhat special case, given its flagship Disney Channel doesn'tcarry advertising and therefore has no ad revenue to lose. (Disney Channel's twofast-growing siblings do carry advertising. DXD carries traditional 30-second spots,

    Disney Jr carries "sponsorships.") A Machiavellian theorist might expect Disney togladly drive lots of kids' viewing to SVOD, because such a strategy will hurtViacom (and Time Warner) more than it will hurt Disney. Disney must have givenNetflix enough certainty of a continued supply of kids' content for Netflix to beconfident enough to drop its bulk deal with Viacom. That seems true on thetheatrical side as well, where Disney just partnered up with Netflix for a long-termoutput deal (starting 2017), including some library titles never before madeavailable in a SVOD or premium network window.

    What's so frustrating is that kids' networks didn't need to become victims of the

    SVOD phenomenon. Kids' TV is centralized in the hands of 2.5 players (Disney,Viacom and a little bit of Time Warner). If those three players had resisted SVODfrom the outset, kids' offerings would never have found their way to SVODproviders. The content owners could have instead satisfied the needs of theirviewers through TV Everywhere, and gotten paid for the content via affiliate feesand forced-view advertising, while preserving the pay-TV bundle.

    We have characterized this situation as a form of a prisoner's dilemma. If all ofthe content owners abstained, they'd all be better off. But if one of the networksbreaks ranks and participates, then the others probably will change their minds anddecide to take advantage of SVOD money, because SVOD migration is going tohurt results whether they participate or not. (This must be what Cartoon Networkdecided when it finally threw in the towel and acquiesced to a Netflix deal.) Andworst fate of all is what is currently happening to Viacom. Viacom helped trainviewers to watch kids' programming on SVOD, and now Viacom is about to be cutout of a large portion of the licensing fees.

    Networks airing returning seasons of serialized dramas have found that SVOD hasexactly the opposite effect from what has been observed on kids' networks. As best

    exemplified by AMC Network, overall ratings have trended higher in Netflixhouseholds compared to non-Netflix households. Specific accelerations in theratings gap can be traced to the availability of past seasons of hit shows on Netflix,and the introduction of new seasons of those shows on the traditional network (seeExhibit 14).

    The implication for content owners and networks airing serialized dramas:They should take every SVOD deal they can get, because they are getting paid, and

    SVOD The UltimateSerialized Drama Marketing

    Platform

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    Exhibit 14 For Serialized Dramas, Placing Programming on Netflix Can Improve Linear TVRatings

    Source: TiVo Stop||Watch, corporate reports and Bernstein analysis.

    The data in all of the chapters in this Blackbook come from TiVo's Stop||Watchservice, which relies on an opt-in panel of some 35,000 TiVo subscribers. Thesesubscribers volunteer to provide information about their households and agree to letTiVo anonymously associate these household factors to the stream of viewing data(what we call "set-top box data") collected from their TiVo boxes. All of thesesubscribers are "TiVo-owned" subs, meaning they bought their own physical TiVobox (from Best Buy, for example) and installed it in their house.

    For our project, the panelists were asked to indicate whether they subscribed tothe Netflix streaming service and have viewed content from this service, on theirconventional TV set (through their TiVo boxes), in the past month. Based on theanswers to these questions, two cohorts of about 10,000 "streamers" in Netflixhouseholds and about 10,000 "non-streamers" in non-Netflix households werecreated. This set of data exists only from 2011 onward, and our period of study forthisBlackbookended in January 2013.

    TiVo set-top box data is collected daily and provides a second-by-second tallyof all viewing that takes place, whether "live" or "timeshifted." The data are

    compiled into "TiVo household ratings" (i.e., percentage of the respective universewatching any given program at any given second), which are able to be summedacross dimensions, such as networks, dayparts, or even specific commercials.

    We realize the data are not perfect. Neither the total TiVo subscriber universe,the Stop||Watch panel, or the specific streamer/non-streamer cohorts are nationallyrepresentative. Even if the demographics were weighted to match the U.S.population the data still wouldn't be perfect because TiVo households have one

    2.274

    2.096

    0.300

    0.500

    0.700

    0.900

    1.100

    1.300

    1.500

    1.700

    1.900

    2.100

    2.300

    Netflix Non-Netflix

    1st fourseasons ofMad Men

    Available viaNetflix

    1st threeseasons of

    Breaking BadAvailable via

    Netflix

    1st season of

    WalkingDead

    Available viaNetflix

    Months in which newepisodes of BreakingBad, Walking Dead andMad Men were aired

    About the Data We Used

    U S MEDIA: CELEBRITY REHAB SVOD MOVES FROM EUPHORIA TO HANGOVER 19

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    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 19

    CBS and SVOD Viewers AreAddicted to Each Other

    Compared to its large-cap media peers, CBS is the most dependent on SVOD as apercentage of earnings: 6-7% of operating income, assuming SVOD margins are60%, and as much as 10%, if SVOD margins are 85%. As we dug into the data, wediscovered CBS perfectly illustrates the short-term upside but long-term risk thatSVOD poses for many content owners.

    The cannibalization risk at CBS and its subsidiary Showtime is minimal,unlike what we've seen at kids' networks. In fact, both CBS and Showtime havebeen experiencing higher viewership in Netflix homes compared to non-Netflixhomes, with the increase greatest when CBS and Showtime are airing newepisodes.

