Content Deep Dive and Recent Media and Ad Trends

INDUSTRY | COMMENTAPRIL 7, 2011

Media's New Opportunities From Old Threats

Deep Dive Into Content And Current FundamentalsIn Media And Advertising

Online Video Distributors (Most notably Netflix) Increasingly Appear ToBe A Highly Effective Monetization Vehicle Of Under-Exploited Content

• Not only were the initial concerns regarding OTT probably over stated, butthe potential upside from them was probably materially under-stated.

There Is A New Opportunity To Monetize What Has Historically BeenUndermonetized In Syndication: Serialized Drama and/orNon-Fiction—OTT now offers potential upside to media conglomerates thathave not monetized original content in secondary windows, as well as theplayers who have historically not played in the global syndication game –most notably Viacom’s MTV, Discovery and Scripps.

Traditional Scripted Players Can Drive Upside From TonnageDeals—Best opportunities that balance optimal monetization of alternativeOTT distribution opportunities and cannibalization concerns for traditionalscripted TV content producers are probably still in tonnage (lots of titles, butlargely tail-oriented with little exploitable value in current ecosystem).

• Players like Disney, News Corp. and Time Warner should benefit for thenext several years exploiting previously “spent” libraries.

Given The Economics Of Content, The Consumer Probably GarnersMore Value From OTT Content As A Complement Rather Than AReplacement For The Existing Ecosystem

• The existing TV ecosystem invests ~$30bn/year in TV programmingcontent versus ~$1bn in streaming content acquisition costs for the largest(and only meaningful) online subscription video distributor in 2012.

• We think most consumers should/would be reluctant to pay 20% of the costfor an online video subscription (which assumes no increased subscriptionor broadband costs), for just ~3% of the content investment benefit.

In The Broad Context Of Broadcast Content Investments,Retransmission Consent And Especially Reverse Network CompensationAppear To Be A Relative Bargain—The cost of programming for abroadcast network runs in the ~$4bn range annually. Broadcast networks withlarger O&O groups (Fox and CBS), who provide content to ~55% of thecountry through non O&O stations, are receiving only ~$10mm/month or~$120mm/year at ~$0.20 per sub, while the smaller O&O operators such asABC and NBC will ultimately be receiving closer to $240mm/year.

Uncertainty Surrounding The NFL Lock-out Turns The Upfront ProcessInto A Game Of 5-Dimensional Chess With The Advantage InitiallyGoing To Network Sellers

• Advertisers will likely have to plan for no NFL season, despite expectationsthere will be a season.

• This will cause a feeding frenzy with respect to remaining GRPs (becauseNFL represents ~10-20% of M18-49 GRPs during calendar 4Q).

• If the work stoppage is resolved between the time the upfronts “break” andwhen they are actually “inked” (the hold period), the scatter market couldbe negatively impacted.

Priced as of prior trading day's market close, EST (unless otherwise noted).All values in USD unless otherwise noted.

RBC Capital Markets, LLC

David Bank (Analyst)(212) 858-7333; [email protected]

Ross Sandler (Analyst)(212) 428-6227; [email protected]

Ryan Vineyard (Analyst)(212) 428-6489; [email protected]

Sun-Il (Sean) Kim (Associate)(212) 428-2363; [email protected]

Andre Sequin (Associate)(212) 618-7688; [email protected]

Whitney Goldstein (Associate)(212) 428-6412; [email protected]

Companies Previewed:

The Walt Disney Company (NYSE: DIS; $42.27,Outperform, Average Risk)

Discovery Communications Inc. (NASDAQ:DISCA; $40.33, Outperform, Average Risk)

News Corporation (NASDAQ: NWSA; $17.56,Outperform, Average Risk

Scripps Networks Interactive, Inc. (NYSE: SNI;$51.02, Outperform, Average Risk)

Time Warner Inc. (NYSE: TWX; $36.24,Outperform, Average Risk)

Viacom Inc. (NYSE: VIA.B; $47.36, Outperform,Average Risk)

Interpublic Group of Companies (NYSE: IPG;$12.41, Outperform, Above Average Risk)

MDC Partners Inc. (NASDAQ: MDCA; $16.95,Outperform, Speculative Risk)

Omnicom Group Inc. (NYSE: OMC; $48.76;Outperform, Speculative Risk)

For Required Conflicts Disclosures, see Page 100.

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Table of Contents

Key Industry Investment Themes .......................................................................................................................................................... 3

Broader Media/Advertising Agency Industry Update and Channel Checks ...................................................................................... 5

The Modern Franchise Procedural and How It Changed Syndication (And the Economics of TV).......................................................... 6

Broadcast Network Content Cost Structure Differs from Cable Network Content Cost Structure Due to Both Total Cost per Hour and Total Hours of Original Content Run ....................................................................................................................................... 10

How Original Content Is Priced ............................................................................................................................................................... 16

Each of the Major Media Conglomerates Create TV Content for Their Own Platforms and Others....................................................... 17

How Does a TV Show Get to Profitability? 100 Episodes Is the Magic Number.................................................................................... 18

Monetizing Primetime Content ................................................................................................................................................................ 24

The Difference between Pricing on a Production-by-Production Basis Versus a Packaged Channel – Unbundled Content Is Expensive for the Consumer and a Tough Proposition for the Content Providers ................................................................................... 30

Many Networks Have Historically Lost Money on Advertising Alone – That Is Why They Have Affiliate Fees – But the Prospect of Paying Affiliate Fees Based on Viewership Rather than on Total Subscribers Is Where the Proposition Becomes Less Clear ................................................................................................................................................................................................ 34

What Is the Value Proposition to the Consumer of the Current Ecosystem? What if Over-The-Top Providers Can Offer More Non-linear, Video-On-Demand Content than Any (or Many) Linear Channel, but for a High-Single Digit Monthly Subscription Fee? .......................................................................................................................................................................................................... 36

Reverse Compensation and the Cost of Content ...................................................................................................................................... 38

Network TV Pricing Trend – Proprietary Upfront/Scatter Pricing Trend Analysis Indicates Viacom and Discovery Have the Most Tailwind and Scripps Has the Most Headwind as 2011 Progresses................................................................................................ 39

NFL Lockout and the Upcoming Upfronts .............................................................................................................................................. 46

Network TV Ratings Update – Surprise! Cable Taking Viewership Share From Broadcast ................................................................... 48

Network TV Market Update – More Of The Same With Pricing Hot And Inventory Scarce ................................................................. 50

Local/Spot TV Market Update ................................................................................................................................................................. 51

2011 Box Office Season – Starting The Year With A Whimper…Not Expecting Much Until The Summer ......................................... 53

Large-cap Media Company Notes ........................................................................................................................................................ 57

The Walt Disney Company (NYSE: DIS) ................................................................................................................................. 60

Discovery Communications Inc. (NASDAQ: DISCA) ............................................................................................................. 66

News Corporation (NASDAQ: NWSA) .................................................................................................................................... 69

Scripps Networks Interactive, Inc. (NYSE: SNI) ...................................................................................................................... 74

Time Warner Inc. (NYSE: TWX) ............................................................................................................................................. 78

Viacom Inc. (NYSE: VIA.B) ..................................................................................................................................................... 83

Advertising Agencies Company Notes ................................................................................................................................................. 87

Interpublic Group of Companies (NYSE: IPG) ......................................................................................................................... 90

MDC Partners Inc. (NASDAQ: MDCA) ................................................................................................................................... 94

Omnicom Group Inc. (NYSE: OMC) ........................................................................................................................................ 97

Media's New Opportunities From Old ThreatsApril 7, 2011

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Key Industry Investment Themes

The First Window In Media Is The Least Profitable; Rather Media Companies Rely On All The Windows That Come After It. The existing broadcast network ecosystem (and increasingly the cable network ecosystem as well) are driven by viewership for original programming. But that programming (on its first run) tends to be the lowest-margin proposition for premium media. Rather, by taking the first window (broadcast network viewership) and “breaking” a show, producers can monetize the show in domestic, international, and even online syndication as well as home video (both in sell-through and electronic sell-through). Historically, online monetization has been a window that lagged all the others (with subscription-driven consumption all but unheard of before the past one or two years), but the lure of big money and the reality of consumer behavior have put forces on media producers to move the online window after first-run forward.

Media Conglomerates Are Massively Benefiting From The Syndication Of Content To Cable Channels. Approximately 65% of all cable channel content (remember there are ~100 channels distributed in 50mm homes or more) are from acquired (primarily off network syndication) rather than original programming. This means that the cable channel business supplies content producers with ~$13bn worth of content sales annually, that are, on an economic basis, incredibly high margin (since they represent the re-sale of content that has generally already been produced for a prior broadcast network run). Though disruption to the existing ecosystem could

make these revenue streams more vulnerable, we don’t see much danger in the near- to-intermediate term.

Online Video Distributors (Most notably Netflix) Increasingly Appears To Be A Profitable Source Of Incremental Monetization Of Otherwise Under-Exploited Content. Not only were the initial concerns over selling content to new sources of distribution probably over stated, but the potential upside afforded by them was probably materially under-stated. Most content likely to be monetized is a “melting ice cube” anyway, with little by way of residual value left in the traditional market (few meaningful syndication opportunities for TV). For instance, in CBS’s recent Netflix deal (Netflix paying CBS, according to press reports, ~$150mm per year) CBS is merely monetizing content that had largely been available on off net syndication as well as for free on CBS.com. The pace of cannibalization of existing highly monetizable revenue streams in traditional first run and global syndication windows is probably not impacted by current deals (short term in nature). In the long-run, the consumer will likely shift some viewership to other, non-traditional platforms, regardless of near-term incremental distribution deals, but the ecosystem will likely migrate structurally such that incumbent players will benefit more than we initially assumed.

The Evolving Landscape Is Offering Up New Opportunities To Monetize What Has Historically Been Under-monetized In Syndication: Serialized Drama and/or Non-Fiction; It’s Providing Yet Another Outlet For Traditionally Syndicatable Content To Be Re-Monetized. The best opportunities that balance optimal windowing versus monetization alternative OTT distribution are probably still in tonnage (lots of titles, but largely tail-oriented content with little exploitable value in the current ecosystem). Most non-fiction (traditionally categorized as reality, or unscripted, though they are really neither) hasn’t been monetized in the aftermarket. OTT offers a new buyer and potential upside to media conglomerates that have not monetized original content in secondary windows as well as the players who have historically not played in the global syndication game – most notably Viacom’s MTV, Discovery and Scripps. In addition, traditional content suppliers to syndication such as Disney, News Corp. and even Time Warner, which has been the most vocal about not doing broader deals with alternative OTT providers for content, have material potential opportunities to monetize unexploited archives that are unlikely to cannibalize existing viewership.

We Don’t Think The Traditional Broadcast Networks Are In Much Danger Of Being Displaced As The Primary Sources Of High-Priced Syndicated Content By Cable Networks, Despite More Original Content Being Programmed On Cable Networks (Or Even Emerging OTT Providers). While many of the larger cable networks are starting to program far more original programming, it is still a relative drop-in-the-bucket, in terms of hours per week versus the big broadcast networks. Further, much of that original content is non-fiction-oriented, which tends to syndicate poorly. Of the fiction-oriented content, that is potentially more viable for syndication, the cable networks tend to run seasons of only ~9-10 episodes. Big ticket syndication requires a minimum of approximately 60 episodes to be viable, so it will take approximately six years for many of them to reach viable syndication levels (a feat few shows perform). Finally, procedural content is by far the best suited to global syndication (with serialized dramas, even successful ones in first run, being very difficult to syndicate domestically) and much of the cable original drama content is more serialized versus procedural.

The Current Ecosystem Provides Syndication Content With A Search-And-Discovery Mechanism That Drives Demand For Content. In alternative mechanism for distribution (say, OTT), content could have a solid source of demand. However, if the balance of viewership shifts too far to the alternative distribution mechanism, it will be increasingly difficult to differentiate content in a way that can drive premium pricing for content. While there will likely be a willingness to pay for certain high profile content (such as the

recent Kevin Spacey/David Fincher House of Cards production), without a mass reach exposure to drive search-and-discovery, the demand for such content could be limited.

Consumer Behavior Is Pushing For Alternative Distribution Platforms Primarily Because They Offer Unbundled Content Cheaper, Rather Than Due To A Desire To Watch Content On Different Screens. Clearly, the consumer has made it clear that there is a desire for access to TV content on all media distribution platforms (most notably online) as opposed to traditional


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linear/VOD access on cable through a living room television. Increasingly though, online content will be available through smart TV applications (Netflix is addressable through the Blu-ray player, as well as Samsung TVs, for instance). Initially, it seems as though in return for access across all platforms, some consumers might be willing to trade a broader library of choices available primarily on a traditional basis for a narrower (but good enough) library wholly on-demand through any screen. In the long run, the broader system will be starved of more premium content that a more fragmented distribution system simply can’t be monetized as effectively, and the consumer could end up moving back the other way, if it means more and better content availability.

The Consumer Pays More For Content Under The Current Ecosystem Than He/She Would In An Alternative System, But The Sheer Volume Of Content Available Creates Massive Consumer Benefits And We Think The Consumer Would Choose More Content Over Less. The existing TV ecosystem invests ~$30bn per year in TV programming content. We believe investors expect ~$1bn in streaming content acquisition costs for the largest (and only meaningful) online subscription video distributor. While there is at least some small portion of the consumer market that would be net ahead (paying less to consume the small amount of content they desire), the big question remains, would the vast majority of consumer rather pay 20% of the cost for an online video subscription (and this is assuming no increased subscription costs), for ~3% of the content investment benefit?

We Do Not Think Consumers Will Be Fooled By Tonnage: OTT Providers Are Getting More Titles And More Scale, But They Are No Substitute For First Run Premium Content. For today, we suspect new entrants such as Netflix, Amazon, Google, etc. will seek to buy available content if for nothing else than pure library tonnage. With ~70% of Netflix streaming viewership reportedly being TV content, it’s become increasingly important to supply the OTT ecosystem with as much of that product as economically possible. From a pure marketing perspective, we suspect the OTT ecosystem is willing to pay for tonnage (lots of somewhat recognizable titles) even if they are on a non-exclusive basis and even if they lag years behind in terms of window parity with current TV. There is some flagship content that is necessary, but the TV tail is important if for nothing else than marketing.

It’s More Difficult To Monetize Non-Fiction Content In Syndication, But Format/Ancillary Opportunities Can Be Compelling. Very few producers have successfully monetized non-fiction (sometimes referred to as unscripted, sometimes as reality programming, but in actuality, it’s often neither) programming anywhere outside of on-network domestic platforms. Non-scripted content is often culturally contextual (though Discovery Channel has had some real success crossing over internationally with content intact). However, some producers have been able to use formats (sold in the international markets to local producers) and ancillary opportunities (consumer branded products or other licensing opportunities) to drive high margin revenues.

While The Consumer May Continue To Push For Unbundled Content, The Underlying Economics Of The Industry Don’t Support Unbundled Channels, Let Alone Content. On a per viewer basis, over 50% of the existing ~100 widely distributed digital basic channels would simply not be viable given current economics parameters of subscription TV. The channels with more mass reach probably work on an unbundled basis, but the rest simply do not.

In The Broad Context Of Content Investments By Broadcast Investments, Retransmission Consent And Especially Reverse Network Compensation Appears To Be A Relative Bargain. While the broadcast networks invest ~$4bn annually in programming expenses versus a top 10 cable network ~$500mm, they earn roughly the same monthly affiliate fees. Further, the average affiliate fee only covers ~25-55% of the total affiliate base, bringing in 25- 50% of the “effective” affiliate base. While the networks could capture more of that affiliate revenue through reverse compensation, the ~$0.20 per subscriber currently sought by most network affiliates effectively generates ~33% of the affiliate fee per subscriber versus ~6x the investment in programming. Furthermore, providing $4bn of programming investment in return for ~$120-240mm of reverse compensation offers an incredibly compelling proposition for the affiliates to program their stations. They simply couldn’t acquire anything close to the amount of premium first run programming that they receive from their network partners in return for that small of a programming investment.

There Will Likely Be A Bigger Market For Content, But It’s Unclear That Fragmentation Will Increase The Value Of The Type Of Content That Currently Provides The Bulk Of Profitability. In the existing ecosystem, the biggest advantage in the media business is arguably the ownership of content. But not all content is created equally. As the market for media consumption continues to fragment, there will be an increasing number of distribution channels for content. But, precisely because of the fragmentation, the price that any individual distribution channel can pay for that content is likely to decline.


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Broader Media/Advertising Agency Industry Update and Channel Checks

Uncertainty Surrounding the NFL Lockout Will Likely Further Shift the Balance of Power Toward Networks in the Upfronts, and Turns the Process Into a Game Of Five-Dimensional Chess. Advertisers will likely have to plan as if there is no NFL season, despite their general belief (and ours) that there will be a full season (or close to it). This will cause a feeding frenzy with respect to remaining GRPs (because NFL represents ~10%-20% of male 18-49 ratings points in C4Q). Other male 18-49 targeted networks and programs (i.e. college sports) will likely be the beneficiaries. If the work stoppage is resolved between the time the upfronts “break” and when they are actually “inked” (the hold period), the scatter market could be impacted negatively.

The Current National Advertising Environment Remains Incredibly Robust and Continued Broadcast Ratings Softness Has Led to Another Inventory Shortage. Our channel checks indicate that few cancellation options have been taken heading into C2Q11. Key categories (most notably auto) appear to be holding up well despite increasing caution. We are keeping an eye on commodities-reliant categories (most prominently consumer packaged goods, which could easily pull back advertising spend if there is a need to cut costs in light of higher cost of goods sold) as well as tech and telecom in light of the consolidation of AT&T and T-Mobile. For now though, the market appears broad and deep. Scatter pricing trends remain very healthy, though scatter-over-scatter comps are going to get much more difficult heading into C2H11.

Cable Channels Took Back Share This Quarter, Giving Greater Credibility to Our Secular Bull Thesis on Cable Networks. In terms of the broadcast networks, the biggest success story in C1Q11 was probably Fox as American Idol ratings accelerated beyond expectations after the first few weeks of the season, driving +2% primetime ratings growth (though this included the Super Bowl). The biggest successes on the cable network side remained the juggernaut at Viacom, which, if not for the shifting of the Kids Choice

Awards to April from March in the prior year, might have been in contention for industry-level domestic advertising growth. MTV ratings were up ~60% in the A18-34 demo in primetime. Disney’s portfolio was greatly aided by ESPN up ~39% in primetime for A18-49, helped in no small part by exploding audiences for the BCS. Additionally, FX had a very strong resurgence, which should probably help C2Q11 results. CNN also benefited from a very strong news cycle with the tragic events in Japan and unrest in the Middle East. Scripps remained soft as did most of the other Turner Networks, while Discovery’s ratings were mixed with flagship Discovery Channel being relatively strong as other sister networks were soft.

Our Proprietary Upfront/Scatter Pricing Trend Analysis Indicates Viacom and Discovery Have the Most Tailwind. According to our proprietary network TV pricing analysis (as detailed later in this report), Discovery and Viacom have the most pricing tailwind behind them on a YoY basis; Discovery also has the best pricing profile on a sequential acceleration/deceleration-basis from C4Q10-C3Q11. On the other hand, Scripps has the most pricing deceleration heading into the back half of 2011. We think there may have been somewhat of a lag in the scatter pricing pickup for Viacom’s networks last year, and the particularly hot scatter market for MTV likely did not kick in until C2H10, making comps easier in C1Q11 but more difficult in C2H11. Discovery appears to have the most consistent scatter pricing momentum in 2010 and 2011.

Few Big Bets But Even Fewer Box Office Hits in C1Q11. The biggest bomb of the quarter was Mars Needs Moms – Disney’s animated feature that reportedly cost ~$150mm to make and grossed ~$20mm at the domestic box office. That said, we suspect Disney took a sizable write-off in C4Q10, in advance of the actual disappointment. On a relative basis, it’s been Paramount’s quarter, in terms of movies that worked. Major Hollywood studios seem to have hit a slump in terms of being able to produce major hits (over the past eight months or so), and we may have to wait until the summer to see a “turn” in fortunes. When the summer tentpole season begins, all eyes will be on Disney’s Cars 2, which is expected to more than atone for the sins of Mars Needs Moms.

Local TV Trends Are Slowing, But Not Unexpectedly, and 2012’s Political Season Is Just Around the Corner. Anecdotally, channel checks indicate that local TV probably ended C1Q11 up in the low-to-mid single digit range, in term of top-line growth. Remember, the comps are extremely difficult (local was up in the 20% range a year ago) so low single-digit growth would be quite respectable and inline with our expectations generally. In fact, we’d expect things to decelerate further into the back half of 2011, before the inevitable political “pop” in 2012. Local economies are finally starting to demonstrate some strength, giving positive potential for stabilization in the market longer term.

General Advertising Trends Steady Despite Some Macro-related Concerns. While there has been a fair amount of focus on stresses to the broader global macro environment (sovereign risks in the EU rearing their ugly head again) as well as Japan and the price of oil, the domestic market as well as many of the emerging markets have provided enough momentum to keep the outlook for 2011 organic growth looking much like 2010 growth, in the mid single-digit range. Many players on the agency side should also begin to see a ramp up in margins (at least a modest one relative to the variable-cost nature of the agency business) as the year progresses and the agencies achieve more benefits of scale as the recovery matures.


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The Modern Franchise Procedural and How It Changed Syndication (And the Economics of TV) In 1989, a gritty New York cop drama premiered to very little fanfare. In many ways, it was a most unremarkable show. While critics appreciated it, the show finished the season ranked 46 out of ~100 network primetime shows that year. At the time, however, we didn’t know that Law & Order would a) run for an astounding 20 years, b) spawn another four franchises (Law & Order: Special

Victims Unit, Law & Order: Criminal Intent, Law & Order: Trial by Jury, and Law & Order: Los Angeles), and c) essentially change the face of the economics of television as we knew it for the next several decades, possibly forever.

Law & Order heralded the advent of the modern, hour-long, drama-based, and self-contained procedural. By luck or design, it also coincided with a moment in time when a number of niche-oriented cable channels were seeking more general market audiences and stronger mainstream identities associated not just with situation comedies, or sitcoms, (the prevalent premium syndicated fare). The procedural ended up being the magic ingredient.

Law & Order was a relatively novel format given its closed-ended procedural perspective and the absence of deep identity for recurring characters. Viewers knew little about these characters; and more importantly, they didn’t need to know much about those characters in order to follow any given episode. The episodes were all self-contained. Furthermore, with cold openings that generally had nothing to do with the broader story, the viewer couldn’t remember if he had seen the episode before and so could get much more easily sucked into watching a rerun.

In the decade or so prior to the premier of Law & Order, closed-ended episodic drama seemed anachronistic. The biggest legal and cop shows of the prior decade were Hill Street Blues and L.A. Law, which were heavy on regular characters’ personal lives, inner-office politics, and actually tended not to feature that much street or courtroom action. The project was viewed as such a long shot, in fact, that it was designed to be cut into two half-hour episodes (the investigative half-hour and the prosecution half-hour) in case the show was cancelled in short order so that there would be enough episodes to enter syndication earlier.

The closed-ended episodic drama format allowed for something that had eluded TV content producers since the beginning of syndication market—the ability to exploit scripted drama off-network in a material way. A&E paid ~$150,000 per episode for the syndication rights and really milked the show by airing it four or five times per day. Ironically, this “over exposure” made the show even more popular, driving ratings higher for first runs on NBC. As a result, when Universal cut its second rerun deal, this time with Turner Broadcasting's Turner Network Television (TNT), Turner agreed to a deal that would start in 2001, paying $200,000 for those original episodes and ~$700,000 for the newer episodes.

Realizing how much value these programs could generate outside of the first run, in addition to the success they could bring in the first run, Dick Wolf (the creator of Law & Order) sought to create other programs whose primary goal would be to find lucrative homes on cable television in syndication. The most obvious way to approach the proposition was to design extensions from the existing franchise. These extensions of a single franchise would give any new show a huge advantage—audience familiarity—and therefore a ready-made, built-in viewer base.

As a result, Wolf and NBC Universal created Law & Order: Special Victims Unit, Law & Order: Criminal Intent, and Law & Order:

Los Angeles. There was another show launch—Law & Order: Trial by Jury—that was not successful. However, this was clearly the exception rather than the rule. These franchise extensions ultimately drove higher license fees in syndication on cable than the original show did, mainly on the USA Network.

Thus, the pattern for the franchise procedural was solidified the television industry and it would be repeated with great success, particularly by CBS.


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Exhibit 1: Law & Order Franchise Syndication History

$1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900

$1,300 $1,300 $1,300

$1,300 $1,300 $1,300 $1,300 $1,300 $1,300 $1,300

$159 $159 $159 $159 $159 $159 $159

$700 $700 $700

$700 $700 $700 $700 $700 $700 $700

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce P

er

Ep

iso

de (

in $

000's

)

Law & Order CI Law & Order SVU Law & Order

Source: Broadcasting and Cable, TV By The Numbers, RBC Capital Markets estimates

At around the time of the second-cycle pick-up for Law & Order, CBS and Jerry Bruckheimer must have been taking notes when they launched CSI: Crime Scene Investigation in 2000. CSI is a similar procedural format to Law & Order (each story wrapped up neatly in one episode with little recurring character background). CSI found a home in syndication on Spike; and when franchise extension, CSI: New York, was launched, it went to Spike as well. CSI: Miami found a deep pocketed distributor in A&E.

Exhibit 2: CSI Franchise Syndication History

$1,900 $1,900 $1,900 $1,900 $1,900 $1,900 $1,900

$1,000

$1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000

$0

$1,600 $1,600

$1,600

$1,600 $1,600 $1,600 $1,600 $1,600 $1,600 $1,600

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce P

er

Ep

iso

de (

in $

000's

)

CSI New York CSI Miami CSI



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More similar to the path of Law & Order, CBS found another franchise extension (sort of) in JAG and its related NCIS spin-offs. JAG was itself a military courtroom/adventure procedural. It was syndicated to USA Network in 1998, where it benefited from increased exposure and helped drive cable ratings—a similar story to Law & Order’s. In 2003, during its eighth season, the series spawned the spin-off, NCIS. Whereas the JAG episodes were primarily oriented on courtroom drama, NCIS is more focused on the field of criminal investigations. This would be increasingly important for the international market where the U.S. court system is less easy to identify with than the criminal investigation world. NCIS later produced its own spin-off, NCIS: Los Angeles, which went into syndication in a somewhat ground-breaking deal after only airing six episodes.

Exhibit 3: JAG/NCIS Franchise Syndication History

$2,500 $2,500

$1,000 $1,000 $1,000

$1,000 $1,000

$750 $750 $750 $750 $750 $750 $750 $750

$750 $750 $750

$750 $750

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce P

er

Ep

iso

de (

in $

000's

)

NCIS LA NCIS JAG


As we will demonstrate later in this report, franchise procedurals are not only major syndication earners for their producers, they provide us with the most dramatic illustration of the evolution of the market for procedurals. Procedurals, and to a lesser extent situation comedies, generally are the engine for cable TV networks. Note, while The Mentalist is not a franchise procedural (at least not yet), CBS recently syndicated The Mentalist for ~$2 million per episode to TNT, one of the highest prices ever paid per episode in off-network cable syndication.

Equally as important, just as the syndication opportunity for cable took off, so did the international opportunity. While, as we show in this report later, other types of TV content syndicated well into cable (notably situation comedies, which were monetized at similar prices per episode as successful crime procedurals), only the procedurals sold well internationally. This was the other major change to the landscape. We believe these types of procedurals consistently generate another ~$2 million per episode in the international syndication market.

With this evolution, programming strategies by many of the networks changed from simply creating shows that would be hits in their first run and earn some sort of modest return in syndication, to creating programming that would essentially feed the cable and international off-network syndicated beast. Many producers, most notably CBS, NBC Universal, and Time Warner, have been rewarded handsomely for this. But, while most investors are arguably now highly aware that evolving methods of TV content distribution could put the affiliate fee ecosystem in a vulnerable position, far fewer are probably aware that it could also put the syndication ecosystem, which has fed the beast so well for the past 15 years, into jeopardy as well.

The content producers need the domestic cable channels to stay healthy and profitable on a linear basis in order to keep driving demand for their content. Should these channels drop off basic tiers, or simply be displaced by fragmentation in a move to greater online video distribution over-the-top, a healthy source of demand could disappear. We think the consumer is probably unaware of just how much content he has access to, due to this ecosystem. While in the short-term, there is likely money to be made with the over-the-top online distributors by selling them content as well, the content companies need to be careful not to let the tail wag the dog and cannibalize the true driver of positive economics before a new ecosystem that can monetize content just as well (or better) is fully


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in place. As a result, we’d expect the availability of franchise procedurals in early syndication windows to be off the table for over-the-top (OTT) in the near term.

Exhibit 4: Programming Strategy and Monetization Summary

Broadcast Network TV Programming Strategy

Broadcast Networks

Genres

Programming Strategy (Original vs. Off Net Syndication)

Current First Run Content Self Produced Versus Outsourced

Current Original Programming Primary Monetization Domestically

Suitability Of Self Produced For Syndication/Intl Monetization

Ad Supported Cable Network TV Programming Strategy

Ad Supported Cable Networks FX, Fox Sports Nets, etc.

Programming Strategy (Original vs. Off Net Syndication)

Genres Non Fiction Non Fiction

Current First Run Content Self Produced Versus Outsourced Self produced Self produced Largely outsourced

Current Original Programming Primary Monetization Domestically

Suitability Of Self Produced For Syndication/Intl Monetization

Discovery produces its

TV related content at

the U.S. Networks

(cable channel) division.

Syndication likely

amounts to an

insignificant portion of

revenue/OI

Scripps produces its

TV related content at

the Lifestyle Media

(cable channel)

division. Syndication

likely amounts to an

insignificant portion of

revenue/OI

The TV Studio is

housed under the

Entertainment

segment. We

estimate CBS

generates $2.5bn+

annually in

syndication sales, of

which ~$1bn comes

internationally

Warner Bros. TV

Studio is housed

under the Filmed

Entertainment

segment. ~1/2 of

Filmed Entertainment

segment OI ($1.1bn

in 2010) is generated

from programming

sales to 3rd party

networks and

syndication

Commentary Regarding TV Studio/TV Syndication Business

Viacom produces its TV

related content at the

Media Networks (cable

channel) division.

Syndication likely amounts

to an insignificant portion

of revenue/OI

We estimate Disney

generates $1bn+ in

syndication sales

annually, which is

accounted for in the

Broadcasting segment

20th Century Fox TV

Studio is housed under

the Filmed Entertainment

segment. The TV Studio

accounts for ~40% of

Filmed Entertainment

revenue. ~35% of TV

Studio revenue is

generated from

syndication

CBS

Content almost exclusively

distributed through Viacom

Nets (MTV, VH1, Nick,

etc.). Not well suited to off

net syndication

Non Fiction, Sitcoms, Kids

MTV, Nick, Comedy, BET

All content distributed

through both owned

channels and 3rd

parties. Mix of first run

and syndication oriented

Original

Serialized dramas and

non-fiction tend to be

self produced. Sit coms

a mix.

Largely self produced.

Current schedule not

well suited. Serialized

dramas and sports hard

to syndicate.

Varies -- some channels

(MTV, Nick, etc. self

produced, some Comedy

Central, etc. mixed and

some Nick at Night, etc.

primarily outsourced)

Core franchises Mixed --

MTV and Nick Original,

Comedy Central original,

Nick at Night, etc. Off Net

syndication.

Content almost

exclusively distributed

through Discovery Nets.

Unsuited to syndication

None ABC None

Primarily on network.

Some monetization of

sit com production in

syndication.

Studio Content Monetization Strategy: Suitability for exploitation in

syndication

On network. Almost no

original content that is

syndicatable in

meaningful way.



dramas and sports hard

to syndicate.

Core franchises Mixed --

MTV and Nick Original

versus Comedy Central,

Nick at Night, etc. Off Net

syndication.

Sports (non-fiction) and

serialized drama. Some

sit coms.

Sports outsourced. FX,

etc. some self produced,

but largely syndicated.

Sports outsourced.

ABC Family, etc. self

produced anchor with

syndicated content

supporting.

Almost all current ABC

studio content

distributed through ABC

in first run. More legacy

programming

distributed in

syndication

Sit Com, Serialized

Drama, Non Fiction

(Dancing With The

Stars, etc.)

Sports and non-fiction

at ESPN with ABC

Family a mix anchored

with originals supported

by off net syndication.

Original

Fox



syndicatable in

meaningful way.

ESPN, ABC Family



syndicatable in meaningful

way.

Serialized

drama/dramedy, non

fiction (American Idol,

etc.), animated sit com

Primarily on network.

Some monetization of sit

com production in

syndication.

Tends to be lower as mix

shifts toward serialized

drama and non fiction

Sports and non-fiction at

Fox Sports Nets with FX

a mix anchored with

originals supported by off

net syndication.

Sports (non-fiction) and

serialized drama. Some

sit coms.

Tends to be lower as

mix shifts toward

serialized drama and

non fiction



dramas and sports

hard to syndicate.

NoneTNT, TBS, TrueTV

Some original, but still

mostly off network

syndicated content.

Increasing amounts

of sports as well.

Procedurals, sit coms

and serialized

dramas.

Almost exclusively on

network as it tends

toward serialized.

Some sit com

content, but none

really syndicated yet.

Discovery, TLC, Animal

Planet, ID

Original

Some formats and

shows may work

Internationally. Some

tastes are more local.

Some formats and

shows may work

Internationally.

Discovery tends to

program it's owned and

operated channels

rather than provide 3rd

party programming.


network (both Domestic

and International)

Procedurals, Sitcoms,

some non fiction

(Survivor)

Original

Distribution primarily

through 3rd party

networks. Highly

suited to syndication

Current content

almost exclusively

distributed through

CBS and highly suited

to syndication.

None None

Content almost

exclusively distributed

through Scripps Nets.

Unsuited to

syndication


network

Procedurals largely

self produced,

sitcoms outsourced.

Content works well

both on net and off

net generally

Highly suitable.

Food Channel,

HGTV, Travel

Original

Source: Company reports and RBC Capital Markets estimates

The Cost of Content at “Wholesale” There have been a number of announcements recently regarding the licensing of content for digital distribution, particularly with respect to Netflix. Numbers are always scant (at least to what is “officially” reported). But even if they are known (for instance, Disney recently announced a deal in which it would license Disney Channel and ABC Family channel content to Netflix for a reported $200 million for a one-year license period), it’s difficult to understand the value proposition for either side without knowing a) what the content cost to make, b) what it traditionally could be monetized at, and c) how important it is for the buyer as an anchor.

Was this a good deal, a bad deal, or a neutral deal? Part of the problem in answering the question is that the value of the content probably means more to Netflix (or other nascent platforms) than it does to the traditional ecosystems. This is the case precisely because they are so nascent, and therefore have very little existing content. Each piece of incremental premium content brings an


10

emerging competitor closer to critical mass/competitive status with the traditional ecosystem. Ironically though, the emerging digital distribution ecosystem for traditional content is least able to monetize the content, since it charges the end user a lower price.

Broadcast Network Content Cost Structure Differs from Cable Network Content Cost Structure Due to Both Total Cost per Hour and Total Hours of Original Content Run Broadcast networks program ~16 hours per day directly (with the exception of Fox, which programs far fewer hours per day). The remaining amount of programming airtime reverts back to broadcast station affiliates—the basic distribution mechanism for broadcasters. This stands in stark contrast to a cable network, in which 24 hours per day of a cable channel’s programming is supplied by the cable network. At first blush, one might expect that the cost of programming would be materially higher at cable networks since the cable network is required to program 24 hours per day, versus the broadcast networks’ considerably lower number of hours to program. However, broadcast networks tends to program with virtually 100% of original, “first-run” programming (which technically includes one rerun per season of each show) and one run per show per day. Compare this to cable networks, which typically run anywhere from 100% to 65% of acquired programming (typically older, syndicated fair) with “first-run” fare often multiple times in its first window. Some networks (notably TNT and USA) are running more broadcast-like original programming and some networks, such as Discovery Channel or Food Network, produce lots of first-run programming, but the bulk of cable network programming is acquired. In addition, it often includes infomercial programming in late hours, which actually generates revenue, as opposed to costing money.

Exhibit 5: Illustrative Costs of Content for Broadcast Networks

Daypart

Hours

Programmed Typical Content

Total Number

Of Hours per

Day

Cost Per

Hour

(mm)

Cost per

Day (mm) Comments

Early Morning 7AM-10AM Morning News Talk -- Good Morning America, Today, etc. 3.0 $0.10 $0.30Not "re-runnable". Also leverages off of some

network news department fixed costs.

Daytime 10AM-4PMVaries, but might include Soap Operas, Game Shows.

Affiliates might also air first run syndication (Oprah, etc.)6.0 $0.20 $1.20 Each episode can be run multiple times per year.

Early Fringe 6PM-7PM Generally includes 1/2 hour of Network News 1 0.5 $0.25 $0.13

Not "re-runnable". Provides resources to other

programming -- news magazines, Sunday morning political talk shows and morning shows.

Prime Time 8PM-11PM First run Drama/Comedy/Reality 3.0 $3.00 $9.00 Each episode can be run 2x per year.

Late Night 11:30-1:30 Leno, Letterman, Jimmy Kimmel, Nightline, etc. 2.5 $0.25 $0.63 Each episode can be run 2x per year.

Varies Varies Sports Programming2 0.0 $2.50 $0.00

Varies by programming type 1

so we make some assumptions based on individual programs and

hours of sports per week and exclude Olympics.

Total 15.0 $0.75 $11.25

Daypart

Hours

Programmed Typical Content

Total Number

Of Hours per

Day

Cost Per

Hour

(mm)

Cost per

Day (mm) Comments

Early Morning 8AM-9AM Morning News Talk -- Good Morning America, Today, etc. 1.0 $0.10 $0.10Not "re-runnable". Also leverages off of some

network news department fixed costs.

Early Morning 9AM-12PM Saturday Kids programming/Sunday News Talk (blended) 3.0 $0.20 $0.60In some cases, Kids blocks are managed by 3rd

parties.

Varies Varies Sports Programming2 5.0 $2.50 $12.50

Cost of individual programming varies heavily by

network and season.

8PM-11PM First run Drama/Comedy/Reality 3.0 $3.00 $9.00 Each episode can be run 2x per year.

Total 12.0 $1.85 $22.20

Weighted Average 3 14.1 $1.02 $14.38

3 Weighted average -- 5/7 = ~71% for weekdays, 2/9 = ~29% for weekends.

2 Major league baseball ~$425mm/year for Fox, NFL ~$700mm/year for each major network, NBA ~$485mm/year for ABC/ESPN, NHL $75mm/year, NCAA $335mm/year for CBS, Other

college sports $100mm/year for each network, NASCAR, costing networks that carry it ~$200mm/year, while the summer Olympics ~$1.2bn, split across NBC and it's sister cable networks. Assume average budget of ~$2bn per year, 52 weeks per year, $38mm per week, 15 hours per week, $2.5mm. We believe the Industry generates ~$22bn of annual sports rights costs with

~66% going to broadcast networks.

1 Because this programming can be spread across multiple dayparts and include primetime programming (60 Minutes, 20/20, Evening News, Late News, Meet The Press, This Week, etc.,

this is very difficult to allocate. Also, costs can be spread over multiple networks. No figure is widely available for any network. We assume ~1,000 employees ~$200k/annually each and

fixed costs of another ~$50mm and major talent costs of another $50mm. Other costs probably exist, but are shared with other parts of network (studios, etc.).

Weekend

Weekday

Source: RBC Capital Markets estimates


11

Not every network programs precisely the same amount of hours per week. In particular, Fox generally programs one-third of the other major broadcast networks. Because a major component of Fox’s programming costs are sports (the most expensive programming on TV) and primetime TV (the most expensive daypart to program), its cost per hour of programming is far higher than that of CBS, NBC, and ABC.

Exhibit 6: Programming Costs for Major Broadcast Networks

Network

2011

Programming

Costs (mm)

Program

Cost Per

Week

(mm)

Hours

Programmed

Per Week

Programming

Cost Per Hour

(mm) Additional Comments

NBC $3,285 $63 87.0 $0.73

Provides 22 hours of prime time programming to affiliated stations: 8-11pm (ET/PT)/7:00-10:00 pm (CT, MT,

AT)/6-9 pm (HT) Monday through Saturday and 7-11 pm on Sundays. Programming is also provided 7-11 am

weekdays in the form of Today , which also has a two-hour Saturday and one-hour Sunday edition; one-hour

weekday soap; nightly editions of News ; the Sunday political talk show; weekday early-morning news program;

late night talk shows The Tonight Show with Jay Leno , Late Night with Jimmy Fallon and Last Call with Carson

Daly ; sketch comedy show Saturday Night Live ; and a three-hour Saturday morning animation block under the

name qubo. In addition, sports programming is also provided weekend afternoons any time from 12-6 pm. ET, or

tape-delayed PT.

