Media economics - Evolution vs Revolution -- RBC Capital Markets

See the future RBC39s Evolving Subscriber ModelWe don39t claim to know what Hulu YouTube or any other digital MVPD will ultimately come up with exactly So what we39ve done instead is create what we consider to be a powerful proprietary model that allows us take the current consensus outlook of 12 annual subscriber declines in multichannel Pay TV the basis for most longterm forecasts and compare that to a world whereby large numbers of traditional subscribers migrate to digitally distributed platforms and skinnier traditional OTT bundles We39re able to build out scenarios across a broad range of variables including Multichannel net addslosses skinny bundle trends subscriber growth at OTT and customizable OTT tiers with different Media nets and bespoke assumptions on persub monetization Affiliate Fee and Ad The output of RBC39s Evolving Subscriber Model is domestic revenue growth by Media company so for each Media stock it can be flexed under unique scenarios around OTT and the overall ecosystemMedia economics Evolution vs RevolutionIn setting up our ecosystem scenarios we started with 3 tiers of OTT options that we think will emerge We have the skinny 39Limited Edition39 bundle at 3035mo but we think this will be tough to create and content will be limitedincomplete A much more robust 39Best of Cable39 content offering prices out at 5060mo and we think this will garner far more OTT subs An 39All Cable39 offering is ampgt75mo We39ve tiered networks based on how we see negotiating leverage with CBS DIS FOXA and TWX in the best positions Our scenarios then encompass some pretty big inflections in subscribers After laying out a Base Case Scenario 1 we then model in a big increase in skinny bundle penetrationScenario 2 and then a massive loss of traditional subs at 5mm pa going to OTT tiers Scenario 3Media may have terminal growthScenarios 2 and 3 encompass some pretty massive shifts to the ecosystem But for CBS DIS FOXA and TWX the change in revenue CAGR vs the Base Case is negligible CBS DIS FOXA or modest TWX but from a high base with these stocks still seeing MSDHSD revenue CAGR There is more material revenue growth pressure at DISCA SNI and VIAB and these are starting from lower bases of LSDMSD growth suggesting some bifurcation of fortunes in Media from OTT Overall though our Scenarios still imply positive terminal growth for Media stock revenueFOXA and TWX are our preferred namesWe think the results are particularly important for FOXA and TWX with ampgt50 of OIBDA from cable nets and lowly 125x CY17 PE valuations If investors begin to agree that the changing ecosystem will still mean growth at FOXA and TWX we think they can rerate CBS and DIS show well in our Model too but we think this is already well known for CBS to their credit whereas DIS is probably binary to exactly how ESPN is worked into OTT tiers a point of contention DISCA SNI and VIAB show less well and this could mean lower relative valuations vs peers ceteris paribusAll values in USD unless otherwise notedPriced as of prior trading day39s market close EST unless otherwise statedLink to Full Research Report including Required Disclosures and Disclaimeramp174 Registered trademark of Royal Bank of Canada RBC Capital Markets is a trademark of Royal Bank of Canada Used under licenseThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers

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Media economics - Evolution vs Revolution -- RBC Capital Markets

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Steven Cahall

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