    That suggests CBS should take all the SVOD deals it can get and webelieve it can get a few more. The network's booked SVOD run-rate thus far in2013 is slightly lower than in 2012, but we believe CBS will find an SVODcustomer for past seasons of a handful of shows currently airing in its primetimelineup (as it did with The Good Wife), lifting CBS's 2013 SVOD revenue to a newrecord. If a new SVOD company (such as Intel) entered the market, that would beanother source of revenue, but it would only be incremental on a sustained basis tothe extent it brought net incremental paying subscribers into the SVOD universe.

    We believe that licensing revenue growth will soon be limited by the amountof money SVOD players have at their disposal to invest in programming(especially with increasing amounts funneled to originals, and Netflix soon payingfor the Disney output deal). CBS may have a lot more content it could sell, but wequestion the size of the pool of dollars available to pay for the content.

    Additionally, we believe the negotiating leverage that content owners have

    over SVOD providers is starting to balance out. The networks now need the SVODplayers just as much as the SVOD players need the networks. Losing any of theSVOD deals would be a major blow that CBS (and its peers) cannot afford. Netflixand Amazon know this, and can selectively play content owners against each other,and even back up a threat to drop certain content (like Netflix did with AETV), or"break the bundle" and buy a smaller amount of content for a smaller amount ofdollars (like Netflix did with Viacom).

    The Showtime viewership data in particular, as well as the CBS primetime datain general, prove to us that Netflix households are not using the SVOD service as a

    patchwork substitute for regular TV viewing, or as some kind of cord-cuttingprelude. Instead, they seem to be households that absolutely love entertainmenttelevision and can't get enough of it. They actually watch more entertainmentcontent on linear TV as a share of their total traditional TV viewing, apparentlysiphoning off the less purposeful/engaging viewing hours.

    CBS Has Made Hay While theSun Shines

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    On an absolute basis, we estimate digital licensing contributed ~$350 millionto CBS's revenue in 2012, translating into about 2.5% of total revenue and nearly7% of operating income, if one assumes a 60% gross margin on those incrementalrevenues (see Exhibit 16). (The content involved in these deals has been librarycontent, which is almost entirely fully amortized. So the only identifiable variableexpenses are participations. There is also some cost to getting the deals done,accounting for them, etc.).

    Exhibit 15 SVOD Has Been a Strong Contributor toCBS's Revenue and Operating IncomeGrowth

    Exhibit 16 SVOD Is Becoming a Meaningful Share ofCBS's Revenue and Operating Income(Assumes 60% Gross Margin)

    Source: Corporate reports and Bernstein estimates and analysis. Source: Corporate reports and Bernstein estimates and analysis.

    To achieve these results, CBS has tapped its vast library archives. After somedigging, we have assembled a fairly complete list of the programs CBS haslicensed to Netflix, Amazon and Hulu+ (see Exhibit 17).

    Detailed estimates of pricing for each of these titles (season-by-season) witheach SVOD provider is included in the Appendix of this chapter, in Exhibits 35-39,with the value of deals totaled in Exhibit 40. This bottom-up pricing triangulationexercise is a critical input for assessing the expected fair price for potential futuredeals (on new titles). Some of the notable titles in the CBS library that don't appear

    on the SVOD list are highlighted in Exhibit 18.

    15%

    22%

    32%

    2011 2012

    % Growth From SVOD

    Operating Income Revenue

    NA

    1.5%

    2.5%

    0.0%

    4.6%

    6.7%

    2010 2011 2012

    SVOD Financial Contribution

    % of Revenues % of Operating Income

    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 21

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    Exhibit 17 CBS Has Licensed Over 7% of Its Library to All the Major SVOD Players in the UnitedStates

    Current Domestic Library Availability

    Significant Titles NFLX AMZN Hulu + Legend

    7th Heaven All seasonsAccidently, On Purpose Partial seasons

    Amazing Race Not Available

    Andy Griffith

    Brotherhood

    Charmed

    Cheers

    CSI: Miami

    Dr. Quinn, Medicine Woman

    Everybody Hates Chris

    Everybody Loves Ray Family Ties

    Flashpoint

    Frasier

    Ghost Whisperer

    Gilligan's Island

    Good Wife

    Hack

    Harper's Island

    Hawaii 5-0 (Classic)

    I Love Lucy JAG

    Jericho

    L Word

    Life, Unexpected

    MacGyver

    Medium

    Melrose Place

    Mission: Impossible

    Next Top Model

    Numbr3s

    Philly

    Sleeper Cell

    Star Trek

    Star Trek Animated

    Star Trek DS9

    Star Trek Enterprise

    Star Trek Next Gen

    Star Trek Voyager

    Survivor

    Three Rivers

    Tudors

    Twilight Zone

    Twin Peaks

    Undercover Boss

    United States of Tara

    Wi

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    Exhibit 18 Some Notable Holdouts from the CBS Library, Not Yet Licensed to SVOD

    Source: imdb.com, locatetv.com and Bernstein analysis.

    Like every other business in the world, CBS has only two ways to continuegrowing revenue: price and volume. For SVOD price to grow, the end-market hasto grow, which is a function of the number of subscribers and ARPU. We laid out

    scenarios for such growth in the chapter "Addiction Sets In," as we believedifferent investors will have different beliefs about subscriber growth rates, ARPUsand the ultimate size of the SVOD market.