CBS $3,320 $64 87.5 $0.73

Provides 22 hours of prime time programming to affiliated stations: 8–11 p.m. Monday to Saturday (all times

ET/PT) and 7–11 p.m. on Sundays. Programming is also provided 10 a.m.–3 p.m. weekdays (game shows and soaps); 7–9 a.m. weekdays and Saturdays (The Early Show); CBS News Sunday Morning, nightly editions of the

CBS Evening News, the Sunday political talk show, a 2½-hour early morning news program Up to the Minute and

CBS Morning News; the late night talk shows Late Show with David Letterman and The Late Late Show with

Craig Ferguson; and a three-hour Saturday morning live-action/animation block under the name Cookie Jar TV.

Sports programming generally runs on weekends, though it varies -- but generally it's aired between noon and

7pm.

ABC $2,817 $54 92.5 $0.59

Provides 22 hours of prime time programming to affiliated stations: 8–11 p.m. Monday to Saturday (all times ET/PT) and 7–11 p.m. on Sundays. Programming also be provided 11 a.m. – 4 p.m. weekdays, 7–9 a.m.

weekdays smf 8-9 a.m. weekend editions; nightly editions of News, the Sunday political talk show, early morning

news and late night talk show; and a three-hour Saturday morning live-action/animation block. sports (or

sometimes other) programming is also provided weekend afternoons any time from 12–6 pm (all times ET/PT).

When no sports are scheduled on one or both weekend afternoons, ABC will provide 1–2 hours of filler

programming (either reality shows or movies) in the afternoon hours, usually airing in the late afternoon between

4-6 pm ET/PT.

FOX $2,216 $43 27.0 $1.58

Fox currently programs 19.5 hours of programming per week. It provides 15 hours of prime time programming to

owned-and-operated and affiliated stations: 8-10 p.m. Monday to Saturday (all times ET/PT) and 7–10 p.m. on

Sundays. One and a half hours of late night programming is offered on Saturdays from 11:00 p.m. to 12:30 a.m.

Weekend daytime programming consists of the infomercial block Weekend Marketplace (Saturdays from 10:00

a.m. to noon) and the hour-long political news program Fox News Sunday (time slot may vary). Sports

programming is also provided, usually on weekends (albeit not every weekend year-round), and most commonly

between 12-4 or 12-8 p.m. on Sundays (during football season, slightly less during NASCAR season) and 3:30–7

p.m. on Saturday afternoons (during baseball season).

1 Includes an average of 8 hours on weekends for Sports.

Source: RBC Capital Markets estimates and Kagan

In recent years, networks like TNT and USA have been programming several nights of original scripted drama and scripted comedy programming in primetime, but none of them come close to the ~15–21 hours of primetime, non-sports original programming the broadcast networks provide. The cable networks have developed a number of original series, actually, but few of them run the typical 22 original episodes of broadcast network (they range from ~9–13 episodes). As a result, they put on a number of series that do not run a full, typical season. Rather, the various series essentially combine to program to a full season. As a result, for each broadcast channel series produced, the cable channels typically have to produce twice as many to match a traditional series’ season worth of content. Additionally, and increasingly, each of these cable networks are acquiring the rights to various professional sports leagues for some coverage.

This strategy can be extremely cost effective in terms of programming costs. The cable network will spend $1-$2 million on a few scripted hours of content to “anchor” its schedule/franchise. The network can further re-run the original series’ episodes many times per week (unlike the broadcast networks, for which such a practice is unheard of). Then, the cable networks can run syndicated programming, or much cheaper original programming, for the balance of its primetime and other daypart schedules.


12

Exhibit 7: Content on General Market Cable Channels Emphasizing Scripted Fiction

Network

Hours Per Week Of

Original Scripted

Primetime Content1

Current Original Scripted Primetime

Series 2Most Often Run Syndicated

Content

Original Sports Content

Featured

TNT 3-6

The Closer, Leverage, Hawthorne, Men

Of A Certain Age, Southland, Memphis

Beat, Rizzoli & Isles, Dark Blue, Fallen

Skies

Bones, CSI: NY, Numb3rs,

Charmed, Law & Order, Angel,

Las Vegas, Cold Case, and

Supernatural

NBA, NCAA

TBS 2-3

Conan O’Brien, Lopez Tonight, My

Boys, Are We There Yet?, Neighbors

From Hell, Meet The Browns, House of

Payne, Glory Daze, Wedding Band, The

Rabbit Factory, The Catch, Good and

Evel

Seinfeld, Family Guy, The Office,

Married With Children, Saved By

the Bell, Yes Dear, My Name Is

Earl

MLB

USA 2-4

Burn Notice, White Collar, Psych, In

Plain Sight, Covert Affairs, Law & Order:

CI, Coyote Ugly, A Legal Mind

House, CSI, Becker, JAG, Law &

Order SVU, NCIS, NCIS LA

Westminster Kennel Club

Dog Show, WWE Wrestling,

collge football (Fall 11)

FX 3-6

Archie, The League, Lights Out, Louie,

Justified, Damages, Nip/Tuck, Sons Of

Anarchy, It's Always Sunny In

Philadelphia

Two and A Half Men, Spin City,

That 70's Show, The Practice-

1 Varies by week, but on average, in this range. Also, excludes late night and sports.

2 Some "announced", but still in development.

Typically, the broadcast networks program 9-11 hours of

scripted fiction original content in primetime.

Source: TNT, TBS, USA, TV By The Numbers, RBC Capital Markets estimates

For the most part, however, these cable networks (even the ones that typically feature more first-run programming), typically fill the bulk of their primetime schedules (and much of their non-primetime schedules) with syndicated, off-network programming or non-fiction original content (historically, this was called unscripted reality or unscripted documentary, but this programming has become increasingly scripted). In the chart below, we highlight the actual programming schedules for three of the most originally programmed cable networks in existence today—USA, TNT, and TBS—for the week of March 6, 2011 through March 12, 2011. While this week may be somewhat lighter on original content than other weeks (it’s not a sweeps period, etc.), we think it’s worth illustrating just how little original fare appears on these networks relative to the broadcast networks.

The syndicated content becomes extremely cost effective as well when one considers it costs, at the high end , ~$1 million per episode (see our discussion regarding syndicated programming costs later), but the costs can be amortized across a large number of runs across multiple dayparts, for each episode. For example, one episode of Law & Order, bought in syndication by TNT, may cost $1 million, but unlike a broadcast network which could amortize the cost of a single episode over only two runs over an entire season, a cable network could run the episode two times over a single day, ten times per season, and multiple times over a multi-year cycle that it’s purchased for.

The most cost-effective content of all, however (at least in first run) is original non-fiction, also known as unscripted documentary, content. This type of content is the mainstay of channels such as Discovery Channel, History and, in more recent years, A&E. For the most part, a typical hour of this type of primetime programming costs ~10–25% of a typical scripted hour. One could argue that since the cable network needs to program 24 hours per day instead of the 4–12 hours per day of a typical broadcast network does, it must come up with far more cost-effective programming expense strategies.


13

Exhibit 8: Average Cost per Hour of Production

$0.3

$3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Cable Original Non-Fiction Broadcast Fiction

(in

$ m

m)


During 2010, USA, TNT, TBS, FX, A&E, History Channel, and Discovery Channel were the seven highest-rated advertising-supported cable networks in the United States. In their rise to the top of the ratings, many industry observers (and the channels themselves) have made much noise about their migration to original, premium programming. But the chart below shows that the vast majority of primetime programming, especially on USA, TNT, TBS, and FX, which are aiming to compete directly with the broadcast networks, are still heavily reliant on a) syndicated fare, b) movies, and c) non-fiction content.

These networks continue to be a primary avenue for the major premium scripted production houses (the studios controlled by the major broadcast networks as well as Warner Brothers) to monetize their off-network broadcast content highly efficiently.

Exhibit 9: Original versus. Acquired Basic Cable Programming Expenses at Cable Networks 2010 (in mm)

$7,437, 37%

$12,727, 63%

Original Acquired

Source: SNL Kagan and RBC Capital Markets estimates


14

Exhibit 10: Programming Schedules for Week of March 6th – Top 7 Rated Non–Sports Cable Networks, A18-49 Demo

USA TNT TBS FX A&E History Discovery

8PM Movie Movie Movie Movie

Syndication (Criminal

Minds) Original Series (Ax Men)

Original Series (Flying

Wild Alaska)

9PM


Minds) Original Series (Ax Men)


Wild Alaska)

10PM

Original Scripted

Series (Breakout

Kings)

Original Series

(American Pickers)


Wild Alaska)

8PM

Syndicated Series (NCIS) Syndication (Bones)

Syndication (Family Guy) Movie

Original Series (Intervention)

Original Series (Pawn Stars)

Original Series (American Chopper)

9PM


Syndication (Family Guy)

Original Series (Intervention)

Original Series (American Pickers)

Original Series (American Chopper)

10PM Wrestling

Original Scripted

Series (The Closer)

Syndication (Family Guy) Original Series (Heavy)


Original Series (Sons Of Guns)

8PM

Syndication (Law & Order: SVU) Movie

Syndication (The Office) Movie

Original Series (The First 48)

Original Series (Only In

America With Larry The Cable Guy)

Original Series (Dirty Jobs)

9PM

Syndication (Law & Order: SVU)

Syndication (The Office)


Original Series (Only In

America With Larry The Cable Guy)

Original Series (Dirty Jobs)

10PM

Syndication (Law &

Order: SVU)

Original Scripted

Series (Southland)

Syndication (The

Office)

Original Series

(Lights Out)

Original Scripted

Series (Breakout

Kings)

Original Series (Top

Shot)

Original Series

(American Treasures)

8PM

Syndicated Series

(NCIS) Syndication (Bones)

First Run Syndication

(Meet The Browns) Movie

Original Series (Dog

The Bounty Hunter)

Original Series (Ancient

Aliens Underwater

Worlds)

Original Series (Sons of

Guns)

9PM

Syndicated Series

(NCIS) Syndication (Bones)

Original Series (Are

We There Yet?)

Original Series (Dog

The Bounty Hunter)

Original Series (Killer

Shockwaves)


Guns)

10PM


First Run Syndication

(House Of Pain)

Original Series

(Justified)

Original Series (Storage)

Original Series (Predators Of the Deep)

Original Series (Desert Car Kings)

8PM

Syndication (Law &

Order: SVU) NBA Movie

Syndication (Two

and A Half Men)

Original Series (The

First 48)

Original Series (Modern

Marvels)

Original Series (Man

Versus Wild)

9PM

Syndication (Law &

Order: SVU)

Syndication (Two

and A Half Men)


First 48)

Original Series (Swamp

People)

Original Series (Man

Versus Wild)

10PM

Original Scripted

Series (Fairly

Legal)

Syndication (Family Guy)

Original Series

(Archer)

Original Series (Beyond Scared Straight) Original Series (Ax Men)

Original Series (Out Of The Wild)

8PM

Syndicated Series

(NCIS) Syndication (Bones) Movie Movie


Minds)

Original Series (Modern

Marvels)


Guns)

9PM

Syndicated Series (NCIS) Movie

Syndication (Criminal Minds)


Original Series (Sons of Guns)

10PM

Syndicated Series (NCIS)

Syndication (Criminal Minds)


Original Series (American Loggers)

8PM Movie Movie

Syndication (Family Guy) Movie



Original Series (Cops and Coyote)

9PM MovieSyndication (Two and A Half Men)



Original Series (Cops and Coyote)

10PM

Syndication (Two

and A Half Men)


First 48)

Original Series

(American Pickers)

Original Series (Texas

Drug Wars)

Wednesday

Thursday

Friday

Saturday

Sunday

Monday

Tuesday

Scripted Oriented Unscripted Oriented

This schedule reflects less original programming (scripted and sports) than average, but even at

the higher end of the spectrum (during sweeps periods or heavy sports content seasons), the

amount of scripted original programming in primetime pales versus the networks.

Note that unscripted content tends to cost 50-75% less than

scripted drama.

Source: USA, TNT and TBS and RBC Capital Markets

However, given their lack of reliance on premium scripted fare and their ability to re-run programming through multiple dayparts on the same day or during the same week, etc., cable networks have a very different expense structure than broadcast networks. They program many more hours but tend to have far less expensive programming costs. With the exception of ESPN, no cable network comes remotely close to any of the broadcast networks in terms of total programming expenses.


15

Exhibit 11: Programming Costs for Major Broadcast Networks and Select Cable Networks

$394 $479 $481 $495 $510 $515 $710$923

$2,216

$2,817$3,285$3,320

$4,924

0

1,000

2,000

3,000

4,000

5,000

6,000

FX Net

work

ESPN2

TBS

FOX N

ews

NFL Networ

k

MTV

USA

TNT

FOX

ABCNBC

CBS

ESPN/ESPN

HD

(in

$ m

m)

Source: RBC Capital Markets estimates and Kagan.

Other cable networks enjoy dramatically lower programming expense structures. We analyzed program expense data for ~175 cable networks with approximately two-thirds of those networks enjoying coverage over ~50 million or greater total subscribers. This data suggests the difference in programming expense for most of the cable networks versus the broadcast networks is even more dramatic than the Top 10 cable network data would suggest. Where an hour of programming at the broadcast networks costs closer to $750,000 (blending dayparts), it is closer to the $10,000 level for cable.

Exhibit 12: Most Cable Channels Program Networks on a Shoestring Compared to Broadcast Networks

% Of Cable Networks With Annual Programming

Expenses Of...

<$50mm

58%

$50mm -

$200m

27%

>$200mm

15%

% Of Cable Networks With Per Hour Programming

Expenses Of...

<$5,700

59%

$5,700 -

$23,000

27%

>$23,000

14%

Source: RBC Capital Markets and SNL Kagan.

While not the focus of this report, it is worth noting that the trade-off for lower programming costs tends to be lower ratings. While the Big 4 broadcast networks represent ~4% of the total ad-supported networks with distribution to 50 million or more homes in the U.S., they capture ~40% of the primetime ratings. It takes ~three of the largest ad-supported cable networks (non-sports) to garner a similar audience in primetime as a broadcast network.


16

Exhibit 13: Adults 18-49 Ratings

1.7 1.7 1.9 1.9

6.6

17.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

ABC CBS NBC Fox Combined Four

Broadcast

Networks

Advertising

Supported Cable

4 broadcast networks generate ~40% of total ratings of over 100 ad supported cable networks combined.

Source: Nielsen and RBC Capital Markets

How Original Content Is Priced All content is not created equal. An hour of high-quality scripted drama on network TV can cost upwards of $6 million per hour to produce, and sitcoms with premium talent can cost $5 million per hour to produce. Cable-produced dramas, on the other hand, can cost only ~$0.5 million to produce (even relatively high-quality shows such as Mad Men or Justified). Unscripted, non-fiction or reality programming, however, can cost as little as $0.1 million per hour. Furthermore, sports programming can cost as much as $13 million per hour. Assume, for example, ESPN’s Monday Night Football contract at $1.1 billion per hour, which is divided up among 16 regular season games (assuming ~three hours of “game time”, including commercial breaks, time outs, etc.).

Exhibit 14: Illustrative Cost per Hour of Network Programming

Type Of Programming

Likelihood of

Break Even

on First Run

Ability To

Recoup In

Syndication Commentary

Low High

Scripted Drama

Procedural 1.5 - 6.0 Low High

Arc Based 1.5 - 6.0 Medium Low

Sitcom 1.0 - 5.0 Low High

Reality/Documentary 0.8 - X High Low Monetization generally occurs on first run.

Reality/Documentary -- more

Cable Net Oriented0.1 0.5 High Medium

Relatively low cost content with modest "re-

run" monetization.

Pro/Premium College Sports1 0.5 - 23.0 Low Negligible Often a loss leader to "lift" a schedule.

News - Low None Often a loss leader to fortify franchise.

Range Of

Cost per Hour

(in $ mm)

1 At high end, assume annual cost for ESPN Monday Night Football of ~$1.1bn, divided by 16 games, or ~$69mm per game. Then assume 3 hours per game, or ~$23mm per hour At low end, assume

annual NBC/Versus $75mm cost divided by 82 games or ~$0.9mm per game. Then assume 2 hours per game, or ~$0.45mm per game.

Programming generally deficit financed for

network distribution, but recouped in later

windows

Generally rely on syndication,

International distribution, etc.

windows to drive profitability.

Generally rely on initial window

to drive profitability, or are

basically loss leaders.


Not all content is initially designed to be profitable in its first window. In fact, it generally takes five or so seasons for a big broadcast drama to fully recoup (when it goes into syndication). Additionally, content is increasingly being financed in the international market place.


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Each of the Major Media Conglomerates Create TV Content for Their Own Platforms and Others Each of the major media conglomerates have their own in-house TV production studios. These include 20th Century Television for Fox/News Corp., ABC Studios (formerly Buena Vista TV) for ABC/Disney, CBS Studios for CBS, and Warner Brothers TV Studios for Time Warner. Historically, these studios produced as much, if not more content for third party networks as they did for their own networks.

But as the model for profitability came to rely more on syndication (and frankly, when syndication became a real upside driver for TV shows), the emphasis on creating TV for a studios’ affiliated network has increased. Think about it this way: historically, a studio would produce a TV show and sell it to a TV network for a fixed license fee. With no robust syndication market, if the show was a hit, the network benefited from having a hit show in first run by driving advertising around the show and the studio attempted to price the license fee such that it could make a decent enough profit to make production of the show worthwhile. That was the end of it—it was basically a 10% margin type of business. There wasn’t much benefit for a network to produce or own a show. In fact, there was a disincentive to self-produce: why take production risk on a show that might not last when there is so much start-up related costs associated with the pilot and first season generally? However, when the syndication market began to explode, especially with the rise a robust cable TV landscape and a burgeoning international marketplace that would pay for off-network syndication fare, a real change occurred. That is, the first run of the episode became not an end unto itself, but a promotional vehicle for the ultimate profit driver of the show—syndication. As such, the first run (which almost always happened on the broadcast network) was considered the first “window.”

However, it’s always nice to have a hit show (it usually, though not always, makes money for the network that runs it) as it drives profit for a single time slot and can often lift audiences for adjacent time slots. But, if the network doesn’t own the show, it can’t really participate in the huge benefits that show offers—massive exposure to the first window. As a result, the first window simply becomes a means to an end. The network that doesn’t feature its own content is simply allowing another studio to monetize one of its strongest assets—the promotion of the first window.

Furthermore, networks have become increasingly reliant on franchise shows (particularly in the procedural genre) that can easily beget other spin-offs. Consider, for instance, the Law & Order franchise or the CSI franchise. By owning one show that airs in the first window, there is the potential to exploit multiple billion-dollar franchise opportunities. We think CBS and NBC Universal have historically been most successful at this game while ABC and Fox have lagged.

Ironically, ABC and Fox have had some very substantial success with shows in first run that translated very poorly to second runs in syndication. For instance, shows like Lost for ABC or 24 for Fox were both commercial and critical successes, driving major ratings in first run primetime. However, as we will discuss later in this report, they lacked the ability to be monetized in syndication, the most potentially profitable window for TV shows. These shows were serialized and thus were very difficult to sell into syndication. In essence, from a commercial stand point, one could argue that while these shows demonstrated ratings strength, they were a waste of the first window.


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Exhibit 15: Using the First Run Window to Monetize Syndicated Content

Network/StudioWhere They Are Helping A Rival Studio To Exploit

Content

CSI Two And A Half Men -- Owned by Warners

CSI The Big Bang Theory -- Owned by Warners

CSI Miami How I Met Your Mother -- Owned by 20th Century Fox

CSI New York

NCIS

NCIS

NCIS LA

Law & Order

Law & Order

Law & Order: SVU Burn Notice -- Owned by 20th Century Fox

Law & Order: CI

Law & Order LA

Monk

Dancing With The Stars Modern Family -- Owned by 20th Century Fox

Lost

Desperate Housewives

Glee House -- Owned by NBC Universal

24

House

Fox/Twentieth Century Fox

Where They Are Lining

Their Own Pockets

CBS/CBS Studios

NBC/NBC Universal

Disney/ABC

Billion-Dollar Franchises

Source: RBC Capital Markets

How Does a TV Show Get to Profitability? 100 Episodes Is the Magic Number When a studio produces a critical mass of shows with a long run of episodes (historically 4 or 5 seasons, or ~65-100 episodes), the show is sold to local TV stations or cable networks in “packages” containing (typically) one chronologically continuous run of episodes. A package usually contains at least 65 episodes, which is enough to “strip” the show across the schedule Monday through Friday for 13 weeks. The distributor (TV station or cable network) pays one upfront fee, but it’s based upon a price per episode. The individual price per local station may not be terribly high for an individual show, but if 250 to 300 stations pay for the rights to show the program, the total amount of money that goes to the studio can easily be in the $1 million per episode range for a situation comedy.

For shows with relatively shorter runs (not much more than an initial 65 episodes), the syndication package will contain the entire run of the show. For shows that have been on the air for longer than say, 100 episodes, the show is generally sold in multiple packages. While the value of the initial package could decrease when it’s renewed, the newer show package is often worth more than the first show package when the prior syndication agreement was struck. Historically, there was a lag in windows in which shows could be syndicated in broadcast and cable channels. The first window was generally dedicated to the local broadcasting stations (which tended to pay a premium) and last as much as three or four years, at which time cable channels could start showing runs of the same series. These windows have now compressed and in many cases are indistinguishable.

Generally, two kinds of shows work really well in syndication (meaning there is high demand, thus license fees are very high). Those two kinds of shows are comedies (which work very well domestically but not internationally, thus upside is limited to the U.S. market) and procedural-based dramas (which work well domestically as well as internationally, thus driving more upside because there is a global market place). With procedural dramas such as Law & Order or CSI, the plot is far more important than the characters. The viewer doesn’t need to have seen any prior episodes of the show to follow any other episodes of the show. This is in contrast to arc-based dramas (in its extreme, something like a night-time soap opera—think Dallas, or even a show like Lost).

Note, Time Warner claims that Seinfeld has generated ~$2.7 billion of syndication revenues over the past 12 years (which, given that the content has been bought and paid for should almost all be profit). Though, we aren’t sure how much “back-end” participation Jerry, George, Kramer and Elaine received. A show initially had to reach ~100 episodes, and later ~60 episodes, to be considered for syndication, because each episode will be played multiple times. Recently, a few sitcoms, including Modern Family, Glee, and The


19

Cleveland Show entered into syndication deals three or four seasons before the 100-episode mark. Similarly, NCIS:LA was syndicated for $2 million an episode after only six first-run episodes (a move that shocked many in the industry). If these early syndication vehicles continue to perform and the syndication bet pays off, it may start more of a trend away from the 100-episode standard.

We’d note that some of the non-fiction based, cable-oriented shows have also been syndicated. They tend to be a more difficult economic proposition since they have higher residual/back-end components than typical broadcast content (in many cases, this makes off-network syndication cost prohibitive). The most high-profile example of this has probably been Discovery Communications in partnership with distribution platform, Debmar Mercury (part of Lionsgate), syndicating Deadliest Catch and American Chopper in a joint offering. We’d estimate these shows produced far lower off-network licensing opportunities.

Exhibit 16: Non-Fiction TV Content – Comparative Production Costs (in 000’s)

Examples

Cable BroadcastDocudrama The Hills/Deadliest Catch $400-$600 $800-$1,000

Competition

Ensemble Oriented Survivor - $800-$1,200

Individual Oriented Wipeout/Project Runway $250-$650 $750-$1,000

Informational Drive Ins, Diners and Dives $400-$600 -

Cost Per EpisodeGenre


Because of limited monetization off-network, these non-fiction programs tend to be profitable on a first-run licensing basis. However, upside is available on a licensing basis for either formats (à la American Idol with its global formats) or on an ancillary merchandising basis (think Biggest Loser diet shakes). Outside of some big budget competition shows, these non-fiction based programs tend primarily to be the provenance of cable networks.

Exhibit 17: First-Run Content Monetization Drivers

Cable Broadcast

Average Production Budget/Hour $2.00 $3.00Average License Fee From Network $1.00 $1.50

Deficit/(Profit) From First Run $1.00 $1.50

Typical Shortfall Funding Source International Syndication Domestic Syndication "Off Net"

Upside Limited Potentially substantial.

Cable Broadcast

Average Production Budget/Hour $0.35 $0.90Average License Fee From Network $0.40 $1.00

Deficit/(Profit) From First Run ($0.05) ($0.10)

Typical Shortfall Funding Source International Syndication International Syndication

Upside Limited Limited

Cost/Profit Profile For Network Scripted Content (in mm)

Cost/Profit Profile For Network Non-Fiction Content (in mm)

But highly dependent on success as it takes 5 seasons

to accumulate enough content.

There are almost no cases where off-net

"stripping" has occurred. International

can deliver some upside.

Opportunity tends to come from

format monetization rather than

original productions.

Source: RBC Capital Markets, TV By The Numbers


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One might ask, why is it that scripted content costs so much more than non-fiction content to produce for both broadcast and cable networks? The answer lies in the lack of need for writers, regular cast members, and even production facilities. You don’t really need to build pre-existing sets for a non-fiction show about fishing crews (the boats already exist), addiction interventions (the “cast” shows up at the person’s home), or pawn shop operators (they work at a pre-existing pawn shop). These writing and production facility/personnel–related fees can make up 30–50% of the budget. Additionally the cost of the cast members in non-fiction tends to pale in comparison to successful scripted content. However, there is one exception to that rule: when a show “blows up” into a bona fide big hit, the salaries also tend to go up materially. This will happen in the second or third season of the series.

Exhibit 18: Cost per Episode of TV Talent (in 000’s)

Hugh Laurie (House) $400 Charlie Sheen (Two and a Half Men ) $2,000

Christopher Meloni (Law & Order: SVU ) $395 Jon Cryer (Two and a Half Men ) $550

David Caruso (CSI: Miami) $375 Marcia Cross (Desperate Housewives ) $400

Marg Helgenberger (CSI) $375 Teri Hatcher (Desperate Housewives ) $400

Mark Harmon (NCIS ) $375 Felicity Huffman (Desperate Housewives ) $400

Laurence Fishburne (CSI) $350 Eva Longoria (Desperate Housewives ) $400

Kyra Sedgwick (The Closer) $350 Dan Castellaneta (The Simpsons ) $400

Denis Leary (Rescue Me) $350 Julie Kavner (The Simpsons ) $400

Gary Sinise (CSI: NY ) $275 Tina Fey (30 Rock ) $400

Non-Fiction First Cycle Later Cycles

David Letterman (The Late Show ) $133 Kate Gosselin (Kate Plus 8 ) $25 - $250

Jay Leno (The Tonight Show ) $119 Real World Contestants $0 - $0

Conan O'Brien (Conan ) $48 Cast members of Big Brother $1 - $1

Ellen DeGeneres (The Ellen DeGeneres Show ) $38 Cast Members of Real Housewives $3 - $100

Jimmy Kimmel (Jimmy Kimmel Live ) $29 Nicole "Snooki" Polizzi (Jersey Shore ) $5 - $30

Chelsea Handler (Chelsea Lately ) $17 Catelynn Lowell (Teen Mom ) $5 - $5

Ozzy Osbourne (The Osbournes ) $5 - $1,000

Donald Trump (The Apprentice ) $50 - $100

Late-night

Drama Sitcom

First run cable network non-fiction cast

salaries are a "rounding error" versus

sitcoms/dramas.

Broadcast late night talent is 70% less expensive

per episode than drama/comedy and cable network

is a fraction of that.

Source: TV Guide, Entertainment Weekly, RBC Capital Markets estimates

At the end of the day, scripted content can be incredibly lucrative in domestic syndication from sales to cable networks alone for off-network stripping. We’d note though, it’s the existing ecosystem of general market cable, such as USA, TNT and TBS, being included in basic cable channel tier packages and further being able to command strong affiliate fees that allows for the profitable monetization of this content. The largest threat to the disruption of this ecosystem is the exclusion of some of these networks from basic cable carriage (TNT, for instance isn’t included in the Time Warner Essentials package) or more importantly, competition for viewership of syndicated content from online video distributors such as Netflix, or even Hulu.

While there is a potentially longer term opportunity to create a similar distribution channel for premium video content online, it’s unlikely to be matched by the existing ecosystem. In other words, the fate of the off network syndication market is directly tied to the

long-term prospects of the general market cable channels that primarily feature this type of programming. For today, it’s simply the only way to generate ~$2 million per hour for a procedural drama or a big budget situation comedy on an off-network basis (outside of very few special circumstances such as the recent Kevin Spacey House of Cards Netflix deal).


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Exhibit 19: Off-Network Cable Syndication Deals

Off-net

Launch Program Studio

License Fee

per Episode

(in mm)

Channel

Licensee Comments

2005 Sopranos HBO $2.50 A&EOne of very few high profile serialized syndication

deals and viewed as a ratings failure.

2009 The Mentalist Warner Brothers $2.20 TNT Syndicated before Season 3.

2009 NCIS-LA CBS $2.20 USA NetworkRemarkable, given that only a few episodes had

aired before the deal was struck.

2010 The Big Bang Theory CBS $2.00TBS and Fox

Stations

TBS paying $1.5mm while Fox stations paying

$0.5mm. Set a record for off network sitcom

purchases and syndicated during season 3.

2004 Law & Order: CI NBC Universal $1.90 Bravo/USA -

2002 CSI Warner Brothers $1.90 Spike -

2010 Modern Family Fox $1.40 USA Network Syndicated before season 3.

2004 Without A Trace Warner Brothers $1.40 TNT TNT took a major write-down in 4Q09

2007 Two and a Half Men Warner Bros. $0.80 FXInitially syndicated off-net to Tribune in

broadcasting. Cable rights kicked during 2010.

2009 30 Rock NBC Universal $0.80Comedy Central/

WGN AmericaSyndicated after Season 4.

2006 NCIS CBS $0.75 -

2009 How I Met Your Mother Fox $0.75 Lifetime Syndicated after Season 4.

2010 Glee Fox $0.50 Oxygen Network

Includes rights to make Glee themed specials. Also

surprisingly syndicated before the typical 4-season

mark.

2010 The Cleveland Show Fox $0.50TBS and Fox

StationsSyndicated before the typical 4 season mark.

2010 New Adventures of Old Christine Warner Bros. $0.35 Lifetime

2008 Lost ABC Studios $0.20 Syfy/G4

2007 Heroes NBC $0.30 G4

2006 Desperate Housewives ABC Studios $0.50 Lifetime

2010 Prison Break Fox $0.10 SiTV

2009 Ugly Betty ABC Studios $0.20 TV Guide

Very solid ratings performers in first run that

basically found "no home" in off-net cable

syndication compared to procedurals and

situation comedies.

Source: TV Guide, Broadcasting And Cable, TV By The Numbers, RBC Capital Markets

Domestically, content producers are also able to monetize situation comedies through local broadcast stations off-network, most often through stripping. Much like the procedural drama, situation comedies are often somewhat self-contained. While characters are generally more important than they are in procedurals, they probably aren’t as important as the overall storyline. Unlike with a serialized drama, a viewer can come into a sitcom “cold” (without ever having seen an episode before) and follow the story. Furthermore, the half-hour format of the sitcom fits scheduling needs well for adjacent access programming. Unlike procedurals, however, sitcoms rarely have broad international appeal.


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Exhibit 20: Select Off-Network Series to Station Syndication

Off-Net

Launch Program Studio

Off-

Network

License

Fee/Episode

($ mm)

2001 King of the Hill 20th Century Fox FOX 3.0

2001 Everybody Loves Raymond CBS CBS 2.5

2002 Dharma & Greg 20th Century Fox ABC 2.8

2002 Will & Grace Warner Bros. NBC 1.32004 Malcolm in the Middle 20th Century Fox FOX 2.0

2005 My Wife and Kids Buena Vista/ABC ABC 2.2

2005 Bernie Mac Show, The Twentieth TV FOX 2.0

2006 According to Jim Buena Vista/ABC ABC 2.0

2007 Two and a Half Men Warner Bros. CBS 1.52009 Office, The NBC Universal NBC 1.8

2010 How I Met Your Mother 20th Century Fox CBS 1.4

Source: SNL Kagan

While syndication figures are less available on the international side, our industry sources indicate to us the major franchise shows generally index around 1x for rest-of-world versus domestic. In other words, for a show like NCIS: LA, which generated ~$2.2 million in domestic syndication revenues per episode in its first window, it should also generate ~$2.2 million for syndication in the rest of the world.

But other non-procedural content is far more difficult to monetize internationally. Situation comedies, for example, while being another major staple of both off-net cable and local broadcast programming, are incredibly difficult to monetize internationally. Humor is a somewhat culturally driven sensibility and it varies from country to country. For this same reason, the film industry has tended to focus on action adventures for tent-pole movie production since it is far easier to monetize abroad than comedies.

One odd hybrid method of monetization (not quite first-run and not quite monetization) of non-fiction based programming is the sale of not actual content, but rather content format. For example, The Biggest Loser may not syndicate well, nor may Real Housewives of

Orange County, but the producers of that content (Fox through Shine Media Group and NBC Universal, respectively) are able to sell a format to local producers. We have also seen such an opportunity with situation comedies as well. There is almost no expense associated with a sale (they come from existing scripts and developed ideas), and they offer very little risk to the buyer since the content tends to have at least some sort of proven track record. That said, international companies have tended to fair much better in that competitive landscape than have domestic U.S. producers.

Exhibit 21: International TV Programming Sales by U.S. Suppliers

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

(in

$ m

m)

Source: RBC Capital Markets estimates and SNL Kagan


23

Exhibit 22: Content Creation/Monetization Chain

Domestic Syndication To Cable Nets

Domestic Syndication To Broadcast

International Syndication

First Run TV Content License Fees

Studio Produces TV Show


Additionally, new OTT distributors (such as Netflix and Hulu) are providing another new window for distribution revenues. These deals tend to be more multi-title package (or library) based, as opposed to being priced by title. It’s unclear how large a market OTT could become, but it has grown to a substantial marketplace from virtually nothing in only a few short years. We expect the OTT ecosystem to be a new and highly effective platform for the monetization of content that was historically under-exploited.

In the initial examples below, reflective of the first stage of evolution of the ecosystem, OTT distributors have generally taken the form of purchasing content that was historically leveraged on traditional syndicated platforms—TV sitcoms and some dramas—that had essentially played themselves out in the traditional syndication world. In other words, much of this content was simply unsyndicatable: it was either too old and circulated for a new buyer to come in and pay a material price for exclusivity (in fact, in the case of the recent CBS deal, much of it was actually available for free on the web), or it was a premium serialized drama that was very difficult to syndicate.


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Exhibit 23: Recent Online Syndication Deals

Studio/Network

Online

Distributor Terms Content Comments

Disney/ABC Netflix

Press reports indicate

~$200mm/year, one-year

deal.

Previous seasons of current series on

ABC such as Grey's Anatomy , old

series such as Lost , ABC

Family/Disney Channels that have

aired as recently as 15 days prior.

Previously, cable channel content was

generally not available on-line.

CBS Netflix

Press reports indicate

~$100mm/year, two-year deal,

non-exclusive.

~10% of CBS/Paramount TV archive

library. Examples include Family

Ties, Cheers, Star Trek, etc.

Virtually all of this content was

available for free on ad-based

streaming basis at CBS.com

Viacom/Comedy

Central/MTVHulu/Hulu

PlusTerms unknown

Content includes recent episodes of

Jon Stewart, Colbert and Jersey

Shore.

Previously, cable channel content was

generally not available on-line.

Time

Warner/Warner

Brothers

Netflix $200K/episodeOff network syndication rights to

Nip/Tuck.

Given the risqué content and limited

number of runs, this content would

have gone largely unmonetized

through traditional distribution.

Kevin Spacey/David

Fincher

Netflix

Not disclosed, but press

reports indicate ~$4mm per

episode, for 20 episodes.

First run syndication deal for original

series "House of Cards".

First major initiative for programming

on Netflix as "first window" content.

News Corp./20th

Century FoxNetflix Terms unknown

First season of Glee, first two

seasons of Sons of Anarchy, library

series such as Ally McBeal and The

Wonder Years

Non-exclusive multi-year agreement;

extension of a prior agreement that

included several library series

Source: RBC Capital Markets and company reports

Future Monetization of TV Content Is at the Heart of the OTT Conflict The conflict that these OTT monetization opportunities highlight is the following: if the content companies attempt to increase monetization of content by pulling it forward to certain new windows (à la OTT), they run the risk of pulling the viewer from other windows that are further back. Thus, they could cannibalize the existing highly profitable ecosystem with the incremental, emerging one. We think concerns over the issue, given the incremental content approach, have probably been overstated.

Monetizing Primetime Content So how does a network monetize the cost of content for that initial “first window” period? Traditionally, the answer lies largely in the amount of advertising revenue a distributor (TV network or individual station) can generate to help offset the cost of content. The key driver in that assessment is the cost per thousand eyeballs (or CPM) that a network can generate during the program. These CPMs for primetime broadcast network programming typically range from ~$20 at the low end to ~$40 at the higher end. For cable networks, CPMs have traditionally fallen anywhere from 30% to 50% lower than they are for the broadcast nets. However, the cable networks tend to have a) lower programming costs overall (they tend to re-run more of their original programming often), b) affiliate fees to supplement advertising revenues (though clearly with retransmission consent fees, broadcast networks are likely to benefit from a similar model), and c) the ability to retain more of the total amount of advertising units available for a show—broadcast networks allocate a far greater proportion of advertising commercials, or units, to their broadcast affiliates versus cable networks, which allocate far less to the local cable systems that serve as their primary distribution vehicles. The chart below illustrates typical primetime costs per unit of advertising (30 second spots) for broadcast networks during the Fall/Winter 2010 schedule.


25

Exhibit 24: Illustrative Cost Per Spot for Fall Season 2010 (in $ 000's) -- Broadcasting

Networks Spot Sunday Monday Tuesday Wednesday Thursday Friday Saturday Additional Comments

8PM 127 204 107 111/114 91 60 100 Saturday night ABC College Football.

9PM 210 204 167 193/141 222 75 Grey's Anatomy on Thursday at 9 on ABC is standout.

10PM 131 134 112 117 142 71

8PM 115 142/151 150 153 195/113 60 22

9PM 153 206/190 154 121 147 84 30 Two and a Half Men on Monday at 9PM is standout.

10PM 101 134 109 110 156 68 34

8PM 415 94 134 91 66 50 16 Sunday Night Football on NBC is standout along with The Office

9PM 137 134 95 213/122 50 22 Thursday night The Office is major driver for NBC.

10PM 87 100 81 99 68 37

8PM 253/188 226 272 100 132 62 41/45 Glee on Tuesday Night is a major CPM driver.

9PM 259/173 140 125 121 122 62 47

High 259 226 272 193 213 84 100

Low 131 87 100 81 91 50 22

Average 197 137 149 119 140 65 40Average For Week 121

Average Audience -- 18 - 49 Demographic 4.0mm

Average CPM $33

Note: / delineates half hour shows. Additionally, we have not included the CW, where CPMs are ~30% to 70% lower, on average.

Fox

ABC

CBS

NBC

Fridays and Saturdays are the graveyard of TV with

lowest audiences and unit cost.

Source: RBC Capital Markets, Ad Age

The other major driver for advertising revenue in a network TV program is the audience watching the show. In its most simplistic form, the revenue of a show is the total number of “M”s multiplied by the CPM, or total number of 1000 eyeballs times cost per 1000 eye balls:

Audience/1000 * CPM * Number of Commercials = Total Advertising Revenues

In reality though, a) the network doesn’t keep all the advertising units that are run in a show (in a broadcast network, ~10–12 of the 32 units, which are ~30 seconds in length in any hour of prime-time programming, are allocated to the local stations, while ~22 are allocated to the broadcast network or cable network), and b) the total audience isn’t the audience that is actually monetized, it’s rather target demographic. Generally, we speak in terms of 18 to 49–year-olds for primetime broadcast networks (cable networks often have more niche demographic targets). So, the core audience population of 18 to 49–year-olds is ~131 million in the U.S. A rating point represents one percent of this population in the target demo. In general, we quote audience sizes where each rating point is a percentage of the U.S. TV population in that demographic group and equals: 2.90 million viewers, 1.31 million adults 18 to 49, 0.68 million adults 18 to 34 and 1.24 million adults 25 to 54.

