Comcast’s NBC: It Will Take More Than Higher Ratings To Grow Its Broadcasting Operations

Comcast‘s (NASDAQ:CMCSA) NBC broadcasting has been riding high on the success of its programming and continues to top the ratings in the current television season. After 15 weeks of 2014-15 television season, NBC saw an average rating of 2.8 in the coveted 18-49 demographic. ^[1] The network benefited from the success of its shows such as Law and Order: SVU, Chicago PD and The Blacklist, which saw increased viewership during the season. For content owners, higher ratings translate into better advertising revenues, which is the bread and butter of broadcasting networks. However, higher ratings won’t be enough for NBC to see a steady growth in the long run due to its mix of advertising and non-advertising income. Around 70% of NBC’s revenues are derived from advertising while content licensing and retransmission consent make up for the rest. The split between advertising and non-advertising income is much higher for NBC as compared to other broadcasting networks. Disney’s (NYSE:DIS) ABC derives 45% of its revenue from non-advertising sources and CBS (NYSE:CBS) around 50%.

Broadcasting networks rely heavily on advertising income, which trends unevenly driven by various events such as political campaigns and sports. Moreover, the trends in the advertising marketplace are shifting away from television and moving towards the Internet. While we believe NBC will continue to see moderate growth in advertising revenues in the near term, the company should be more aggressive on growing its non-advertising income such as content licensing and re-transmission consent, which can provide a more stable growth in the long run.

Also, increasing the non-advertising income will aid to the broadcasting EBITDA margins. Currently, NBC’s broadcasting operations has very low margins. While it contributes close to 30% to NBCUniversal’s (NBCU) revenues, it merely accounts for 7% of NBCU’s EBITDA. The margins are much lower as compared to Disney’s 16% and Fox’s 18%, according to our estimates. This can be attributed to NBC’s high programming and production costs, which  include distribution costs, sports rights and direct production costs.

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NBC Is Performing Better Than Its Peers

NBC was an exception with continued ratings growth led by its new programming such as Blacklist. Most of the broadcasting networks, including CBS and ABC, saw ratings decline in 2014. While CBS tried to bring new programming to bear, most of its new shows were cancelled amid lower ratings. As a result, the company saw a 7% decline in advertising revenues during the first nine months of 2014. ^[2] Looking at the previous television season ratings, ABC was down 5%, Fox was even while CBS was down 17%. ^[3] While CBS continues to struggle in the current season with most of its shows down in ratings, ABC is benefiting from higher ratings and viewership at The Scandal, The Goldbergs and Once Upon A Time. ((ABC 2014-15 Season Ratings, TVSeriesFinale, Jan 10, 2015)) For the fiscal 2014 (fiscal years end with September), Disney’s broadcasting advertising revenues were down slightly to $3.90 billion as compared to $3.96 billion in the prior year period. ^[4]

A decline in ratings will weigh over the advertising income of some of the broadcasting networks such as CBS in the near term. Over the course of the past few years, the cable networks have risen in popularity owing to their specific focus. This has helped them create a loyal audience base and consequently broadcast networks have suffered in terms of viewership. Also, growth in online streaming and other video alternatives is leading to lower audience sizes for broadcasting networks. While we believe this trend will continue and weigh over broadcasting network ratings in the coming years, a lot will also depend on the quality of programming that is being introduced. For instance, Blacklist was a very fruitful experiment for NBC and Sony TV and if the networks can invest more to offer quality programming, the ratings could rebound. A good mix of sports programming also helps these broadcasting networks to secure high ratings, evident from NBC’s Winter Olympics coverage last year. NBC will also benefit from the Olympics television rights (until 2032), which it secured in a $7.65 billion deal signed last year.

Besides Ratings Improvement, NBC Is Benefiting From Growth In Non-Ad Revenue

NBCU’s broadcasting business includes the NBC Network and its owned  NBC affiliated local television stations, the Telemundo Network and its owned Telemundo affiliated local television stations, television production operations and related digital media properties.

The broadcasting business derives revenues primarily from two sources, advertising fees and content licensing. Broadcasting revenues increased from $6 billion in 2011 to $8 billion in 2012 and stood at $7 billion in 2013. The surge in 2012 revenues was driven by the Olympics games and high political spending. During the first, three quarters of 2014, the figure stood at $6.21 billion while the operating income was over $500 million. ^[5] Advertising income represented 70% of overall broadcasting income in 2011 and 2013, while it was a touch higher at 73% during 2012. However, the figure reduced to 68% during the first nine months of 2014 and content licensing revenues grew close to 20% as compared to the prior year period. This is a good sign for NBC as a faster growth in its non-advertising income than advertising income can provide the company a stable growth outlook in the long run. In 2014, NBCU inked a content licensing deal with Hulu for an undisclosed amount. We forecast broadcasting revenues to grow moderately and be north of $10 billion by 2020, driven by higher advertising income and continued growth in licensing revenues. Sustained demand for its programming will help the network achieve higher advertisement rates and a continued growth of alternative video platforms will lead to more licensing revenues for the network. An estimated EBITDA margin of around 5% will translate into EBITDA of around $500 million, representing a little more than 5% of NBCU’s overall EBITDA.

Overall Advertising Is Growing But Share Of Television Is Declining

Advertisement pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to shell out more money. Television still remains the biggest medium for advertisements and content owners will benefit from this broad level improvement. Television currently accounts for close to 40% of all advertising and it is expected to drop to 37% by 2017, according to a research by ZenithOptimedia. However, this decrease will primarily be due to a rise in ad spending at other platforms and television ad spending will continue to grow by 3% annually until 2017. Meanwhile, Internet display ad spending is growing at an average annual rate of 18% and is expected to continue to grow at same pace in the coming years.  ((Executive summary: Advertising Expenditure Forecasts December2014, ZenithOptimedia)) It will be interesting to see how the scatter market trends for the broadcasting networks in the coming months. (The scatter market refers to ad sales closer to the broadcast date rather than upfront market.) In November 2014, the overall broadcasting spend was up 3% while CBS and NBC saw a 6% growth. ^[6]

We estimate revenues of about $68 billion for Comcast in 2014, with Non-GAAP EPS of $3.01, which is in line with the market consensus of $2.89-$3.24, compiled by Thomson Reuters. We currently have a $59 price estimate for Comcast, which is around 5% ahead of the current market price.

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1. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 15 Ending January 4, 2015, Zap2it, Jan 7, 2015 [↩]
2. CBS Corporation’s SEC Filings [↩]
3. NBC Wraps TV Season As Demo Champ for First Time Since ’04, Variety, May 20, 2014 [↩]
4. Disney’s SEC Filings [↩]
5. Comcast’s SEC Filings [↩]
6. SMI: TV Ad Spending Down 2% in November, Broadcasting & Cable, Dec 17, 2014 [↩]