    In our view, the SVOD market will grow to around 55-60 million domesticsubs in the next 2-3 years (counting Amazon Prime members as "subs," which is awhole debate unto itself). Assuming a gross margin of 35%, that translates to totalrevenue from SVOD providers growing from $3.1 billion now to $4 billion in thenext 2-3 years. Focusing on just the large-cap media companies in our coverage, wesee SVOD revenue increasing from $1.6 billion to $2 billion equal to 25%growth (although a big percentage of that is earmarked for the Netflix-Disney

    theatrical output deal starting 2017).The specific mechanisms CBS has at its disposal to capture its share of that

    growth include:

    Put options with Netflix, and

    Opening up prior seasons of shows still being aired on the CBS network.Exhibit 19 lists recent shows cancelled by CBS that have been subject to a

    Netflix put option. One of them stands out as a "hit" title: CSI Miami(although as aprocedural, it's not exactly "perfect" for Netflix, which really thrives on serializedcontent, often viewed in binges by people that can't stop watching because they

    desperately want to see how the story proceeds). The other titles, shall we saypolitely, didn't quite work out as hoped in their broadcast debuts.

    Exhibit 19 Netflix Put Options Treasure Trove or Garbage Can?

    Last National

    Title Library Seasons Season Syndicators

    Cold Case CBS / WB 7 2010 TNT / ION

    Becker Paramount 6 2004 REELZTouched by an Angel CBS 9 2003 GMC

    Sister, Sister Paramount 6 1999 GMC / Style

    Roseanne Paramount 9 1997 WE / TVL / CMT

    Webster Paramount 6 1989 None

    Dynasty Spelling 9 1989 None

    The Love Boat Spelling 10 1987 None

    Happy Days Paramount 11 1984 HALL / HUB

    Laverne and Shirley Paramount 8 1983 HUB

    Taxi Paramount 5 1983 None

    Gunsmoke CBS 20 1975 TVL / ENCBrady Bunch Paramount / ABC 5 1974 HALL

    Perry Mason CBS / Fox 9 1966 HALL

    Season

    Title Seasons Debut

    Hits

    Can CBS's SVOD RevenueKeep Growing?

    U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER 23

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    Of even greater potential to SVOD services and probably CBS is thelicensing of prior seasons of programs still airing on CBS, such as in the recentGood Wife deal. Not only are there some truly hit shows CBS could offer, butmaking prior seasons of these types of shows available on SVOD also would belikely to helpratings of new episodes on the network, based on the evidence we've

    collected. We believe CBS can get paid in licensing fees as well as getting paid inhigher advertising revenue as a result of licensing prior seasons of current hitshows.

    Looking at CBS's primetime lineup (see Exhibit 20), we have identified showsthat would make the best candidates for SVOD licensing: serialized dramas andprograms with more SVOD potential than traditional syndication potential, likelybecause they have already been played out in traditional syndication. Based onthose criteria, we have identified four high-potential candidates for SVODsyndication, listed in Exhibit 21. Based on our estimated value of other CBS deals,

    we believe these four titles could generate as much as ~$150 million in SVODrevenue (depending on term length, exclusivity, and other terms).

    Exhibit 20 CBS Has Kept Its Current Dramatic Series Off SVOD Services

    Current CBS Primetime Lineup Full Ep.

    Avail Available Available Available

    Time Show Producer CBS.com? on NFLX? on AMZN? on Hulu +?

    SUN 7:00 60 Minutes CBS News Y N N N

    8:00 Amazing Race CBS Y N S17-20 S1-20

    9:00 The Good Wife* CBS Y N S1-3 N10:00 The Mentalist WB Y N N N

    MON 8:00 How I Met Your Mother Fox Y S1-7 N N

    8:30 Rules of Engagement Sony (NA) Y S1-6 N N

    9:00 2 Broke Girls WB N N N N

    9:30 Mike & Molly WB N N N N

    10:00 Hawaii 5-0 CBS Y N N N

    TUES 8:00 NCIS CBS Y N N N

    9:00 NCIS: LA CBS Y N N N10:00 Vegas CBS Y N N N

    WED 8:00 Survivor: Caramoan CBS Y N S21-24 S21-24

    9:00 Criminal Minds CBS/ABC Y N N N

    10:00 CSI: Crime Scene Investigation CBS Y N N N

    THURS 8:00 Big Bang Theory WB Y N N N

    8:30 Two and a Half Men WB Y N N N

    9:00 Person of Interest WB N N N N

    10:00 Elementary CBS Y N N N

    FRI 8:00 Undercover Boss Independent Y N S3 N

    9:00 Golden Boy WB Y N N N

    10:00 Blue Bloods CBS Y N N N

    SAT 8:00 Rotates

    24 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

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    Exhibit 21 The Most Likely Opportunity for SVOD Upside for CBS Is Licensing PreviousSeasons of Current Series

    Note:This analysis is representative of a non-exclusive, two-year deal for an SVOD service the size of Netflix.

    Source: imdb.com and Bernstein estimates and analysis.

    CBS will need to pull one or more of these levers just to keep SVOD growing

    in 2013, according to our analysis. We estimate CBS generated $350 million ofrevenue from SVOD deals in 2012, but we believe it only has ~$335 millionbooked to be recognized in 2013 (see Exhibit 22). We expect CBS will do what'snecessary to boost this year's SVOD revenue: We wouldn't be surprised if therewas another announcement sometime in the not-too-distant future about a newSVOD deal for past seasons of still-running shows, and/or another put option toNetflix.

    Beyond 2013, however, the path to keep SVOD revenue growing becomesvery hard, in our view. CBS will need significant price increases on its library

    deals, as well as additional titles, and maybe new SVOD customers as well (whichcan only pay incremental money over time if they generate incremental netsubscribers). As indicated by Netflix's recent announcement that it intends not torenew Viacom's library deal, a large amount of CBS's SVOD revenue could be atrisk.