Even for a broadcast network, the average program is monetized twice off of its original license fee. It’s monetized in one premier run (usually during the Fall and Spring) and one rerun (usually during the Summer or Winter).


26

Exhibit 25: Cable CPMs and Cable Ratings Trail Broadcast, Leading to Different Monetization Models

Primetime CPMs

$13

$28

$0

$5

$10

$15

$20

$25

$30

Cable -- Top 10 Broadcast

Primetime Ratings

0.83%

2.50%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Cable -- Top 10 Broadcast

Given that cable gets half the CPM and 30% to 50% the ratings (for a premium, top 10 rated network), the cable

network needs to monetize original content more efficiently. This is accomplished through multiple runs of the

same episode. Additionally, affiliate fees help defray costs that advertising cannot cover.


The chart below is an attempt to illustrate the economics of primetime broadcast TV show, assuming a range of production costs, as well as CPMs and audience levels. Note that we have made some assumptions about audience levels and CPMs across genres and seasons. Ratings are somewhat seasonal with the third quarter being lower than average. But generally, broadcast networks will average ~2.5–2.75 Adult 18 to 49. We think reruns tend to generate audiences ~60% of first run, on average. Comedies tend to repeat better than serialized dramas. Interestingly, the economics reflected in the chart below are not inclusive of the impact of retransmission consent payments, which when allocated to particular programs, could greatly enhance profitability.


27

Exhibit 26: Illustrative Network Original Programming Economics for Broadcast Network Primetime Shows

Low Mid-Range High Low Mid-Range High

License Cost Per Hour (000's) $1,500 $3,500 $5,000 $1,000 $1,750 $3,000

First Run Low Mid-Range High Low Mid-Range High

Commercial Units Per Hour 32 32 32 16 16 16

Retained By Network 20 20 20 10 10 10

Retained By Affiliate 12 12 12 6 6 6

Average Ratings Points 1

1.5 3.0 4.0 1.5 3.0 4.0

Total Audience (000's) 1

1,965 3,930 5,240 1,965 3,930 5,240

CPM $25 $30 $40 $25 $30 $40

Total Advertising Revenue (000's) $1,572 $3,773 $6,707 $786 $1,886 $3,354

Total Advertising Revenue Retained By Network (000's) $983 $2,358 $4,192 $491 $1,179 $2,096

Re-Run (Second Run of Season) Low Mid-Range High Low Mid-Range High


Retained By Network 20 20 20 10 10 10

Retained By Affiliate 12 12 12 6 6 6


1.0 2.0 2.7 1.1 2.3 3.0

Total Audience (000's) 1

1,309 2,617 3,490 1,474 2,948 3,930

CPM $25 $30 $40 $25 $30 $40

Total Advertising Revenue (000's) $1,047 $2,513 $4,467 $590 $1,415 $2,515

Total Advertising Revenue Retained By Network (000's) $654 $1,570 $2,792 $368 $884 $1,572

Combined Hourly Profit (000's) $137 $428 $1,984 ($140) $313 $668

1 18-49 demo.

Hour-Long Drama 1/2 Hour Comedy

Note, we assume that higher budget content garners higher ratings.


But network programming isn’t limited to primetime. For the broadcast networks, it includes many other dayparts. CPMs in other dayparts such as daytime (Monday–Friday) run closer to $6, or early morning (Good Morning America, etc.) which can run closer to $18. And pricing structure for programming is obviously different for those dayparts as well. As a result, the rest of the profitability of the schedule will vary.

With respect to original cable programming, the model is somewhat different. Cable networks retain a much greater portion of their advertising inventory than broadcast networks, as there are no station affiliates to share the inventory with. As a general rule of thumb, cable networks retain ~28 of the 32 commercial units per hour, with the balance going to the local MSO distributor.

Exhibit 27: Advertising Inventory per Hour Retained by Networks

20

28

0

5

10

15

20

25

30

Broadcast Networks Cable Networks



28

Additionally, generally, an original cable show will be shown a number of times in one week. This way, a program can be monetized more effectively, since a cable network programs 24 hours per day (as opposed to broadcast network which is programmed half that level), with an audience in primetime that that can be 25% the amount. Since the cost of the programming is spread over many more hours of advertising (as well as an allocation of affiliate fees), cable networks can still be profitable despite much lower primetime audiences.

Exhibit 28: Illustrative Network Original Programming Economics for Cable Network Primetime Shows


License Cost Per Hour (000's) $750 $1,000 $1,500 $400 $600 $800

First Run Low Mid-Range High Low Mid-Range High


Retained By Network 28 28 28 28 28 28Retained By Affiliate 4 4 4 4 4 4


0.5 0.7 0.8 0.5 0.7 0.8

Total Audience (000's) 1 655 852 983 655 852 983

CPM $6 $8 $12 $6 $8 $12Total Advertising Revenue (000's) $126 $218 $377 $126 $218 $377

Total Advertising Revenue Retained By Network (000's) $110 $191 $330 $110 $191 $330

Re-Runs (Multiple Runs Of Episodes) Low Mid-Range High Low Mid-Range High


Retained By Network 28 28 28 28 28 28Retained By Affiliate 4 4 4 4 4 4


0.3 0.3 0.4 0.3 0.5 0.6

Total Audience (000's) 1 328 426 491 328 639 737

CPM $6 $8 $12 $6 $8 $12Total Advertising Revenue (000's) $63 $109 $189 $63 $163 $283

Total Advertising Revenue Retained By Network (000's) $55 $95 $165 $55 $143 $248

Combined Profitability After 2 Runs (000's) ($585) ($714) ($1,005) ($235) ($266) ($222)

Implied Number of Runs To Break Even 11x 7x 6x 4x 2x 1x

1 18-49 demo.

Hour-Long Drama Hour Long Non Fiction

Note, we assume that higher budget content garners higher ratings.


The prior exhibit is based purely on an advertiser-supported model. However, most general market cable channels are dual revenue stream based, so the network is able to monetize content across both subscription affiliate fees as well as advertising. It’s difficult to figure out just how much of the affiliate fee should be allocated to any specific program, since the affiliate fee applies to a 24-hour period of content access. As a result, we simply assume that affiliate fees are spread across programming on un-weighted, even basis across a 24-hour programming period, 365 days per year.

It’s difficult to generalize monthly cable subscription affiliate fees since they vary immensely channel by channel. But generally, the monthly affiliate fees for the top 15 cable networks (excluding sports) is in the ~$0.30–1.00 range. To generalize, though, we would say most top general market cable networks have affiliate revenue contributions in the $350 million to $1 billion range, while smaller, niche-oriented top networks generate ~$200-500 million of affiliate revenues.


29

Exhibit 29: Annual Affiliate Revenues and Monthly Affiliate Fees/Sub for Select Cable Networks

0

200

400

600

800

1,000

1,200

1,400

TLC

Bra

vo

E! E

nte

rtain

ment

TV

AB

C F

am

ily

Channel

His

tory

AM

C

A&

E

Life

time

Tele

vis

ion

Dis

covery

Channel

FX

Netw

ork

TB

S

US

A

TN

T

An

nu

al R

ev

en

ue

s (

in $

mm

)

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20M

on

thly

Re

ve

nu

es

Pe

r Su

b

Annual Aff iliate Revenues

Monthly Aff iliate Revenues Per Subscriber

Source: RBC Capital Markets estimates and Kagan.

The average cable network also doesn’t generally program a 24-hour schedule with its own programming. On average, we’d estimate the cable networks are programming about 25% of their day (six hours) with paid programming/infomercials. Adjusting for this programming, we see the following allocation of affiliate revenue for premium programming on an hourly basis:

Exhibit 30: Allocation of Affiliate Fees on an Hourly Basis

Annual Affiliate Fee Revenue $50,000,000 $250,000,000 $450,000,000 $650,000,000 $850,000,000 $1,050,000,000Days Per Year 365 365 365 365 365 366

Revenue Per Day $136,986 $684,932 $1,232,877 $1,780,822 $2,328,767 $2,868,852Hours Per Day Actually Programmed

118 18 18 18 18 18

Revenues per Hour Actually Programmed $7,610 $38,052 $68,493 $98,935 $129,376 $159,381

1 Assume that cable networks run 6 hours of paid programming/informercials per day.


If we assume a generic $600 million of annual affiliate revenue across all of these networks (a blend of different types of major network and their affiliate fee generation), we revise our prior analysis as follows.


30

Exhibit 31: Cable Network Programming Runs to Break-Even, Assuming Affiliate Fee Allocation (in $ 000’s)


License Cost Per Hour 750 1000 1500 400 600 800

Total First Run Advertising Revenue Retained By Network 110 191 330 110 191 330

Total Second Run Advertising Revenue Retained By Network 55 95 165 55 143 248

Allocation Of Affiliate Fees Per Hour Of Programming 1

99 99 99 99 99 99

Combined Profitability After 2 runs (486) (615) (906) (136) (167) (123)

Implied Number of Runs To Break Even 11x 8x 7x 4x 3x 2x

1 Assumes $500mm of annual affiliate fees spread over an 18 hour programmed day (balance of programming is infomercial/paid programming).

Hour-Long Drama Hour Long Non Fiction

● Note, we assume higher cost programming garners higher ratings.

● This would imply that the typical hour-long original drama programming would

need ~8 runs to break even while the typical hour-long non-fiction programming

would need 3 runs to break even.


The Difference between Pricing on a Production-by-Production Basis Versus a Packaged Channel – Unbundled Content Is Expensive for the Consumer and a Tough Proposition for the Content Providers The exhibit below illustrates the extraordinary content investment on a per basic subscriber basis (the traditional base over which content costs are shared in the existing ecosystem) and on a per viewer basis (the system, we believe, consumers are increasingly pushing for). The costs on a per-subscriber basis are striking while the costs on a per-viewer basis are overwhelming.

Exhibit 32: Cost of Content Allocated across Subscribers versus Actual Viewers

Network

Annual

Programming

Expense (mm)

Programming

Expense Per

Basic Cable

Subscriber

Programming

Expense Per

Cable Subscriber

per Month

Number Of

Viewers

(mm)1

Allocation of

Programming

Expenses for

Primetime

Estimated

Primetime

Expenses

(mm)

Annual

Programming

Expense Per

Viewer 1

Programming

Expense Per

Viewers per

Month

NBC $3,285 $32 $2.66 2.8 60% $1,971 $700 $58

CBS $3,320 $32 $2.69 4.0 60% $1,992 $494 $41

ABC $2,817 $27 $2.28 3.0 60% $1,690 $571 $48

FOX $2,216 $22 $1.79 3.4 85% $1,883 $551 $46

Sub Total $11,638 $113 $9.42 13.2 $7,536 $2,316 $193

Content Expenses Allocated Evenly Across All

Cable Subscribers Content Expenses Allocated Evenly Across Viewers

While not completely apples-to-apples, the exhibit illustrates the advantages of spreading the cost of content over a

larger number of total subscribers, versus actual viewers. The cost of Big 4 Network primetime programming on a

monthly basis is ~$193/viewer versus ~$9.42/basic cable subscriber. This helps us understand the drive for bundling

versus à la carte content, as a proposition for the consumer.


The economics of content cost per hour for a viewer for cable channels are lower, but they are nonetheless relatively higher than one might expect on a cost-per-viewer basis. However, when spread across the total basic cable subscriber base, they become almost de

minimus.


31

Exhibit 33: Cost to Program a Channel

Broadcast Networks

Top 10

Networks

Top 11-50

Networks

Top 51-100

Networks Primetime Only

Cost/Hour (mm)1$0.075 $0.040 $0.010 $1.750

Number Of Hours/Day To Program 20 20 20 3

Total Cost/Day (mm) $1.50 $0.80 $0.20 $5.25Total Annual Cost (mm) $548 $292 $73 $1,916

Total Viewers (mm) 1

0.75 0.45 0.08 3.33Cost/Viewer/Day $2.00 $1.78 $2.67 $1.58

Programming Cost/Viewer/Month $60.00 $53.33 $80.00 $47.3

Programming Cost/Basic Cable Sub/Month $0.45 $0.24 $0.06 $1.6

Average CPM $5.75 $3.50 $2.00 $32.0

Cable

1 For Costs, on cable, assumes multiple runs of a single show "amortized" across a total day. For both cable and broadcast networks, assume total viewers 2mm+.

For broadcast, assumes primetime total viewers of an "average" network, and for cable, assumes top 20 network average, total viewers, total dayparts.


So, on a cost-per-viewer basis, programming costs per month can range from $80 per month (for relatively under-distributed networks) to $47 per month for widely distributed broadcast networks. While these costs per viewer may seem extraordinarily high (and in the grand scheme of current “bundled” economics, they are), in the context of advertising revenues, they aren’t as bad an economic proposition as they first seem. This is especially the case for the larger networks, where reach allows for much better economies of scale, even over expensive programs that are more costly on an hourly basis. In fact, it’s the larger networks, with their higher cost programming, that are able to cover programming costs with advertising far more efficiently than smaller cable channels.

For advertising-supported cable networks (as well as broadcast networks), the top 10 networks “make money” as they cover their cost of programming through revenue per viewers. But this is only on a “gross basis”. The exhibit below doesn’t take into consideration the impact of overhead.


32

Exhibit 34: Unbundled Content Cost and Ad Revenue per Month of Network Content per Viewer

Broadcast Networks

Top 10

Networks

Top 11-50

Networks

Top 51-100

Networks Primetime Only

Revenue Per Viewer Per Spot/Viewer $0.006 $0.004 $0.002 $0.032Total 30 Second Spots Retained By Network/Hour 28 28 28 20

Total 30 Second Spots Retained By Network/Day 560 560 560 60

Total Ad Revenue/Viewer/Month $96.6 $58.8 $33.6 $57.6

Total Annual Ad Revenue/Viewer $869.4 $317.5 $30.2 $2,301.7

Cable

$60.00$53.33

$80.00

$47.3

$96.6

$58.8

$33.6

$57.6

$0

$20

$40

$60

$80

$100

$120

Top 10 Cable Networks Top 11-50 Cable Networks Top 51-100 Cable Networks Broadcast Networks

Programming Cost/Viewer/Month Total Ad Revenue/Viewer/Month

In the case of top 10 cable networks and broadcast networks where scale

is larger Ad revenues can exceed programming expense. But, these

expenses EXCLUDE associated overhead.


When Overhead Is Added, It Becomes Obvious that the Whole Cable Ecosystem Rests on a Bundled Basis Much like programming expenses, overhead, which is commonly referred to as Selling, General and Administrative (SG&A) costs, can vary materially by network. On an annualized basis, for larger cable networks, we believe SG&A likely runs in the $175 million–$300 million range. For mid-sized networks, they likely run closer to the $50 million–$175mm range. Smaller networks, meanwhile, can run as low as $5 million annually, but are probably closer to the $10 million–$25 million range.


33

Exhibit 35: Total Network Overhead and Overhead Allocated per Viewer

Note: For Broadcast networks, we assume roughly 2/3 of total network overhead, allocated to primetime (same as in chart above)

$240

$83

$21

$300$26.65

$15.29

$23.72

$7.51

0

50

100

150

200

250

300

350

Top 10 Cable

Networks

Top 11-50 Cable

Networks

Top 51-100 Cable

Networks

Broadcast Networks

An

nu

al O

verh

ead

Co

st

(in

$ m

m)

$0

$5

$10

$15

$20

$25

$30M

on

thly

Co

st A

llocate

d p

er V

iew

er

Total Overhead Overhead/Viewer/Month


While it’s clear that mass reach networks create a heavy value proposition for operators, when overhead is loaded in, smaller networks, which together can accumulate the same numbers of viewers of any one mass reach network (thus demonstrating their reach and popularity on a combined basis in the world of highly fragmented TV viewership), are simply not profitable on an individual basis.

It becomes very obvious in the chart below that on a bundled basis, the profitability on a viewer by viewer basis for the larger networks massively subsidizes the losing proposition of the smaller networks (on a viewer by viewer basis). In other words, the bundled package is what makes the sub top 50 networks a viable, non–cost-prohibitive proposition.


34

Exhibit 36: Unbundled Content, Overhead Cost and Ad Revenue per Month of Network Content per Viewer

$96.6

$58.8

$33.6

$57.6

$86.7

$68.6

$103.7

$54.8

$9.9

($9.8)

($70.1)

$2.8

($80.0)

($60.0)

($40.0)

($20.0)

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

Top 10 Cable Networks Top 11-50 Cable Networks Top 51-100 Cable Networks Broadcast Networks

Total Ad Revenue/Viewer/Month Programming + Overhead/Viewer/Month Profit Per Viewer/Per Month

Only mass reach broadcast and cable networks (top 10) create an economic proposition for channels to

operate on an unbundled, à la carte basis. Most smaller networks are highly unprofitable on a per viewer

basis.


Many Networks Have Historically Lost Money on Advertising Alone – That Is Why They Have Affiliate Fees – But the Prospect of Paying Affiliate Fees Based on Viewership Rather than on Total Subscribers Is Where the Proposition Becomes Less Clear On a pre-affiliate fee basis, as in the examples given above, the typical network makes a profit/loss as follows.

Exhibit 37: Annual Profit/(Loss) Solely Based On Ad Revenue (in mm)

Broadcast Network

Top 10

Network

Top 11-50

Network

Top 51-100

Network Primetime Only

Total Annual Ad Revenue $869.4 $317.5 $30.2 $2,301.7Total Programming + Overhead $779.9 $370.6 $93.3 $2,190.0

Profit Based On Advertising $89.5 ($53.0) ($63.1) $111.7

Cable


Historically, the losses at the smaller networks have been subsidized by affiliate fees across the entire subscriber base, and gains at larger cable networks have been made even greater by affiliate fees.


35

Exhibit 38: Cable Networks Affiliate Fees per Viewer

Top 10

Networks

Top 11-50

Networks

Top 51-100

Networks

Average Monthly Affiliate Fee $0.62 $0.20 $0.14

Average Number Of Subscribers (mm) 95.7 79.3 57.6Total Annual Affiliate Fees (mm) $709.1 $189.9 $93.7

Implied Affiliate Fees/Month/Viewer $78.79 $35.17 $104.06

These would be affiliate fees per viewer required to maintain current affiliate

fee structure and profitability.

Source: RBC Capital Markets and Kagan

But for the purposes of this analysis, we are not interested in whether or not the cable channel operator can maintain its existing margins or profitability. For now, we are focused on the consumer and whether a move toward à la carte consumption would bring more choices at lower prices for a wide range of consumers, or just a very select few. In that context, let’s assume for a minute that cable channels must now operate on a per-viewer basis rather than being able to subsidize programming costs across an entire ~100 million basic subscriber base. In order to break-even, we’ll let the network operator figure out what his own appropriate margins are in an à la carte world, though as you can see below, the network operator will have very little motivation to move to à la carte because it would be giving up a tremendous amount of affiliate fees—what would the channel operator need to charge? The good news for the consumer is that for the larger channels with broader reach, at least for break-even purposes anyway, they wouldn’t need to charge anything. However, as suggested in the chart in which we looked at advertiser supported results of the generic channel model, there would be an enormous uptick for the viewer who views more than five or six channels in the top 11 – 50 bracket and a virtually non-economic uptick for viewers in the top 51- 100 category.

Exhibit 39: Total Potential Profit (Loss) per Month on a Per-Viewer Basis

Number Of Networks

Profit (Loss) Per

Viewer/Month per

Networks

Implied Affiliate

Fee/Viewer/Month

For Break-Even per

Networks

Top 10 Cable Networks 10 $10 $0

Top 11-50 Cable Networks 40 ($10) $10 =======

Top 51-100 Cable Networks 50 ($70) $70 =======

These networks are

simply not viable on

an à la carte, per

viewer basis.


Now, we have heard many investors (and consumers for that matter) argue that the high cost of subsidizing smaller channels is irrelevant; in theory, very few people watch them. So on a per-viewer basis, very few consumers would be economically penalized by a move to à la carte in terms of choice. As a result, the average cost of content to the consumer on an unbundled basis would likely go down, since there would be lots of channels nobody wants to watch, which therefore don’t need to be subsidized with affiliate fees. This, to us, is where the great fallacy of à la carte content for the consumer lies.

As illustrated in the chart below, roughly two-thirds of the cable channel viewing audience is associated with relatively low margin-to-money losing economics. The chart below demonstrates the total number of ratings points associated with each tier.


36

Exhibit 40: Cumulative Ratings Across Cable Networks by Tier

15.47

25.63

5.45

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Top 10 Cable Networks Top 11-50 Cable Networks Top 51-100 Cable Networks

To

tal R

ati

ng

s P

oin

ts

~2/3 of viewership is attributable to networks, that, on an

à la carte basis, represent a non-compelling economic proposition for operators.


What Is the Value Proposition to the Consumer of the Current Ecosystem? What if Over-The-Top Providers Can Offer More Non-linear, Video-On-Demand Content than Any (or Many) Linear Channel, but for a High-Single Digit Monthly Subscription Fee? The current TV ecosystem (whose distribution mechanism includes some over-the-air consumers, but for the vast majority, consists of Pay TV subscribers) invests ~$30 billion annually in TV programming expenses for its consumers. We would compare this to estimates for the subscription online video distributors of an estimated ~$1 billion in 2012. Today, this consists largely of Netflix, but over time, it’s likely to be an expanded universe potentially consisting of other players such as Amazon, Google, or Apple.


37

Exhibit 41: Programming Expenses for Current TV Ecosystem vs. Subscription Online Video Distribution

$7,437

$12,727

$11,638

$1,0000

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Television Subscription Online Video Distribution

(in

$ m

m)

Basic Cable Original Basic Cable Acquired Broadcast Network

Consumers benefit from over

30x the programming expense


Granted, there is a trade off. The consumer will likely pay more for a video subscription in the traditional ecosystem than in an alternative subscription-based online video distribution model such as Netflix. Assuming a generic $60 per month cable subscription versus an online video subscription service of ~$10 per month, the consumer could conceivably save ~20% of his video subscription costs. However, by giving up a double/triple-play video service, the consumer’s broadband bill would likely increase ~$15. So, the net savings would be ~60%.

So, the real question for the consumer is whether or not he believes the ~60% savings in monthly outlay for video services compensates for the 97% lower investment in content.

Exhibit 42: Out-of-Pocket Savings versus Loss of Access to Content

60%

3%

0%

10%

20%

30%

40%

50%

60%

70%

Monthly Out Of Pocket Expense Decline Programming Investment Consumer Has Access

To



38

We’d also note that as time goes by, we’d expect the market for OTT content to become more competitive, increasing either the cost to the end user for content (likely driving subscription prices higher) or the delta between programming investment in the traditional ecosystem and the emerging subscription OTT ecosystem.

Reverse Compensation and the Cost of Content In the broad context of content investments by broadcast networks, retransmission consent, and especially reverse network compensation, appears to be a relative bargain. The cost of programming a broadcast network runs in the ~$4 billion range annually. This investment is ~4-8x the typical amount by many top 10 cable networks (with the exception of ESPN). However, the ~$0.60 affiliate fees that the typical broadcast network is garnering in retransmission fees is in line with the affiliate fees of those networks, which provide far less programming investment.

Exhibit 43: Programming Investments and Affiliate Fees per Sub – Cable versus Broadcast Networks

Cable Network Versus Broadcast Network Programming

Investments

$525

$4,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Top 10 Cable Network Broadcast Network

An

nu

al

Pro

gra

mm

ing

Exp

en

ses

(in

$ m

m)

Cable Network Versus Broadcast Network Monthly Affiliate Fees

Per Sub

$0.57

$0.60

$0.54

$0.55

$0.56

$0.57

$0.58

$0.59

$0.60

$0.61

Top 10 Cable Network Broadcast Network

Avera

ge M

on

thly

Aff

ilait

e F

ee/S

ub

6% Difference

662% Difference

Despite ~6.5x the programming investment, broadcast networks only garner ~6% more

affiliate fee per subscriber.


For the larger O&O groups, who provide content to only ~55% of the country, they are receiving only ~$10 million per month or $120 million per year at $0.20 per sub while the smaller O&O operators such as ABC and NBC will be receiving closer to ~$240 million per year.

Exhibit 44: Reverse Compensation versus Investment in Content

Annual Reverse Compensation Received by Broadcast

Networks

$120

$240

0

50

100

150

200

250

300

Larger Owner Of O&O's Smaller Owner Of O&O's

(in

$ m

m)

Average Annual Broadcast Network

Programming Investment

$4BN



39

Network TV Pricing Trend – Proprietary Upfront/Scatter Pricing Trend Analysis Indicates Viacom and Discovery Have the Most Tailwind and Scripps Has the Most Headwind as 2011 Progresses

In our 4Q10 preview note on January 21 titled A New Détente In OTT?: RBC Media, Entertainment & Advertising Update, we introduced our proprietary network TV pricing analysis for major cable and broadcast networks in our coverage universe. Network pricing is comprised of two basic components: upfront pricing (for which inventory is typically sold in May of the prior broadcast year) and scatter pricing (which is basically the spot market). The two components multiplied by eyeballs (or ratings change) will generally point directionally (if not exactly) to broader advertising revenues for networks. But first, one must arrive at a blended (upfront/scatter) pricing metric, which is more art than science from the outside.

Upfront pricing is generally quoted on the basis of a year-over-year increase (vs. the prior year upfront pricing), while scatter pricing is generally quoted on a premium-to-upfront basis, particularly in the press and in investor events. However, it’s virtually impossible to derive a year-over-year impact from scatter-over-upfront pricing quotes. In our proprietary analysis, we use both our proprietary channel checks as well as publicly available data (commentary typically given at investor events/earnings calls) to make our best estimate on “scatter-over-scatter” pricing. We’d note that upfront pricing changes are relatively transparent given both public comments and consistent data found in our channel checks.

To arrive at a blended pricing (upfront + scatter), one must also know the current and prior year’s split on upfront vs. scatter inventory. For this, we also use our channel checks to derive the shift in inventory weightings for each category. We perform the analysis for the cable network groups in our coverage universe, as well as for the ABC and CBS broadcast networks, for which we believe we have an accurate enough data set. In doing so, we can compare which networks have a pricing tailwind vs. those facing a headwind in the

2010-11 broadcast year.

We think there are two key metrics regarding pricing that could help determine how the networks (and thus the parent companies) are likely to perform on an absolute basis, as well as relative to each other. The first key metric is simply the year-over-year increase/decrease in blended pricing. The second is quarter-over-quarter acceleration/deceleration in blended pricing. Note, given the mix differences for broadcast and cable networks between upfront and scatter inventory (broadcast networks tend to have a materially greater proportion of inventory allocated to upfronts), comparisons of pricing trends between cable and broadcast are somewhat difficult. As a result, in our summary chart below, we highlight the relative performance of just the cable networks (although, later we do illustrate the analysis for the broadcast networks as well).

Management commentary and our channel checks in recent weeks suggest that cable network scatter premium (vs. upfront) has remained consistent to slightly better than where it was in C4Q10; we believe C1Q11 scatter-to-upfront premium was ~20%+ for cable networks overall. For the broadcast networks, we believe scatter-to-upfront premium was slightly better than where it was in C4Q10, up ~30%+ vs. the upfronts in C1Q11. The lack of available inventory (on declining ratings) may be pushing scatter pricing higher for the broadcast networks.

Conclusion: Discovery and Viacom to have the most pricing tailwind behind them on a year-over-year basis; Discovery also has the best pricing profile on a sequential acceleration/deceleration-basis from C4Q10-C3Q11. On the other hand, Scripps has the most pricing deceleration heading into the back half of 2011. We think there may have been somewhat of a lag in the scatter pricing pickup for Viacom’s networks last year, and the particularly hot scatter market for MTV likely did not kick in until C2H10, making comps easier in C1Q11 but more difficult in C2H11. Discovery appears to have the most consistent scatter pricing momentum in 2010 and 2011.

Exhibit 45: Summary of Proprietary Upfront/Scatter Pricing Trend Analysis

YoY Blended Pricing Growth

Network Group 1Q11 2Q11 3Q11 Above Avg Below Avg Above Avg Below Avg Above Avg Below AvgDiscovery Networks 8.8% 6.8% 6.5%Scripps Networks 9.8% 5.0% 3.8%Turner Networks 6.1% 4.9% 4.9%Viacom Networks 9.4% 7.7% 5.1%

Average 8.5% 6.1% 5.1%

QoQ Blended Pricing Acceleration/Deceleration (bps)

Network Group 1Q11 2Q11 3Q11 Above Avg Below Avg Above Avg Below Avg Above Avg Below AvgDiscovery Networks 20 (207) (26)Scripps Networks (213) (472) (124)Turner Networks (434) (124) 0Viacom Networks 6 (171) (254)

Average (155) (244) (101)

2Q11

Discovery,

Viacom

Scripps,

Turner

Viacom,

Discovery,

Turner

Scripps

1Q11

2Q111Q11

Discovery,

Scripps,

Viacom

TurnerDiscovery,

Viacom

Scripps,

Turner

Discovery,

Turner

Scripps,

Viacom

3Q11

Discovery,

Viacom

Scripps,

Turner

3Q11

Does not reflect potential

pricing strength for NCAA

Discovery and Viacom have the most pricing tailwind behind them on a YoY-basis; Discovery also has the best pricing profile on a sequential improvement-basis from C4Q10-C3Q11. Scripps has the most pricing deceleration heading into the back half of 2011.

Source: Company reports, RBC Capital Markets Research


40

In the exhibits below, we show historical commentary from management of each company regarding upfront/scatter pricing as well as a detailed analysis of upfront, scatter and blended upfront/scatter pricing trends for each of the network groups.

Exhibit 46: CBS – Historical Scatter Pricing Commentary from Management (CBS Broadcast Network)

Date Earning Call Commentary on Historical Performance Forward Commentary

16-Feb-11 CY4Q10 Scatter premium up by over 35% Scatter pricing for first quarter up more than 40% over upfront

4-Nov-10 CY3Q10 Scatter up more than 35% over the upfrontPricing at the network is robust, up 40% above last year's

upfront

3-Aug-10 CY2Q10 Scatter Premium up 25% (advertising up 5%) Scatter premium projected to be up more than 30% in CY3Q10

5-May-10 CY1Q10 Scatter pricing up 30% over last year's upfront So far in CY2Q10, scatter premium up 20% plus

10-Feb-10 CY4Q09 Primetime scatter premium up an average of 25% So far in CY1Q10, primetime scatter premium up more than 30%

5-Nov-09 CY3Q09 - In CY4Q09, scatter premium up nearly 25%

6-Aug-09 CY2Q09Scatter pricing higher than upfront, however, not as robust as it

was a year-agoStronger scatter market in CY3Q09 than in the previous quarter

7-May-09 CY1Q09Softer scatter pricing; slightly above upfront, however, not as

robust as it was a year-ago-

18-Feb-09 CY4Q08Scatter pricing higher than the upfront; not as high as in the

CY4Q07-

30-Oct-08 CY3Q08 - Scatter pricing slightly above the upfront

Source: Company reports

Exhibit 47: CBS – Estimated Pricing Trend (CBS Broadcast Network)

Assumptions:

1) 2007-2008 base case upfront pricing of 1.00 08-09 Upfront/Scatter Mix 09-10 Upfront/Scatter Mix 10-11 Upfront/Scatter Mix

2) 2008-2009 upfront pricing increase of 7% Upfront 77.5% Upfront 67.5% Upfront 75.0%

3) 2009-2010 upfront pricing decline of 5% Scatter 22.5% Scatter 32.5% Scatter 25.0%

4) 2010-2011 upfront pricing increase of 9%

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.07 1.07 1.07 1.07 1.02 1.02 1.02 1.02 1.11 1.11 1.11 1.11

YoY change 7.0% 7.0% 7.0% 7.0% -5.0% -5.0% -5.0% -5.0% 9.0% 9.0% 9.0% 9.0%

Scatter pricing 1.12 1.10 1.12 1.18 1.27 1.32 1.27 1.37 1.50 1.55 1.50 1.50

Scatter-over-upfront 5.0% 2.5% 5.0% 10.0% 25.0% 30.0% 25.0% 35.0% 35.0% 40.0% 35.0% 35.0%

Scatter-over-scatter 13.1% 20.5% 13.1% 16.6% 17.7% 17.4% 17.7% 9.0%

Blended pricing 1.08 1.08 1.08 1.09 1.10 1.12 1.10 1.13 1.20 1.22 1.20 1.20

YoY change 1.6% 3.7% 1.6% 3.5% 9.6% 9.2% 9.6% 6.4%

Broadcast year 2008-09 Broadcast year 2009-10 Broadcast year 2010-11



41

Exhibit 48: DIS – Historical Scatter Pricing Commentary from Management (ABC Broadcast Network)


8-Feb-11 CY4Q10 Scatter pricing 24% above upfront levels In CY1Q11 (till date), scatter premium up 30%

11-Nov-10 CY3Q10 Network scatter premium over upfront up 23% In CY4Q10 (till date), ABC Network's scatter premium is up 22%

10-Aug-10 CY2Q10 At ABC Network, scatter premium up 33% So far scatter premium up almost 20%

11-May-10 CY1Q10 Scatter premium up more than 35% So far scatter premium up almost 30%

9-Feb-10 CY4Q09 Scatter premium up more than 20% In CY1Q10 (till date), scatter premium up almost 30%

12-Nov-09 CY3Q09 - So far network scatter premium up almost 20%

30-Jul-09 CY2Q09 - Well positioned for the scatter market

5-May-09 CY1Q09 Network Scatter premium modestly ahead of the up front -

3-Feb-09 CY4Q08- Scatter premium up by roughly 10%

- Significant YoY fall in scatter-over-scatter pricing

- Scatter pricing slightly above upfront pricing

- Scatter-over-scatter pricing YoY growth in high single digits

6-Nov-08 CY3Q08At ABC Network, scatter pricing running at low double digit

percentages ahead of upfront


Exhibit 49: DIS – Estimated Pricing Trend (ABC Broadcast Network)

Assumptions:

1) 2008 base case upfront pricing of 1.00 2008-09 Upfront/Scatter Mix 2009-10 Upfront/Scatter Mix 2010-11 Upfront/Scatter Mix



4) 2010-2011 upfront pricing increase of 8.5%

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.07 1.07 1.07 1.07 1.02 1.02 1.02 1.02 1.10 1.10 1.10 1.10

YoY change 7.0% 7.0% 7.0% 7.0% -5.0% -5.0% -5.0% -5.0% 8.5% 8.5% 8.5% 8.5%

Scatter pricing 1.18 1.12 1.12 1.15 1.22 1.37 1.35 1.25 1.37 1.43 1.38 1.38



Blended pricing 1.12 1.10 1.10 1.11 1.13 1.21 1.20 1.15 1.22 1.25 1.23 1.23

YoY change 0.4% 10.5% 9.5% 3.1% 8.3% 3.3% 2.2% 7.2%




42

Exhibit 50: DISCA – Historical Scatter Pricing Commentary from Management


11-Feb-11 CY4Q10 Scatter premiums in mid-20% range across networks Scatter pricing well above the upfront and ahead of C4Q10

2-Nov-10 CY3Q10

- YoY overall pricing up mid-single digits

- Scatter premiums over upfront averaging high-teens or more; low-

double digit growth YoY

-

3-Aug-10 CY2Q10

- YoY overall pricing up mid-single digits

- Scatter premiums averaging high teens or more; low-double digit

growth YoY

Scatter premium remains at about 15% plus

30-Apr-10 CY1Q10- Blended pricing slightly above the prior year

- Scatter premiums averaging high teens; mid-single digits growth YoY-

10-Feb-10 CY4Q09Scatter premiums in high teens to mid-20% range across networks;

sequential improvement of over 1000 basis pointsImproving scatter pricing

3-Nov-09 CY3Q09 Scatter premium below the prior year's 20-30% premium -

4-Aug-09 CY2Q09 Sequentially weaker scatter premium Scatter pricing at a premium to prior year upfront

4-May-09 CY1Q09 YoY decline in scatter premiums; however, above the upfront prices -

25-Feb-09 CY4Q08 YoY decline in scatter-over-scatter prices- Scatter premium remains in double digit, but with a narrowed gap

- YoY decline in scatter-over-scatter prices

7-Nov-08 CY3Q08 Scatter prices above upfront and year-ago levels -


Exhibit 51: DISCA – Estimated Pricing Trend

Assumptions:





4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.07 1.07 1.07 1.07 1.03 1.03 1.03 1.03 1.10 1.10 1.10 1.10

YoY change 7.0% 7.0% 7.0% 7.0% -4.0% -4.0% -4.0% -4.0% 7.5% 7.5% 7.5% 7.5%

Scatter pricing 1.23 1.15 1.12 1.12 1.21 1.21 1.24 1.25 1.35 1.36 1.35 1.35


Scatter-over-scatter -1.9% 5.4% 10.6% 11.1% 12.1% 12.5% 8.8% 8.4%

Blended pricing 1.15 1.11 1.10 1.10 1.13 1.13 1.15 1.15 1.22 1.23 1.22 1.22

YoY change -2.1% 1.7% 4.5% 4.7% 8.7% 8.8% 6.8% 6.5%




43

Exhibit 52: SNI – Historical Scatter Pricing Commentary from Management

Date Earnings Call Scatter vs. Scatter Scatter vs. Upfront

10-Feb-11 4Q10 Up mid-to-high teens in 4Q; up mid-to-high teens in 1QUp mid-to-high 20s over upfront; In 1Q up mid-20s over the most

recent upfront

4-Nov-10 3Q10 Up mid-to-high teens in 3Q; up mid-teens in 4Q Up 25-30% in 3Q; up low-to-mid 20s vs. new upfront in 4Q

9-Aug-10 2Q10 Up in the mid-to-high teens in 2Q; up mid teens in 3Q Up as much as 25% to 30% in 2Q

6-May-10 1Q10 Up high-single digits in 1Q; Up mid-teens in 2Q 2Q trending up 20-25%

10-Feb-10 4Q09 Down YoY in 4Q09 but now in the plus territory (mid-singles) in 1Q10 Up over upfront pricing

6-Nov-09 3Q09Seeing scatter pricing that is at or slightly above the level of last

year's scatter in 4QIn excess of mid-teens to high teens over upfronts in 4Q

6-Aug-09 2Q09 Scatter-to-scatter pricing was off YoY in 2QScatter-to-upfront pricing is holding at 4-5% above last year's upfront

in 3Q

8-May-09 1Q09Early in 1Q, scatter-to-scatter pricing declines were at 10-12%, but it

has been improving steadily (not quite flat yet)

Scatter pricing has continued to hold up well over upfronts; 2Q scatter

coming in a little better than upfronts

5-Feb-09 4Q08

- Scatter versus scatter for both networks is down compared to last

year's very hot scatter market. Food down ~8% and HGTV down ~12% in

1Q

- Across all networks, down ~10% in 1Q

Food up 11% over the upfronts; HGTV is ~flat in 1Q. Strategy is to

maintain scatter at or above upfront

29-Oct-08 3Q08 Scatter has softned in 4Q. Blended scatter pricing in 4Q up ~4% YoY -

24-Jul-08 2Q08 Moderated from a torrid pace in 1Q/2Q - up mid-single digits in 3Q Pacing at 20-25% better than last year's upfronts in 3Q


Exhibit 53: SNI – Estimated Pricing Trend

Assumptions:


2) 2008-2009 upfront pricing increase of 7.5% Upfront 50.0% Upfront 45.0% Upfront 50.0%



4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.08 1.08 1.08 1.08 1.02 1.02 1.02 1.02 1.10 1.10 1.10 1.10

YoY change 7.5% 7.5% 7.5% 7.5% -5.0% -5.0% -5.0% -5.0% 7.5% 7.5% 7.5% 7.5%

Scatter pricing 1.16 1.13 1.13 1.13 1.15 1.21 1.30 1.33 1.34 1.37 1.37 1.37


Scatter-over-scatter -0.6% 7.2% 15.4% 17.6% 17.1% 13.4% 5.4% 3.4%

Blended pricing 1.12 1.10 1.10 1.10 1.09 1.13 1.18 1.19 1.22 1.24 1.24 1.24

YoY change -2.1% 2.1% 6.7% 8.0% 11.9% 9.8% 5.0% 3.8%




44

Exhibit 54: TWX – Historical Scatter Pricing Commentary from Management


2-Feb-11 CY4Q10 -Strong scatter market with pricing up solid double digit over the

upfront

3-Nov-10 CY3Q10 - Scatter pricing up 15-20% over most recent upfront

4-Aug-10 CY2Q10 Scatter premium continues to be up in the 20-30% rangeRobust domestic Scatter pricing, with scatter premium up more

than 20%

5-May-10 CY1Q10 Scatter premium up 20% to 30%Strong scatter prices in CY2Q10, up more than 20% over the

upfront

3-Feb-10 CY4Q09 Strong scatter market -

4-Nov-09 CY3Q09 -- Scatter premium up in double-digits

- In CY4Q09, scatter-over-scatter up mid-single digits YoY

29-Jul-09 CY2Q09 Scatter pricing is about flat to up-front levels -

29-Apr-09 CY1Q09 - In CY2Q09, scatter pricing is about flat to upfront levels

4-Feb-09 CY4Q08 - In CY1Q09, scatter pricing is flat to slightly up over the upfront

7-Nov-08 CY3Q08 - Current scatter pricing modestly ahead of upfront pricing


Exhibit 55: TWX – Estimated Pricing Trend

Assumptions:





4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.07 1.07 1.07 1.07 1.02 1.02 1.02 1.02 1.10 1.10 1.10 1.10

YoY change 7.0% 7.0% 7.0% 7.0% -5.0% -5.0% -5.0% -5.0% 8.5% 8.5% 8.5% 8.5%

Scatter pricing 1.10 1.08 1.08 1.10 1.14 1.25 1.27 1.27 1.30 1.32 1.32 1.32



Blended pricing 1.08 1.07 1.07 1.08 1.08 1.14 1.15 1.15 1.19 1.21 1.21 1.21

YoY change -0.1% 5.8% 7.1% 6.4% 10.5% 6.1% 4.9% 4.9%




45

Exhibit 56: VIA – Historical Scatter Pricing Commentary from Management


3-Feb-11 CY1Q11 Scatter market remains strong Robust scatter market

11-Nov-10 CY3Q10 Scatter-to-upfront pricing up mid-20s on a %age basisQuarter-to-date (CY4Q10), scatter market strength is

continuing

5-Aug-10 CY2Q10 Scatter premium over upfront up mid teens Scatter Premium to continue at same level or a little better

29-Apr-10 CY1Q10 Strong scatter market -

11-Feb-10 CY4Q09 Scatter premium up double digits Scatter market remains strong

3-Nov-09 CY3Q09Scatter market active throughout CY3Q with increasing scatter

premiumsDouble-digit premiums over the upfront pricing

28-Jul-09 CY2Q09 Scatter market strengthening towards the end of CY2Q -

30-Apr-09 CY1Q09 - Stable scatter pricing to date

12-Feb-09 CY4Q08 - -

3-Nov-08 CY3Q08 - Strong scatter pricing


Exhibit 57: VIA – Estimated Pricing Trend

Assumptions:




4) 2010-2011 upfront pricing increase of 7%

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Upfront pricing 1.07 1.07 1.07 1.07 1.02 1.02 1.02 1.02 1.09 1.09 1.09 1.09

YoY change 7.0% 7.0% 7.0% 7.0% -5.0% -5.0% -5.0% -5.0% 7.0% 7.0% 7.0% 7.0%

Scatter pricing 1.10 1.10 1.11 1.10 1.13 1.15 1.18 1.27 1.28 1.31 1.31 1.36



Blended pricing 1.08 1.08 1.09 1.09 1.08 1.09 1.11 1.16 1.18 1.19 1.19 1.22

YoY change -0.2% 0.8% 2.0% 7.0% 9.3% 9.4% 7.7% 5.1%




46

NFL Lockout and the Upcoming Upfronts

Uncertainty Surrounding the NFL Lockout Will Likely Further Shift the Balance of Power Toward Networks In the Upfronts, and Turns the Process Into a Game of Five-Dimensional Chess Advertisers will likely have to plan as if there is no NFL season, despite their general belief (and ours) that there will in fact be a full season (or close to it). This will cause a feeding frenzy with respect to remaining GRPs, because NFL represents ~10%-20% of male 18-49 ratings points in 4Q10. Other male 18-49-targeted networks and programs (i.e. college sports) will likely be the beneficiaries.

