Comcast-NBC Deal Could Weigh on News Corp’s Cable Programming Profit Margin

News Corp’s (NASDAQ:NWS) profit margins from its cable programming business, which includes cable networks like Fox Sports, Fox News, Fuel TV and FX Network, have increased despite a slowdown in economy. This is mainly because of cost saving efforts and pricing control exerted by News Corp on cable & satellite providers for its content. News Corp competes with other media conglomerates like Time Warner (NYSE:TWX), Disney (NYSE:DIS), Viacom (NYSE:VIA) and CBS (NYSE:CBS).

We maintain a $20.17 price estimate for News Corp’s stock.

Comcast-NBC Merger A Concern

As a condition for regulatory approval of its merger with NBC, Comcast will have to sacrifice its day-to-day control (voting rights and board representation) of Hulu.com, an online video site jointly owned by NBC, News Corp and Disney. However, News Corp still has worries about program access-related merger conditions dealing with online video providers since the FCC proposed a condition that would allow Comcast to provide its programming to an online video service if rivals such as Walt Disney Co.’s ABC or News Corp.’s Fox were also supplying content to it.

News Corp’s Control of Content Pricing

Cable, satellite and telecom operators like AT&T, Dish and Time Warner Cable continue to battle each other over providing quality content to their subscribers and, content providers like News Corp can exert pricing control and leverage this ability to drive revenues and margins.

News Corp’s Fox blocked its programming, including two World Series games, from Cablevision’s 3 million subscribers for two weeks in October 2010 until Cablevision agreed to pay what it called an “unfair price.” ^[1]

We expect News Corp’s cable programming margins will increase in the short term and then stabilize at around 35% by the end of our forecast period. However, Trefis members are more skeptical, forecasting the margins to fall below 25%, representing a downside of 4% to our price estimate for NWS stock. We can attribute some of this skepticism to the Comcast-NBC merger and concerns that control on content creation as well as distribution will affect cable networks and cable operators alike.

1. Cablevision-Fox Spat May Raise Hurdles for Comcast-NBC, Bloomberg.com, Nov. 1, 2010 [↩]