    Exhibit 22 CBS's Current SVOD Package Leaves the Company Short of Last Year's Total($ million)

    Show Value / Episode (000's) Total Value ($mm)

    Likely SVOD Candidates Type Seasons Episodes Syndication Low High Low High

    NCIS Procedural 10 227 CLOO / USA 150 200 34 45

    Criminal Minds Procedural 8 179 A&E / ION 150 200 27 36

    CSI: Crime Scene Investigation Procedural 13 273 USA / CLOO / SPIKE 150 200 41 55

    Blue Bloods Serialized 3 61 None 150 200 9 12

    Total Value $111 $148

    $350

    $105

    $450

    $101

    $74$30

    $25

    $115

    2012 Amazon Netflix Goodwife CW Hulu + Unannounced Illustrative

    CBS 2013 SVOD Revenue Bridge

    Deals Currently In Place

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    While we question the ability of the SVOD industry to keep delivering growingrevenues to CBS (and others), at least CBS seems to be immune from the other bigSVOD risk cannibalization. We have seen the effects of SVOD cutting bothways: hurting kids' networks as well as boosting TV ratings of serialized dramas(namely at AMC Networks).

    CBS and Showtime fall into the camp of SVOD boosting ratings. We reachthat conclusion after analyzing our proprietary set of TiVo viewing data, whichprovide a comparison of TV viewing among two cohorts of nearly 10,000households one group with Netflix, the other without.

    We first need to establish base levels of viewing. We find CBS indexessomewhat lower (as a starting point) in absolute viewing in Netflix householdsversus non-Netflix households (see Exhibit 23). Showtime is the opposite (whichmay be surprising to some). Baseline levels of Showtime viewership are higher inNetflix households than non-Netflix households (see Exhibit 24). This is yet

    another confirmatory point in our growing body of evidence that, to date, Netflixappeals to households that over-index on entertainment content (they can't getenough of it), as opposed to a theory of Netflix appealing to households as asubstitute for the traditional pay-TV bundle, as a pathway to cord-cutting.

    Despite starting at a lower point, CBS audiences have grown faster in Netflixhouseholds than in non-Netflix households (see Exhibit 25). This suggests thatsomething about the presence of Netflix in the viewing equation causes people toshift the proportion of their traditional TV viewing in favor of CBS. Wehypothesize this is a function of viewers in Netflix households becoming more

    choosy in what they watch on traditional TV, and gravitating toward hitprogramming. We believe it's also a function of a decrease in kids' viewing inNetflix households, leading to a share increase for other types of viewing.

    Exhibit 23 The Baseline Level of CBS Viewing in Netflix Households Tends to Be Lower, Exceptin Early Mornings

    0.81 0.88

    1.81

    6.36

    1.99

    2.56

    0.781.10

    2.12

    7.17

    2.19

    2.90

    Morning Show Daytime Evening News Primetime Late Shows Total Day

    CBS Ratings By Daypart - Netflix vs. Non-Netflix Homes(Jan 2011 - Jan 2013)

    Netflix Homes Non-Netflix Homes

    Cannibalization? Nope, Justthe Opposite at CBS andShowtime

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    Exhibit 24 The Baseline Level of Showtime Viewing Is Higher in Netflix Households

    Source: TiVo Stop||Watch and Bernstein analysis.

    Exhibit 25 CBS Has Gained Audience Share in Netflix Households Relative to Non-NetflixHomes

    Source: TiVo Stop||Watch and Bernstein analysis.

    0.108

    0.404

    0.094

    0.348

    Total Day Primetime

    Showtime Ratings(Jan 2011 - Jan 2013)

    Netflix Homes Non-Netflix Homes

    1.227

    1.307

    0.4

    0.6

    0.8

    1.0

    1.2

    1.4

    1.6

    Jan-1

    1

    Feb-1

    1

    Mar-1

    1

    Apr-11

    May-1

    1

    Jun-1

    1

    Jul-1

    1

    Aug-1

    1

    Sep-1

    1

    Oct-11

    Nov-1

    1

    Dec-1

    1

    Jan-1

    2

    Feb-1

    2

    Mar-1

    2

    Apr-12

    May-1

    2

    Jun-1

    2

    Jul-1

    2

    Aug-1

    2

    Sep-1

    2

    Oct-12

    Nov-1

    2

    Dec-1

    2

    Jan-1

    3

    IndexedRatings(Jan2011=1)

    CBS Network - Total Day Ratings

    Non-Netflix HH Netflix HH

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    Exhibit 26 CBS's Share Has Increased in NetflixHouseholds in Every Daypart: Morning

    Exhibit 27 Daytime

    Source: TiVo Stop||Watch and Bernstein analysis. Source: TiVo Stop||Watch and Bernstein analysis.

    Exhibit 28 News Exhibit 29 Late Night

    Source: TiVo Stop||Watch and Bernstein analysis. Source: TiVo Stop||Watch and Bernstein analysis.