Our industry sources indicate to us that one possibility will be taking some of the Saturday college football games that go unaired and instead airing them on Sunday. Another game could also be moved to Monday. While these games typically don’t approach audience reach of the NFL (they typically achieve ratings in the 50% range), they would give the networks at least some additional leverage.

Our sources tell us, however, that rather than simply putting the same number of dollars to work in lower-cost GRPs on alternative sports programming on broadcast or cable networks, the advertisers are likely to pull some money from network TV altogether. The simple explanation is that cable networks such as Spike or Discovery Channel have always been cheap relative to pro football. The NFL offers mass reach that simply can’t be replicated by accumulating lower-priced GRPs from a number of other sources. As a result, while some GRPs will get picked up by alternative platforms, we think network TV as a whole could ultimately stand to lose in overall dollars to a greater magnitude than any individual network will gain from an NFL work stoppage. In this case, digital platforms are likely to be a big beneficiary.

That’s not to say that buyers and advertisers will need to enter the upfront season with a contingency plan for reaching at least some of the viewers it could lose. But how will these advertisers hedge their bets? They will need to buy alternative sources of inventory in the event of a season cancellation but will likely not expect the season cancellation to occur. Procedurally then, what can they do?

Advertisers could place “phantom” buy commitments on alternative networks. That is, they could make commitments that they wouldn’t necessarily honor in the event that NFL inventory becomes available (assuming a season materializes). At first, this might seem like an impossible proposition because, as most students of network advertising know, it’s virtually impossible to cancel network TV advertising commitments during the first broadcast quarter (i.e. during calendar 4Q11). But this of course is contingent on those commitments being contractually written, as opposed to being committed to.

Why are we making a distinction here between making the commitment and writing the contracts? Because, as many investors do not know, there is typically a hold period of several months between the time the upfront commitment is made (typically around Memorial Day) and when contracts are actually signed (typically around Labor Day). So, cancellation after Labor Day is virtually impossible. But not honoring commitments before Labor Day (should the work stoppage be resolved) is possible. If the work stoppage is resolved between the time the upfronts “break” and when they are actually “inked” (the hold period), the scatter market could be negatively impacted.

Exhibit 58: Upfront Timeline

May June July August September October

Upfront "breaks" at end of May

"Hold period" -- upfront inventory commitments generally

are not yet contractually written during this time

New broadcast year beginsUpfront contracts are

"inked" in early September


We are relatively unconcerned by this potential situation because, while it’s technically possible to make phantom buys and cancel them, the relationship nature of the advertising business (according to both buyers and sellers in our channel checks) makes it very difficult and thus unlikely that an advertiser would choose not to honor a commitment. It would be very difficult, for instance, to see how an advertiser could cancel an upfront buy after making a phantom commitment and then expect to get fair treatment in the scatter market, or even future upfronts. It’s been described to us by both buyers and sellers simply as dirty pool.

That said, we think that network sellers will be working diligently to put into place far greater teeth on upfront commitments either by requiring earlier contractual execution than normal or by making it perfectly clear that phantom buys won’t be tolerated in the context of long-term business. Buyers, on the other hand, will likely seek to establish material adverse change clauses that would allow for on-the-fly advertising budget allocation changes, without penalty.


47

In general though, we think the uncertainty surrounding the NFL lockout will generally lead to the kind of inventory dynamics that will put increasing upward pricing pressure on upfront inventory. This will likely be compounded by the continual downward spiral in overall broadcast network audiences, which has created an odd paradox in which pricing keeps increasing as audiences continue to dwindle. The scarce commodity of network TV audiences and their necessity in marketing continue to give broadcast networks a tremendous amount of pricing leverage. In this context, we believe the outlook for low-teens upfront pricing increases and high-singles upfront volume increases, especially for the broadcast networks, look realistic.


48

Network TV Ratings Update – Surprise! Cable Taking Viewership Share From Broadcast After what seemed like a period of stabilizing broadcast network viewership share (vs. cable), in C1Q11, cable networks once again extended its viewership share gain at the expense of broadcast nets, giving more credibility to our secular bull thesis on cable networks.

Exhibit 59: Cable vs. Broadcast – 1Q11 A18-49 Ratings Share

43.842

40.6 39.638.2 38.6

36.5

31.3 31.3 32.1

28.1

33.936.3 37.6

39.6 40.6 39.542.1

46.3 47.1 47.3

51.2

0

10

20

30

40

50

60

1Q01 1Q02 1Q01 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

(Thru 20-

Mar-11)Broadcast Cable

Source: Nielsen

Broadcast network ratings were soft across the board with Fox being the only network to show YoY increase in the A18-49 primetime category (up 2%). Ratings at Fox were partially helped by American Idol, which accelerated beyond expectations after the first few weeks, but results were somewhat skewed by the Super Bowl – excluding the Super Bowl, Fox ratings would have been down YoY, and ratings growth at CBS (which had the Super Bowl in the prior year) would have been at least a few hundred bps better than what was reported. NBC faced tough comps given the Winter Olympics a year ago, and ratings excluding the Olympics may have been closer to flattish. At ABC, while some shows were working well, such as Wipeout and Dancing With The Stars, the aging of stalwarts like Grey’s Anatomy and the failure to generate a new big hit (No Ordinary Family stands out as a disappointment) continued to weigh heavily on the network. That said, of our coverage universe, Disney probably has relatively less to lose (or gain), as compared to its peers, from weakness (or strength) in the network TV side given its lower overall reliance on the broadcast network TV business. While C4Q10 broadcast network viewership had some support from robust NFL football viewership, we think the end of the football season as well as the networks’ inability to create new hits (CBS’s Bluebloods and Hawaii Five-0 have garnered some positive results, but there has not been much outside of that) have weighed down on overall broadcast networks ratings in C1Q11.

Exhibit 60: Broadcast Network 1Q11 Ratings

1Q11 4Q10 3Q10 2Q10 1Q10

NWS

FOX 2% -15% -10% 0% -2%

CBS

CBS -20% -1% -6% -4% 9%

DIS

ABC -12% -8% 13% 13% -14%

GE

NBC -32% 1% -5% 0% 7%

-24% excl. Winter Olympics

Note: Primetime, Adults 18-49.

Source: Nielsen


49

In terms of cable networks, Viacom continued to stand out. MTV ratings were up 60% in primetime for A18-34. MTV’s ratings “turn” continued to be about how Jersey Shore was able to lift the broader schedule. We believe the network is trying to reach beyond docudramas such as Jersey Shore (fourth season currently under production), and launch more scripted fare, giving the network a complexion more like other mainstream cable nets, and allowing it to have a much easier time carrying its momentum into 2012 and beyond. Other than MTV, BET was able post the first quarter of ratings gain after several quarters of declines and Comedy Central ratings also gained 15% in primetime A18-49 in C1Q11. While VH1 ratings continued to decline double-digits, a wholesale re-programming of the channel later in the year should help reverse that trend.

Disney’s portfolio was greatly aided by ESPN up 39% in primetime for A18-49, helped in no small part by exploding audiences for the BCS bowl games – ESPN carried five of the big 5 college bowl games in January versus none in the prior year. As for News Corp., FX had a very strong resurgence in ratings (up 20% in primetime A18-49) helped by new show launches. While there will likely be some lag between ratings gains and ad growth, the ratings gain in C1Q11 (if sustained at a certain level) should help C2Q11 results. At Time Warner (Turner), CNN benefited from a very strong news cycle with the tragic events in Japan and the socio-political unrest in the Middle East. We think the rebound in CNN ratings confirmed what media buyers have been telling us for a while – that the ratings issues at the network was more news cycle-related with the more extreme-leaning competitors (Fox News Channel and MSNBC) likely to gain in the absence of a major news cycle (war, hotly contested election, etc.).

Discovery saw some level of rebound in ratings at its flagship Discovery Channel, while TLC ratings were more or less at a stable level. ID continued its hot streak with primetime A18-49 ratings up 50% in the quarter. Recall that somewhat soft ratings across Discovery’s portfolio had a negative impact on 4Q10 ad growth – the improvement in overall ratings likely allowed for improvement in ad growth as well in C1Q11.

Scripps Networks’ two flagship channels (Food Network and HGTV) saw some level of stabilization in ratings after material declines in C4Q10 that led to the Company having to take reserves for potential future make-goods (resulting in a negative impact to 4Q10 ad growth). Travel Channel ratings continued to show solid gains - up 18% in day-part A18-49. We continue to keep a close eye on Food/HGTV ratings as the year progresses; while we’d like to see a stronger rebound in Food/HGTV ratings, media buyers indicate that, relative to other networks, Scripps Networks’ content is “clean,” with almost all programming friendly to advertisers, unlike programming at other hot networks like MTV.

Exhibit 61: Cable Network 1Q11 Ratings Summary 1Q11 Thru 3/20/11

Audience

Size (MM) Total Day1 Prime Time1

Sequential

Trend2

NWS

Fox News 0.197 -15% -20% Decline

FX 0.495 19% 20% Improvement

DIS

ESPN 0.605 20% 39% ImprovementESPN2 0.155 3% -10% StableABC Family 0.349 6% -5% Stable

VIA

MTV 0.330 23% 60% Improvement

VH1 0.187 -20% -21% ImprovementBET 0.243 7% 23% ImprovementComedy Central 0.359 2% 15% Stable

Nick 1.313 1% NA ImprovementNick At Night 0.611 -3% -3% Decline

DISCA

Discovery Channel 0.364 -4% 3% Improvement

TLC 0.270 -3% -6% StableAnimal Planet 0.158 -12% -7% DeclineID 0.169 36% 50% Stable

TWX

TNT 0.603 -5% 1% DeclineTBS 0.533 -8% -12% DeclineCNN 0.149 23% 27% Improvement

ADSM 0.710 5% 0% DeclineTOON 0.500 -15% NA Decline

SNI

Food 0.312 -7% -2% ImprovementHGTV 0.258 -6% -6% Stable

Travel 0.161 18% -4% Stable

1 Adults 18-49, except Nick and TOON (kids 2-11) and MTV (Adults 18-34).

2 Total Daypart vs. 4Q10

Source: Nielsen


50

Exhibit 62: Cable Network Quarterly YoY Ratings Trend

-45%

-25%

-5%

15%

35%

55%

75%F

ox N

ew

s

FX

ES

PN

ES

PN

2

AB

C F

am

ily

MT

V

VH

1

BE

T

Com

edy C

entr

al

Nic

k

Nic

k A

t N

ight

Dis

covery

Channel

TLC

Anim

al P

lanet

ID

TN

T

TB

S

CN

N

AD

SM

TO

ON

Food

HG

TV

Tra

vel

2Q10 3Q10 4Q10 1Q11 (Thru 20-Mar-11)

Source: Nielsen

Network TV Market Update – More Of The Same With Pricing Hot And Inventory Scarce Our most recent channel checks continue to sound a lot like what we have been hearing for the past 12 months. Strength is broad across almost all categories with no indication of a slowdown in auto. With rampant under-delivery in ratings and national dollars continuing to flood-in, the market place was among the tightest it has been in a decade, continuing to drive pricing up to nosebleed levels on minimal inventory. While broadcast network sell-outs are always in effect, cable networks tend to have more inventory availability, which generally goes to lower CPM generating direct response (DR), though we think overall market tightness has allowed cable nets to transition DR to more premium inventory. While networks continue to quote scatter-over-upfront pricing levels in the high-teens to 30%+ range (depending on the network), we think our channel checks with scatter-over-scatter pricing are more revealing of YoY pricing trends. These checks indicate scatter-over-scatter varies from the teens-to-20s range, depending on the network. As we expected, there was no material cancellation activity in the first quarter of 2011, and future cancellation activity appears minimal heading into option deadlines. Combined with an upfront-pricing increase in the high-single digit range and weak ratings, volumes for the first quarter of 2011 were likely up in the low to mid-single digits for broadcast networks and high single-digits for cable networks.

In terms of the outlook for the rest of the broadcast year, it seems as if we are seeing more of the same. With advertisers so far expressing little interest in C3Q11 cancellation options and ratings trends largely consistent with C1Q11, there is too much money chasing too little inventory. According to our channel checks with buyers and sellers alike, there is some caution in the market place, especially with respect to auto – should sales start dropping, it is entirely possible that national brands will pull back on advertising. At this point, however, there is nothing visible that would indicate any sort of slowdown. We think Turner and CBS were big beneficiaries in the first year of their new joint venture in broadcasting the NCAA basketball tournament.


51

Exhibit 63: Cable and Broadcast Networks – Summary Of Recent Management Commentary

NWS● Cable advertising revenues grew 17% while affiliates revenues increased 11%

● Currently, TV businesses benefiting from very strong advertising markets● Strong scatter market with pricing up more than 33% above the upfront

CBS

● Network advertising revenues grew 8% due to solid pricing gains in

primetime and sports

● Scatter pricing in the quarter was up 35%

● Robust scatter market pricing, up 40% above last year's upfront

DISCA● US Networks advertising revenues grew 13%

● International Networks advertising revenues were up 12%

● First quarter domestic ad sales to exceed fourth quarter levels

● Management encouraged by the improved pricing and ad trends

VIA ● Domestic advertising revenues grew 10% driven by strong scatter market ● Momentum/acceleration expected to continue into the C1Q11

TWX

● Cable networks advertising increased 21%● Domestic entertainment networks grew advertising strong double digits in

the quarter

● International network organic advertising revenue growth was in the high

single digits

● Management expects strong advertising growth in FY11

● Domestic scatter pricing remains very strong, up solid double digits over

the upfront

● Advertising trends are also very positive at international networks

DIS

● Ad revenue for ESPN came in 34% above prior-year, driven in part by strong demand for NFL programming

● Scatter pricing above 24% vs. upfronts

● C1Q11 scatter pacing up 30% above upfronts

● ESPN ad growth pacing up double-digits

CMCSA

● Cable revenue increased 6.9%

● Ad revenue was up 29.3%; up 10.2% excluding political revenues

● Improvements were driven by strength in automotive and political spending

● Integration of NBCU to provide new growth opportunities in advertising

and content

Cable/Broadcast Network


Local/Spot TV Market Update Overall local TV trends are slowing – channel checks indicate that local TV probably ended 1Q11 up in the low-to-mid single digit-range, in term of top-line growth. Remember, the comps are extremely difficult (local was up in the 20% range a year ago) and therefore low single-digit growth would be quite respectable and inline with our expectations generally. In fact, we would expect things to decelerate further into the back half of 2011, before the inevitable political “pop” in 2012. Local economies are finally starting to demonstrate some strength, giving positive potential for stabilization in the market longer term. Our channel checks also indicate that continued tightness in the national and network market could spill into the local TV market, offering some tailwind. This tailwind could offer upside to our current outlook. An overall strong local TV environment should be favorable to NWSA because it is disproportionately leveraged to local stations and RSNs (heavily leveraged to local ad sales), as well as CBS with its major presence in local TV.


52

Exhibit 64: Local Advertising – Summary Of Recent Management Commentary

Company C4Q10 Results C1Q11/CY11 Outlook

BLC

● 22% increase in spot revenue; Local spot revenue increased 1.2%, while national increased 7.1%

● Near record political revenue of $35.7● Automotive revenues increased 29% and financial services, telecommunications and grocery and food products experienced double digit growth

● Spot revenue excluding political to grow in 2011, but at a more moderate rate than in 2010● Difficult comps in C1Q11 due to Super bowl, Olympics and political revenues in C1Q10

TVL

● 24% increase in net revenues primarily driven by strong political advertising● $28.2 million of political revenue, representing 23% of total TV advertising revenues

● Automotive, Financial services, Lottery and gambling, Education and media communications increased 10%, 41%, 32%, 20% and 12% respectively

● C1Q11 net revenues expected to be flat to down 1% due to off political cycle

● Excluding political and the Olympics, net revenues to be up about 4%

JRN● Television revenues increased 32.1% driven by $9.4 million in political revenue● Strengthening in non-political revenue including improved automobile advertising

● Anticipates FY11 advertising revenue to decline to moderate and total revenue declines to mirror 2010

GCI

● 27% increase in total revenues ● $52 of political revenue ● Domestically, results were strong in auto and employment, while real estate continued to show

slower growth

● Expects total television revenues to be up in the very low single digits

NWS

● Local television station revenues increased 20%

● Revenues were driven by higher political spending and overall improved local advertising● Automotive advertising represented the next largest portion of revenue growth

● Local advertising trends point to a growing and stable market ahead

● Supported by sturdy auto, telecom, and financial advertising demands

DIS ● Ad revenue at TV stations up 20%, driven by higher political advertising demand ● Pacing up double-digits

CBS● Television stations advertisings up 28%

● Strength in television was broad-based led by political spending and automotive

● Optimistic outlook for local business in FY2011, even without the Super Bowl or political

● TV stations' advertising revenues are pacing to be flat

MNI● Advertising and circulation revenues declined 6.9% and 3.3% respectively

● Print Advertising weakness was driven by 8.4% and 18.7% declines in retail and real estate● Classified revenues were down 6.6% due to weakness in real estate and automotives

● Both national and retail advertising decline expected to be more than that in the fourth quarter

NYT

● Print advertising declined 7%; circulation revenues down 4%● By total advertising category, national and retail revenues were each down 2%, classified was

down 8%

● Limited visibility; advertising revenues continue to be highly volatile

● Circulation revenues expected to decrease in line with the declines experienced in the 2H10

GCI● Publishing revenues were down in the mid single digits● In US, Classified advertising declined by just 2% as auto and employment were up 7% and

10% respectively

● Revenues are expected to grow positively year on year

JRN

● Daily newspaper revenues increased 5.3%

● National advertising up 11.3%, benefiting from a range of categories.● Classified revenues were down 11% mainly due to weakness in real estate, which declined

35.8%

● Anticipates FY11 publishing revenue to decline to moderate and total revenue declines to mirror 2010

ETM

● Net Revenues increased by 6%

● National revenues continued to be strong while local revenues started to accelerate● Digital revenues continued to post robust growth, up close to 50%● Political revenues were $3.3 for the quarter

● Management quite optimistic about business for 2011, expects recovery in local ad spending

CMLS

● Revenues up only slightly to $69.8 million; ex one-time non-cash revenue event in Q409 revenues up 6.2%

● Apart from political, continued strength exhibited nationally, with auto, education, insurance, home improvement, and restaurants driving local revenues

● With respect to C1Q11, CMI's revenues currently pacing at 2.5% up, while CMP's up at 3%

JRN● Radio revenues increased 0.2%● Strengthening in non-political revenue including improved automobile advertising

● Anticipates FY11 advertising revenue to decline to moderate and total revenue declines to mirror 2010

MDP

● Reported 14% increase in total Company ad revenue; 30% growth in Local Media Group ad revenue, including $22 million in net political advertising, while National Media Group increased

by 5%● Achieved increase in net advertising revenue per magazine page; Online advertising revenues

grew more than 30%

● National Media Group advertising revenues increase is expected to be in the mid single digits

for C1Q11

MSO

● Revenue from Publishing segment, including print and digital, was down to $44.6 million compared to $47.6 million in the prior year quarter

● Excluding the Weddings issue, print advertising revenue down $2.5 million and circulation revenue down $0.5 million

● FY2011 EBITDA estimates at ~$30 million, representing at least 15% growth● In C1Q11, Publishing revenue expected to be up low single digits, with print ad revenue growth

in a similar range and digital ad revenue growth a bit higher

Magazine

Local TV

Newspapers

Radio



53

2011 Box Office Season – Starting The Year With A Whimper…Not Expecting Much Until The Summer Whereas last year’s box office season started with a roar (with several blockbuster releases such as Alice in Wonderland and carry-over of Avatar from 4Q09), the start to the 2011 box office season has been a disappointment for the most part, with just two releases in 1Q11 barely making more than $100 million at the domestic box office (versus four film releases in 1Q10 making more than $100 million at the domestic box). 1Q11 domestic box office receipts were down a whopping 21% YoY partly due to extremely difficult comps and partly due to lower-than-expected performance from the quarter’s releases. This follows a disappointing 4Q10 when domestic box office receipts were down 10% YoY after three relatively decent quarters. Major Hollywood studios seem to have hit a slump in terms of being able to produce major hits, and we may have to wait till the summer to see a “turn” in fortunes.

Exhibit 65: 1Q10 vs. 1Q11 Tentpole Comparison

Release Date Movie Title Studio

Domestic

BO (mm) Release Date Movie Title Studio

Domestic

BO (mm)

26-Mar-10 How to Train Your Dragon P/DW $217.6 4-Mar-11 Rango Par. $113.8

5-Mar-10 Alice in Wonderland (2010) BV $334.2 11-Feb-11 Just Go With It Sony $101.4

19-Feb-10 Shutter Island Par. $128.0 11-Feb-11 Gnomeo and Juliet BV $96.9

12-Feb-10 Percy Jackson & The Olympians: The Lightning ThiefFox $88.8 14-Jan-11 The Green Hornet Sony $98.3

12-Feb-10 Valentine's Day WB $110.5

15-Jan-10 The Book of Eli WB $94.8

Total $973.9 Total $410.3

1Q11 Tentpoles1Q10 Tentpoles

1Q11 Tentpoles were a disappointment overall with a decline of ~60% over the prior year

“Tentpoles” included films that made (or are expected to make) at least $85 million at the domestic box office. Source: Boxofficemojo.com, RBCCM research

Exhibit 66: Quarterly Domestic Box Office Trend (in mm)

$1,900

$2,000

$2,100

$2,200

$2,300

$2,400

$2,500

$2,600

$2,700

$2,800

$2,900

1Q 2Q 3Q 4Q 1Q

2009 Domestic Box 2010 Domestic Box 2011 Domestic Box

Source: Boxoffice.com, RBCCM research

A closer look at the monthly domestic box office performance shows that the box office slump has persisted for quite some time now – on a monthly basis, each month since July 2010 was down YoY. The stellar performance in July 2010 – which was helped by Toy

Story 3, The Twilight Saga: Eclipse, Inception, Despicable Me, etc. – faded quickly throughout the rest of 2010 and into 2011. As detailed in our 4Q10 preview note on January 21 titled A New Détente In OTT?: RBC Media, Entertainment & Advertising Update, the 2010 winter holiday box office season was a huge disappointment and so far it seems like major Hollywood studios haven’t been able to buck the negative trend in 2011.


54

Exhibit 67: Monthly Domestic Box Office Trend (in mm)

4.3%

-2.0%

28.1%

8.2%

-11.0%

-3.0%

13.0%

-3.6%-0.3% -0.5%

-9.3%

-16.9%

-28.7%

-12.6%

-17.9%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Januar

y

Febru

ary

Mar

chApr

ilM

ayJu

neJu

ly

August

Septe

mber

Oct

ober

Novem

ber

Decem

ber

Januar

y

Febru

ary

Mar

ch

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2009 Domestic Box 2010 Domestic Box 2011 Domestic Box YoY Change

Source: Boxoffice.com

Solid International Box Office Saved The Studios In 2010 And 2011 Will Likely Continue To Show Solid Over-Indexing Internationally Despite a soft finish to the year at the domestic box office in 2010, it was overall another solid year in terms of “over-indexing” of tentpole films internationally. In 2010, the weighted average domestic-to-international box office conversion was a healthy 1.43x (for films that generated over $85 million at the domestic box office). We had noted in the past that Hollywood is becoming increasingly focused on action/adventure tentpole franchises as they tend to perform much better at the international box office, with domestic-to-international box conversion often over 2x. Our industry sources also indicate that the build-out of theaters abroad (especially in emerging markets) over the past few years has helped increase attendance in those regions, and Hollywood studios are simply taking advantage of this trend by focusing more on culturally neutral action/adventure movies.

• As we’ve noted in the past, comedies tend to perform poorly at the international box office likely given their strong ties to American culture and the fact that it’s difficult to translate humor; with the exception of Sex and the City 2, this year’s major comedy releases (Grown Ups, The Other Guys, Date Night, Due Date) indexed at much less than the average internationally, proving our point. However, comedies tend to cost much less than $100 million to make, compared to large action tentpoles that could cost well over $150 million, making the global box office “hurdle” for profitability generally lower for comedies.

• Given the earthquake in Japan, we think overall international box office receipts could see a minor negative impact for the next few months. Japan is known to be a major consumer of Hollywood entertainment content, and while studios appear to be releasing films in the country, largely on schedule, we think some level of disruption is inevitable.

• In 2010, the weighted average domestic-to-international box office conversion was 1.43x, improving further from 2009 (~1.25x in 2009 excluding Avatar), and steadily increasing from ~1.2x in 2005. We’d note that so far in 2011, given the limited number of theatrical releases (and the sheer lack of tentpoles), it’s difficult to accurately assess international box office performance. However, we don’t have any reason to believe that the positive international box office conversion trend has ceased to continue.


55

Exhibit 68: Solid Over-Indexing at the Int’l Box

1.15x

1.20x

1.25x

1.30x

1.35x

1.40x

1.45x

2005 2006 2007 2008 2009 2010

Excluding

Avatar

Includes films that generated $85 million+ at the domestic box office Source: Boxofficemojo.com, RBCCM research

While it’s difficult to accurately measure the ultimate profitability of a film based on box office figures and production costs (pre-sold international distribution rights, P&A spend, etc., complicate matters), as a rule of thumb, we generally think a film breaks even if it makes the equivalent of ~2–2.5x production budget at the global box office. This, of course, is more art than science and every film is different depending on financing arrangements, etc. In 2010, the weighted average worldwide box-to-production budget ratio has been ~3.7x, well ahead of our estimated 2–2.5x profitability hurdle. With the exception of just a few films, we think the majority of the tentpole films released in 2010 were quite profitable, especially given strong over-indexing internationally. While the ultimate profitability of yet-to-be-released films in 2011 is difficult to predict, as long as international strength continues to boost global box office receipts, we think major films should be able to sustain a similar level of profitability to what they enjoyed in 2010. We’d note that the two exhibits below are based on 2010 releases as data for 2011 so far is somewhat limited.

Exhibit 69: 2010 Box Office vs. Production Budget ($ in mm)

$0

$200

$400

$600

$800

$1,000

$1,200

Domestic Box Office International Box Office Production Cost



56

Exhibit 70: 2010 Global Box Office-to-Production Cost Ratio

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

Toy S

tory

3

Alice

in W

onde

rland

(201

0)

Iron

Man

2

The T

wilig

ht S

aga:

Eclipse

Har

ry P

otte

r and

the

Dea

thly H

allows: P

art I

Ince

ption

Des

pica

ble

Me

Shrek

For

ever

Afte

r

How

to T

rain Y

our D

rago

n

Tangled

The K

arat

e Kid

TRON: L

egac

y

True

Grit

(201

0)

Clash

of t

he T

itans

(201

0)

Gro

wn

Ups

Little

Focke

rs

Meg

amind

The K

ing's

Speec

h

The L

ast A

irben

der

Shutte

r Islan

d

The O

ther

Guy

sSal

t

Jack

ass 3D

Valen

tine's Day

Black

Swan

Rob

in H

ood

The C

hron

icles of

Nar

nia:

The

Voy

age

of th

e Daw

n Tre

ader

The E

xpen

dables

Due

Dat

e

Yogi B

ear

Dat

e Night

The S

ocia

l Net

wor

k

Sex a

nd th

e City

2

The B

ook of

Eli

The F

ight

er

The T

own

Prince

of P

ersia

: The

San

ds o

f Tim

e

Red

(201

0)

Percy

Jac

kson

& T

he O

lym

pian

s: T

he L

ight

ning

Thi

ef

Estimated

profitability hurdle


Premium VOD Window Could Be An Incremental Positive For The Studios Recent media reports indicate that the much anticipated premium VOD service/window (eight weeks after theatrical release) is expected to launch in late April on DirecTV and Comcast, with Warner Bros., Universal Pictures, and 20th Century Fox as studio partners. Time Warner Cable, an early supporter of the idea, is also expected to launch a premium VOD service sometime in the summer with studio partner Disney in trials right now with the service. The price point for the service is reported to be $30 per view – roughly equivalent to four movie theater tickets. The premium VOD service could initially include Sony Pictures’ Just Go With It, 20th Century Fox’s low-budget comedy Cedar Rapids and Universal Pictures’ The Adjustment Bureau or Paul, and Warner Bros.’ Hall

Pass and/or Red Riding Hood. The films on the service would reportedly be ones that have already disappeared from theaters early on and appeal largely to adults who rarely rush out to see movies in the first few weeks. While theater operators are understandably unhappy with this new VOD service, at this point it’s difficult to tell what the consumer uptake of a such a service would be (and whether it will have a material impact on box office receipts), especially as $30 could be considered a pretty hefty price tag. Given that the vast majority of the box office receipts are already made in the first eight weeks of release, and only a select number of films will actually enter the “premium VOD” window, we think the service could be a modest incremental positive for the studios, but unlikely to have a major impact (at least in the early stages of the service roll-out). In the coming months, we will keep a close eye on the potential impact premium VOD has on studio results as well as “windowing” of theatrical content.

• We think the premium VOD service could strengthen the relationship between pay TV operators and media conglomerates (who own both the major studios as well as the major cable network groups), helping to strengthen/preserve the existing TV ecosystem.


57

Large-cap Media Company Notes


58

Summary of Estimate Changes

Exhibit 71: Summary of Estimate Changes for Large-cap Media Companies Previewed in This Note

($ in mm except per share amt)

Estimate Changes Estimate ChangesCompany Period Metric New Est. Prior Est. Consensus Period Metric New Est. Prior Est. Consensus

DIS F2Q11 Revenue 9,201 9,411 9,149 FY2011 Revenue 40,988 41,598 41,075

Segment EBIT 2,032 2,118 N/A Segment EBIT 9,276 9,504 N/A

EPS $0.58 $0.61 $0.57 EPS $2.67 $2.71 $2.65

Comments:

DISCA 1Q11 Revenue 933 933 938 2011 Revenue 4,049 4,049 4,066Adjusted OIBDA 413 413 N/A Adjusted OIBDA 1,866 1,866 N/A

EPS $0.49 $0.49 $0.46 EPS $2.32 $2.32 $2.27

Comments:

NWSA F3Q11 Revenue 8,372 8,492 8,433 FY2011 Revenue 32,788 32,812 33,024

Segment EBIT 1,171 1,236 1,219 Segment EBIT 4,906 4,922 4,919EPS $0.27 $0.29 $0.28 EPS $1.13 $1.14 $1.12

FY2012 Revenue 34,095 34,216 34,735

Segment EBIT 5,716 5,721 5,717

EPS $1.37 $1.37 $1.32

Comments:

SNI 1Q11 Revenue 528 528 524 2011 Revenue 2,299 2,299 2,275EBITDA 235 235 230 EBITDA 1,060 1,060 1,054

EPS $0.59 $0.62 $0.60 EPS $2.74 $2.85 $2.79

Comments:

TWX 1Q11 Revenue 6,477 6,605 6,532 2011 Revenue 28,148 28,197 28,350

Segment EBIT 1,248 1,292 1,321 Segment EBIT 5,804 5,775 5,889EPS $0.55 $0.57 $0.58 EPS $2.73 $2.71 $2.74

Comments:

VIA'B F2Q11 Revenue 2,924 2,915 2,971 FY2011 Revenue 13,757 13,663 13,985

Segment EBIT 688 687 664 Segment EBIT 3,640 3,618 3,597

EPS $0.64 $0.64 $0.60 EPS $3.53 $3.51 $3.44

Comments: Management has guided to double-digit domestic ad growth in Media Networks, and we think domestic ad growth accelerated sequentially despite the

shift of Teen Choice Awards and Easter out of F2Q and into F3Q. Filmed Entertainment comps were generally favorable in the quarter and we think

Street estimates for the segment could be revised higher over the next few weeks. Our EPS estimates for F2Q11 and FY11 remain above consensus,

and our newly introduced FY12 EPS estimate of $4.11 is also significantly above consensus, despite it being based on what we think are relatively

conservative assumptions.

We’re lowering estimates primarily to account for tough Studio comps as well as impact of the Japan earthquake, though the ~$200mm Netflix deal

should give some wiggle room for calendar 2011 performance – the Netflix payment could add up to $0.07 of EPS on a full-year basis, which we haven’t

explicitly modeled. The theatrical release slate for the next few weeks looks somewhat uninteresting until the release of Cars 2 and the next instalment

of Pirates in the summer. There's likely upside bias to Cable Networks results as ESPN ratings have been strong (especially with respect to the BCS

bowl games).

1Q11 ratings trend at Discovery’s major networks appear to have progressed generally inline-to-slightly better than what we were previously expecting,

and therefore while we’re maintaining our 1Q11 domestic ad growth forecast of 15%, we think bias is to the upside. Our margin and EPS estimates are

above consensus as we think Street estimates don’t fully reflect the “add back” of $17mm in non-recurring above-the-line charges in the YoY comp.

While return of capital to shareholders isn’t a top priority for management currently, given the share price performance in 1Q11, we wonder if the

Company was more aggressive with stock buybacks in the quarter.

Filmed Entertainment faced one of the toughest comps in F3Q11 as the bulk of the Avatar box office receipts came in the prior year quarter and the

performance of F3Q11 theatrical releases were somewhat mediocre. We’re revising our F3Q estimates lower to reflect the extremely tough studio

comps as well as the continued "drag" from MySpace. Overall F4Q results should improve materially from F3Q, largely given that much of difficult Avatar comp will have lapped by then. NWSA is more of a “FY12 story”, in our view, as comps become easy (potential MySpace loss reversal,

DISH/Cablevision blackout related loss reversal) and potential consolidation/acquisition of BSkyB could be highly accretive.

Results for Turner networks in 1Q11 were likely “skewed” due to the first year of NCAA basketball tournament – we think there’s limited downside risk to

management’s prior commentary that 1Q11 Media Networks adjusted operating income should grow modestly YoY. Currenlty, investors appear to be to

much more focused on the potential risks to HBO than the positive fundamentals of the advertising market. We’re taking 1Q11 estimates lower largely

on difficult comps in Filmed Entertainment (and the Street may have to bring estimates down as well), but our FY11 estimates are revised slightly higher

as Filmed Entertainment segment results will likely improve drastically in 2H with more tentpole releases.

Advertising/ratings trends at Scripps’ major networks appear to have progressed basically inline with what we were previously expecting in 1Q11, and

therefore we’re maintaining our prior above-the-line estimates for 1Q11 and FY11. We’re lowering our EPS estimates (for 1Q11 and FY11) to account

for the increased minority expense arising from Tribune restoring its ownership stake in Food/Cooking partnership to 31% (from 25%) – we’d note that

this was largely already expected.

Source: RBC Capital Market estimates


59

Large-cap Media Comp Table

Exhibit 72: Large-cap Media Comp Table

Ticker NWSA DIS VIA'B TWX DISCA SNI CBS

Company

News

Corporation Walt Disney Viacom Time Warner

Discovery

Comm.