    1.345

    1.460

    0.6

    0.8

    1.0

    1.2

    1.4

    1.6

    1.8

    Jan-11

    Mar-11

    May-11

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    IndexedRatings(Jan2011=1)

    CBS - Weekday Morning Show

    Non -Netflix Homes Netflix Homes

    1.124

    1.285

    0.7

    0.8

    0.9

    1.0

    1.1

    1.2

    1.3

    1.4

    1.51.6

    Jan-11

    Mar-11

    May-11

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    IndexedRatings(Jan2011=1)

    CBS - Weekday Daytime

    Non-Netflix Homes Netflix Home

    1.35

    1.43

    0.6

    0.7

    0.8

    0.9

    1.0

    1.1

    1.2

    1.3

    1.4

    1.5

    1.6

    Jan-11

    Mar-11

    May-11

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    IndexedRatings(Ja

    n2011=1)

    CBS - Evening News

    No n-Netflix Homes Netflix Ho mes

    0.98

    1.08

    0.6

    0.7

    0.8

    0.9

    1.0

    1.11.2

    1.3

    1.4

    1.5

    Jan-11

    Mar-11

    May-11

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    IndexedRatings(Jan2011=1)

    CBS - Late Night

    Non-Netflix Homes Netflix Homes

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    Exhibit 30 And Primetime Exhibit 31 Primetime Gains Are Heavily SkewedToward Periods When CBS Airs NewContent

    Source: TiVo Stop||Watch and Bernstein analysis.

    Note:Index spread is the difference between Netflix and non-Netflixindexed values for each period.

    Source: TiVo Stop||Watch and Bernstein analysis.

    The phenomenon of a widening and narrowing in the gap of Netflix versusnon-Netflix viewing depending on the primetime season is particularly visible forthe programHow I Met Your Mother(owned by Warners), which is the only showairing on CBS that is also available on Netflix (Rules of Engagementalso fits thatcriteria, but does not have a regular CBS timeslot and there weren't enough

    observations to support a proper analysis). CBS does betterin Netflix households,relative to non-Netflix households, for new episodes of How I Met Your Mother,but worsein Netflix households for reruns (see Exhibit 32).

    The pattern is remarkably similar for Showtime. While total growth in ratingsdid not gap significantly higher in Netflix homes, it did gap noticeably higherduring periods of time when Showtime was airing the heaviest levels of newcontent (see Exhibit 33). The specific ratings results for Weeds were exactly thesame pattern as that ofHow I Met Your Mother(Weedsis the only series currentlyairing on Showtime that is also available on Netflix). Viewing levels for new

    episodes of Weedswere higher in Netflix households than non-Netflix households,while viewing levels for reruns of Weeds were lower in Netflix households (seeExhibit 34).

    The implication of all this data is that CBS should gladly take every SVODlicensing dollar it can get. We just worry that the growth of the available pie ofSVOD licensing dollars is going to shrink, and each piece of the pie will be tougherand tougher to get

    1.211.29

    0.20

    0.40

    0.600.80

    1.00

    1.20

    1.40

    1.60

    1.80

    2.00

    Jan-11

    Mar-11

    May-11

    Jul-11

    Sep-11

    Nov-11

    Jan-12

    Mar-12

    May-12

    Jul-12

    Sep-12

    Nov-12

    Jan-13

    IndexedRatings(Jan2011=1)

    CBS - Primetime

    Non-Netflix Homes Netflix Homes

    0.00

    0.02

    0.04

    0.06

    0.08

    0.10

    0.12

    0.14

    0.16

    Feb-11

    Apr-11

    Jun-11

    Aug-11

    Oct-11

    Dec-11

    Feb-12

    Apr-12

    Jun-12

    Aug-12

    Oct-12

    Dec-12

    IndexSpread

    Netflix Relative Out-Viewing

    BroadcastSeason

    Broadcast Season

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    Exhibit 32 Relative Ratings for How I Met Your MotherWere Strongly Positive When NewEpisodes Aired, But Reversed Course During Periods of Reruns

    Note:Index spread is the difference between Netflix and non-Netflix indexed values for each period. Periods with no ratio of new episodes toreruns are periods in which there are no reruns.

    Source: TiVo Stop||Watch and Bernstein analysis.

    Exhibit 33 Overall Showtime Viewership in Netflix Homes Over-Indexed Most During PeriodsWhen New Programs Are Shown

    -1.0

    -0.5

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    4.0

    (0.06)

    (0.04)

    (0.02)

    0.00

    0.02

    0.04

    0.06

    0.08

    0.10

    Jan-11

    Feb-11

    Mar-11

    Apr-11

    May-11

    Jun-11

    Jul-11

    Aug-11

    Sep-11

    Oct-11

    Nov-11

    Dec-11

    Jan-12

    Feb-12

    Mar-12

    Apr-12

    May-12

    Jun-12

    Jul-12

    Aug-12

    Sep-12

    Oct-12

    Nov-12

    Dec-12

    RatioofNewEpisodestoReruns

    IndexSpread

    How I Met Your Mother - Relative Ratings Spread

    Relative Ratings Spread Ratio of New Episodes to Reruns

    1.241.17

    0.4

    0.6

    0.8

    1.0

    1.2

    1.4

    1.6

    1.8

    2.02.2

    2.4

    Jan-11

    Feb-11

    Mar-11

    Apr-11

    May-11

    Jun-11

    Jul-11

    Aug-11

    Sep-11

    Oct-11

    Nov-11

    Dec-11

    Jan-12

    Feb-12

    Mar-12

    Apr-12

    May-12

    Jun-12

    Jul-12

    Aug-12

    Sep-12

    Oct-12

    Nov-12

    Dec-12

    Jan-13

    IndexedRatings(Jan2011=

    1)

    Showtime - Primetime

    N N tfli H N tfli H

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    Exhibit 34 The Show WeedsOver-Indexes in Netflix Homes More Than the Average ShowtimeSeries for Non-Reruns

    Note:Index is the ratio of Netflix homes to non-Netflix homes.Source: TiVo Stop||Watch and Bernstein analysis.