Scripps

Networks

CBS

Corporation

Price as of:

2011/04/06 $18.65 $42.27 $47.36 $36.24 $40.33 $51.02 $24.51

Class A NWS Shares $17.56

50 Day Average Volume 16,426,165 10,545,569 3,892,301 9,158,728 1,574,753 1,096,953 11,312,609

ENT. VALUE CALCULATION

Diluted Shares Outstanding 2,624,978 1,924,894 598,193 1,092,833 414,064 169,220 675,978

Diluted Equity Market Cap $46,965,002 $81,365,288 $28,330,439 $39,604,270 $15,789,127 $8,576,070 $16,568,231

Total Enterprise Value $43,667,988 $91,900,434 $34,283,439 $50,699,270 $17,648,127 $9,166,153 $22,089,031

KEY FINANCIAL METRICS

Net Revenues

2009A 30,926,000 36,289,000 13,619,000 19,970,000 3,516,000 1,546,689 13,014,600

2010A 33,082,000 39,040,000 13,245,000 20,522,000 3,783,000 2,067,162 14,059,800

2011E 33,588,711 41,699,786 13,887,902 21,391,810 4,048,933 2,299,157 14,507,220

EBITDA

2009A 5,092,000 7,765,000 3,295,000 5,418,000 1,204,000 601,700 1,803,700

2010A 5,763,000 9,166,000 3,504,000 6,366,000 1,517,000 873,836 2,378,600

2011E 6,457,364 10,303,683 4,028,817 6,756,559 1,766,356 1,059,615 2,753,530

EPS

2009A $0.78 $1.94 $2.56 $1.83 $1.25 $1.65 $0.50

2010A $1.17 $2.29 $2.86 $2.41 $1.74 $2.39 $1.11

2011E $1.25 $2.68 $3.66 $2.73 $2.32 $2.74 $1.54

TRADING/VALUATION MULTIPLES Average

EV/2009A EBITDA 8.6x 11.8x 10.4x 9.4x 14.7x 15.2x 12.2x 11.8x

EV/2010A EBITDA 7.6x 10.0x 9.8x 8.0x 11.6x 10.5x 9.3x 9.5x

EV/2011E EBITDA 6.8x 8.9x 8.5x 7.5x 10.0x 8.7x 8.0x 8.3x

Price/2009A Earnings 22.4x 21.8x 18.5x 19.8x 32.3x 30.9x 49.0x 27.8x

Price/2010A Earnings 15.0x 18.4x 16.6x 15.1x 23.2x 21.3x 22.1x 18.8x

Price/2011E Earnings 14.0x 15.8x 12.9x 13.3x 17.4x 18.6x 15.9x 15.4x

Figures in thousands, except per share data. All multiples based on calendar year estimates/consensus. Source: Company reports, RBC Capital Market estimates (NWSA, DIS, VIA’B, TWX, DISCA, SNI), Thomson One Analytics (CBS)


60

The Walt Disney Company (NYSE: DIS)

ESPN Likely Continued To Perform Like a Champ in F2Q11; Earthquake in Japan Could Have a Modest Negative Impact

Outperform, Average Risk

Price: 42.27 Price Target: 48.00

Implied All-in Return: 15%

Shares O/S (MM): 1,917.0 Market Cap (MM): 81,032

Dividend: 0.40 Yield: 0.9%

ROE: 12.36% Avg. Daily Volume (MM): 10.34

Float (MM): 1,760.0 3-Yr. Est. EPS Growth: 19.8% Institutional Ownership: 69%

Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2E Q3E Q4E 2011E 2012E

Revenue (B) $9.6 $8.1 $8.6 $9.9 $36.1 $9.7 $8.6 $10.0 $9.7 $38.0 $10.7 $9.2 $10.6 $10.5 $41.0 $43.8

Prev. $9.4 $10.8 $10.6 $41.6 N/A

EPS (Op) - FD $0.41 $0.43 $0.52 $0.46 $1.82 $0.47 $0.48 $0.67 $0.45 $2.08 $0.68 $0.58 $0.85 $0.57 $2.67 $3.03

Prev. $0.61 $0.86 $0.58 $2.73 N/A

Source: Company reports, RBC Capital Markets estimates

Investment Opinion

Estimates Revised Lower To Account for Tough Theatrical Comps and Minor Negative Impact from the Earthquake in Japan; F2Q11 Was Likely Another Solid Quarter for ESPN, In Part Due To the College Bowl Games Advertising appears to have remained steady across all of Disney’s TV assets in F2Q11, and we think Disney’s overall business trends held up well as the overall macro environment continued to improve. ESPN likely had another great quarter with ratings improving sequentially and additional carriage of the college bowl games. The studio’s theatrical releases were somewhat disappointing as Mars

Needs Moms underperformed even lowered expectations with less than $25 million in domestic box office receipts and comps are especially tough given Alice in Wonderland, released in the prior-year quarter, eventually made over $1bn in global box office. The theatrical release slate for the next few weeks looks somewhat uninteresting until the release of Cars 2 and the next instalment of Pirates in the summer. The Parks business continued to show signs of improving trends, and the new cruise ship should begin to help results. We’re lowering estimates primarily to account for tough Studio comps as well as the impact of the Japan earthquake, though the ~$200mm Netflix deal (announced in early December) should give some wiggle room for calendar 2011 performance – the Netflix payment could add up to $0.07 of EPS on a full-year basis, which we haven’t explicitly modeled. We believe Disney remains a best-of-breed media/entertainment company that 1) is benefitting from continued favorable advertising trends (and strong ESPN ratings), 2) is transitioning to a much stronger part of the content cycle in its studio business, and 3) will likely benefit from a late-cycle turn at the Parks. One caveat is how the NFL lockout could impact business – that said, even if it does, it would be temporary. We are maintaining our Outperform rating, $48 price target.

Minor Negative Impact from the Earthquake in Japan Disney’s exposure to Japan includes mainly theatrical content, Consumer Products (Disney operates 38 stores in the country) and theme parks (for which Disney collects royalty fees). Given the disruption from the earthquake, we think some level of negative impact on results is inevitable in F2Q and F3Q11. The biggest impact will likely be felt on the Parks business where the temporary shutdown of the park in Japan (since March 12) will most certainly have an impact on the royalties Disney collects. In FY10, Disney received ~$240mm of high margin royalty fees related to the park business in Japan – this implies that, on average, every day the Park in Japan is closed, Disney is missing out on ~$0.7mm/day of high-margin royalty revenue. Of the ~38 Disney stores, we believe a few suffered physical damage from the earthquake, which will likely have some level of negative impact on sales. Japan is known to be a major consumer of Hollywood entertainment content, and while studios (including Disney) appear to be releasing films in the country, largely on schedule (Tangled was released the weekend after the earthquake), we think some level of disruption is inevitable.

Expecting Another Quarter of Solid Results from the Cable Nets (ESPN) ESPN advertising was up a whopping 34% in F1Q11 (27% excluding the extra two bowl games), outperforming its competitors by a wide shot. With the overall network TV pricing environment as strong as it’s ever been, and ESPN ratings continuing to show solid gains (A18-49 primetime ratings were up 39% in F2Q), we think ESPN ought to be able to continue to outperform its cable network peers in ad growth by at least a few hundred bps each quarter. Ad growth in F2Q11 was likely further supported by the college bowl

125 WEEKS 21NOV08 - 6APR11HI-4MAR11

LO/HI DIFF

124.867

47.21%

LO-6FEB09 84.823

CLOSE 119.891

DISNEY Rel. S&P 500

90.00

100.00

110.00

120.00

N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A2009 2010 2011

HI-4MAR11

LO/HI DIFF

44.340

192.87%

LO-13MAR09 15.140

CLOSE 42.270

DISNEY

20.00

25.00

30.00

35.00

40.00

PEAK VOL.

VOLUME

147485.2

22258.2 40000

80000

120000


61

games; ESPN showed all five of the big five bowl games in January 2011 vs. none in the prior year, and the BCS Championship game in January garnered 27.3mm viewers, making it cable’s biggest audience in history, and demonstrating the strength of the college bowl franchise. In terms of affiliate fees, we’re expecting stable single-digit growth for at least the next few quarters. With no new noteworthy events (other than perhaps the five bowl games), programming expense growth was likely largely stable, allowing for meaningful margin expansion, though we continue to keep a close eye on future margins at the Cable Networks and the impact of increasing sports rights fees.

The Theatrical Releases in the Quarter Were Generally Disappointing and Comps Were Especially Difficult With Alice in the Prior Year Mars Needs Moms (released March 11) was a huge disappointment, making less than $25mm at the domestic box office on a relatively large production budget of ~$150mm. Much of the costs of the film were probably already written off in F1Q11; however, the film likely underperformed even the studio’s lowered expectations, potentially warranting a further write-off in F2Q. Further, the box office performance of the other two releases in the quarter (I Am Number Four and Gnomeo & Juliet) were somewhat uninspiring. Comps in F2Q11 were also extremely difficult as Alice in Wonderland from a year ago ended up making over $1 billion at the global box office. Investors will likely have to wait until F3Q11 when summer tentpoles Cars 2 and Pirates of the Caribbean: On Stranger

Tide are released, in order to get greater confidence in Disney’s renewed content cycle. We’re lowering Studio Entertainment estimates to account for the lacklustre box office performance in the quarter.

Exhibit 73: YoY Studio Box Office Comparison (units in mm)

F1Q10A F1Q11A

Title Release Dom. B.O Int'l B.O. Production Cost Title Release Dom. B.O Int'l B.O. Production Cost

Everybody's Fine 4-Dec-09 $9.2 $7.2 $21.0 Tron: Legacy 17-Dec-10 $171.7 $225.5 $170.0

The Princess and the Frog 25-Nov-09 $104.4 $162.6 $105.0 The Tempest 10-Dec-10 $0.3 $0.3 $20.0

Old Dogs 25-Nov-09 $49.5 $47.3 $35.0 Tangled 24-Nov-10 $197.1 $354.8 $260.0

A Christmas Carol 6-Nov-09 $137.9 $187.4 $200.0 Secretariat 8-Oct-10 $59.7 $59.7 $35.0

Toy Story / Toy Story 2 (3D) 2-Oct-09 $30.7 $1.6 NA

Total $331.7 $406.1 Total $428.8 $640.3

F2Q10A F2Q11E


The Last Song 31-Mar-10 $63.0 $26.1 $20.0 Mars Needs Moms (in 3D) 11-Mar-11 $23.7 $23.7 $150.0

Waking Sleeping Beauty 26-Mar-10 $0.1 $0.0 NA I Am Number Four 18-Feb-11 $52.7 $57.3 $60.0

Alice in Wonderland 5-Mar-10 $334.2 $690.1 $200.0 Gnomeo & Juliet (in 3-D) 11-Feb-11 $93.7 $53.5 NA

When in Rome 29-Jan-10 $32.7 $10.4 NA

Total $429.9 $726.6 Total $170.1 $134.5

F3Q10A F3Q11E


Toy Story 3 18-Jun-10 $415.0 $648.2 $200.0 Cars 2 24-Jun-11 $246.0 $246.0 NA

Prince of Persia: The Sands of Time 28-May-10 $90.8 $244.4 $200.0 Pirates of the Caribbean: On Stranger Tides (3D) 20-May-11 $239.2 $239.2 NA

Iron Man 2 7-May-10 $312.1 $309.6 $200.0 Prom 29-Apr-11 $36.7 $36.7 NA

Oceans 22-Apr-10 $19.4 $63.1 $80.0 African Cats 22-Apr-11 $8.3 $8.3 NA

Total $837.3 $1,265.3 Total $530.2 $530.2

Note: box office figures represent the total reported (or expected) box office receipts of the particular film, and not the box office receipts made in the particular quarter

Source: boxofficemojo.com, HSX.com

Core Parks Trends Likely Continued to Improve Modestly in F2Q11 F1Q11 appears to have been the “turn” investors were looking for in the domestic Parks business as resort occupancy improved 400bps YoY, Parks attendance was up 2% YoY, and per cap spending was up 8% YoY. We believe the core business continued to improve modestly in F2Q11, and Smith Travel Research data over the past few months indicate that hotel metrics in the Orlando region have generally continued to improve over the past few months, with February (the latest available data) showing strong growth in both ADR and occupancy across several Disney Parks-related sub-regions within Orlando. The launch of a cruise ship in the quarter should also begin to help results as the fundamentals of the cruise ship business have been robust overall. We’re taking estimates for the segment slightly lower to account for increased depreciation (related to the ramp in capex over the past few quarters) as well as impact from lower royalty fees from Japan.


62

Exhibit 74: Orlando Hotel Monthly ADR & Occupancy Growth Trend

Orlando Hotel ADR Growth

Area Jun Jul Aug Sep Oct Nov Dec Jan Feb

Metro Orlando 2.1% 3.6% 6.4% 4.2% 2.3% 1.0% 10.2% -0.4% 12.3%

Orlando North -4.1% -3.9% -3.2% -7.0% -6.0% -5.7% -2.3% -0.1% 12.2%

Orlando Central -5.9% -1.1% 0.4% -1.9% -8.2% -4.0% -3.4% -1.1% 19.3%Orlando South 0.4% 1.0% -2.5% -4.2% -6.6% -0.7% 6.8% -1.0% 2.5%International Drive 5.0% 7.1% 12.8% 13.3% 10.9% 4.9% 21.0% 3.4% 16.2%

Lake Buena Vista -4.4% 1.8% 4.1% 3.0% -0.9% 2.4% 4.8% -3.0% 10.3%

Kissimmee East 6.4% 0.3% 5.7% -10.1% -8.6% -17.7% 3.8% -0.8% 10.9%

Kissimmee West -4.2% 2.7% 0.6% 1.1% -2.3% -3.8% 0.9% -6.0% 12.4%

Orlando Hotel Occupancy Growth

Area Jun Jul Aug Sep Oct Nov Dec Jan Feb

Metro Orlando 4.2% 6.8% 4.3% 12.3% 10.1% 13.5% 11.9% 0.6% 7.7%

Orlando North 1.5% 2.6% 9.7% 6.5% 7.9% 17.4% 19.6% 11.9% 1.4%

Orlando Central 6.3% 7.1% 10.0% 10.8% 8.8% 17.6% 13.3% 16.9% -0.2%

Orlando South 4.1% 9.8% 4.5% 5.2% 5.5% 15.2% 6.7% -4.1% 0.9%International Drive 3.9% 4.8% 2.2% 16.5% 17.1% 13.2% 15.4% 0.6% 12.0%

Lake Buena Vista 6.9% 7.6% 5.0% 17.4% 4.8% 13.5% 9.5% -4.1% 7.9%

Kissimmee East 7.2% 16.3% 9.6% 4.3% 16.7% 11.4% 15.5% 3.8% 5.2%

Kissimmee West -12.6% -1.4% -6.4% -7.7% -2.7% 1.7% -1.8% 0.4% -5.6%

Source: STR


63

Exhibit 75: Estimate Changes

F2Q11E F2Q11E F2Q10A FY11E FY11E FY10ANew Est. Prior Est. Reported New Est. Prior Est. Reported Average

($ in M)

Segment RevenuesCable Networks 2,693 2,693 2,412 12,666 12,666 11,475 12,801

Y/Y Growth 11.6% 11.6% 9.4% 10.4% 10.4% 8.7%

Broadcasting 1,495 1,495 1,432 5,944 5,944 5,687 5,888

Y/Y Growth 4.4% 4.4% 1.1% 4.5% 4.5% 0.6%Media Networks 4,187 4,187 3,844 18,610 18,610 17,162 18,689

Y/Y Growth 8.9% 8.9% 6.2% 8.4% 8.4% 5.9%

Parks & Resorts 2,655 2,688 2,449 11,656 11,758 10,761 11,605

Y/Y Growth 8.4% 9.7% 1.7% 8.3% 9.3% 0.9%Studio Entertainment 1,482 1,635 1,536 6,635 7,020 6,701 6,972

Y/Y Growth -3.5% 6.5% 7.0% -1.0% 4.8% 9.2%

Consumer Products 700 724 596 3,137 3,262 2,678 3,015

Y/Y Growth 17.5% 21.5% 20.2% 17.2% 21.8% 10.4%

Interactive Media 177 177 155 949 949 761 919

Y/Y Growth 13.9% 13.9% 20.2% 24.7% 24.7% 6.9%

________ ________ ________ ________ ________ ________ ________

Total Revenues 9,201 9,411 8,580 40,988 41,598 38,063 41,199

Y/Y Growth 7.2% 9.7% 6.1% 7.7% 9.3% 5.3%

Segment EBIT

Cable Networks 1,375 1,375 1,183 5,167 5,167 4,473 56%

Y/Y Growth 16.3% 16.3% 10.6% 15.5% 15.5% 5.0%

Broadcasting 174 174 123 905 905 659 832

Y/Y Growth 41.5% 41.4% -16.3% 37.3% 37.3% 30.5%

Media Networks 1,549 1,549 1,306 6,072 6,072 5,132 6,123

Y/Y Growth 18.6% 18.6% 7.3% 18.3% 18.3% 7.7%Parks & Resorts 201 225 150 1,630 1,717 1,318 1,598

Y/Y Growth 34.0% 50.2% -52.5% 23.7% 30.3% -7.1%

Studio Entertainment 156 192 223 901 970 693 918

Y/Y Growth -30.2% -14.1% 114.4% 30.0% 40.0% 296.0%Consumer Products 170 196 133 868 940 677 862

Y/Y Growth 28.0% 47.4% -27.7% 28.2% 38.8% 11.2%

Interactive Media (44) (44) (55) (195) (195) (234) (209)

Y/Y Growth -19.8% -19.8% -47.1% -16.7% -16.7% -20.7%________ ________ ________ ________ ________ ________ ________

Total EBIT 2,032 2,118 1,757 9,276 9,504 7,586 9,295

Y/Y Growth 15.7% 20.6% 15.1% 22.3% 25.3% 13.7%Margin 22.1% 22.5% 20.5% 22.6% 22.8% 19.9%

Less: Corp. & unallocated expenses 97 99 91 471 476 420 471

________ ________ ________ ________ ________ ________ ________

EBIT 1,935 2,019 1,666 8,805 9,028 7,166 8,824

F2Q11E F2Q11E F2Q10A F2Q11E FY11E FY11E FY10A FY11E($ in M except per share data) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus

Revenue 9,201 9,411 8,580 9,149 40,988 41,598 38,063 41,075

Y/Y growth 7.2% 9.7% 6.1% 7.7% 9.3% 5.3%

EPS $0.58 $0.61 $0.48 $0.57 $2.67 $2.71 $2.08 $2.65

Source: Company reports, RBC Capital Markets estimates, Thomson ONE Analytics

Valuation Our valuation methodology derives a $48 price target for The Walt Disney Company. We average our sum-of-the-parts analysis, DCF analysis and blended C2011/12E P/E multiple. We use a 16x P/E multiple, a level at which most comparable publicly traded companies have historically traded.


64

Price Target Impediment Changes in economic conditions, consumer confidence or a major terrorist event could affect Disney's Parks and Resorts or other businesses. Disney's Parks and Resorts segment comprised 28% of revenue and 18% of operating income in FY10.

A decline in advertising expenditures could materially affect Disney's operating results. Disney's business has significant exposure to advertising expenditures. An adverse change or decline in advertising expenditures could negatively affect many of the company's business units.

The loss of carriage agreements presents risks. Several of Disney's businesses depend heavily on the carriage of the company's cable channels on multi-system operators (MSOs). A loss of these carriage agreements could adversely affect both affiliate and advertising revenue, which account for a substantial portion of the company's total revenue.

The loss of sports programming rights poses risks. Disney's sports rights contracts with sports leagues are all finite and are offered for renewal when expired. However, these contracts may not be renewed on similarly favorable terms or Disney could be outbid, losing the rights entirely. A loss of one or more significant sports contracts could negatively affect Disney's operating results.

Growth in piracy could threaten Disney's business. Disney's business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the company's intellectual property by others without proper authorization or compensation (piracy) could materially affect the company's operating results.


65

Exhibit 76: DIS Earnings Model

Segment Details - DIS

Fiscal Year Ended September 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Sept Dec Mar Jun Sept Sept Dec Mar Jun Sept Sept Sept

in millions

Segment Revenues

Cable Network 10,555 2,654 2,412 3,280 3,129 11,475 3,068 2,693 3,518 3,387 12,666 13,784

Broadcasting 5,654 1,521 1,432 1,449 1,285 5,687 1,577 1,495 1,508 1,364 5,944 6,185

Parks & Resorts 10,667 2,662 2,449 2,831 2,819 10,761 2,868 2,655 3,045 3,089 11,656 12,613

Studio Entertainment (DIS+MVL) 6,136 1,935 1,536 1,639 1,591 6,701 1,932 1,482 1,619 1,602 6,635 6,822

Consumer Products (DIS+MVL) 2,425 746 596 606 730 2,678 922 700 712 803 3,137 3,294

Interactive Media 712 221 155 197 188 761 349 177 212 212 949 1,072

Total Revenues 36,149 9,739 8,580 10,002 9,742 38,063 10,716 9,201 10,615 10,455 40,988 43,770

Segment EBIT

Cable Network 4,260 544 1,183 1,676 1,070 4,473 771 1,375 1,827 1,194 5,167 5,732

Broadcasting 505 180 123 209 147 659 295 174 249 187 905 947

Parks & Resorts 1,418 375 150 477 316 1,318 468 201 560 401 1,630 1,908

Studio Entertainment (DIS+MVL) 175 243 223 123 104 693 375 156 162 208 901 917

Consumer Products (DIS+MVL) 609 243 133 117 184 677 312 170 173 212 868 936

Interactive Media (295) (10) (55) (65) (104) (234) (13) (44) (64) (74) (195) (110)

Segment EBIT (ex corporate expense) 6,672 1,575 1,757 2,537 1,717 7,586 2,208 2,032 2,907 2,129 9,276 10,329

Less: Corporate & unallocated shared expenses 398 72 91 119 138 420 112 97 123 139 471 493

Operating Income 6,274 1,503 1,666 2,418 1,579 7,166 2,096 1,935 2,784 1,991 8,805 9,836

Income Statement - DIS

Fiscal Year Ended September 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Sept Dec Mar Jun Sept Sept Dec Mar Jun Sept Sept Sept

in millions except per share amounts

Revenues 36,149 9,739 8,580 10,002 9,742 38,063 10,716 9,201 10,615 10,455 40,988 43,770

Year-Over-Year Growth -4.5% 1.5% 6.1% 16.4% -1.3% 5.3% 10.0% 7.2% 6.1% 7.3% 7.7% 6.8%

Operating Expenses 28,602 7,873 6,616 7,244 7,724 29,457 8,290 6,955 7,481 8,075 30,801 32,563

Segment EBITDA 7,547 1,866 1,964 2,758 2,018 8,606 2,426 2,246 3,135 2,380 10,187 11,207

Less: Corporate & unallocated shared expenses 270 41 58 80 99 278 74 64 85 106 329 351

EBITDA 7,277 1,825 1,906 2,678 1,919 8,328 2,352 2,181 3,050 2,275 9,858 10,856


Margin 20.1% 18.7% 22.2% 26.8% 19.7% 21.9% 21.9% 23.7% 28.7% 21.8% 24.1% 24.8%

Stock Option Expense 113 - - - - - - - - - - -

EBITDA (Pre-stock option expense) 7,390 1,825 1,906 2,678 1,919 8,328 2,352 2,181 3,050 2,275 9,858 10,856

Less: Depreciation 1,580 411 394 399 398 1,602 412 408 412 406 1,638 1,695

EBITA 5,697 1,414 1,512 2,279 1,521 6,726 1,940 1,773 2,638 1,869 8,219 9,160


Margin 15.8% 14.5% 17.6% 22.8% 15.6% 17.7% 18.1% 19.3% 24.8% 17.9% 20.1% 20.9%

Less: Amortization - - - - - - - - - - - -



Margin 15.8% 14.5% 17.6% 22.8% 15.6% 17.7% 18.1% 19.3% 24.8% 17.9% 20.1% 20.9%

Equity in income of investees 577 89 154 139 58 440 156 162 146 122 585 676

Adj.Operating Income including equity income of investees 6,274 1,503 1,666 2,418 1,579 7,166 2,096 1,935 2,784 1,991 8,805 9,836

Less: Net Interest Expense 466 103 130 89 87 409 95 134 114 106 449 442

Less: Other Expense (Income) - - - (7) - (7) (63) - - - (63) -

Pre-tax Income 5,808 1,400 1,536 2,336 1,492 6,764 2,064 1,801 2,670 1,884 8,419 9,394

Less: Income Tax 2,049 478 537 831 468 2,314 730 648 961 678 3,018 3,382

Less: Minority Interest 302 - 45 174 131 350 32 50 95 125 302 302

Add: Tax Expense (Benefit) on Extraordinary Items (38) (21) (1) - (19) (41) - - - - - -

Net Income from Continuing Operations 3,419 901 953 1,331 874 4,059 1,302 1,102 1,614 1,081 5,099 5,710

Income from Discontinued Operations - - - - - - - - - - - -

Net Income before extra-ordinary items 3,419 901 953 1,331 874 4,059 1,302 1,102 1,614 1,081 5,099 5,710

Extra-ordinary Income/(Expenses) after tax (112) (57) - - (39) (96) - - - - - -

Net Income (Reported) 3,307 844 953 1,331 835 3,963 1,302 1,102 1,614 1,081 5,099 5,710

Basic Weighted Average Shares O/S 1,856 1,867 1,940 1,945 1,909 1,915 1,891 1,881 1,871 1,861 1,876 1,849

Diluted Weighted Average Shares O/S 1,875 1,903 1,973 1,978 1,941 1,949 1,927 1,917 1,907 1,897 1,912 1,885

Recurring Basic EPS $1.84 $0.48 $0.49 $0.68 $0.46 $2.12 $0.69 $0.59 $0.86 $0.58 $2.72 $3.09

Recurring Diluted EPS $1.82 $0.47 $0.48 $0.67 $0.45 $2.08 $0.68 $0.58 $0.85 $0.57 $2.67 $3.03

Reported Basic EPS $1.78 $0.45 $0.49 $0.68 $0.44 $2.07 $0.69 $0.59 $0.86 $0.58 $2.72 $3.09

Reported Diluted EPS $1.76 $0.44 $0.48 $0.67 $0.43 $2.03 $0.68 $0.58 $0.85 $0.57 $2.67 $3.03



66

Discovery Communications Inc. (NASDAQ: DISCA)

Improving Ratings = Re-acceleration In Ad Growth




Shares O/S (MM): 413.9 Market Cap (MM): 16,693


Debt to Cap: 37% Avg. Daily Volume (MM): 1.72

Institutional Ownership: 98% 3-Yr. Est. EPS Growth: 20.0%

Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1E Q2E Q3E Q4E 2011E 2012E

Revenue (MM) $817.0 $881.0 $854.0 $964.0 $3,516.0 $879.0 $963.0 $926.0 $1,015.0 $3,783.0 $932.7 $1,032.7 $994.6 $1,089.0 $4,048.9 $4,359.1

Prev. $932.7 $1,032.7 $994.6 1,089.0 $4,048.9 N/A

EBITDA (MM) $283.0 $314.0 $259.0 $348.0 $1,204.0 $320.0 $405.0 $359.0 $433.0 $1,517.0 $387.8 $471.2 $432.2 $475.2 $1,766.4 $1,975.1

Prev. $387.8 $471.2 $432.2 $475.2 $1,766.4 N/A

EPS (Op) - FD $0.29 $0.34 $0.23 $0.39 $1.25 $0.39 $0.49 $0.37 $0.48 $1.74 $0.49 $0.63 $0.57 $0.64 $2.32 $2.73

Prev. $0.49 $0.63 $0.57 $0.64 $2.32 N/A

Historical values are based upon reported data and may be different from pro forma figures. Source: Company reports, RBC Capital Markets estimates

Investment Opinion

1Q11 Ratings Rebound Is Encouraging And Proves 4Q10 Was Likely A Minor Speed Bump; Maintaining Our Above-Consensus 1Q11 EPS Estimate 1Q11 ratings trend at Discovery’s major networks appear to have progressed generally inline-to-slightly better than what we were previously expecting and, therefore, while we’re maintaining our 1Q11 domestic ad growth forecast of 15%, we think bias to the upside. Our margin and EPS estimates are above consensus as we think Street estimates don’t fully reflect the “add back” of $17 million in non-recurring above-the-line charges in the YoY comp. If Discovery’s networks are able to sustain its current ratings momentum, we think there could be upside to guidance. While return of capital to shareholders isn’t a top priority for management currently, given the share price performance in 1Q11, we wonder if the company was more aggressive with stock buybacks in the quarter. DISCA shares are currently trading at ~17x 2011E P/E, a premium to the group, but a much more reasonable level vs. the past, and therefore we feel comfortable owning the stock heading into earnings. We’re introducing FY12 estimates. Maintaining Outperform rating, $46 price target.

Domestic Advertising Growth Re-acceleration With The Rebound In Ratings Following a material deceleration in ad growth in 4Q10 (somewhat soft ratings were a ~200-300bps headwind to ad growth), ratings did stabilize and even improve somewhat in 1Q11. Flagship Discovery Channel’s ratings were up a healthy ~7% in the quarter helped by new shows such as Auction Kings, Gold Rush, etc. Animal Planet ratings were down low-to-mid single digits while TLC ratings were flattish. At an investor conference in early March, management noted that ratings for the overall portfolio of networks were up ~7% through February. Given the ratings rebound, we think domestic ad growth accelerated by ~250bps sequentially and we’re maintaining our 15% domestic ad growth for the quarter (with bias to the upside). Internationally, we believe trends remained solid with minimal disruption from the political/social unrest in the Middle East or the earthquake in Japan. Following a ~25% organic ad growth last year internationally, we’re expecting ~14% organic ad growth this year, outpacing affiliate revenue growth of an expected 9%.

Discovery Health Deconsolidation As Well As Certain Non-recurring Charges Last Year Could Make Comparisons Somewhat Confusing With the launch of OWN in January, 1Q11 was the first quarter of Discovery Health deconsolidation above the line. The channel accounted for ~$80 million of annual revenue, most of which was advertising. While we believe much of the Street estimates already reflect this, we think it could create some confusion in pro forma comparisons when numbers are reported. Additionally, in 1Q10, there were ~$17 million of non-recurring charges – $13 million domestic content write-down and a $4 million international acquisition-related charge. These charges actually make YoY margin comparisons easier and we don’t think Street margin estimates fully reflect the “add back” of these charges; as such we think Street margin estimates could be revised slightly higher (both domestic and international) over the next few weeks.

125 WEEKS 21NOV08 - 6APR11HI-24SEP10

LO/HI DIFF

235.991

155.13%

LO-12DEC08 92.497

CLOSE 188.007

DISCOVERY COMMUNICATIONS INC Rel. S&P 500

120.00

160.00

200.00


HI-29OCT10

LO/HI DIFF

45.420

301.95%

LO-21NOV08 11.300

CLOSE 40.330

DISCOVERY COMMUNICATIONS INC

15.00

20.00

25.00

30.00

35.00

40.00

PEAK VOL.

VOLUME

81819.3

4002.2 30000

60000


67

Investors May Be Somewhat Disappointed That Discovery Isn’t Returning Capital To Shareholders As Aggressively As Some Of Its Peers With some of its media conglomerate peers (most notably Viacom and Time Warner) maintaining an aggressive stance towards return of capital to shareholders, investors may be somewhat disappointed that stock buybacks aren’t a higher priority for Discovery, especially given ~$1 billion annual free cash flow and debt leverage far below its target of ~2.5x. Previously, management noted that its capital allocation plans include (in order of priority): 1) reinvestment in the business (primarily programming/rebrands), 2) M&A, for which we expect Discovery to exercise its traditional discipline, and lastly, 3) return of capital to shareholders. In 1Q11, we’re modeling $125 million of stock buybacks, though we think bias is to the upside given the stock price performance during the quarter. Management has previously noted that the level of stock buybacks partially depends on the stock price – ie, more buybacks when the stock moves lower.

OWN Off To A Somewhat Rocky Start, But It’s Too Early To Judge The Ultimate Success Of The Network As Oprah’s Presence Will Be Minimal Until September OWN received some negative press shortly after its launch given that its ratings hadn’t shown a significant improvement over its predecessor, Discovery Health. The lackluster ratings performance was likely one of the reasons why Discovery decided to invest an additional $50 million into the channel, on top of the $189 million it has already committed. Our channel checks indicate that DISCA is spending a great deal of energy and time getting traction from the advertising community, and DISCA’s ultimate goal is to grow OWN into a top-tier cable network over the next few years. While OWN’s ratings performance has been somewhat disappointing, we think it’s too early to judge the success of the network as Oprah’s on-screen presence will be limited until her current contract with CBS ends in September 2011, after which the channel could start showing reruns of her current “flagship” show, and she could begin a new show on OWN. Further, we don’t think OWN’s current ratings performance is likely to have an impact on DISCA’s near-term earnings. We’d note that in early January, management indicated that the channel could be EBITDA positive in 2011.


FY1Q11E FY1Q11E FY1Q10A FY1Q11E FY11E FY11E FY10A FY11E FY11E

($ in mm, except per share data) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus Guidance

Segment Revenue

Domestic Networks 578.8 578.8 546.0 2,497.4 2,497.4 2,363.0PF YoY growth 10.0% 10.0% 7.4% 9.4% 9.4% 9.8%

Distribution 270.3 270.3 259.0 1,092.9 1,092.9 1,047.0PF YoY growth 6.0% 6.0% 10.0% 6.0% 6.0% 8.4%

Advertising 287.5 287.5 266.0 1,310.6 1,310.6 1,222.0PF YoY growth 15.0% 15.0% 9.5% 13.2% 13.2% 13.0%

Other 21.0 21.0 21.0 94.0 94.0 94.0

International Networks 314.5 314.5 293.0 1,388.7 1,388.7 1,261.0PF YoY growth 7.3% 7.3% 15.8% 10.1% 10.1% 7.6%

Distribution 203.1 203.1 186.0 831.7 831.7 760.0PF YoY growth 9.2% 9.2% 6.9% 9.4% 9.4% 6.1%

Advertising 93.8 93.8 82.0 483.1 483.1 422.0PF YoY growth 14.3% 14.3% 43.9% 14.5% 14.5% 24.9%

Other 17.6 17.6 25.0 73.9 73.9 79.0

Education, Corp. & Other 39.4 39.4 40.0 162.8 162.8 159.0PF YoY growth -1.4% -1.4% 0.0% 2.4% 2.4% 1.3%

Total Revenues 932.7 932.7 879.0 937.8 4,048.9 4,048.9 3,783.0 4,066.0 4,000-4,100

PF YoY growth 8.6% 8.6% 9.9% 6.7% 9.3% 9.3% 8.9% 7.5%

Segment Adjusted-OIBDA

Domestic Networks 325.2 325.2 293.0 1,461.1 1,461.1 1,365.0% margin 56.2% 56.2% 53.7% 58.5% 58.5% 57.8%

International Networks 142.9 142.9 124.0 631.8 631.8 547.0% margin 45.5% 45.5% 42.3% 45.5% 45.5% 43.4%

Education, Corp. & Other (55.4) (55.4) (50.0) (226.6) (226.6) (211.0)% margin -140.5% -140.5% -125.0% -139.2% -139.2% -132.7%

Total Adjusted-OIBDA 412.8 412.8 367.0 N/A 1,866.4 1,866.4 1,701.0 N/A 1,825-1,900

% margin 44.3% 44.3% 41.8% 46.1% 46.1% 45.0%

PF YoY growth 9.6% 9.6% 19.3% 10.6% 10.6% 16.2%

Reported Net Income 201.5 201.5 169.0 951.3 951.4 663.0 925-1000

Reported diluted EPS $0.49 $0.49 $0.39 $0.46 $2.32 $2.32 $1.54 $2.27Recurring diluted EPS $0.49 $0.49 $0.39 $0.46 $2.32 $2.32 $1.74 $2.27


Valuation Our valuation methodology derives a $46 price target for DISCA shares. We average our DCF analysis and our one-year forward multiples on blended 2011/12E EBITDA and EPS. We apply a 10x EBITDA multiple and a 20x P/E multiple, consistent with historical trading levels and in line with other publicly traded entertainment/cable network companies.


68

Price Target Impediment A decline in advertising expenditures could materially affect Discovery's operating results. Discovery's business has significant exposure to advertising expenditures, with approximately 43% of overall revenues derived from advertising in 2010. An adverse change or decline in advertising expenditures could negatively affect many of the company's businesses.

The loss or change in carriage agreements presents risk. Discovery depends heavily on the carriage of its cable channels on multi-system operators (MSOs). A loss or material change in these carriage agreements could adversely affect both distribution and advertising revenue, which together account for the vast majority of the company's total revenue.

Foreign currency fluctuations could negatively impact Discovery's results. Discovery has a significant international presence with approximately 33% of revenues generated from abroad in 2010. A material strengthening in USD versus other major currencies could negatively impact Discovery's international operations.

Growth in piracy could threaten Discovery's business. Discovery depends heavily on the protection of its intellectual property. A significant growth in the distribution of the company's original content programming by others without proper authorization or compensation (piracy) could materially affect the company's operating results.

Exhibit 78: DISCA Earnings Model

Segment Details - DISCA

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012ECalendar Month Ended: Dec Mar June Sep Dec Dec Mar June Sep Dec Dec Dec

($ in mm)

Revenue Source

Advertising 1,427.0 348.0 435.0 402.0 459.0 1,644.0 381.3 475.6 436.4 500.4 1,793.7 1,959.9Distribution 1,713.0 445.0 449.0 452.0 461.0 1,807.0 473.4 478.9 481.7 490.4 1,924.5 2,060.8All Other 376.0 86.0 79.0 72.0 95.0 332.0 78.0 78.1 76.5 98.2 330.8 338.4

Total Revenues 3,516.0 879.0 963.0 926.0 1,015.0 3,783.0 932.7 1,032.7 994.6 1,089.0 4,048.9 4,359.1

Segment Revenue

Domestic Networks 2,142.0 546.0 620.0 585.0 612.0 2,363.0 578.8 656.2 616.6 645.8 2,497.4 2,680.9

International Networks 1,189.0 293.0 306.0 304.0 358.0 1,261.0 314.5 341.1 337.5 395.6 1,388.7 1,511.4Commerce, Education, Corp. & Other 185.0 40.0 37.0 37.0 45.0 159.0 39.4 35.3 40.5 47.6 162.8 166.7

Total Revenues 3,516.0 879.0 963.0 926.0 1,015.0 3,783.0 932.7 1,032.7 994.6 1,089.0 4,048.9 4,359.1

Segment Adjusted-OIBDA

Domestic Networks 1,196.0 293.0 379.0 346.0 347.0 1,365.0 325.2 402.0 365.5 368.4 1,461.1 1,587.4

International Networks 450.0 124.0 132.0 130.0 161.0 547.0 142.9 153.6 151.2 184.1 631.8 706.7Commerce, Education, Corp. & Other (182.0) (50.0) (56.0) (58.0) (47.0) (211.0) (55.4) (59.5) (59.5) (52.3) (226.6) (233.0)

Total Adjusted-OIBDA 1,464.0 367.0 455.0 418.0 461.0 1,701.0 412.8 496.2 457.2 500.2 1,866.4 2,061.1

Income Statement - DISCA

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012ECalendar Month Ended: Dec Mar June Sep Dec Dec Mar June Sep Dec Dec Dec

($ in mm, except per share data)Revenues 3,516.0 879.0 963.0 926.0 1,015.0 3,783.0 932.7 1,032.7 994.6 1,089.0 4,048.9 4,359.1

YoY growth 3.2% 7.6% 9.3% 8.4% 5.3% 7.6% 6.1% 7.2% 7.4% 7.3% 7.0% 7.7%Operating expenses 2,312.0 559.0 558.0 567.0 582.0 2,266.0 544.9 561.5 562.3 613.8 2,282.6 2,384.0

EBITDA (incl. non-cash comp. expense) 1,204.0 320.0 405.0 359.0 433.0 1,517.0 387.8 471.2 432.2 475.2 1,766.4 1,975.1

YoY growth -8.1% 13.1% 29.0% 38.6% 24.4% 26.0% 21.2% 16.3% 20.4% 9.7% 16.4% 11.8%% margin 34.2% 36.4% 42.1% 38.8% 42.7% 40.1% 41.6% 45.6% 43.5% 43.6% 43.6% 45.3%

Less: Depreciation & Amortization 155.0 34.0 33.0 32.0 32.0 131.0 31.2 30.8 30.4 29.9 122.3 120.2

Operating income / EBIT 1,049.0 286.0 372.0 327.0 401.0 1,386.0 356.5 440.4 401.9 445.3 1,644.0 1,854.9

YoY growth -8.2% 16.7% 35.8% 49.3% 28.9% 32.1% 24.7% 18.4% 22.9% 11.0% 18.6% 12.8%% margin 29.8% 32.5% 38.6% 35.3% 39.5% 36.6% 38.2% 42.6% 40.4% 40.9% 40.6% 42.6%

Interest, net (250.0) (58.0) (48.0) (49.0) (48.0) (203.0) (48.2) (48.2) (48.2) (48.2) (192.9) (192.9)Loss/gain from non-hedged derivative instruments, net 0.0 0.0 (46.0) 0.0 0.0 (46.0) 0.0 0.0 0.0 0.0 0.0 0.0

Minority Interests in consolidated subsidiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Equity in earnings of unconsolidated affiliates 12.0 (5.0) 0.0 0.0 0.0 (5.0) (2.5) (2.5) (2.5) (2.5) (10.0) 7.5Other, net 198.8 (3.0) (22.0) (31.0) (36.0) (92.0) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax income 1,009.8 220.0 256.0 247.0 317.0 1,040.0 305.8 389.6 351.2 394.6 1,441.2 1,669.5

Less: Income tax (472.0) (47.0) (41.0) (83.0) (106.0) (277.0) (101.8) (129.7) (116.9) (131.4) (479.9) (567.6)Less: Minority interest in consolidated subsidiaries 2.0 (4.0) (3.0) (3.0) (6.0) (16.0) (2.5) (2.5) (2.5) (2.5) (10.0) (10.0)

Less: Stock dividends to preferred interests (9.0) 0.0 (1.0) 0.0 0.0 (1.0) 0.0 0.0 0.0 0.0 0.0 0.0Net income from recurring operations 530.8 169.0 211.0 161.0 205.0 746.0 201.5 257.4 231.7 260.7 951.3 1,091.9

Gain/(Loss) from discontinued operations net of tax 0.0 0.0 0.0 25.0 (3.0) 22.0 0.0 0.0 0.0 0.0 0.0 0.0Extra-ordinary/non-recurring items 21.2 0.0 (105.0) 0.0 0.0 (105.0) 0.0 0.0 0.0 0.0 0.0 0.0

Net income (reported) 552.0 169.0 106.0 186.0 202.0 663.0 201.5 257.4 231.7 260.7 951.3 1,091.9

Diluted weighted average shares O/S 425.5 429.0 431.0 431.0 428.0 429.8 413.9 411.1 408.7 406.3 410.0 399.4

Recurring diluted EPS $1.25 $0.39 $0.49 $0.37 $0.48 $1.74 $0.49 $0.63 $0.57 $0.64 $2.32 $2.73

Reported diluted EPS $1.30 $0.39 $0.25 $0.43 $0.47 $1.54 $0.49 $0.63 $0.57 $0.64 $2.32 $2.73

Source: Company reports, RBCCM estimates


69

News Corporation (NASDAQ: NWSA)

Studio Comps Are Still Tough And MySpace Continues To Be A Drag, But Outlook For FY12 Looks Solid


Price: 17.56 Price Target: 21.00 (Prior 20.00) Implied All-in Return: 20%




Float (MM): 2,260.0

FY Jun Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2 Q3E Q4E 2011E 2012E

Revenue (B) $7.5 $7.9 $7.4 $7.7 $30.4 $7.2 $8.7 $8.8 $8.1 $32.8 $7.4 $8.8 $8.4 $8.2 $32.8 $34.1

Prev. $8.5 $8.1 $32.8 $34.2

EPS (Op) - FD $0.20 $0.12 $0.15 $0.17 $0.64 $0.22 $0.25 $0.32 $0.30 $1.08 $0.27 $0.29 $0.27 $0.31 $1.13 $1.37

Prev. $0.29 $0.30 $1.14 $1.37


Investment Opinion

Positive Momentum In National TV Advertising In F3Q11; Studio Comps Were Tougher Than Expected And MySpace Continued To Be A Drag, But NWSA Is More of a FY12 Story Both the TV ad pricing environment and ratings were quite favorable for NWSA’s TV properties in F3Q11, and we think both the cable nets and Fox performed solidly in the quarter, both from a top-line growth and margin perspective. On the other hand, Filmed Entertainment faced one of the toughest comps in F3Q11 as the bulk of the Avatar box office receipts came in the prior year quarter and the performance F3Q11 theatrical releases were somewhat mediocre. MySpace continued to be a drag in the quarter and we think losses were likely similar to the prior two quarters – in the ~$50-60 million range. We’re revising our F3Q11 estimates lower to reflect the extremely tough studio comps as well as the continued “drag” from MySpace. Overall, F4Q results should improve materially from F3Q, largely given that much of the difficult Avatar comp will have lapped by then. Further, NWSA is more of a “FY12 story”, in our view, as comps become easy (potential MySpace loss reversal, DISH/Cablevision blackout-related loss reversal) and potential consolidation/acquisition of BSkyB could be highly accretive. Maintaining Outperform rating; new $21 price target.

National TV Advertising Strength Across The Board With Ratings Rebound Fox enjoyed the best ratings trend among all broadcast networks in F3Q11 (A18-49 prime time ratings up 2%, though the Super Bowl clearly helped). Despite some concerns earlier in the quarter about how American Idol would perform with the change in judges, the ratings for the show ended up being much better than expected, improving each week and sometimes even above the prior year level. Profitability of the network likely also improved given that Idol is much cheaper to produce than in prior years and 24 (a high-cost show) ended last year, making programming expense comps easier. The ratings turn at Fox is especially encouraging as the network was unable to produce any new hits in F2Q11 and viewership was largely being supported by returning shows such as Glee and NFL football.

On the Cable Network side, FX staged a massive turnaround in the quarter with A18-49 prime time ratings up 19% YoY helped by new shows. While ratings growth is rarely monetizable immediately, we’d expect ad growth in future quarters to benefit as long as FX is able to sustain at least some of the viewership gains. Fox News ratings were somewhat soft – possibly due to a viewership shift to CNN in the quarter – but the network is basically beginning a new affiliation agreement cycle in which ~50% of its affiliate deals will be renegotiated over the next 18 months or so, providing upside to affiliate fee growth in future quarters. Cable Network revenue growth should also see acceleration from the prior quarter given that the DISH/Cablevision blackouts had ~$47 million negative impact on revenue (likely high margin) and probably even more than that considering the viewership losses due to those blackouts. The segment should also see meaningful margin expansion given strong operating leverage off double-digit revenue growth – EBIT margins for the segment expanded ~450bps in F2Q11 (adding back the $47 million blackout-related loss) similar to the improvement seen in the prior few quarters.

125 WEEKS 21NOV08 - 6APR11HI-1APR11

LO/HI DIFF

174.214

78.21%

LO-27FEB09 97.757

CLOSE 169.935

NEWS CORP Rel. S&P 500

120.00

150.00


HI-4MAR11

LO/HI DIFF

18.110

265.86%

LO-13MAR09 4.950

CLOSE 17.560

NEWS CORP

6.00

8.00

10.00

12.00

14.00

16.00

PEAK VOL.

VOLUME

175169.0

51711.2 50000

100000

150000


70

Studio Comparisons Were Very Difficult In F3Q11, But Should Get Some Much Needed Relief In F4Q11 As The Difficult Avatar Comps Are Lapped The studio had just two theatrical releases in the quarter: Diary of a Wimpy Kid: Rodrick Rules and Big Mommas: Like Father, Like

Son. While both films performed (or are expected to perform) reasonably well at the box office, comps are tough due to three theatrical releases last year (including Percy Jackson & The Olympians, which was a relatively big release) and even more so due to the spill-over of Avatar box office in the prior year – note that the vast majority of the ~$2.8 billion global box office receipts for Avatar were made in F3Q10, allowing for extraordinary performance in both revenue and margins in Filmed Entertainment in that quarter. While we’re lowering F3Q11 segment estimates to account for the more difficult-than-expected comparisons, we think the segment could get some much needed relief beginning in F4Q as much of the difficult Avatar comps are finally lapped and several tentpole films are released – animated 3D film Rio comes out in mid April and X-Men: First Class comes out in early June.

Exhibit 79: YoY Studio Box Office Comparison (units in mm) F2Q10A F2Q11A


Alvin and the Chipmunks: The Squeakuel 23-Dec-09 $219.6 $223.5 $75.0 Gulliver's Travels 25-Dec-10 $42.7 $173.0 $112.0

Avatar 18-Dec-09 $760.5 $2,020.6 NA The Chronicles of Narnia: Voyage of the Dawn Treader 10-Dec-10 $104.2 $299.6 $155.0

Crazy Heart 16-Dec-09 $39.5 $7.7 $7.0 Black Swan 03-Dec-10 $106.3 $175.0 $13.0

Fantastic Mr. Fox 13-Nov-09 $21.0 $25.5 $40.0 Love and Other Drugs 24-Nov-10 $32.4 $61.2 $30.0

Gentlemen Broncos 30-Oct-09 $0.1 $0.0 $10.0 Unstoppable 12-Nov-10 $81.6 $85.9 $100.0

Amelia 23-Oct-09 $14.2 $5.4 $40.0 127 Hours 05-Nov-10 $18.3 $32.5 $18.0

Whip It 02-Oct-09 $13.0 $3.6 $15.0 Conviction 15-Oct-10 $6.8 $6.8 $12.5

Quarter Total $1,068.0 $2,286.3 Quarter Total $392.3 $834.1

F3Q10A F3Q11E


Diary of a Wimpy Kid 19-Mar-10 $64.0 $11.7 $15.0 Diary of a Wimpy Kid: Rodrick Rules 25-Mar-11 $60.6 $60.6 NA

Percy Jackson & The Olympians 12-Feb-10 $88.8 $137.7 $95.0 Big Mommas: Like Father, Like Son 18-Feb-11 $36.4 $28.6 $32.0

The Tooth Fairy 22-Jan-10 $60.0 $52.3 $48.0

Quarter Total $212.8 $201.8 Quarter Total $97.0 $89.2

F4Q10A F4Q11E


Knight and Day 23-Jun-10 $76.4 $185.3 $117.0 Mr. Popper's Penguins 17-Jun-11 $61.3 $61.3 NA

Cyrus 18-Jun-10 $7.5 $2.5 $7.0 Homework (2011) 17-Jun-11 $8.2 $8.2 NA

The A-Team 11-Jun-10 $77.2 $99.8 $110.0 X-Men: First Class 03-Jun-11 $216.0 $216.0 NA

Marmaduke 04-Jun-10 $33.6 $49.7 $50.0 The Tree of Life 27-May-11 $35.1 $35.1 NA

Just Wright 14-May-10 $21.5 $21.5 NA Dum Maaro Dum 22-Apr-11 NA NA NA

Date Night 09-Apr-10 $98.7 $53.6 $55.0 Water for Elephants 22-Apr-11 $54.5 $54.5 NA

Rio 15-Apr-11 $113.9 $113.9 NA



Source: Boxofficemojo.com, HSX.com

All Eyes On U.K. Culture Secretary Jeremy Hunt As BSkyB Decision Nears The most recent media reports suggest Mr. Hunt won’t make his final regulatory decision regarding NWSA’s proposed takeover of BSKyB until after April 26, when the U.K. parliament resumes from recess. In early March, NWSA received provisional approval of the deal with the condition that NWSA spins off Sky News. We remain optimistic that Mr. Hunt will eventually give final regulatory approval of the deal, and we think he may be delaying the final decision somewhat to make it appear like he’s giving enough thought into what is a highly politicized deal. Once NWSA receives final approval, it will have two months to negotiate deal terms with BSkyB. If the two parties do not reach an agreement within two months, NWSA could make a tender offer to BSkyB shareholders, in which case NWSA would have to tender at least half of the shares it doesn’t already own within a three-months period. If NWSA’s tender offer is unsuccessful, it could have the option to go “hostile” and purchase BSkyB shares on the open market.

• We think a full takeover/consolidation of BSkyB could be highly accretive to NWSA’s earnings (~$0.11 to FY EPS), as detailed in our March 18 note titled Catalysts And Tailwinds For Rupert In FY12.


71

Exhibit 80: Estimated EPS Accretion from a Potential BSkyB Acquisition/Consolidation

Source: RBCCM estimates, Thomson One Analytics

We Continue To Remind Investors That the Setup In FY12 Is Very Favorable With More Tailwind Than Most Large-Cap Media Peers In addition to the potential accretion from BSkyB, there are several other factors (almost regardless of fundamentals) that could make FY12 an “easy comp” year:

• ~$200-250mm EBIT loss reversal from MySpace resolution.

• Reversal of $47 million loss from DISH/Cablevision blackouts.

• Estimated $58 million EBIT (or ~$0.01 EPS) accretion from Shine Group.

These three factors combined could “automatically” account for ~7% EBIT/EPS growth in FY12, with BSkyB consolidation potentially adding another ~900bps to EPS growth.

Exhibit 81: Factors That Could Boost FY12 Earnings, Almost Regardless Of Operational Performance

BSkyB Shine MySpace Loss DISH/Cablevision

($ in mm, except per share amount) Accretion Accretion Reversal Blackout Reversal Total

EBIT Impact 1,679 58 225 47 2,009

Contribution To FY12 Growth 3422bps 119bps 459bps 96bps 4095bps

EPS Impact $0.11 $0.01 $0.06 $0.01 $0.19

Contribution To FY12 Growth 929bps 115bps 515bps 107bps 1666bps

EPS impact materially lower than EBIT impact due to incremental interest expense

Source: RBCCM estimates


72


F3Q11E F3Q11E F3Q10A FY2011E FY2011E FY2010A

($ in M, except per share data) New Est. Prior Est. Reported New Est. Prior Est. Reported

Segment Revenues

Filmed Entertainment 1,539 1,682 2,422 6,505 6,530 7,631

% Growth -36% -31% 65% -15% -14% 29%

Television 1,456 1,406 1,168 4,771 4,721 4,228

% Growth 25% 20% 2% 13% 12% 4%

Cable Network Programming 2,050 2,043 1,798 8,027 8,002 7,038

% Growth 14% 14% 16% 14% 14% 15%

Direct Broadcast Satellite Television 915 915 954 3,624 3,624 3,802

% Growth -4% -4% 3% -5% -5% 1%

Publishing 2,126 2,126 2,116 8,652 8,652 8,548

% Growth 0% 0% 17% 1% 1% 5%

Other 287 319 327 1,209 1,283 1,531

% Growth -12% -2% -31% -21% -16% -36%______________________________ ______________________________

Total Revenues 8,372 8,492 8,785 32,788 32,812 32,778

-4.7% -3.3% 19.2% 0.0% 0.1% 7.7%

Segment EBIT

Filmed Entertainment 208 263 497 893 927 1,349

% Growth -58% -47% 76% -34% -31% 59%

Margin 14% 16% 21% 14% 14% 18%

Television 128 128 40 554 524 220

% Growth 220% 220% 471% 152% 138% 29%

Margin 9% 9% 3% 12% 11% 5%

Cable Network Programming 729 721 588 2,826 2,804 2,250

% Growth 24% 23% 38% 26% 25% 36%

Margin 36% 35% 33% 35% 35% 32%

Direct Broadcast Satellite Television 51 51 35 250 250 230

% Growth 45% 45% -44% 9% 9% -41%

Margin 6% 6% 4% 7% 7% 6%

Publishing 210 210 243 991 991 967

% Growth -13% -13% 268% 3% 3% 28%

Margin 10% 10% 11% 11% 11% 11%

Other (154) (138) (150) (608) (575) (577)

% Growth 3% -8% 69% 5% 0% 59%

Margin -54% -43% -46% -50% -45% -38%______________________________ ________________________________________

Segment EBIT 1,171 1,236 1,253 4,906 4,922 4,439

% Growth -7% -1% 66% 11% 11% 29%

Margin 14% 15% 14% 15% 14% 14%

F3Q11E F3Q11E F3Q10A F3Q11E FY2011E FY2011E FY2010A FY2011E FY2011E

New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus Guidance

Revenue 8,372 8,492 8,785 8,433 32,788 32,812 32,778 33,024

y/y growth -5% -3% 19% 0% 0% 8%

Operating Income 1,171 1,236 1,253 1,219 4,906 4,922 4,439 4,919

y/y growth -7% -1% 66% 10% 11% 29% 10% low double-digit

EPS $0.27 $0.29 $0.32 $0.28 $1.13 $1.14 $1.08 $1.12

Source: Company reports, RBCCM estimates, Thomson One Analytics

Valuation Our valuation methodology derives a $21 price target for News Corporation. We average our sum of the parts analysis, DCF analysis, and blended C2011/12E P/E multiple. We use a 15x P/E multiple, a level at which most comparable public companies have historically traded.

Price Target Impediment A decline in advertising expenditures could materially impact News Corp.'s operating results. News Corp.’s business has significant exposure to overall advertising expenditures. An adverse change or decline in overall advertising expenditures could negatively impact many of the company’s business units.

The loss of carriage agreements presents risk. Several of News Corp.’s businesses depend heavily on the carriage of the company’s cable channels on multi-system operators (MSOs). A loss of these carriage agreements could adversely impact both affiliate and advertising revenue, which comprise a substantial portion of the company’s total revenue.

The loss of sports programming rights presents risks. The sports rights contracts between News Corp. and various sports leagues all have finite time periods and are offered for renewal when expired. However, risks exist that these contracts may not be renewed on


73

similarly favorable terms or that News Corp. may be outbid and lose the rights entirely. A loss of one or more significant sports contracts could negatively impact News Corp.’s operating results.

Growth in piracy could threaten News Corp.'s business. News Corp.’s business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the company’s intellectual property by others without proper authorization or compensation (piracy) could materially impact the company’s operating results.

Exhibit 83: NWSA Earnings Model

Segment Details - NWSA

Fiscal Year Ended June 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11A 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: June Sep Dec Mar June June Sep Dec Mar June June June

figures in millions

Segment Revenues

Filmed Entertainment 5,936 1,521 1,898 2,422 1,790 7,631 1,503 1,809 1,539 1,654 6,505 6,721

Television 4,051 765 1,248 1,168 1,047 4,228 851 1,369 1,456 1,095 4,771 4,779

Cable Network Programming 6,131 1,606 1,756 1,798 1,878 7,038 1,872 1,974 2,050 2,132 8,027 8,927

Direct Broadcast Satellite Television 3,760 927 1,008 954 913 3,802 856 944 915 909 3,624 3,753

Publishing 8,167 1,980 2,327 2,116 2,125 8,548 2,046 2,346 2,126 2,134 8,652 8,727

Other 2,378 400 447 327 357 1,531 298 319 287 305 1,209 1,187

Total Revenues 30,423 7,199 8,684 8,785 8,110 32,778 7,426 8,761 8,372 8,229 32,788 34,095

Segment EBIT

Filmed Entertainment 848 391 324 497 137 1,349 280 189 208 216 893 984

Television 171 38 29 40 113 220 105 151 128 170 554 611

Cable Network Programming 1,650 495 604 588 563 2,250 659 735 729 703 2,826 3,277

Direct Broadcast Satellite Television 393 128 (30) 35 97 230 82 (12) 51 130 250 305

Publishing 756 118 410 243 196 967 178 380 210 223 991 976

Other (364) (128) (125) (150) (174) (577) (156) (156) (154) (142) (608) (437)

Segment EBIT 3,454 1,042 1,212 1,253 932 4,439 1,148 1,287 1,171 1,299 4,906 5,716

Income Statement - NWSA

Fiscal Year Ended June 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11A 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: June Sep Dec Mar June June Sep Dec Mar June June June

figures in millions

Revenues 30,423 7,199 8,684 8,785 8,110 32,778 7,426 8,761 8,372 8,229 32,788 34,095


EBITDA 4,592 1,339 1,511 1,547 1,227 5,624 1,422 1,567 1,451 1,586 6,025 6,852

Less: Depreciation & Amortization 1,138 297 299 294 295 1,185 274 280 279 286 1,120 1,137

Operating Income 3,454 1,042 1,212 1,253 932 4,439 1,148 1,287 1,171 1,299 4,906 5,716

Gains on sale of equity investment and business - - - - - - - - - - - -


Equity in income of investees (309) 32 58 181 177 448 94 67 139 153 452 651

Other Income/(Expense) 124 (12) (96) (51) (91) (250) (17) (287) (10) (10) (324) (40)

Pre-tax Income 2,433 842 921 1,156 818 3,737 1,019 865 1,088 1,230 4,202 5,478

Less: Income Tax 692 245 137 295 2 679 285 190 348 394 1,217 1,753

Less: Minority Interest 68 26 30 22 27 105 34 33 27 32 126 130

Less: Other Misclaneous Adjustments - - 110 - - 110 - (114) - - (114) -

Net Income from Continuing Operations 1,673 571 644 839 789 2,843 700 756 713 805 2,973 3,595

Gain/(Loss) on disposition of discontinued

operations/other net of tax 1,686 - - - - - - - - - - -

Income before extraordinary items 3,359 571 644 839 789 2,843 700 756 713 805 2,973 3,595

Extraordinary Items net of tax (7,383) - (390) - 86 (304) 75 (114) - - (39) -

Net Income (Reported) (4,024) 571 254 839 875 2,539 775 642 713 805 2,934 3,595





Reported Basic EPS ($1.54) $0.22 $0.10 $0.32 $0.33 $0.97 $0.30 $0.24 $0.27 $0.31 $1.12 $1.37

Reported Diluted EPS ($1.54) $0.22 $0.10 $0.32 $0.33 $0.97 $0.30 $0.24 $0.27 $0.31 $1.12 $1.37

Source: Company reports, RBCCM estimates


74

Scripps Networks Interactive, Inc. (NYSE: SNI)

Still Waiting For The “Turn” In Ratings






Float: 56.24 Avg. Daily Volume (MM): 1.07

Institutional Ownership: 67%


Revenue (B) $361.2 $391.3 $364.5 $429.7 $1,546.7 $469.4 $516.0 $508.7 $573.0 $2,067.2 $528.5 $577.4 $562.1 $631.1 $2,299.2 $2,496.5

Prev. $528.5 $577.4 $562.1 $631.1 $2,299.2 N/A

EBITDA $139.3 $166.1 $144.3 $152.0 $601.7 $175.2 $227.9 $223.8 $247.0 $873.8 $234.6 $268.6 $256.1 $300.4 1,059.6 $1,177.3

Prev. $234.6 $268.6 $256.1 $300.4 $1,059.6 N/A

EPS (Op) - FD $0.37 $0.49 $0.39 $0.41 $1.65 $0.43 $0.58 $0.61 $0.77 $2.39 $0.59 $0.69 $0.64 $0.82 $2.74 $3.15

Prev. $0.62 $0.72 $0.68 $0.82 $2.85 N/A


Investment Opinion

We’re Maintaining Our Above-The-Line Estimates As Overall Trends Were As Expected In The Quarter; Adjusting EPS Lower On Increased Minority Interest Expense From Tribune Restoring Its Ownership Stake In Food/Cooking Back To 31% Advertising/ratings trends at Scripps’ major networks appear to have progressed basically in line with what we were previously expecting in 1Q11, and therefore we’re maintaining our prior above-the-line estimates for 1Q11 and FY11. We’re lowering our EPS estimates (for 1Q11 and FY11) to account for the increased minority expense arising from Tribune restoring its ownership stake in Food/Cooking partnership to 31% (from 25%) – we’d note that this was largely already expected. Upcoming upfronts, Food Network affiliate fee negotiations, and potential opportunities to buy in the remaining 31% stake in Food/Cooking from Tribune could become catalysts in the next few quarters, but investors likely want to see a material positive turn in ratings more than anything else right now. SNI shares are currently trading at ~18.5x 2011E P/E, a premium to the group, but a much more reasonable level versus the past, and therefore we think near-term downside risk is limited. We’re introducing FY12 estimates. Maintaining Outperform rating, $57 price target.

Fundamentals In 1Q11 Appear To Have Played Out Largely As We Had Previously Expected Following a material deceleration in ad growth in 4Q10 (given accrual of forward liability for potential make-goods arising from ratings softness), ratings did stabilize somewhat in 1Q11. Food Network ratings in prime time improved each month of the quarter (better than expected) though daypart and weekend ratings were somewhat softer than expected. HGTV ratings were down slightly in 1Q11 in its key demo, an improvement from the prior quarter, and is now basically at a “steady state”. Travel Channel ratings continued to grow at a rapid pace. Given the stabilization in ratings, we think 1Q11 ad growth likely re-accelerated, and we’re maintaining our 14.5% YoY ad growth estimate for the quarter (450bps) sequential improvement. We’re also maintaining our FY11E Lifestyle Media total revenue growth of ~11%, in line with guidance of 10-12%.

In terms of Lifestyle Media EBITDA margins, we’d note that there were ~$26.5 million of non-recurring expenses in the prior year quarter (Travel Channel transition costs and legal/marketing expenses related to affiliate deal negotiations), and we’re expecting ~120bps of margin expansion on a pro forma basis (excluding non-recurring items). Given much heavier programming expense in 2Q and 3Q, we expect less margin expansion in those two quarters.

Tribune Meets Capital Call And Its Ownership Stake In The Food/Cooking Partnership Reverts Back To 31%, Resulting In Increased Minority Interest Expense Management noted that in during 1Q, Tribune contributed $54 million to the Food/Cooking partnership, restoring its ownership stake back to 31% from 25%. Recall, in 4Q10, Scripps contributed Cooking Channel to the Partnership, but Tribune was unable to meet its capital commitment ($54 million) resulting in a reduction in its ownership stake from 31% to 25%. In addition, given the reduction in Tribune’s ownership stake, Scripps recorded $4.7 million less in minority interest expense in 4Q10, and a reversal would have to be recorded in 1Q11. We’d note that management’s FY11 minority interest expense guidance of $125-135 million was based on Tribune

125 WEEKS 21NOV08 - 6APR11HI-19NOV10

LO/HI DIFF

144.154

87.32%

LO-19DEC08 76.957

CLOSE 123.886

SCRIPPS NETWORKS INTERACTIVE Rel. S&P 500

80.00

100.00

120.00

140.00


HI-18FEB11

LO/HI DIFF

53.660

196.46%

LO-6MAR09 18.100

CLOSE 51.020

SCRIPPS NETWORKS INTERACTIVE

20.00

25.00

30.00

35.00

40.00

45.00

50.00

PEAK VOL.

VOLUME

11501.8

2884.6 5000

10000


75

not making the capital call, and therefore the guidance will have to be updated, likely on 1Q11 earnings. At this point, it’s difficult to get to an accurate new minority interest expense figure for 1Q11 and FY11 given limited disclosure – our new FY11 minority interest expense estimate is $153 million (including the $4.7 million reversal in 1Q11), which has a negative ~$0.02-0.03/quarter impact on EPS versus what we were previously modeling. However, given that management had already communicated its expectation for Tribune to make its capital call (sooner than later), we don’t think the EPS reduction arising from increased minority interest expense should come as a surprise to investors. We’d also note that the restoration of Tribune’s stake in Food/Cooking back to 31% could lower SNI’s effective tax rate somewhat but we’re not sure if it will have a material impact on tax rate guidance.

Potential Catalysts In The Next Few Quarters We think there are several potential upcoming events investors could increasingly focus on in the next several months:

• As the Tribune bankruptcy case progresses, the opportunity for Scripps to buy in the remaining stake in Food/Cooking will likely receive heightened attention. While the potential accretion from full ownership of Food/Cooking (we estimate ~$0.22 to FY EPS) is relatively well understood by investors, we think future events that increase the perceived likelihood of a deal will likely be a positive catalyst.

• With ~25% of Food affiliate deals slated to expire at the end of 2011, the preceding negotiations could garner some attention.

• The current NFL’s “lockout” could cause a material disruption in the upcoming upfront negotiations, and SNI (along with other cable network groups without exposure to NFL) could be potential beneficiaries.

Exhibit 84: Potential EPS Accretion From Remaining Food Network Stake Buy-in

($ in mm, except per share amt) 2011E 2011E 2011E

Advertising revenue 548.7 Food Network EBITDA 407.6 Value of Tribune's stake in Food 1,263.4

Affiliate revenue 190.3

Other revenue 2.0 Less: D&A 37.1 Financing:

Total Food Network revenue 741.0 Food Network EBIT 370.5 Cash 263.4

New debt 1,000.0

EBITDA 407.6 Minority interest expense 114.9

% margin 55% Tribune's stake in Food 31% Current 2011 net income estimate 465.9

Add: minority interest expense (tax effected) 74.7

EV/EBITDA multiple 10x Less: after tax interest expense on new debt 35.8

Total Food Network value 4,075.5 Adjusted 2011 net income 504.8

Tribune's stake 31% 2011 estimated diluted S/O 170.3

Value of Tribune's stake in Food 1,263.4 Adjusted 2011 EPS $2.96

Current 2011 EPS estimate $2.74

With $417mm cash (at end of 3Q10)

and estimated $400mm annual FCF,

we think SNI ought be able to

finance ~$500mm with cash on hand.

However, we conservatively assume

the majority of the purchase price is

financed with debt.

Assuming 5.5% annual interest on

new debt and 35% tax rate. SNI's

current tax rate of less than 33% is

lower than "normal" given that the

31% minority interest isn't "taxed".

A buy-in of the remaining stake in Food Network from

Tribune would be accretive by roughly $0.22 to our 2011 EPS

estimate.



76


F1Q11E F1Q11E F1Q10A F1Q11E 2011E 2011E 2010A 2011E 2011E

($ in mm, except per share amt) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus Guidance

Segment Revenue

Advertising 328.9 328.9 287.3 1,465.5 1,465.5 1,288.0

Y/Y growth 14.5% 14.5% 27.9% 13.8% 13.8% 27.6%

Affiliate fees, net 145.3 145.3 135.9 584.8 584.8 551.4

Y/Y growth 6.9% 6.9% 71.9% 6.1% 6.1% 69.2%

Others 5.2 5.2 5.4 24.3 24.3 27.8

Lifestyle Media 479.4 479.4 428.6 2,074.6 2,074.6 1,867.2 10-12% growth

Interactive Services 45.1 45.1 37.6 208.5 208.5 184.5

Corporate & Eliminations 4.0 4.0 3.2 16.0 16.0 15.5

Total revenue 528.5 528.5 469.4 523.9 2,299.2 2,299.2 2,067.2 2,274.7 2,294.5

Segment expense

Lifestyle Media 235.6 235.6 242.4 993.1 993.1 963.7

Programming expense 98.2 98.2 89.5 431.6 431.9 399.0 6-9% growth

Non-programming expense 137.4 137.4 152.9 561.6 561.2 564.6 flat to down 2%

Interactive Services 37.7 37.7 32.7 157.9 157.9 145.8

Corporate & Eliminations 20.6 20.6 19.1 88.5 88.5 83.9

Total segment expense 293.9 293.9 294.2 293.6 1,239.5 1,239.5 1,193.3 1,221.1

Segment profit (EBITDA):

Lifestyle Media 243.7 243.7 186.2 1,081.5 1,081.5 903.6

% margin 50.8% 50.8% 43.4% 52.1% 52.1% 48.4%

Interactive Services 7.4 7.4 4.9 50.7 50.7 38.7 55-55

% margin 16.5% 16.5% 13.0% 24.3% 24.3% 21.0%

Corporate & Eliminations (16.6) (16.6) (15.9) (72.5) (72.5) (68.4)

Total segment profit (EBITDA) 234.6 234.6 175.2 230.4 1,059.6 1,059.6 873.8 1,053.6

% margin 44.4% 44.4% 37.3% 44.0% 46.1% 46.1% 42.3% 46.3% 1,055.49

Reported Diluted EPS $0.59 $0.62 $0.43 $2.74 $2.85 $2.45

Recurring Diluted EPS $0.59 $0.62 $0.43 $0.60 $2.74 $2.85 $2.39 $2.79


Valuation Our valuation methodology derives a $57 price target for SNI shares. We average our DCF analysis and our one-year forward multiples on blended 2011/12E EBITDA and EPS. We apply a 10x EBITDA multiple and a 20x P/E multiple, consistent with historical trading levels and in line with other publicly traded entertainment/cable network companies.

Price Target Impediment A decline in advertising expenditures could materially affect Scripps Networks’ operating results. SNI’s business has significant exposure to advertising expenditures, with approximately 63% of overall revenues derived from advertising in 2010. An adverse change or decline in advertising expenditures could negatively impact many operating results

The loss or change in carriage agreements presents risk. Scripps Networks’ depends heavily on the carriage of its cable channels by pay TV operators (MSOs, DBSs, telcos, etc.), with ~27% of overall revenues derived from pay TV operator affiliate fees in 2010. A loss or material change in these carriage agreements could adversely affect both distribution and advertising revenue, which together account for the vast majority of the Company's total revenue.

Concerns regarding “cord cutting” could become an overhang on the sector. The proliferation of over-the-top online streaming services and their perceived threat to traditional methods of TV content viewing could become an overhang on the sector and potentially compress trading multiples.


77

Growth in piracy could threaten Scripps Networks’ business. SNI depends heavily on the protection of its intellectual property. A significant growth in the distribution of the Company's original content programming by others without proper authorization or compensation (i.e., piracy) could materially affect the Company's operating results.

The Edward W. Scripps Trust has much of the voting power. Class A Common Share holders are entitled to elect one-third of the board of directors but are not permitted to vote on any other matters. Common Voting Share holders are entitled to elect the remainder of the Board and to vote on all other matters. The Edward W. Scripps Trust holds ~90% of the Common Voting Shares, and as a result, it has the ability to elect two-thirds of the board of directors and to control the outcome of any matter that does not require a vote by the Class A Common Share holders. This could discourage others from initiating a potential merger or other value-enhancing transactions.

Exhibit 86: SNI Earnings Model Segment Details - SNI

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Dec Mar Jun Sep Dec Dec Mar Jun Sep Dec Dec Dec

($ in mm)

Segment revenue:

Advertising 1,009.5 287.3 331.5 316.4 352.8 1,288.0 328.9 378.4 358.7 399.5 1,465.5 1,585.9

Affiliate fees, net 325.9 135.9 138.6 139.0 138.0 551.4 145.3 146.7 147.4 145.4 584.8 649.2

Other 31.4 5.4 5.2 7.1 10.2 27.8 5.2 5.4 6.1 7.7 24.3 24.3

Lifestyle Media 1,366.8 428.6 475.2 462.5 501.0 1,867.2 479.4 530.5 512.2 552.6 2,074.6 2,259.5

Interactive Services 179.4 37.6 37.3 41.8 67.8 184.5 45.1 42.9 46.0 74.5 208.5 219.0

Corporate 0.7 3.3 3.6 4.4 4.3 15.5 4.0 4.0 4.0 4.0 16.0 18.0

Intersegment eliminations (0.1) (0.0) (0.0) (0.0) (0.0) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0

Total revenue 1,546.7 469.4 516.0 508.7 573.0 2,067.2 528.5 577.4 562.1 631.1 2,299.2 2,496.5

Segment profit (EBITDA):

Lifestyle Media 636.9 186.2 237.0 232.5 247.9 903.6 243.7 277.6 264.6 295.5 1,081.5 1,195.9

Interactive Services 30.8 4.9 6.0 7.1 20.8 38.7 7.4 8.4 9.4 25.4 50.7 57.0

Corporate (66.0) (15.9) (15.1) (15.8) (21.7) (68.4) (16.6) (17.4) (17.9) (20.6) (72.5) (75.6)

Intersegment eliminations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total segment profit (EBITDA) 601.7 175.2 227.9 223.8 247.0 873.8 234.6 268.6 256.1 300.4 1,059.6 1,177.3

Income Statement - SNI

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E


($ in mm, except per share data)

Total Revenue 1,546.7 469.4 516.0 508.7 573.0 2,067.2 528.5 577.4 562.1 631.1 2,299.2 2,496.5

YoY growth -2.8% 29.9% 31.9% 39.6% 33.3% 33.7% 12.6% 11.9% 10.5% 10.1% 11.2% 8.6%

Less: Operating expenses 945.0 294.2 288.2 284.9 326.0 1,193.3 293.9 308.8 306.0 330.8 1,239.5 1,319.1

EBITDA (incl. non-cash comp. expense) 601.7 175.2 227.9 223.8 247.0 873.8 234.6 268.6 256.1 300.4 1,059.6 1,177.3

YoY growth -7.5% 25.8% 37.2% 55.1% 62.5% 45.2% 33.9% 17.9% 14.4% 21.6% 21.3% 11.1%

% margin 38.9% 37.3% 44.2% 44.0% 43.1% 42.3% 44.4% 46.5% 45.6% 47.6% 46.1% 47.2%

Less: Depreciation & Amortization 83.0 31.4 33.2 30.3 30.1 125.0 30.7 32.0 32.8 32.9 128.4 129.5

Operating income / EBIT 518.7 143.7 194.7 193.5 216.9 748.9 203.9 236.6 223.3 267.5 931.2 1,047.8

YoY growth -10.0% 20.4% 32.8% 56.6% 68.0% 44.4% 41.9% 21.5% 15.4% 23.3% 24.4% 12.5%

% margin 33.5% 30.6% 37.7% 38.0% 37.8% 36.2% 38.6% 41.0% 39.7% 42.4% 40.5% 42.0%

Other gains (losses) (2.5) (0.1) (1.2) 0.0 (0.5) (1.8) 0.0 0.0 0.0 0.0 0.0 0.0

Interest, net (2.8) (8.5) (9.3) (8.8) (8.6) (35.2) (8.8) (8.8) (8.8) (8.8) (35.4) (35.4)

Equity in earnings of affiliates 18.6 6.2 8.4 6.9 8.6 30.1 7.0 7.0 7.0 7.0 28.0 30.0

Gains (losses) on repurchases of debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Miscellaneous, net (14.3) (0.6) (0.2) (0.3) (0.9) (2.1) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax income 517.7 140.7 192.4 191.4 215.4 739.9 202.0 234.7 221.4 265.6 923.8 1,042.4

Less: Income tax 160.5 44.9 60.7 55.3 60.1 220.9 66.7 77.5 73.1 87.7 304.9 328.4

Income after tax 357.2 95.8 131.7 136.1 155.4 519.0 135.4 157.3 148.4 178.0 619.0 714.0

Income (loss) from discontinued operations, net of tax 27.7 0.0 10.0 0.0 0.0 10.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 384.9 95.8 141.7 136.1 155.4 529.0 135.4 157.3 148.4 178.0 619.0 714.0

Less: net income attributable to noncontrolling interests 85.5 23.3 35.5 34.4 24.8 118.0 35.7 40.2 39.1 38.1 153.1 172.9

Net income attributable to SNI 299.3 72.5 106.2 101.7 130.6 411.0 99.7 117.0 109.3 139.9 465.9 541.2

Diluted weighted average shares O/S 165.4 167.0 167.8 167.8 169.2 168.0 169.6 170.1 170.5 170.9 170.3 172.0

Reported diluted EPS $1.81 $0.43 $0.63 $0.61 $0.77 $2.45 $0.59 $0.69 $0.64 $0.82 $2.74 $3.15

Reported diluted EPS excl. discontinued ops $1.64 $0.43 $0.57 $0.61 $0.77 $2.39 $0.59 $0.69 $0.64 $0.82 $2.74 $3.15

Recurring diluted EPS $1.65 $0.43 $0.58 $0.61 $0.77 $2.39 $0.59 $0.69 $0.64 $0.82 $2.74 $3.15



78

Time Warner Inc. (NYSE: TWX)

Core Advertising Fundamentals Are Sound, But HBO Subs Remain a Near-term Focus







Float: 1,009.0 3-Yr. Est. EPS Growth: 15.1%

Institutional Ownership: 83.4%


Revenue (B) $6.0 $5.9 $6.3 $7.2 $25.4 $6.3 $6.4 $6.4 $7.8 $26.9 $6.5 $6.8 $6.7 $8.2 $28.1 $29.2

Prev. $6.6 $6.7 $6.7 $8.2 $28.2 N/A

EPS (Op) - FD $0.39 $0.36 $0.49 $0.52 $1.83 $0.62 $0.49 $0.46 $0.68 $2.41 $0.55 $0.64 $0.78 $0.76 $2.73 $3.14

Prev. $0.57 $0.60 $0.74 $0.81 $2.71 N/A


Investment Opinion

Advertising Fundamentals Solid But Investors Are Likely To Continue To Scrutinize HBO Sub Trends In The Near Term Our channel checks indicate the network advertising market environment basically maintained the sequential momentum it has seen over the past few quarters. Results for Turner networks in 1Q11 were likely skewed due to the first year of NCAA basketball tournament; although it’s difficult to accurately define the financial impact of the tournament, we think there’s limited downside risk to management’s prior commentary that 1Q11 Media Networks adjusted operating income should grow modestly YoY, given that the ad sales effort and rating for the tournament are generally perceived to have been better than expected. The rebound in CNN ratings (from a pickup in the “hard news” cycle) could help ad growth modestly, though historically ratings and ad growth have not been as directly correlated as might have been expected. With HBO/Cinemax losing ~1.6mm subs in 2010, investors appear to be much more focused on the potential risks to HBO than the positive fundamentals of the advertising market, and we think material near-term stock price appreciation could be somewhat limited until investors regain confidence in the HBO business model. We’re taking 1Q11 estimates lower largely on difficult comps in Filmed Entertainment (and the Street may have to bring estimates down as well), but our FY11 estimates are revised slightly higher as Filmed Entertainment segment results will likely improve drastically in 2H with more tentpole releases. Maintaining Outperform rating, Average Risk, $41 price target.

Filmed Entertainment Comps In 1Q11 Were Generally Difficult There weren’t any noteworthy theatrical releases from Warner Bros. in 1Q11, with no film making (or expected to make) over $100mm at the domestic box office. This should not come as a huge surprise as the quarter’s release slate simply did not include any high-budget films. We think most films in 1Q11 performed reasonably well at the box office relative to their production budgets, but YoY profitability comps are much tougher given the very impressive performance of Valentine’s Day ($216mm global box, $52 production budget) in 1Q10 as well as the “spill over” of Sherlock Holmes’ profits from 4Q09 into 1Q10. On the home-video side, Harry Potter and the Deathly Hallows: Part 1 was the only major release in the quarter, though the year-ago quarter did not have many major releases either. We’re adjusting Filmed Entertainment segment estimates lower for 1Q11 largely on difficult YoY theatrical comps. Management has previously noted that FY11 should be a record year in terms of profits for the segment, and we think TWX is largely on track to meet this goal as most of Warner Bros’ tentpole films will be released much later in the year (beginning with The Hangover 2 in May and Green Lantern in June) and therefore profits are likely to be much more 2H-weighted.