    1.24

    1.13

    1.21

    1.16

    1.13

    1.15

    New Episodes Reruns All Programs

    Netflix Over-Index Factor(Jan 2011 - Jan 2013)

    Weeds Showtime (Total)

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    Appendix: Supporting Materials on CBS's SVOD Deals

    Exhibit 35 CBS: Summary of Significant SVOD Deals

    SVOD Deal Reported SCB Production /

    Service Date Amount Est Distribution Partner TermsNFLX 09/23/08 ND ND CBS Television Network

    --Current season episodes of a number of TV shows available the

    day after airing

    --350 episodes of prior seasons

    NFLX 02/22/11$200mm

    for 2 yrsCBS Corporation

    --Two-year, non-exclusive licensing deal, with two additional one-

    year extension options (CBS' option)

    --Select TV shows from ~7% of CBS' library; shows already sold

    into syndication

    --1st delivery in CQ211 ("dozens of hit shows"), 2nd

    in CQ112

    --Put option, requiring Netflix to carry any cancelled series at an

    additional cost, subject to an unspecified capNFLX 03/20/11 ND $30mm Showtime --Extension of previous deal (expired in summer 2011)

    --No longer includes episodes of current original series, reserving

    those exclusively for Showtime Anytime

    --Older seasons of non-current shows will still be available

    AMZN 07/20/11 $100mm $50-70mm CBS and Showtime --Non-exclusive, 18-mos license

    --2,000 episodes from full seasons of 18 series

    NFLX Intl 07/27/11 $75mm $20mm CBS Corporation--Two-year, non-exclusive international licensing agreement for

    Canada and Latin America

    --Current seasons of Select series and past seasons of certain

    CBS and Showtime series

    --Provides "Broad Range" of CBS library programming

    NFLX 10/09/11 $40mm $40mm CBS Corporation --Put option exercised for CSI: Miami

    NFLX 10/13/11 CW (CBS, TWX)--4-year, non-exclusive output deal for previous seasons of

    scripted series

    --No in-season episodes

    --Netflix licensed 700 hours of previous-season episodes of current

    and future programs

    --Rights extend 4 years after each series, current or future, ends

    its broadcast run on the network

    --80% of fees go to producer parent companies (Warners and

    CBS), with the remainder going to CW

    NFLX Intl 11/01/12 NDAdditional

    $40mmCBS Corporation

    --Extension of International license agreement to stream select

    CBS Corp shows in Canada, Latam, UK, Ireland

    --License includes previous seasons of Showtime and CBS series

    on a territory-by-territory basis and certain library programs

    Hulu + 11/05/12 ND $25mm CBS Corporation--Non-exclusive, multi-year deal on Hulu Plus only, beginning

    January 2013

    --Includes more than 2,600 episodes of library series

    --Clips from Entertainment Today will be available day of

    broadcast on Hulu and Hulu Plus

    --The selection of library shows will rotate through Hulu

    AMZN 02/11/13 ND $5mm CBS Corporation --Exclusive in-season, online window for Under the Dome

    --Series will premiere on CBS June 24, 2013; access to all

    episodes will be available four days after initial broadcast

    AMZN 02/13/13 ND $100mm CBS and Showtime--Extended and expanded licensing agreement for shows from

    CBS and Showtime

    --Length of deal not announced

    AMZN / 03/13/13 Aggregate $850k per CBS Corporation License deal for previous seasons of Good Wife to Amazon and

    "Hundreds

    of millions"

    (possibly

    $200mm)

    $1bn over

    4yrs to all

    parties

    $100mm to

    CBS 2011-

    2012

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    32

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    Exhibit 36 CBS: Netflix Domestic Current SVOD Inventory and Estimated Deal Values

    Source: imdb.com, Netflix and Bernstein estimates and analysis.

    Put

    CSI: Family HI 5-0 Star Star Tk Star Tk Star Tk Star Tk Star Tk Twin Twilight Andy Melrose Loves Ghost

    Miami Medium Flashpt Cheers Frasier Ties (orig) Trek Anmtd Next DS9 Voy Ent Peaks Zone Griffith Nmbr3s Place Ray Whisp

    Season 1 24 16 13 22 24 22 25 30 16 25 19 15 25 8 36 32 13 32 22 22

    Season 2 24 22 18 22 24 22 24 26 6 22 26 26 26 22 29 31 24 31 25 22

    Season 3 24 22 13 25 24 24 24 24 26 26 26 24 37 32 24 30 26 18

    Season 4 25 16 18 26 24 24 24 26 25 26 22 NA 32 18 32 24 23

    Season 5 24 19 26 24 30 24 26 26 25 36 32 23 32 25 22

    Season 6 21 22 25 24 28 24 26 26 26 30 16 26 25

    Season 7 25 13 22 24 26 24 26 25 24 30 35 24

    Season 8 24 26 24 23 30 23Season 9 22 27 24 23 16

    Season 10 19 26 24 24

    Season 11 28 24 21

    Season 12 19

    232 130 62 275 264 176 279 80 22 177 173 168 97 30 138 249 118 218 210 107

    Price/Ep (000) $172 $125 $100 $50 $50 $25 $50 $75 $50 $75 $50 $50 $50 $50 $50 $25 $100 $75 $50 $50

    Price ($mm) $40 $16 $6 $14 $13 $4 $14 $6 $1 $13 $9 $8 $5 $2 $7 $6 $12 $16 $11 $5

    Last Episode 2012 2011 2011 1993 2004 1989 1980 1969 1975 1994 1999 2001 2004 1991 1964 1968 2010 1998

    Cable

    Syndication

    WE /

    AMC /A&E No ION

    HALL /

    USA

    HALL /

    LIFE

    HUB /

    GMC No No No BBCA No No No No Syfy TVL

    HALL /

    ION /TNT

    Library CBS CBSDistr.