125 WEEKS 21NOV08 - 6APR11HI-18JUN10

LO/HI DIFF

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49.69%

LO-20FEB09 94.041

CLOSE 129.549

TIME WARNER INC Rel. S&P 500

100.00

120.00


HI-4MAR11

LO/HI DIFF

38.340

167.24%

LO-6MAR09 14.347

CLOSE 36.250

TIME WARNER INC

15.00

20.00

25.00

30.00

35.00

PEAK VOL.

VOLUME

100916.4

17682.6 40000

80000


79

Exhibit 87: Studio Box Office Comparison (units in mm) 4Q09A 4Q10A


Sherlock Holmes 25-Dec-09 $209.0 $315.0 $90.0 Yogi Bear 17-Dec-10 $99.4 $100.2 $80.0

Invictus 11-Dec-09 $37.5 $84.7 $60.0 Harry Potter and the Deathly Hallows: Part I 19-Nov-10 $294.8 $657.2 $150.0

Ninja Assassin 25-Nov-09 $38.1 $23.5 $40.0 Due Date 05-Nov-10 $100.5 $109.2 $65.0

The Blind Side 20-Nov-09 $256.0 $53.2 $29.0 Hereafter 22-Oct-10 $32.7 $71.1 $50.0

The Box 06-Nov-09 $15.1 $18.3 $30.0 Life as We Know It 08-Oct-10 $53.4 $50.6 $38.0

Where the Wild Things Are 16-Oct-09 $77.2 $22.9 $100.0

The Invention of Lying 02-Oct-09 $18.5 $14.0 $18.5


1Q10A 1Q11E


Hubble 3D 19-Mar-10 $20.4 $20.4 NA Sucker Punch 25-Mar-11 $70.0 $70.0 NA

Cop Out 26-Feb-10 $44.9 $10.6 $30.0 Red Riding Hood 11-Mar-11 $78.5 $78.5 $42.0

Valentine's Day 12-Feb-10 $110.5 $106.0 $52.0 Hall Pass 25-Feb-11 $47.6 $47.6 $36.0

Edge of Darkness 29-Jan-10 $43.3 $37.8 $80.0 Unknown 18-Feb-11 $61.1 $43.9 $30.0

The Book of Eli 15-Jan-10 $94.8 $62.3 $80.0 The Rite 28-Jan-11 $32.9 $46.1 $37.0


2Q10A 2Q11E


Jonah Hex 18-Jun-10 $10.5 $0.4 $47.0 Green Lantern 17-Jun-11 164.3 164.3 NA

Splice 04-Jun-10 $17.0 $8.7 $30.0 The Hangover 2 26-May-11 $217.7 $217.7 NA

Sex and the City 2 27-May-10 $95.3 $193.0 $100.0 Something Borrowed 06-May-11 $37.5 $37.5 NA

A Nightmare on Elm Street 30-Apr-10 $63.1 $52.6 $35.0 Arthur (2011) 08-Apr-11 $45.8 $45.8 NA

The Losers 23-Apr-10 $23.6 $5.8 $25.0 Born to Be Wild (IMAX) 08-Apr-11 $1.0 $1.0 NA

Clash of the Titans 02-Apr-10 $163.2 $330.0 $125.0



Source: Boxofficemojo.com, HSX.com

Financial Impact of The NCAA Basketball Tournament Is Difficult To Define Given the nature of the shared contract with CBS, the financial impact of the NCAA basketball games on Turner is difficult to define with much accuracy. On the 4Q10 earnings call, management noted that Media Networks adjusted operating income should be up only modestly in 1Q11 given that the NCAA broadcast rights fees will pressure margins. We are expecting ~3% adjusted operating income growth in Media Networks in 1Q11 and we think downside risk is limited as recent press reports and management commentary since its last earnings call suggest the joint ad sales effort with CBS as well as ratings for the tournament have been better than previously expected. For the most part, we think investors already recognize that the upside from the NCAA basketball tournament comes from longer-term affiliate fee growth potential and we don’t think there will be much emphasis on 1Q11 segment results in isolation.

Reversal of CNN Ratings Should Help Modestly Given the disruption from the NCAA tournament, we think it’s also difficult to put core 1Q11 ratings (for TNT, TBS, truTV) into perspective. However, the massive rebound in CNN ratings in 1Q11 is noteworthy given that the network has experienced precipitous ratings declines over the past few quarters. While its programming is being restructured, the ratings rebound in the quarter gives increased credibility to management’s historical commentary that CNN ratings tend to be impacted much more by large-scale international events (earthquake in Japan, socio-political unrest in the Middle East, etc.) and that the ratings declines over the past few quarters doesn’t necessarily signal a secular viewership shift away from CNN. We think ad revenue growth could get a modest boost from the ratings rebound at CNN, though we are largely maintaining our ad growth estimates for 1Q11 and FY11 for now. We’d note that historically ratings and ad growth have not been as directly correlated as one might have expected – even when CNN ratings were declining drastically in early 2010, adverse impact on ad growth was largely muted until 3Q10.


80


F1Q11E F1Q11E F1Q10A FY1Q11E FY2011E FY2011E FY2010A FY2011E

($ in mm, except per share amt) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus

Segment Revenues

Subscription (Affiliate) 2,048 2,048 1,888 8,323 8,323 7,671

YoY Change 8.5% 8.5% 7.5% 8.5% 8.5% 8.4%

Advertising 995 995 790 4,187 4,182 3,736

YoY Change 26.0% 26.0% 9.3% 12.1% 11.9% 14.2%

Content 252 252 252 963 963 942

YoY Change 0.0% 0.0% 22.3% 2.2% 2.2% 15.0%

Other 28 28 28 131 131 131

YoY Change 0.0% 0.0% 40.0% 0.0% 0.0% 54.1%

Media Networks 3,324 3,324 2,958 13,604 13,599 12,480

yoy change 12.4% 12.4% 9.3% 9.0% 9.0% 10.9%

Filmed Entertainment 2,502 2,629 2,694 11,822 11,868 11,622

yoy change -7.1% -2.4% 2.3% 1.7% 2.1% 5.0%

Publishing 781 781 799 3,611 3,619 3,675

yoy change -2.3% -2.3% -0.9% -1.7% -1.5% -1.6%

Intersegment eliminations (129) (129) (129) (889) (889) (889)

Total Revenues 6,477 6,605 6,322 28,148 28,197 26,888

yoy change 2.5% 4.5% 5.4% 4.7% 4.9% 5.9%

Adjusted Segment Operating Income

Media Networks 1,177 1,176 1,142 4,502 4,541 4,165

yoy change 3.1% 3.0% 22.0% 8.1% 9.0% 18.3%

% Margin 35.4% 35.4% 38.6% 33.1% 33.4% 33.4%

Filmed Entertainment 106 151 307 1,189 1,119 1,105

yoy change -65.4% -50.8% 43.5% 7.6% 1.3% -1.1%

% Margin 4.3% 5.8% 11.4% 10.1% 9.4% 9.5%

Publishing 55 55 50 514 515 526

yoy change 9.3% 9.3% -256.3% -2.4% -2.1% 88.5%

% Margin 7.0% 7.0% 6.3% 14.2% 14.2% 14.3%


Adjusted Operating Income 1,248 1,292 1,415 5,804 5,775 5,400

yoy change -11.8% -8.7% 7.5% 6.9%

% Margin -11.8% -8.7% 22.4% 20.6% 20.5% 20.1%

Segment Operating Income

Media Networks 1,177 1,176 1,201 4,502 4,541 4,224

yoy change -2.0% -2.1% 28.3% 6.6% 7.5% 21.7%

% Margin 35.4% 35.4% 40.6% 33.1% 33.4% 33.8%


yoy change -65.4% -50.8% 43.5% 7.4% 1.1% 2.1%

% Margin 4.3% 5.8% 11.4% 10.1% 9.4% 9.5%

Publishing 55 55 50 514 515 515

yoy change 9.3% 9.3% 6.3% -0.3% 0.0% 109.3%

% Margin 7.0% 7.0% 6.3% 14.2% 14.2% 14.0%


Total Operating Income 1,248 1,292 1,463 5,804 5,775 5,428

yoy change -14.7% -11.7% 42.9% 6.9% 6.4% 21.4%

% Margin 19.3% 19.6% 23.1% 20.6% 20.5% 20.2%

F1Q11E F1Q11E F1Q10A FY1Q11E FY2011E FY2011E FY2010A FY2011E FY2011E

New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus Guidance

Revenue 6,477 6,605 6,322 6,532 28,148 28,197 26,888 28,350 N/A

yoy change 2.5% 4.5% 5.4% 3.3% 4.7% 4.9% 5.9% 5.4% -

Operating Income 1,248 1,292 1,463 1,321 5,804 5,775 5,428 5,889 N/A

yoy change -14.7% -11.7% 42.9% -9.7% 6.9% 6.4% 21.4% 8.5% -

Adj. EPS from Cont. Ops $0.55 $0.57 $0.61 $0.58 $2.73 $2.71 $2.41 $2.74 N/A

yoy change -10.6% -7.2% - -5.5% 13.3% 12.7% - 13.8% low teens



81

Valuation Based on our valuation methodology, we derive a $41 price target for Time Warner. We average our sum-of-the-parts valuation, DCF analysis and blended 2011/12E P/E multiple-based methodologies. We use a 15x P/E multiple since we believe that most comparable publicly traded companies in the large-cap media segment have historically traded at this level.

Price Target Impediment Continued deterioration in global macroeconomic conditions could have an adverse effect on TWX's businesses. Virtually all of TWX's businesses are exposed to the global economy. A continued deterioration would likely have negative consequences for TWX's cable, film, print and interactive businesses, among others, and consequently our price target.

Much of TWX's business is based on consumer preferences for content, which can be difficult to predict. The hit-driven nature of the company's content-driven business can be volatile and is based on consumer preferences, which can change rapidly. An unexpected shift in these preferences could affect TWX's operating results and, therefore, our price target.

Excess cash could be a dilutive acquisition waiting to happen. With a significant amount of cash or cash availability on its balance sheet, TWX could choose to make an acquisition with unfavorable economics to the business. Any such acquisition could be dilutive to earnings and/or have an adverse effect on the company's multiple.

A decline in advertising expenditures could materially affect TWX's operating results. The company’s business has significant exposure to overall advertising expenditures. An adverse change or decline in overall advertising expenditures could negatively affect many of the company's business units and also our price target.

The loss of carriage agreements presents risk. A large portion of TWX's businesses depend heavily on the carriage of the company's cable channels on multi-system operators (MSOs). A loss of these carriage agreements could adversely affect affiliate and advertising revenue as well as our price target.

Growth in piracy could threaten TWX's business. The company's business depends heavily on the protection of its intellectual property. Significant growth in the distribution of the company's intellectual property by others without proper authorization or compensation (piracy) could materially affect the company's operating results and also our price target.


82

Exhibit 89: TWX Earnings Model

Segment Details - TWX

Fiscal Year Ended Dec 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E


figures in millions

Segment Revenues

Media Networks 11,253 2,958 3,170 3,004 3,348 12,480 3,324 3,444 3,241 3,595 13,604 14,608

Filmed Entertainment 11,066 2,694 2,516 2,776 3,636 11,622 2,502 2,649 2,914 3,756 11,822 11,940

Publishing 3,736 799 919 901 1,056 3,675 781 899 889 1,043 3,611 3,585

Intersegment eliminations (667) (129) (228) (304) (228) (889) (129) (228) (304) (228) (889) (889)

Total Revenues 25,388 6,322 6,377 6,377 7,812 26,888 6,477 6,764 6,741 8,166 28,148 29,245

Segment EBIT

Media Networks 3,470 1,201 981 1,138 904 4,224 1,177 1,104 1,224 996 4,502 4,938

Filmed Entertainment 1,084 307 173 200 427 1,107 106 238 393 451 1,189 1,182

Publishing 246 50 153 141 171 515 55 148 133 177 514 510

Intersegment eliminations (330) (95) (113) (132) (78) (418) (90) (105) (127) (78) (400) (400)

Total Segment EBIT 4,470 1,463 1,194 1,347 1,424 5,428 1,248 1,386 1,624 1,546 5,804 6,230

Income Statement - TWX

Fiscal Year Ended Dec 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E


figures in millions

Revenues 25,388 6,322 6,377 6,377 7,812 26,888 6,477 6,764 6,741 8,166 28,148 29,245

Year-Over-Year Growth -4.0% 5.4% 7.7% 1.8% 8.3% 5.9% 2.5% 6.1% 5.7% 4.5% 4.7% 3.9%


EBITDA 5,418 1,695 1,430 1,569 1,672 6,366 1,476 1,628 1,852 1,801 6,757 7,214

Year-Over-Year Growth -366.9% 33.9% 16.1% 6.0% 16.1% 17.5% -12.9% 13.9% 18.0% 7.7% 6.1% 6.8%

Margin 21.3% 26.8% 22.4% 24.6% 21.4% 23.7% 22.8% 24.1% 27.5% 22.1% 24.0% 24.7%

Less: Depreciation & Amortization 948 232 236 222 248 938 228 242 228 254 952 984



Margin 17.6% 23.1% 18.7% 21.1% 18.2% 20.2% 19.3% 20.5% 24.1% 18.9% 20.6% 21.3%

Less: Net Interest Expense (1,166) (296) (300) (299) (283) (1,178) (294) (292) (292) (292) (1,170) (1,170)

Other Income/(Expense) (67) (53) (17) (307) 46 (331) (3) (3) (10) 15 - -

Pre-tax Income 3,237 1,114 877 741 1,187 3,919 951 1,092 1,322 1,270 4,635 5,061

Less: Income Tax (1,153) (389) (317) (221) (421) (1,348) (342) (393) (476) (457) (1,669) (1,822)


Discontinued operations net of tax 428 - - - - - - - - - - -

Net Income 2,512 725 560 520 766 2,571 609 699 846 813 2,966 3,239

Less: Minority Interest (35) - 2 2 3 7 - - - - - -

Net Income (Reported) 2,477 725 562 522 769 2,578 609 699 846 813 2,966 3,239

Income from Continuing Operations attributable to

TWX shareholders 2,088 725 560 520 766 2,571 609 699 846 813 2,966 3,239

Adjusted Income from Cont. Operations 2,192 715 580 708 754 2,757 609 699 846 813 2,966 3,239





Adjusted Basic EPS $1.85 $0.62 $0.51 $0.63 $0.68 $2.44 $0.56 $0.65 $0.80 $0.78 $2.78 $3.20

Adjusted Diluted EPS $1.83 $0.61 $0.50 $0.62 $0.67 $2.41 $0.55 $0.64 $0.78 $0.76 $2.73 $3.14





83

Viacom Inc. (NYSE: VIA.B)

Looking For Further Upside In FY11 And Expectations for FY12 Appear Conservative


Price: 47.36 Price Target: 52.00 (Prior 48.00) Implied All-in Return: 11%



Float: 554.7 Avg. Daily Volume (MM): 3.66

Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2E Q3E Q4E 2011E 2012E

Revenue (B) $4.2 $2.9 $3.3 $3.3 $13.8 $4.1 $2.8 $3.3 $3.3 $13.5 $3.8 $2.9 $3.4 $3.6 $13.8 $14.3

Prev. $2.9 $3.4 $3.5 $13.7 N/A

EPS (Op) - FD $0.76 $0.29 $0.49 $0.69 $2.23 $1.09 $0.40 $0.68 $0.75 $2.92 $1.02 $0.64 $0.88 $0.99 $3.53 $4.11

Prev. $0.64 $0.87 $0.98 $3.51 N/A


Investment Opinion

Comfortable With Our Above-Consensus EPS Estimates For F2Q11 and FY11 As the Core Business Hums Along Nicely Viacom continued to post strong ratings gains across many of its flagship networks (especially at MTV), giving us increased confidence in our above-consensus estimates in an environment where the network TV ad market remains robust. Management has guided to double-digit domestic ad growth in Media Networks, and we think domestic ad growth accelerated sequentially despite the shift of Teen Choice Awards and Easter out of F2Q and into F3Q. We think domestic ad growth could accelerate even further to a mid-teens rate in F3Q, helped by Teen Choice Awards and Easter. Filmed Entertainment comps were generally favorable in the quarter (for both theatricals and home video), and we think Street estimates for the segment could be revised higher over the next few weeks. Our EPS estimates for F2Q11 and FY11 remain above consensus, and our newly introduced FY12 EPS estimate of $4.11 is also significantly above consensus, despite it being based on what we think are relatively conservative assumptions. VIA shares continue to demonstrate exceptional value in the group, trading at just 11.5x FY12E P/E. Maintaining Outperform rating; new $52 price target.

F2Q Ad Growth Impacted Negatively Impacted By Shift of Teen Choice Awards and Easter Into F3Q, But We’re Still Comfortable With Double-Digit F2Q Domestic Ad Growth Guidance; F3Q11 Should See Further Acceleration With the exception of VH1 (which is in the midst of a programming overhaul), overall ratings across Viacom’s major networks maintained their positive momentum in F2Q. MTV total day ratings were up 20%+ in its key demo and Comedy Central also posted low-to-mid single digit ratings growth in the quarter, while BET staged a successful turnaround in ratings in the quarter. VH1 ratings continued to suffer but much of the reprogrammed content is scheduled to debut in May/June – the reprogramming effort has been taking longer than expected as we believe management wants to ensure that past mistakes are avoided with more robust market research. Management has previously guided to double-digit domestic ad growth in F2Q11; we’re maintaining our 11% domestic ad growth estimate for the quarter (100bps QoQ improvement). We’d note that the shift of Teen Choice Awards and Easter out of F2Q and into F3Q likely had a ~200bps negative impact on domestic ad growth, but we’re still comfortable with our current estimate as ratings and pricing trends have both been solid. Given the Teen Choice Awards/Easter shift into F3Q, we think domestic ad growth could realistically improve at least another ~200bps or so to the mid-teens in F3Q11, closing the ad growth gap with peers even further.

As noted previously, while F2Q should see some modest improvement in margins in Media Networks, much of the operating leverage will likely come in F2H as programming and marketing expenses are much more F1H-weighted.

125 WEEKS 21NOV08 - 6APR11HI-8APR11

LO/HI DIFF

220.326

120.33%

LO-21NOV08 100.000

CLOSE 220.326

VIACOM INC-NEW Rel. S&P 500

150.00

200.00


HI-1APR11

LO/HI DIFF

54.403

318.48%

LO-21NOV08 13.000

CLOSE 53.920

VIACOM INC-NEW

15.00

20.00

25.00

30.00

35.00

40.00

45.00 50.00

PEAK VOL.

VOLUME

969.7

48.3 400

800


84

Filmed Entertainment Comps Were Generally Favorable Most Paramount theatrical releases in the quarter performed decently at the box office (vs. their production costs) though Rango was a slight disappointment with just over $100mm total expected domestic box office. Depending on its international box office performance, we think the film could break-even in terms of ultimate profitability. Our sense is that Paramount could release a self-produced animated film every one to two years in order to mitigate the potential loss of the DreamWorks Animation distribution deal. F2Q likely also benefited from the flow-through of profits from True Grit and The Fighter, which were both mid-to-late December releases. YoY comps in home video were quite favorable as Up in the Air was the only notable home video release in the year-ago quarter, while F2Q11 saw a slew of October/November 2010 theatrical releases hit the home video window, including Megamind (DWA), Paranormal Activity 2, Jackass 3, etc. We think F3Q could further benefit from the home video release of True Grit and The

Fighter. We are maintaining our Filmed Entertainment segment estimates for now, but we think bias is towards the upside and Street estimates (which are generally lower than ours) could come up modestly over the next few weeks.

Exhibit 90: YoY Studio Box Office Comparison (units in mm) F1Q10A F1Q11A


The lovely bones (DW) 11-Dec-09 $44.1 $49.5 $65.0 True Grit 22-Dec-10 $169.8 $67.5 $38.0

Up in the Air 04-Dec-09 $83.8 $79.4 $25.0 The Fighter 10-Dec-10 $93.4 $30.1 $25.0

Morning Glory 10-Nov-10 $31.0 $20.8 $40.0

Megamind (DWA) 05-Nov-10 $148.4 $171.1 $130.0

Paranormal Activity 2 22-Oct-10 $84.8 $91.9 $3.0

Jackass 3 15-Oct-10 $117.2 $53.0 $20.0

Case 39 01-Oct-10 $13.3 $14.9 $26.0


F2Q10A F2Q11E


How to Train Your Dragon (DWA) 26-Mar-10 $217.6 $277.3 $165.0 Rango 04-Mar-11 $103.3 $103.3 $135.0

She's Out of My League 12-Mar-10 $32.0 $16.8 $20.0 Justin Bieber: Never Say Never 11-Feb-11 $72.2 $72.2 $13.0

Shutter Island 19-Feb-10 $128.0 $166.8 $80.0 No Strings Attached 21-Jan-11 $70.3 $53.5 $25.0


F3Q10A F3Q11E


Shrek Forever After (DWA) 21-May-10 $238.4 $507.0 $165.0 Super 8 10-Jun-11 $173.7 $173.7 NA

Iron Man 2 07-May-10 $312.4 $309.6 $200.0 Kung Fu Panda 2: The Kaboom of Doom (DWA) 26-May-11 $182.5 $182.5 NA

Thor 06-May-11 $191.0 $191.0 NA



Source: boxofficemojo.com, HSX.com

With Current Debt Leverage Well Within Target and EBITDA Continuing To Grow, We Think There’s Upside Potential To Future Stock Buybacks Management has said that it intends to maintain a debt leverage target of ~2x. With current debt leverage already below that level and EBITDA continuing to grow, it’s certainly possible that the company “levers up” and uses the cash raised for additional stock buybacks. In the recent $500mm senior notes offering at the end of March, Viacom indicated that it intends to use the proceeds for – among other things – buying back stock under its share repurchase program. While management has previously indicated that it plans to use all of its $4bn share-repurchase program by FY12 (at least $1.75bn in FY11), we think there’s upside potential to that goal given a debt-leverage ratio that should decline (with EBITDA growth) all else equal.

We’re Introducing FY12 Estimates – Consensus Appears Too Low Even On Relatively Conservative Assumptions Our official FY12 EPS estimate is $4.11 (17% growth) vs. consensus of $3.92. To arrive at our FY12 estimates we make the following assumptions:

• ~7% revenue growth in Media Networks;

• A modest ~50bps EBIT margin expansion in Media Networks;

• A decline in Filmed Entertainment from FY11; and

• $2.25bn of stock buybacks (the balance of the $4bn authorization).

VIA shares are trading at 11.5x FY12E P/E, offering one of the best values in the group, in our view.


85


F2Q11E F2Q11E F2Q10A FY2011E FY2011E FY2010A

($ in M, except per share data) New Est. Prior Est. Reported New Est. Prior Est. Reported

Segment Revenues

Advertising 1,060 1,057 960 4,991 4,936 4,553

Affiliate 850 850 783 3,385 3,385 3,113

Ancillary 130 130 195 632 632 824

Media Networks 2,040 2,038 1,938 9,008 8,952 8,490


Corporate / Eliminations (38) (38) (38) (151) (151) (128)__________ __________ __________ __________ __________ __________

Total Revenues 2,924 2,915 2,786 13,757 13,663 13,515

Segment EBIT (incl. equity-based comp.)

Media Networks 767 766 684 3,672 3,650 3,191

Margin 37.6% 37.6% 35.3% 40.8% 40.8% 37.6%

Filmed Entertainment (14) (14) (86) 230 230 331

Margin -1.5% -1.6% -9.7% 4.7% 4.7% 6.4%

Corporate / Eliminations (65) (65) (64) (262) (262) (265)

Margin N/A N/A N/A N/A N/A N/A__________ __________ __________ __________ __________ __________

Segment EBIT 688 687 534 3,640 3,618 3,257

F2Q11E F2Q11E F2Q10A F2Q11E FY2011E FY2011E FY2010A FY2011E

New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus

Revenue 2,924 2,915 2,786 2,971 13,757 13,663 13,515 13,985

y/y growth 5.0% 4.6% -4.1% 1.8% 1.1% -1.8%

Operating Income 688 687 534 664 3,640 3,618 3,257 3,597

y/y growth 28.8% 28.6% 20.8% 11.8% 11.1% 42.4%

EPS $0.64 $0.64 $0.40 $0.60 $3.53 $3.51 $2.92 $3.44


Valuation Based on our valuation methodology, we derive a $52 price target for Viacom. We average our sum-of-the-parts valuation, DCF analysis and blended FY2011/12E P/E multiple-based methodologies. We use a 15x P/E multiple as this is where publicly traded companies in the large-cap media space have historically traded.

Price Target Impediment Continued deterioration in global macroeconomic conditions could have an adverse impact on Viacom's businesses. Virtually all of Viacom’s businesses are exposed to the global economy. A continued deterioration would likely have negative consequences for Viacom’s cable, film, licensing, online and interactive businesses among others, and consequently our price target.

Much of Viacom’s business is based on consumer preferences for particular content, which can be difficult to predict. The hit-driven nature of Viacom’s content-driven business can be volatile and is based on consumer preferences, which can change rapidly. An unexpected shift in these preferences could impact Viacom’s operating results, and therefore our price target.

A decline in advertising expenditures could materially impact Viacom’s operating results. Viacom’s business has significant exposure to overall advertising expenditures. An adverse change or decline in overall advertising expenditures could negatively impact many of the company’s business units and also our price target.

The loss of carriage agreements presents risk. A large portion of Viacom’s businesses depend heavily on the carriage of the company’s cable channels on multi-system operators (MSOs). A loss of these carriage agreements could adversely impact both affiliate and advertising revenue, which comprise a substantial portion of the company’s total revenue, as well as our price target.

Growth in piracy could threaten Viacom’s business. Viacom’s business depends heavily on the protection of its intellectual property. A significant growth in the distribution of the company's intellectual property by others without proper authorization or compensation (piracy) could materially impact the company’s operating results, and also our price target.


86

Exhibit 92: VIA.B Earnings Model Segment Details - VIA

Fiscal Year Ended Sep 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Sep Dec Mar Jun Sep Sep Dec Mar Jun Sep Sep Sep

figures in millions

Segment Revenues

Media Networks 8,430 2,333 1,938 2,091 2,128 8,490 2,380 2,040 2,270 2,318 9,008 9,616

Filmed Entertainment 5,498 1,791 886 1,245 1,231 5,153 1,497 922 1,213 1,268 4,900 4,819

Corporate / Eliminations (164) (26) (38) (35) (29) (128) (49) (38) (35) (29) (151) (151)

Total Revenues 13,764 4,098 2,786 3,301 3,330 13,515 3,828 2,924 3,448 3,558 13,757 14,285

Segment EBIT (incl. equity-based comp. and restructuring charges)

Media Networks 2,582 861 684 784 862 3,191 1,042 767 905 959 3,672 3,966

Filmed Entertainment (57) 298 (86) 69 50 331 65 (14) 61 119 230 205

Corporate / Eliminations (238) (67) (64) (59) (75) (265) (67) (65) (60) (70) (262) (260)

Total Segment EBIT 2,287 1,092 534 794 837 3,257 1,040 688 905 1,007 3,640 3,911

Income Statement - VIA

Fiscal Year Ended Sep 30 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Sep Dec Mar Jun Sep Sep Dec Mar Jun Sep Sep Sep

figures in millions

Revenues 13,764 4,098 2,786 3,301 3,330 13,515 3,828 2,924 3,448 3,558 13,757 14,285

Year-Over-Year Growth -5.9% -3.4% -4.1% 0.1% 0.4% -1.8% -6.6% 5.0% 4.4% 6.8% 1.8% 3.8%


EBITDA 2,653 1,241 612 872 909 3,634 1,111 770 987 1,084 3,952 4,249


Margin 19.3% 30.3% 22.0% 26.4% 27.3% 26.9% 29.0% 26.3% 28.6% 30.5% 28.7% 29.7%

Less: Depreciation & Amortization 366 149 78 78 72 377 71 82 82 77 312 338

Operating Income 2,287 1,092 534 794 837 3,257 1,040 688 905 1,007 3,640 3,911


Margin 16.6% 26.6% 19.2% 24.1% 25.1% 24.1% 27.2% 23.5% 26.3% 28.3% 26.5% 27.4%

Gains on sale of equity investment & bus. - - - - - - - - - - - -


Equity in income of investees (83) (20) (28) (24) (15) (87) 24 15 15 (10) 44 44

Other Income/(Expense) (205) 10 (10) (3) 5 2 - - - - - -

Pre-tax Income 1,555 977 383 663 724 2,747 960 599 816 893 3,268 3,539

Less: Income Tax 471 316 138 239 234 927 331 210 286 313 1,139 1,239

Less: Equity in earnings of affiliated companies, net of tax - - - - - - - - - - - -

Less: Minority Interest 15 (33) 2 6 2 (23) 9 8 8 8 32 30


Gain/(Loss) on disposition of discontinued operations net of tax 21 - 2 2 (299) (295) (10) - - - (10) -

Other Non Recurring Items (311) 31 - - 27 58 - - - - - -

Adjusted Net Income from Cont. Operations 1,359 663 243 418 461 1,785 620 382 523 573 2,098 2,270

Net Income (Reported) 1,090 694 245 420 189 1,548 610 382 523 573 2,088 2,270

Basic Weighted Average Shares O/S 608 607 608 608 609 608 603 594 585 574 589 546

Diluted Weighted Average Shares O/S 609 609 610 611 611 610 608 600 591 581 595 552







87

Advertising Agencies Company Notes


88

Summary of Estimate Changes

Exhibit 93: Summary of Estimate Changes for Advertising Agency Companies Previewed In This Note

($ in mm except per share amt)

Estimate Changes Estimate ChangesCompany Period Metric New Est. Prior Est. Consensus Period Metric New Est. Prior Est. Consensus

IPG 1Q11 Revenue 1,450 1,437 1,446 2011 Revenue 6,984 6,949 6,955EBIT (47) (47) (47) EBIT 684 681 690EPS ($0.12) ($0.12) ($0.09) EPS $0.62 $0.61 $0.64

Comments:

MDCA 1Q11 Revenue 196 196 189 2011 Revenue 860 860 859EBITDA 9 12 9 EBITDA 110 110 100

Comments:

OMC 1Q11 Revenue 3,131 3,115 3,138 2011 Revenue 13,416 13,379 13,410EBIT 329 337 319 EBIT 1,633 1,638 1,645EPS $0.61 $0.63 $0.60 EPS $3.18 $3.18 $3.17

Comments:

We believe much of the momentum in organic growth from 2Q/3Q/4Q10 continued into 1Q11, though the comps did/do get incrementally tougher, especially in the U.S. IPG recently had some high-profile account losses (namely, Microsoft’s North

America media buying business) but we think the loss is manageable and momentum from IPG’s existing clients remain solid. With the Company recently proving specific long-term financial targets (13% EBIT margin by 2014 on 4-5% annual organic

growth), we think management will continue to focus on its operational/financial turnaround over the next couple of years. Given

IPG’s current net cash position and significant future FCF generation, we just don’t see how IPG would not accelerate return of capital to shareholders in the future (2012 and beyond) – recent “positive watch” in S&P credit rating (for potential upgrade to

investment grade) is extremely encouraging in terms of allowing IPG increased flexibility in future excess capital deployment (through easier access to short-term liquidity). We’re tweaking our FY11 estimates slightly higher and introducing FY12 estimates,

with upside bias from potential acceleration in future buybacks.

Management previously noted ~$90-110mm of incremental severance and real-estate related charges in 2011 and ~$120mm accounting gain related to the consolidation of Clemenger in 1Q11. We’re conservatively expecting the net impact to be a gain of

$10mm above-the-line in 1Q11 (or ~30bps of positive impact to margins). It’s unclear how the rest of the Street is modeling this charge/gain, making margin comparisons for the quarter confusing – excluding the net gain, we’re expecting ~20bps of YoY

margin expansion, and we believe the Street is expecting a similar degree of “core” margin improvement in the quarter. Some

recent high-profile account wins as well as the fact that OMC will now have fully anniversaried the Chrysler loss/BBDO Detroit closing, should provide top-line support. We’re expecting ~15mm shares of net stock buybacks in 2011 (more weighted to the

first half of 2011), which should further support EPS growth this year. We’re tweaking our 1Q11 EPS estimate slightly lower but our FY11 and FY12 EPS estimates remain unchanged.

With the acquisition plan now largely complete, the focus for the Company is shifting back to organic growth. We think MDC is

better positioned than ever to outperform peers on top-line growth with new/improved capabilities as well as a robust business pipeline. While the recent Burger King account loss is somewhat disappointing, we think major account wins in 4Q10 (MetLife, Jell-

O (Kraft) and Milka (Kraft), additional duties for BMW) will be more than enough to offset that loss, and we don’t think FY11 guidance is at risk. Further, given that MDC has been generating 50%+ of its revenues from higher-growth “digital”, with think

MDCA ought to trade at a premium to its larger agency holding company peers. We’re tweaking our 1Q11 EBITDA estimate slightly lower (largely due to seasonality), but maintaining our FY11 estimates.

Source: RBC Capital Market estimates


89

Advertising Agency Comp Table

Exhibit 94: Advertising Agency Comp Table

Ticker OMC IPG MDCA PUB-FR HAV-FR WPP-LN

CompanyOmnicom Group

Inc.

Interpublic Group

of Companies,

Inc.

MDC Partners Inc.Publicis Groupe

S.A. Havas WPP PLC

Price as of:

2011/04/06 $48.76 $12.41 $16.95 € 40.02 € 3.89 788.47p

50 Day Average Volume 2,185,567 8,332,766 78,607 845,791 1,748,331 5,027,672

ENT. VALUE CALCULATION

Basic Shares Out. 896,819 470,809 28,024 235,470 429,937 1,233,100

Diluted Shares Out. 281,721 529,709 28,024 235,470 429,937 1,233,100

Diluted Equity Market Cap 14,798,660 6,727,461 471,226 9,422,350 1,672,454 9,722,562

Total EV 15,839,260 6,649,634 833,727 9,310,350 1,514,454 11,638,562

KEY FINANCIAL METRICS

Net Revenues

2008A 13,359,800 6,962,700 584,648 4,704,000 1,568,000 7,476,900

2009A 11,720,800 6,027,600 545,923 4,524,000 1,441,000 8,684,300

2010A 12,542,600 6,531,900 697,825 5,418,000 1,558,000 9,331,000

2011E 13,416,473 6,983,594 860,054 5,747,600 1,615,030 9,687,410

EBITDA

2008A 1,925,200 843,100 54,748 884,000 232,000 1,291,200

2009A 1,617,800 560,700 54,715 772,000 204,000 1,243,000

2010A 1,713,100 747,100 68,453 967,000 233,300 1,439,000

2011E 1,912,166 882,844 92,868 1,061,920 248,660 1,500,450

EPS

2008A $3.18 $0.52 $0.00 € 2.12 € 0.24 38.40p

2009A $2.53 $0.19 ($0.57) € 1.90 € 0.21 35.30p

2010A $2.70 $0.45 ($0.55) € 2.35 € 0.26 45.90p

2011E $3.18 $0.62 $0.09 € 2.78 € 0.32 53.62p

TRADING/VALUATION MULTIPLES Average

EV/2008A EBITDA 8.2x 7.9x 15.2x 10.5x 6.5x 9.0x 9.6x



EV/2011E EBITDA 8.3x 7.5x 9.0x 8.8x 6.1x 7.8x 7.9x

Price/2008A EPS 15.3x 23.8x N/A 18.9x 16.2x 20.5x 19.0x



Price/2011E EPS 15.3x 20.1x N/A 14.4x 12.2x 14.7x 15.3x

USD/EUR/GBP in 000s; EBITDA for IPG excludes amortization of stock-based compensation

Source: Company reports, RBC Capital Markets estimates for OMC, IPG and MDCA, Thomson One Analytics for others


90

Interpublic Group of Companies (NYSE: IPG)

With Longer-term Targets Set, IPG Is Focused On Execution; We See Upside From Future Buybacks

Outperform, Above Average Risk


Shares O/S (MM): 529.7 Implied All-in Return: 15%

Dividend: 0.24 Market Cap (MM): 6,574

Float (MM): 485.1 Yield: 1.9%

Institutional Ownership: 96.5% Avg. Daily Volume (MM): 6.98


Revenue (B) $1,325 $1,474 $1,427 $1,801 $6,028 $1,341 $1,618 $1,561 $2,012 $6,532 $1,450 $1,744 $1,666 $2,124 $6,984 $7,353

Prev. $1,437 $1,738 $1,660 $2,115 $6,949 N/A

EBITDA $(30.8) $155.1 $113.2 $323.2 $560.7 $(8.3) $226.8 $149.5 $379.1 $747.1 $2.4 $248.8 $170.3 $461.4 $882.8 $1020.8

Prev. $3.5 $248.8 $170.6 $460.3 $883.3 N/A

EPS (Op) - FD $(0.16) $0.04 $0.03 $0.23 $0.19 $(0.15) $0.15 $0.08 $0.35 $0.45 $(0.12) $0.17 $0.11 $0.43 $0.62 $0.78

Prev. $(0.12) $0.17 $0.11 $0.42 $0.61 N/A


Investment Opinion

Core Operating Fundamentals Solid Despite Some Headline Account Losses; We Think There’s Potential For Material Acceleration In Future Stock Buybacks Overall, we believe much of the momentum in organic growth from 2Q/3Q/4Q10 continued into 1Q11, though the comps did/do get incrementally tougher, especially in the U.S. IPG recently had some high-profile account losses (namely, Microsoft’s North America media buying business), but we think the loss is manageable and momentum from IPG’s existing clients remain solid. With the Company recently providing specific long-term financial targets (13% EBIT margin by 2014 on 4-5% annual organic growth) – which we think are realistic and achievable – we think management will continue to focus on its operational/financial turnaround over the next couple of years. Given IPG’s current net cash position and significant future FCF generation, we just don’t see how IPG would not accelerate return of capital to shareholders in the future (2012 and beyond) – recent “positive watch” in S&P credit rating (for potential upgrade to investment grade) is extremely encouraging in terms of allowing IPG increased flexibility in future excess capital deployment (through easier access to short-term liquidity). We’re tweaking our FY11 estimates slightly higher and introducing FY12 estimates, with upside bias from potential acceleration in future buybacks. We are maintaining our Outperform, Above Average risk rating, $14 price target.


F1Q11E F1Q11E F1Q10A F1Q11E FY11E FY11E FY10A FY11E

($ in mm, except per share data) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus

Domestic Revenue 861.3 855.3 803.1 3,925.1 3,919.1 3,709.5

Organic impact 7.3% 6.5% 3.0% 5.8% 5.7% 10.1%

Int'l Revenue 588.2 581.2 538.2 3,058.5 3,030.0 2,822.4

Organic impact 5.6% 5.3% -11.3% 5.2% 5.1% 3.1%

FX impact 2.3% 1.4% 10.2% 2.8% 1.8% 2.4%

Total Revenues 1,449.5 1,436.5 1,341.3 1,445.8 6,983.6 6,949.1 6,531.9 6,954.7

Organic impact 6.6% 6.0% -2.9% 5.5% 5.4% 7.0%

FX impact 0.9% 0.6% 4.2% 1.2% 0.8% 1.1%

YoY growth 8.1% 7.1% 1.2% 6.9% 6.4% 8.4%

Operating income (EBIT) (47.0) (46.7) (59.4) (46.7) 683.9 681.1 548.7 689.9

YoY growth -20.9% -21.4% -27.5% 24.6% 24.1% 60.8%

% margin -3.2% -3.3% -4.4% 9.8% 9.8% 8.4% 9.9%

Diluted EPS ($0.12) ($0.12) ($0.15) ($0.09) $0.62 $0.61 $0.45 $0.64

Source: Company reports, RBCCM estimates, Thomson ONE Analytics

125 WEEKS 21NOV08 - 6APR11HI-4MAR11

LO/HI DIFF

214.997

144.60%

LO-30JAN09 87.896

CLOSE 202.561

INTERPUBLIC GRP Rel. S&P 500

100.00

150.00

200.00


HI-4MAR11

LO/HI DIFF

13.345

419.26%

LO-21NOV08 2.570

CLOSE 12.410

INTERPUBLIC GRP

4.00

6.00

8.00

10.00

12.00

PEAK VOL.

VOLUME

70761.8

17869.4 20000

40000

60000


91

Long-term Guidance At Recent Investor Day Event Largely Validated Our Prior View Of The Company At the investor day event on March 24 (first in five years), management laid out long-term plans to reach 13% EBIT margins by 2014 on 4-5% annual organic growth. These goals were largely in line with what we were expecting, and the presentations from agency executives that day gave us increased confidence in IPG’s “turnaround story” as well as the competitiveness of its agencies.

Long-term guidance and highlights from March 24:

• 13% EBIT margins by 2014 on 4-5% annual organic growth.

• Margin expansion through leverage on investment in base payroll and incentives (~300bps), and leverage on occupancy expense (~160bps).

• There was some focus on increasing performance-based compensation in contracts as a means to drive margins at IPG’s major agencies.

• 30% incremental revenue-to-OI conversion.

• $1.2 billion operating cash flow in 2014.

• 0.9x gross leverage in 2014.

• $150 million in annual acquisitions excluding “earn outs”.

• 2011 guidance maintained – 9.5-10% EBIT margins on 4-5% organic growth.

We See Upside From Future Stock Buybacks At the recent investor day event, management pointed to strong future FCF generation ($1.2 billion operating cash flow in 2014) and gross leverage of 0.9x by 2014. Given IPG’s current net cash position, significant future FCF generation, and the fact that return of capital to shareholders is already one of its primary goals in terms of use of excess cash, we just don’t see how IPG would not accelerate return of capital to shareholders in the future (2012 and beyond). IPG continues to manage its balance sheet conservatively; an eventual upgrade to “investment grade” by the debt ratings agencies (through consistency in performance) could give management more flexibility in terms of excess cash deployment.

• We’d note that S&P recently (on March 31) placed its “BB” corporate rating on IPG on “watch positive”, indicating a potential one-notch rating upgrade in the near-term if S&P is convinced the Company can achieve competitive organic growth in 2011 and expand margins – we believe IPG is on track to meet these conditions for a credit rating upgrade.

Loss Of Microsoft North America Media Buying Business Somewhat Disappointing, But It’s Not Indicative Of The Quality Of IPG’s Agencies On March 18, press reports indicated Universal McCann (IPG’s major media buying agency) lost Microsoft’s North America (U.S. and Canada) media buying business to Publicis’ Starcom, ( http://adage.com/article/agency-news/microsoft-splits-1b-media-starcom-universal-mccann/149485/), while retaining Microsoft’s media buying duties in ~35 markets outside of North America. While revenue impact hasn’t been disclosed, we estimate that the business lost to Publicis generates ~$25 million of revenue (~2-3% of billings) – this represents ~0.4% headwind to organic growth and roughly the same percentage impact to EPS (or less than 1 cent). While an account loss of this size could result in severance action, we don’t think management’s 9.5-10% 2011 EBIT margin guidance is likely to change because of this.

While an account loss of this size is never good news, we think it’s a manageable loss. At the same time, there was some good news more recently – on March 31, media reports indicated McCann Worldgroup retained the U.S. Army account (estimated ~$15 million of revenue and ~$200 million of billings) beating DaftFCB, Grey, and Y&R in the final pitch. This should help quell some fears regarding the competitiveness of McCann and give investors restored confidence in IPG following the partial loss of the Microsoft account.

We’d note that the SC Johnson account (likely a top-10 IPG client; accounts for an estimated 1-2% of overall revenues) is still under a lengthy review process. We think it is highly unlikely that 100% of that is “at risk” and it is possible that IPG wins certain duties that it does not already have. It is too early to tell how a review will end and a review of this size could take months to complete. On the positive side, the tech/telco duty losses in mid 2009, which were a material drag on growth especially in 1H10, will likely no longer be a headwind in 2011.

Valuation Our valuation methodology derives a $14 price target for IPG shares. We average our DCF analysis and our one-year forward multiple on blended 2011/12E "normalized" EPS and EBITDA. We apply a 15x P/E multiple and an 8x EV/EBITDA multiple, consistent with historical trading levels and in line with other publicly traded advertising agency holding companies.


92

Price Target Impediment Slower-than-expected growth in the overall economy, both in the U.S. and abroad, could materially impact organic growth. Growth in advertising spend and broader marketing communications spend depends largely on GDP growth and other macro economic factors. Slower-than-expected global GDP growth in 2011 and beyond could materially impact organic revenue growth.

Loss of key clients and headline account losses may negatively impact IPG shares. While reports of account wins/losses that make it to the trade press are generally poor indicators of organic revenue growth for a certain quarter, headline loss of an account with sizable billings ($100+ million) may negatively impact the stock price in the short term.

Loss of key personnel at the subsidiary agencies may hamper growth. Interpublic had roughly 41,000 employees at the end of 2010. Given the service-oriented nature of the marketing communications industry where there is keen competition for qualified and top-producing employees, much of the company's future growth potential depends on its ability to retain key talent to win new business.

Foreign currency fluctuations could negatively impact Interpublic's results. IPG has a significant international presence, with approximately 43% of revenues generated from abroad in 2010. A material strengthening in the USD versus other major currencies could negatively impact Interpublic's international operations.


93

Exhibit 96: IPG Earnings Model

Segment Details - IPG

Fiscal Year Ended 31st December 2008A 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Dec Dec Mar Jun Sep Dec Dec Mar Jun Sep Dec Dec Dec

$ in mm

Domestic Revenue 3,786.2 3,372.3 803.1 961.0 916.7 1,028.7 3,709.5 861.3 1,016.3 964.8 1,082.7 3,925.1 4,131.4

YoY growth 3.7% -10.9% 2.8% 13.4% 9.9% 13.1% 10.0% 7.3% 5.8% 5.3% 5.3% 5.8% 5.3%

Organic impact 3.2% -11.3% 3.0% 13.6% 10.0% 13.1% 10.1% 7.3% 5.8% 5.3% 5.3% 5.8% 5.0%

Acquisition/divestiture impact 0.5% 0.4% -0.2% -0.1% -0.1% 0.0% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3%

International Revenue 3,176.5 2,655.3 538.2 656.8 644.1 983.3 2,822.4 588.2 727.9 701.0 1,041.4 3,058.5 3,221.4

YoY growth 9.4% -16.4% -1.0% 4.7% 8.7% 10.3% 6.3% 9.3% 10.8% 8.8% 5.9% 8.4% 5.3%

Organic impact 4.6% -10.2% -11.3% 1.6% 8.6% 9.4% 3.1% 5.6% 5.1% 5.2% 5.0% 5.2% 5.0%

Acquisition/divestiture impact 2.4% 1.7% 0.1% 0.4% 1.7% 0.9% 0.8% 1.3% 0.6% 0.0% 0.0% 0.4% 0.3%

FX impact 2.5% -7.9% 10.2% 2.7% -1.6% 0.0% 2.4% 2.3% 5.1% 3.7% 0.9% 2.8% 0.0%

Total Revenues 6,962.7 6,027.6 1,341.3 1,617.8 1,560.8 2,012.0 6,531.9 1,449.5 1,744.2 1,665.8 2,124.1 6,983.6 7,352.8

YoY growth 6.2% -13.4% 1.2% 9.7% 9.4% 11.7% 8.4% 8.1% 7.8% 6.7% 5.6% 6.9% 5.3%

Organic impact 3.8% -10.8% -2.9% 8.5% 9.4% 11.2% 7.0% 6.6% 5.5% 5.2% 5.1% 5.5% 5.0%

Acquisition/divestiture impact 1.3% 1.0% -0.1% 0.1% 0.6% 0.5% 0.3% 0.5% 0.2% 0.0% 0.0% 0.2% 0.3%

FX impact 1.1% -3.6% 4.2% 1.2% -0.7% 0.0% 1.1% 0.9% 2.1% 1.5% 0.4% 1.2% 0.0%

Income Statement - IPG

Fiscal Year Ended 31st December 2008A 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E

Calendar Month Ended: Dec Dec Mar Jun Sep Dec Dec Mar Jun Sep Dec Dec Dec

figures in millions

Domestic Revenues 3,786.2 3,372.3 803.1 961.0 916.7 1,028.7 3,709.5 861.3 1,016.3 964.8 1,082.7 3,925.1 4,131.4

International Revenues 3,176.5 2,655.3 538.2 656.8 644.1 983.3 2,822.4 588.2 727.9 701.0 1,041.4 3,058.5 3,221.4

Total Revenues 6,962.7 6,027.6 1,341.3 1,617.8 1,560.8 2,012.0 6,531.9 1,449.5 1,744.2 1,665.8 2,124.1 6,983.6 7,352.8

YoY growth 6.2% -13.4% 1.2% 9.7% 9.4% 11.7% 8.4% 8.1% 7.8% 6.7% 5.6% 6.9% 5.3%

Operating Expenses 6,119.6 5,466.9 1,349.6 1,391.0 1,411.3 1,632.9 5,784.8 1,447.1 1,495.4 1,495.5 1,662.7 6,100.8 6,331.9

EBITDA 843.1 560.7 (8.3) 226.8 149.5 379.1 747.1 2.4 248.8 170.3 461.4 882.8 1,020.8

YoY growth 40.2% -33.5% -73.1% 46.2% 32.1% 17.3% 33.2% -129.4% 9.7% 13.9% 21.7% 18.2% 15.6%

% margin 12.1% 9.3% -0.6% 14.0% 9.6% 18.8% 11.4% 0.2% 14.3% 10.2% 21.7% 12.6% 13.9%

Less: Depreciation & Amortization 253.4 219.4 51.1 49.6 49.3 48.4 198.4 49.4 49.8 49.3 50.4 198.9 209.0

Operating Income 589.7 341.3 (59.4) 177.2 100.2 330.7 548.7 (47.0) 199.0 121.0 410.9 683.9 811.9

YoY growth 71.3% -42.1% -27.5% 82.9% 71.9% 23.4% 60.8% -20.9% 12.3% 20.8% 24.3% 24.6% 18.7%

% margin 8.5% 5.7% -4.4% 11.0% 6.4% 16.4% 8.4% -3.2% 11.4% 7.3% 19.3% 9.8% 11.0%

Less: Net Interest Expense 121.3 120.6 26.1 28.9 27.9 28.1 111.0 29.1 29.1 29.1 29.1 116.2 112.2

Add: Other Income (Expense) (3.1) (11.7) (0.5) 2.1 3.1 (17.6) (12.9) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Income 471.5 232.4 (85.0) 146.2 69.2 320.2 450.6 (76.0) 169.9 92.0 381.9 567.7 699.6

Less: Income Tax 156.6 90.1 (15.3) 63.3 24.4 98.9 171.3 (17.5) 73.1 33.1 127.0 215.7 261.9

Add: Equity in Earnings of Affiliates 3.1 1.1 (0.6) (0.6) 0.8 1.5 1.1 1.0 1.0 1.0 1.0 4.0 4.0

Less: Minority Interest 23.0 22.1 (5.7) (0.2) 0.3 24.9 19.3 (5.0) 0.0 0.3 22.5 17.8 17.8

Income from continuing operations 295.0 121.3 (64.6) 82.5 45.3 197.9 261.1 (52.5) 97.9 59.6 233.4 338.3 424.0

Income from discontinued operations, net of tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 295.0 121.3 (64.6) 82.5 45.3 197.9 261.1 (52.5) 97.9 59.6 233.4 338.3 424.0

Less: Dividends on preferred stock 27.6 27.6 6.9 2.9 2.9 2.9 15.6 2.9 2.9 2.9 2.9 11.6 11.6

Less: Allocation of participating securities 0.5 0.1 0.0 (25.7) 0.0 0.0 (25.7) 0.0 0.0 0.0 0.0 0.0 0.0

Net Income (Basic) 266.9 93.6 (71.5) 105.3 42.4 195.0 271.2 (55.4) 95.0 56.7 230.5 326.7 412.4

Add: Effect of dilutive securities 2.8 1.4 0.0 (24.6) 0.0 0.0 (24.6) 0.0 0.0 0.0 0.0 0.0 0.0

Net Income (Diluted) 269.7 95.0 (71.5) 80.7 42.4 195.0 246.6 (55.4) 95.0 56.7 230.5 326.7 412.4

Basic Weighted Average Shares O/S 461.5 468.2 471.3 473.0 474.7 475.4 473.6 475.1 472.6 469.4 466.2 470.8 455.3

Diluted Weighted Average Shares O/S 518.3 508.1 471.3 544.9 533.6 553.1 542.1 475.1 547.7 528.3 541.3 529.7 530.4

Recurring Basic EPS 0.58$ $0.20 ($0.15) $0.22 $0.09 $0.41 $0.57 ($0.12) $0.20 $0.12 $0.49 $0.69 $0.91

Recurring Diluted EPS 0.52$ $0.19 ($0.15) $0.15 $0.08 $0.35 $0.45 ($0.12) $0.17 $0.11 $0.43 $0.62 $0.78



94

MDC Partners Inc. (NASDAQ: MDCA)

MDC Is Set To Outperform Peers As Focus Shifts To Organic Growth After A Period Of Active M&A

Outperform, Speculative Risk Price: 16.95 Price Target: 21.00


Shares O/S (MM): 28.5 Market Cap (MM): 483


Institutional Ownership: 68.2% Avg. Daily Volume (MM): 0.08

2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1E Q2E Q3E Q4E 2011E

Revenue (B) $584.6 $126.7 $134.9 $134.6 $149.7 $545.9 $136.2 $170.0 $178.6 $213.1 $697.8 $196.1 $213.0 $211.0 $240.0 $860.1

Prev. $196.1 $213.0 $211.0 $240.4 $860.5

EBITDA $69.2 $11.6 $18.5 $19.9 $20.1 $70.2 $8.7 $18.3 $20.4 $38.8. $86.2 $9.4 $27.1 $27.5 $46.1 $110.1

Prev. $12.0 $26.5 $27.4 $44.2 $110.1


Investment Opinion

With The Acquisition Plan Largely Complete, Focus Shifts Back To Organic Outperformance Throughout 2010, MDC stayed true to its original strategy for the year of acquisition-led growth, with the company spending about $120 million on 13 acquisitions (of various sizes) in 2010. With the acquisition plan now largely complete, the focus for the Company is shifting back to organic growth. We think MDC is better positioned than ever to outperform peers on top-line growth with new/improved capabilities as well as a robust business pipeline. While the recent Burger King account loss is somewhat disappointing, we think major account wins in 4Q10 (MetLife, Jell-O (Kraft) and Milka (Kraft), additional duties for BMW) will be more than enough to offset that loss, and we don’t think FY11 guidance is at risk. Further, given that MDC has been generating 50%+ of its revenues from higher-growth “digital”, we think MDCA ought to trade at a premium to its larger agency holding company peers. We’re tweaking our 1Q11 EBITDA estimate slightly lower (largely due to seasonality), but maintaining our FY11 estimates. Maintaining Outperform, Speculative risk rating, $21 price target.


1Q11E 1Q11E 1Q11E 2011E 2011E 2011E 2011E

($ in mm) New Est. Prior Est. Consensus New Est. Prior Est. Consensus Guidance

SMS revenue 112.6 112.6 506.7 507.1

PMS revenue 83.5 83.5 353.3 353.3

Total revenue 196.1 196.1 188.5 860.1 860.5 859.5 850-870

YoY growth 44.0% 44.0% 23.2% 23.2%

SMS EBITDA 13.5 14.9 82.6 83.7

PMS EBITDA 0.4 1.6 42.2 41.2

Corporate EBITDA (4.4) (4.4) (14.7) (14.8)

Total EBITDA (excl. non-cash comp.) 9.4 12.0 8.9 110.1 110.1 99.9 108-112

% margin 4.8% 6.1% 12.8% 12.8%

YoY growth 8.6% 38.2% 27.7% 29.3%

EBITDA (incl. non-cash comp.) 5.7 8.3 92.9 92.8

% margin 2.9% 4.2% 10.8% 10.8%

YoY growth 7.0% 55.4% 35.7% 34.7%

EBIT -1.9 0.7 55.1 55.0

% margin -1.0% 0.4% 6.4% 6.4%

YoY growth 50.4% -156.4% 90.5% 97.1%

Source: Company reports, Thomson One Analytics, RBC Capital Market estimates

125 WEEKS 21NOV08 - 6APR11HI-14JAN11

LO/HI DIFF

494.900

394.90%

LO-21NOV08 100.000

CLOSE 437.654

MDC PARTNERS INC Rel. S&P 500

200

300 400


HI-11MAR11

LO/HI DIFF

19.080

771.23%

LO-21NOV08 2.190

CLOSE 16.950

MDC PARTNERS INC

4.00

6.00

8.00

10.00

12.00 14.00 16.00 18.00

PEAK VOL.

VOLUME

1316.5

916.7 500

1000


95

Well Positioned To Outgrow The Industry Again In 2010, MDC spent ~$120 million on 13 high-quality acquisitions that, taken in combination, have been transformational. MDC now has a world class data analytics practice (a key area of opportunity for all major agencies) to complement its more traditional creative flagship agencies CP+B and KBS+P. In addition, newly acquired full service agencies, 72andSunny and Anomaly, should further strengthen MDC’s creative prowess. With the current robust business pipeline, materially easier comps from a major telco client (which experienced precipitous declines last year), and MDC’s significantly improved capabilities/offerings, we think the company is well positioned to outgrow the industry once again in 1Q11 and beyond. While we’d like to see greater margin expansion, MDC is currently making “organic” investments to the core business (talent, infrastructure, etc.) for future growth, and at this point, we think the somewhat muted margin expansion prospects for this year are largely baked into expectations.

Loss Of Burger King Somewhat Disappointing But There’s Enough In The Pipeline To Offset It Press reports on March 18 indicated Burger King will part with MDC’s flagship agency CP+B, following major marketing executive churn at the fast food company. While financial impact to MDC wasn’t disclosed, we estimate Burger King accounts for ~$15-20 million of annual revenue (~$3-5 million of EBITDA). We don’t think the loss had anything to do with the quality of CP+B’s work/service (CP+B’s work for BK has historically generated a lot of buzz), and it was likely more a function of BK’s own internal issues. Burger King is likely to remain a paying client until mid 2011, and even though the lost business will inevitably impact 2H11, we think the current strong business pipeline will be enough to offset the loss – note, MDC did have some high-profile account wins in 4Q10 including MetLife, Jell-O (Kraft) and Milka (Kraft) at CB+P, as well as additional duties for BMW, which should further help offset the BK loss. While the loss of the account was not taken into consideration when management issued official 2011 guidance in early March, we think the guidance was somewhat conservative to begin with (and likely had enough wiggle room to accommodate one-off account losses), and therefore we don’t think management will revise guidance in the near-term.

Recent Industry M&A Deal Valuations Indicate That MDC Could Still Be Undervalued MDC has been generating 50%+ of its revenues from “digital”, and all recently acquired agencies have a significant digital component to them. Recent management commentary would suggest that the focus on digital for MDC is only going to increase going forward, making MDC essentially a “digital agency”. Transaction multiples on recent digital agency acquisitions are known to be around 10x EV/EBITDA – our industry sources indicate that Razorfish was acquired by Publicis at a ~10-11x valuation in 2009, and the more recent iCrossing acquisition (by Hearst) was valued at ~9-10x. Given that MDCA shares are currently trading at ~9x forward EV/EBITDA, as a “digital agency”, we think the company could still be undervalued.

Valuation Our valuation methodology derives a $21 price target for MDCA shares. We average our DCF analysis and our one-year forward multiple on 2011E EBITDA. We apply a 9x EV/EBITDA multiple, which is slightly higher than other publicly traded advertising agency holding companies, given MDC's greater exposure to digital.

Price Target Impediment Slower-than-expected growth in the overall economy, both in the US and abroad, could materially impact growth. Growth in advertising spend and broader marketing communications spend depend largely on GDP growth and other macro economic factors. Slower-than-expected global GDP growth in 2011 and beyond could materially impact organic revenue growth.

Loss of key clients and headline account losses may negatively impact MDCA shares. While reports of account wins/losses that make it to the trade press are generally poor indicators of organic revenue growth for a certain quarter, headline loss of an account with sizable billings (over $100 million) may negatively impact the stock price in the short term.

Loss of key personnel at the subsidiary agencies may hamper growth. MDC has roughly 5,000 employees. Given the service-oriented nature of the marketing communications industry, where there is keen competition for qualified and top-producing employees, much of the company's future growth potential depends on its ability to retain key talent to win new business.


96

Exhibit 98: MDCA Earnings Model

Segment Details - MDCA

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E

Calendar Month Ended: Dec Mar June Sep Dec Dec Mar June Sep Dec Dec

($ in mm)

Segment Revenue

Strategic Marketing Services 371.4 91.5 107.0 110.6 129.9 438.9 112.6 125.7 125.0 143.5 506.7

Performance Marketing Services 174.5 44.7 63.0 68.0 83.2 258.9 83.5 87.3 86.0 96.5 353.3

Total Revenues 545.9 136.2 170.0 178.6 213.1 697.8 196.1 213.0 211.0 240.0 860.1

EBITDA (excl. stock-based comp.)

Strategic Marketing Services 70.2 11.5 15.8 15.7 25.9 69.0 13.5 21.0 19.1 29.0 82.6

Performance Marketing Services 12.2 0.7 6.4 7.9 13.1 28.1 0.4 10.4 12.3 19.1 42.2

Corporate (12.3) (3.5) (4.0) (3.3) (0.1) (10.9) (4.4) (4.3) (4.0) (2.0) (14.7)

Total EBITDA (excl. stock-based comp.) 70.2 8.7 18.3 20.4 38.8 86.2 9.4 27.1 27.5 46.1 110.1

Income Statement - MDCA

Fiscal Year Ended December 31 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E

Calendar Month Ended: Dec Mar June Sep Dec Dec Mar June Sep Dec Dec

($ in mm, except per share data)

Revenues 545.9 136.2 170.0 178.6 213.1 697.8 196.1 213.0 211.0 240.0 860.1

YoY growth -6.6% 7.5% 26.0% 32.7% 42.3% 27.8% 44.0% 25.3% 18.1% 12.6% 23.2%

Cost of services sold 354.3 97.0 116.8 122.9 140.9 477.5 141.9 143.3 140.9 157.8 583.9

Gross profit 191.6 39.2 53.2 55.7 72.2 220.3 54.2 69.7 70.1 82.2 276.1

Operating expense 136.9 34.6 39.1 45.1 38.1 156.9 48.5 46.3 48.6 39.8 183.3

EBITDA (incl, stock-based comp.) 54.7 5.3 15.8 13.2 34.1 68.5 5.7 23.4 21.5 42.3 92.9

YoY growth -0.1% -45.2% -4.0% -25.3% 214.6% 25.1% 7.0% 47.7% 62.5% 24.1% 35.7%

% margin 10.0% 3.9% 9.3% 7.4% 16.0% 9.8% 2.9% 11.0% 10.2% 17.6% 10.8%

Less: D&A 34.5 5.8 8.0 9.4 11.3 34.5 7.6 8.9 10.0 11.3 37.8

EBIT 20.2 (1.2) 6.1 1.3 22.8 28.9 (1.9) 14.4 11.5 31.1 55.1

YoY growth -0.5% -158.9% -31.5% -87.6% -2580.0% 42.9% 50.4% 137.5% 813.1% 36.0% 90.5%

% margin 3.7% -0.9% 3.6% 0.7% 10.7% 4.1% -1.0% 6.8% 5.4% 12.9% 6.4%

Interest, net (21.3) (7.6) (8.7) (8.4) (8.2) (32.8) (8.5) (8.5) (8.5) (8.5) (34.0)

Income tax (8.5) (0.2) (0.6) (0.3) 1.3 0.2 3.6 (2.1) (1.1) (7.9) (7.4)

Equity in interest of non-consolidated affiliates (0.0) (0.1) (0.0) (1.5) 2.5 0.9 0.0 0.0 0.0 0.0 0.0

Minority interest (5.4) (1.0) (2.0) (1.4) (5.7) (10.1) (1.1) (2.2) (1.6) (6.2) (11.1)

Income from continuing operations (14.9) (10.2) (5.2) (10.4) 12.8 (12.9) (7.8) 1.7 0.4 8.4 2.7

Income from distontinued operations (0.9) 0.0 (0.6) (0.6) (1.3) (2.5) 0.0 0.0 0.0 0.0 0.0

Net income (15.8) (10.2) (5.8) (10.9) 11.5 (15.4) (7.8) 1.7 0.4 8.4 2.7

Diluted weighted average shares O/S 27.8 27.6 27.8 28.5 28.2 28.0 28.5 28.6 28.6 28.7 28.6

Reported diluted EPS ($0.57) ($0.37) ($0.21) ($0.38) $0.41 ($0.55) ($0.27) $0.06 $0.01 $0.29 $0.09



97

Omnicom Group Inc. (NYSE: OMC)

Non-recurring Charge/Gain In 1Q11 Could Make Margin Comparisons Confusing, But Core Fundamentals Are Sound



Shares O/S (MM): 287.5 Implied All-in Return: 13%

Dividend: 1.00 Market Cap (MM): 14,019

Float (MM): 280.7 Yield: 2.1%

Institutional Ownership: 87% Avg. Daily Volume (MM): 2.19


Revenue (B) $2,747 $2,871 $2,838 $3,266 $11,721 $2,920 $3,041 $2,995 $3,587 $12,543 $3,131 $3,257 $3,206 $3,823 $13,416 $14,090

Prev. $3,115 $3,254 $3,203 $3,807 $13,379 $14,051

EBITDA $338.2 $456.0 $354.9 $468.7 $1,618 $353.0 $476.6 $376.5 $507.0 $1,713 $398 $524 $423 $567 $1912 $2088

Prev. $406 $524 $423 $564 $1,917 $2,093

EPS (Op) - FD $0.53 $0.75 $0.53 $0.73 $2.53 $0.52 $0.79 $0.57 $0.82 $2.70 $0.61 $0.90 $0.69 $0.99 $3.18 $3.70

Prev. $0.63 $0.90 $0.68 $0.98 $3.18 $3.70


Investment Opinion

1Q11 Margins Could Be “Messy” Due To Non-recurring Charge/Gain, But “Core” Top-line/Margin Fundamentals Remain Intact Management previously noted ~$90-110 million of incremental severance and real-estate related charges in 2011 and ~$120 million accounting gain related to the consolidation of Clemenger in 1Q11. We’re conservatively expecting the net impact to be a gain of $10 million above the line in 1Q11 (or ~30bps of positive impact to margins). It’s unclear how the rest of the Street is modeling this charge/gain, making margin comparisons for the quarter confusing – excluding the net gain, we’re expecting ~20bps of YoY margin expansion, and we believe the Street is expecting a similar degree of “core” margin improvement in the quarter. Our checks confirm that organic growth trends have been stable, giving us increased confidence that Omnicom will be able to achieve robust growth this year. Some recent high-profile account wins as well as the fact that OMC will now have fully anniversaried the Chrysler loss/BBDO Detroit closing, should also provide further top-line support. We’re expecting ~15 million shares of net stock buybacks in 2011 (more weighted to the first half of 2011), which should further support EPS growth this year. We’re tweaking our 1Q11 EPS estimate slightly lower but our FY11 and FY12 EPS estimates remain unchanged. Maintaining Outperform, Average risk rating, $54 price target.


1Q11E 1Q11E 1Q10A 1Q11E FY11E FY11E FY10A FY11E

($ in mm, except per share data) New Est. Prior Est. Reported Consensus New Est. Prior Est. Reported Consensus

Domestic Revenue 1,677.3 1,669.3 1,592.8 7,007.6 6,999.7 6,683.2

Organic impact 7.5% 7.0% 5.1% 6.0% 5.9% 8.7%

Int'l Revenue 1,453.7 1,445.6 1,327.2 6,408.8 6,379.5 5,859.4

Organic impact 5.8% 5.8% -1.4% 5.2% 5.2% 3.9%

FX impact 1.1% 0.5% 9.6% 1.0% 0.5% 0.3%

Total Revenues 3,131.0 3,114.9 2,920.0 3,137.9 13,416.5 13,379.1 12,542.6 13,410.1

Organic impact 6.7% 6.4% 2.2% 5.6% 5.5% 6.4%

FX impact 0.5% 0.2% 4.3% 0.5% 0.2% 0.1%

YoY growth 7.2% 6.7% 6.3% 7.0% 6.7% 7.0%

EBITA 351.0 359.2 307.3 N/A 1,725.0 1,730.3 1,530.9 N/A

YoY growth 14.2% 16.9% 4.0% 12.7% 13.0% 7.0%

% margin 11.2% 11.5% 10.5% 12.9% 12.9% 12.2%

Operating income (EBIT) 328.6 336.9 291.0 319.3 1,632.9 1,638.5 1,460.1 1,644.7

YoY growth 12.9% 15.8% 3.0% 11.8% 12.2% 6.2%

% margin 10.5% 10.8% 10.0% 10.2% 12.2% 12.2% 11.6% 12.3%

Diluted EPS $0.61 $0.63 $0.52 $0.60 $3.18 $3.18 $2.70 $3.17

Source: Company reports, RBCCM estimates, Thomson One Analytics

125 WEEKS 21NOV08 - 6APR11HI-3DEC10

LO/HI DIFF

126.245

32.16%

LO-27MAR09 95.527

CLOSE 119.317

OMNICOM Rel. S&P 500

100.00

110.00

120.00


HI-4MAR11

LO/HI DIFF

51.254

155.12%

LO-13MAR09 20.090

CLOSE 48.760

OMNICOM

25.00

30.00

35.00

40.00

45.00

50.00

PEAK VOL.

VOLUME

24092.1

4655.2 10000

20000


98

Non-recurring Charge/Gain Could Make Margin Comparisons Confusing, But “Core” Margins Likely Expanded Modestly In 1Q11 (As Expected) Management previously indicated two non-recurring factors in 1Q11 that will likely have to be “backed out” in order to get to “core” margins. These factors include:

1) ~$90-110 million of severance and real estate-related charges (throughout 2011) in connection with the “portfolio review” that results in the consolidation/restructuring and/or closures of underperforming/sub-scale/non-core agencies. While the exact timing of these charges are unclear, we think the bulk of it likely hit in 1Q11 – we assume the full $110 million charge in 1Q11 out of conservatism.

2) ~$120 million above-the-line accounting gain related to the consolidation of Clemenger, the marketing services firm in Australia in which BBDO increased its stake to ~73.5% from a minority stake (~46.7%) previously.

The combined impact of these two items on EBIT (or EBITA) would be a net gain of $10-30 million (we’re modeling $10 million net gain). We’d note that every $10 million of EBIT (or EBITA) accounts for ~30bps of margins. Excluding this charge/gain, we believe margins likely expanded a modest ~20bps in the quarter, largely in line with what we and the Street are expecting. We’d further note that it’s unclear how the rest of the Street is modeling this charge/gain, making margin comparisons even more confusing. In terms of “core” margins, we think much of the margin expansion will come in 2H11.

Exhibit 100: 1Q11 “Core” EBIT Margins

1Q11E 1Q11E 1Q10A 1Q11E

($ in mm) RBCCM Est. "Core EBIT" Reported Consensus

Total Revenues 3,131.0 2,920.0 3,137.9

YoY growth 7.2% 6.3% 7.5%

Operating income (EBIT) 328.6 318.6 291.0 319.3

% margin 10.5% 10.2% 10.0% 10.2%

Adjusting for the $10mm net gain in the

quarter, "core" EBIT margins would be 10.2%, implying 20bps YoY improvement.

It's unclear how the Street is

modeling this charge/gain.

Source: RBCCM estimates, Thomson One Analytics

Acquisition-led Revenue Growth Related To The Consolidation Of Clemenger Was Likely At Least Partially Offset By Divestitures Arising From The “Portfolio Review” We believe Clemenger was consolidated as of February, 2011, and therefore OMC likely began to recognize acquisition-related revenue growth (from Clemenger) beginning in 1Q11. The consolidation of Clemenger also increases below-the-line expense by ~$20 million vs. 2010 (net of equity in earnings of affiliates and minority interest). In addition, Clemenger, along with other acquisitions, will likely increase amortization expense throughout this year, as we’ve noted previously. At the same time, the agencies currently under “portfolio review” account for ~$300 million of annual revenue, which could potentially be divested, at least partially offsetting the revenue gain from Clemenger and other acquisitions. We’d note that the exact timing and size of these divestitures aren’t known at this point, but we expect much of the restructuring/divestitures to occur in 1H11.

Omnicom Is Well Positioned For Stable Top-line Growth in 2011 While 2011 will likely play out to be a relatively “good growth year” for the industry, we think Omnicom is especially well positioned to provide stable top-line growth given:

1) Consistent historical net quarterly billings win of ~$1 billion.

2) Recent large client wins such as the $1.4 billion GlaxoSmithKline U.S. media account won in December.

3) Lack of a difficult Chrylser comp in 2011 which was a ~1% drag on organic growth in 2010.

The factors mentioned above, along with the macro environment that continues to improve, give us increased confidence that Omnicom will be able to meet or beat organic growth targets this year.


99

Valuation Our valuation methodology derives a $54 price target for OMC shares. We average our DCF analysis and our one-year forward multiples on blended 2011/12E EBITDA and EPS. We apply an 8x EV/EBITDA multiple and a 15x P/E multiple, consistent with historical trading levels and in line with other publicly traded advertising agency holding companies.

Price Target Impediment Slower-than-expected growth in the overall economy, both in the U.S. and abroad, could materially impact organic growth. Growth in advertising spend and broader marketing communications spend depends largely on GDP growth and other macro economic factors. Slower-than-expected global GDP growth in 2010 and beyond could materially impact organic revenue growth.

Loss of key clients and headline account losses may negatively impact OMC shares. While reports of account wins/losses that make it to the trade press are generally poor indicators of organic revenue growth for a certain quarter, headline loss of an account with sizable billings (over $100 million) may negatively impact the stock price in the short term.

Loss of key personnel at the subsidiary agencies may hamper growth. Omnicom had roughly 65,500 employees at the end of 2010. Given the service-oriented nature of the marketing communications industry where there is keen competition for qualified and top-producing employees, much of the company's future growth potential depends on its ability to retain key talent to win new business.

Foreign currency fluctuations could negatively impact Omnicom's results. OMC has a significant international presence with approximately 47% of revenues generated from abroad in 2010. A material strengthening in the U.S. dollar versus other major currencies could negatively impact Omnicom's international operations.

Exhibit 101: OMC Earnings Model Segment Details - OMC

Fiscal Year Ended 31st December 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E


$ in mm

Domestic Revenue 6,178.4 1,592.8 1,636.9 1,617.1 1,836.4 6,683.2 1,677.3 1,706.9 1,696.0 1,927.4 7,007.6 7,393.1

YoY growth -10.3% 3.9% 7.4% 8.4% 12.6% 8.2% 5.3% 4.3% 4.9% 5.0% 4.9% 5.5%

Organic impact -9.7% 5.1% 8.2% 8.4% 12.7% 8.7% 7.5% 5.5% 5.5% 5.5% 6.0% 5.5%

Acquisition/divestiture impact -0.6% -1.1% -0.8% 0.0% -0.1% -0.5% -2.2% -1.2% -0.6% -0.5% -1.1% 0.0%

International Revenue 5,542.4 1,327.2 1,404.3 1,377.5 1,750.4 5,859.4 1,453.7 1,549.9 1,510.0 1,895.1 6,408.8 6,697.2

YoY growth -14.3% 9.3% 4.3% 2.3% 7.0% 5.7% 9.5% 10.4% 9.6% 8.3% 9.4% 4.5%

Organic impact -7.5% -1.4% 3.6% 4.8% 7.2% 3.9% 5.8% 5.4% 5.2% 4.5% 5.2% 4.5%

Acquisition/divestiture impact 0.2% 1.1% 1.1% 1.5% 2.4% 1.6% 2.6% 3.9% 3.6% 2.9% 3.2% 0.0%

FX impact -7.0% 9.6% -0.4% -3.9% -2.6% 0.3% 1.1% 1.1% 0.8% 0.9% 1.0% 0.0%

Total Revenues 11,720.8 2,920.0 3,041.2 2,994.6 3,586.8 12,542.6 3,131.0 3,256.9 3,206.0 3,822.5 13,416.5 14,090.3

YoY growth -12.3% 6.3% 5.9% 5.5% 9.8% 7.0% 7.2% 7.1% 7.1% 6.6% 7.0% 5.0%

Organic impact -8.6% 2.2% 6.0% 6.7% 10.0% 6.4% 6.7% 5.5% 5.4% 5.0% 5.6% 5.0%

Acquisition/divestiture impact -0.2% -0.1% 0.1% 0.7% 1.1% 0.5% 0.0% 1.2% 1.3% 1.1% 0.9% 0.0%

FX impact -3.4% 4.3% -0.2% -1.9% -1.3% 0.1% 0.5% 0.5% 0.4% 0.4% 0.5% 0.0%

Income Statement - OMC

Fiscal Year Ended 31st December 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E


$ in mm, except per share data

Total Revenues 11,720.8 2,920.0 3,041.2 2,994.6 3,586.8 12,542.6 3,131.0 3,256.9 3,206.0 3,822.5 13,416.5 14,090.3

YoY growth -12.3% 6.3% 5.9% 5.5% 9.8% 7.0% 7.2% 7.1% 7.1% 6.6% 7.0% 5.0%

Operating Expenses (Excl. D&A) 10,103.0 2,567.0 2,564.6 2,618.1 3,079.8 10,829.5 2,733.0 2,732.6 2,782.7 3,256.0 11,504.3 12,002.0

EBITDA 1,617.8 353.0 476.6 376.5 507.0 1,713.1 398.0 524.3 423.3 566.5 1,912.2 2,088.3

YoY growth 0.0% 4.4% 4.5% 6.1% 8.2% 5.9% 12.7% 10.0% 12.4% 11.7% 11.6% 9.2%

% margin 13.8% 12.1% 15.7% 12.6% 14.1% 13.7% 12.7% 16.1% 13.2% 14.8% 14.3% 14.8%

Less: Depreciation 186.5 45.7 44.8 44.4 47.3 182.2 47.0 45.6 44.9 49.7 187.1 197.3

EBITA 1,431.3 307.3 431.8 332.1 459.7 1,530.9 351.0 478.7 378.4 516.8 1,725.0 1,891.0

YoY growth -17.9% 4.0% 4.9% 7.3% 10.8% 7.0% 14.2% 10.9% 14.0% 12.4% 12.7% 9.6%

% margin 12.2% 10.5% 14.2% 11.1% 12.8% 12.2% 11.2% 14.7% 11.8% 13.5% 12.9% 13.4%

Less: Amortization 56.3 16.3 16.4 18.0 20.1 70.8 22.4 23.3 22.9 23.5 92.1 105.7

Operating Income (EBIT) 1,375.0 291.0 415.4 314.1 439.6 1,460.1 328.6 455.4 355.5 493.3 1,632.9 1,785.4

YoY growth -18.6% 3.0% 4.3% 6.5% 10.0% 6.2% 12.9% 9.6% 13.2% 12.2% 11.8% 9.3%

% margin 11.7% 10.0% 13.7% 10.5% 12.3% 11.6% 10.5% 14.0% 11.1% 12.9% 12.2% 12.7%

Less: Net Interest Expense 100.7 24.1 23.7 29.8 32.2 109.8 32.3 32.3 32.3 32.3 129.1 129.1

Pre-tax Income 1,274.3 266.9 391.7 284.3 407.4 1,350.3 296.3 423.2 323.2 461.1 1,503.8 1,656.3

Income Tax (433.6) (90.7) (133.2) (96.9) (139.4) (460.2) (101.6) (145.1) (111.2) (158.6) (516.6) (569.0)

Equity in Earnings of Affiliates 30.8 4.7 10.3 8.2 10.4 33.6 3.2 8.8 6.7 8.9 27.6 29.0

Minority Interest (78.2) (17.5) (25.5) (21.0) (32.0) (96.0) (21.5) (29.5) (25.0) (36.0) (112.0) (117.6)

Earnings Allocated to Participating Securities (9.1) 0.0 0.0 (1.7) (2.5) (8.0) (1.5) (1.5) (1.5) (1.5) (6.0) (6.0)

Net Income 784.2 163.4 243.3 172.9 243.9 819.7 174.9 255.8 192.2 273.9 896.8 992.7

Basic Weighted Average Shares O/S 308.2 306.4 302.3 299.3 290.5 299.6 283.5 279.5 275.8 272.4 277.8 264.3

Diluted Weighted Average Shares O/S 310.4 311.0 307.0 303.5 295.7 303.5 287.5 283.4 279.7 276.3 281.7 268.3

Recurring Basic EPS $2.54 $0.53 $0.80 $0.58 $0.84 $2.74 $0.62 $0.92 $0.70 $1.01 $3.23 $3.76Recurring Diluted EPS $2.53 $0.52 $0.79 $0.57 $0.82 $2.70 $0.61 $0.90 $0.69 $0.99 $3.18 $3.70



100

Required Disclosures

Conflicts Disclosures

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

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For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).

Distribution of RatingsRBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 705 51.90 208 29.50HOLD[SP] 595 43.80 134 22.52SELL[U] 59 4.30 10 16.95

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subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

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