    RightsPar Par Par CBS Par Par Par Par Par Par Spell CBS

    CBS/

    ParCBS Spell

    Missn: Three Accid Harper Life Total

    Jericho Wings Imposs MacGy Charm Rivers Purpose Hack Philly Island Unexp Ex-Put

    Season 1 23 6 28 22 22 13 18 22 22 13 13

    Season 2 7 19 25 22 22 18 13

    Season 3 21 25 20 22

    Season 4 17 26 19 21Season 5 24 23 21 21

    Season 6 22 22 21 21

    Season 7 21 22 14 22

    Season 8 19 22

    30 149 171 139 173 13 18 40 22 13 26

    Price/Ep (000) $50 $25 $25 $50 $50 $50 $25 $50 $25 $25 $25

    Price ($mm) $2 $4 $4 $7 $9 $1 $0 $2 $1 $0 $1 $198

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    Exhibit 37 CBS: Amazon Prime Current SVOD Inventory and Estimated Deal Value

    Source: imdb.com, Amazon and Bernstein estimates and analysis.

    Family HI 5-0 Best: Star Tk Star Tk Star Tk Star Tk Twin Twil Andy Melros BH Loves Ghost

    Medium Flashpt Cheers Frasier Ties (Orig) Lucy Star Tk Next DS9 Voy Ent Peaks Zone Griffith Nmbr3s Place 90210 Ray Whisp

    Season 1 16 13 22 24 22 25 20 30 25 19 15 25 8 36 32 13 32 22 22 22

    Season 2 22 18 22 24 NA 24 20 26 22 26 26 26 22 29 31 24 NA NA 25 NA

    Season 3 22 13 25 24 NA 24 30 24 26 26 26 24 37 32 24 NA NA 26 NA

    Season 4 NA 18 26 24 NA 24 30 26 25 26 22 NA 32 18 NA NA 24 NA

    Season 5 NA 26 24 NA 24 26 26 25 36 32 23 NA NA 25 NA

    Season 6 NA 25 24 NA 24 26 26 26 30 16 NA NA 25

    Season 7 NA 22 24 NA 24 26 25 24 30 NA NA 24

    Season 8 26 24 NA 30 NA 23

    Season 9 27 24 NA NA 16

    Season 10 26 24 NA NA

    Season 11 28 24 NASeason 12 19

    60 62 275 264 22 188 100 80 177 173 168 97 30 138 249 118 32 22 210 22

    Price/Ep ($000) 56 45 23 23 11 23 25 34 34 23 23 23 23 23 11 45 34 34 23 23Price ($mm) $3 $3 $6 $6 $0 $4 $3 $3 $6 $4 $4 $2 $1 $3 $3 $5 $1 $1 $5 $0

    Missn: Three Top Amaz Undcr Hates 7th Quinn US Sleeper

    Jericho Imposs Charm Rivers Philly Model Race Boss Surv Chris Heav JAG Medic Gilligan Tudors L Word Tara Cell B'Hood Total

    Season 1 23 28 22 13 22 NA 22 21 17 36 10 NA 12 10 11

    Season 2 7 25 NA 22 22 NA NA 32 10 13 12 8 10

    Season 3 25 NA 13 22 22 NA NA 30 8 12 12 8Season 4 26 NA 22 22 NA NA 10 12

    Season 5 23 NA 22 NA NA 12

    Season 6 NA NA 22 NA NA 8

    Season 7 22 NA 12 22 NA

    Season 8 NA 12 23 NA

    Season 9 13 22 NA

    Season 10 12 22 NA

    Season 11 22

    Season 17 12

    Season 18 11

    Season 19 12

    Season 20 11Season 21 16

    Season 22 15

    Season 23 16

    Season 24 15

    30 149 22 13 22 49 46 13 62 66 243 21 17 98 38 57 36 18 29

    Price/Ep ($000) 23 11 23 23 11 30 30 25 30 25 40 50 25 25 75 75 75 50 50Price ($mm) $1 $2 $0 $0 $0 $1 $1 $0 $2 $2 $10 $1 $0 $2 $3 $4 $3 $1 $1 $99

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    34

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    Exhibit 38 CBS: Hulu + Inventory and Estimated Deal Values

    Source: imdb.com, Hulu and Bernstein estimates and analysis.

    CSI: Family Star Star Tk Star Tk Star Tk Star Tk Twin Twil I Love Top AmazMiami Medium Frasier Ties Trek Next DS9 Voy Ent Peaks Zone Nmbr3s MacGy Lucy Model Race Surv Tudors Total

    Season 1 24 16 24 22 30 25 19 15 25 8 36 13 22 35 13 14 10

    Season 2 24 22 24 22 26 22 26 26 26 22 29 24 22 32 11 10

    Season 3 24 22 24 24 24 26 26 26 24 37 24 20 30 11 8

    Season 4 25 16 24 24 26 25 26 22 18 18 19 30 13 10

    Season 5 24 19 24 30 26 26 25 36 23 21 26 12

    Season 6 21 22 24 28 26 26 26 16 21 26 12

    Season 7 25 13 24 26 26 25 24 14 11

    Season 8 24 24 11

    Season 9 22 24 12

    Season 10 19 24 13

    Season 11 24 12

    Season 12 11

    Season 13 11

    Season 14 12

    Season 15 11

    Season 16 12

    Season 17 13 12

    Season 18 13 11

    Season 19 13 12

    Season 20 11

    Season 21 16

    Season 22 15

    Season 23 16

    Season 24 15

    232 130 264 176 80 177 173 168 97 30 156 118 139 179 39 234 76 38

    Price/Ep (000) $25.8 $18.8 $7.5 $3.8 $11.3 $11.3 $7.5 $7.5 $7.5 $7.5 $7.5 $15.0 $7.5 $7.5 $7.5 $7.5 $7.5 $30.0

    Price ($mm) $6.0 $2.4 $2.0 $0.7 $0.9 $2.0 $1.3 $1.3 $0.7 $0.2 $1.2 $1.8 $1.0 $1.3 $0.3 $1.8 $0.6 $1.1 $26.6

    Last Episode 2012 2011 2004 1989 1969 1994 1999 2001 2004 1991 1964 2010

    Cable

    Syndication

    WE /AMC /

    A&E

    NoHALL /

    LIFE

    HUB /

    GMCNo BBCA No No No No Syfy

    HALL /ION /

    TNT

    Library CBS CBS Par Par Par Par Par Par Par Spell CBS CBS

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    35

    Exhibit 39 CBS: CW Output Deal Summary

    Source: imdb.com, corporate reports and Bernstein estimates and analysis.

    No Longer On Air - Available to Stream Still On Air - Available to Stream Not Yet Available to StreamOne Tree Gossip Secret Hart of Vampire Emily Beauty & Carrie

    Ringer Hill Girl Circle 90210 Dixie Nikita SprNatrl Diaries Cult Owens Arrow Beast Diaries

    Season 1 22 22 18 22 25 22 22 22 22 13 13 19 16 13

    Season 2 23 25 22 19 23 22 22

    Season 3 22 22 22 16 16 22

    Season 4 21 22 24 22 20

    Season 5 18 24 21 22

    Season 6 24 10 22

    Season 7 22 23

    Season 8 22 21Season 9 13

    Total 22 187 121 22 114 41 61 170 86 13 13 19 16 13

    Completed

    Seasons

    Available

    All All 5 / 6 All 4 / 5 1 / 2 2 / 3 7 / 8 3 / 4 0 / 1 0 / 1 0 / 1 0 / 1 0 / 1

    Length 42 42 42 42 42 42 42 42 42 42 42 42 42 42

    Total Hours 15 131 85 15 80 29 43 119 60

    PrimaryProducer(s)

    CBS /

    WB /ABC

    WB CBS /WB CBS /WB CBS CBS /WB WB WB CBS /WB WB CBS /WB WB CBS WB

    Previous

    Seasons First

    Available

    Fall 2012 10/15/11 10/15/11 Fall 2012 Jan 2012 Fall 2012 10/15/11 Jan 2012 10/15/11 Fall 2013 Fall 2013 Fall 2013 Fall 2013 Fall 2013

    Last Season

    Available End

    Date

    4/17/12 4/4/12 5/14/12 5/10/12 5/15/12 5/14/12 5/18/12 5/18/12 5/10/12 NA NA NA NA NA

    36 U.S.MEDIA:CELEBRITY REHABSVODMOVES FROM EUPHORIA TO HANGOVER

  • 7/25/2019 Berstein SVOD and Media

    38/146

    Exhibit 40 CBS: Estimated SVOD Revenue and Operating Income by Deal and Quarter($ million)

    Estimated SVOD Revenue Est.

    2011 Low High Midpt Margin Op Inc

    Q2 1st NFLX Installment $80 $100 $90 60% $54

    Q3 NFLX Intl 20 20 20 60% 12

    Showtime - Amazon 10 12 11 60% 7

    AMZN 40 55 48 60% 29

    Netflix Put

    Defenders 1 1 1 45% 1

    Q4 NFLX - CW $30 $40 $35 50% $18

    Total $181 $228 $205 $119

    2012

    Q1 2st NFLX Installment $100 $120 $110 60% $66Showtime ($30mm increase) 30 30 30 60% 18

    CW Deliveries:

    90210 S1-3 (100%) 28 35 31 50% 16

    Q2 Showtime 8 8 8 60% 5

    Q3 CSI: Miami Put to Netflix 40 40 40 50% 20

    Netflix Puts

    A Gifted man 1 1.6 1 45% 1

    Rob 0 0.6 1 45% 0

    Q4 CBS UK and Ireland - deal extension 35 40 38 60% 23

    Showtime 10 10 10 60% 6

    CW Deliveries

    Ringer (33%) 3 4 3 50% 2

    Gossip Girl (50%) 5 6 5 50% 3

    Secret Circle (50%) 4 6 5 50% 2

    90210 (100%) 10 12 11 50% 5

    Hart of Dixie (50%) 4 6 5 50% 2

    Vampire Diaries (50%) 4 6 5 50% 2

    Subtotal $31 $38 $34 $17

    Other International $40 $50 $45 60% $27

    Total $323 $373 $348 $198

    2013 Based on Deal In Place

    Q1 Amazon - Extended, Amended Deal $95 $105 $100 60% $60

    Amazon - Good Wi