Broadcast Schedule Review -- An Expert's View of 2017-18 Primetime Line-Ups & Ratings -- RBC Capital Markets

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Talking Turkey After the Upfronts  --We hosted an investor lunch with a TV programming expert to review themes from the Upfronts + the 2017-18 schedules. Our key conclusions for the relevant network operators and broader Media industry are below.

CBS: Anticipating Flattish Y/Y Ratings Performance

CBS remains #1 in total viewers and #2 in A18-49 (behind NBC), but non-sports ratings were down double-digits in 2016-17. The major moves this programming year are procedurals SEAL Team and S.W.A.T., and of course comedy spin-off Young Sheldon. Following the success of Bull last year, SEAL Team is likely to perform well with Survivor as its lead-in on Wednesdays. On Thursdays, Young Sheldon will be a success if it can hold ~80% of the audience from The Big Bang Theory. We expect the buyside to focus on these data points (and the critical success of Star Trek Discovery). Overall, our expert thinks ratings for CBS in 2017-18 will perform about like 2016-17, or perhaps slightly better than the overall market. Arguably, the bigger hole for CBS will be when The Big Bang Theory concludes, but that's probably at least 2 years out.

FOXA: Downside Ratings Risk Remains

We think Fox led non-sports broadcast ratings declines last year with A18-49 down around 18% y/y. This year looks risky to us too with all roads leading to Empire (which is the lead-in to Star), while Orville may provide a very modest ratings boost. We think Fox may have made a deliberate choice to invest less capital in broadcast entertainment, instead devoting its capital to sports rights and directing the creative investment to FX.

ABC: Most Likely to Improve Y/Y

ABC is expected to improve the most in 2017-18 as American Idol returns with Katy Perry, probably taking Sunday night ratings from CBS and NBC. Dancing with the Stars also held up well this year. It's also the final season of Scandal, which should help it remain strong. We think ABC was -11% y/y in A18-49 in 2016-17 so down mid-single digits sounds reasonable for the coming season, and would be an improvement.

State of the Industry: Advertising is Business-As-Usual Despite Worrisome Ratings Declines

In total, our expert says broadcast A18-49 ratings fell by 9% y/y in the 2016-17 season, and we think the number is significantly worse for entertainment programming (i.e. non-sports). But, the reach on hit shows like NCIS, The Big Bang Theory, Empire, Scandal and This Is Us (not to mention sports) remains unrivaled for major advertisers, thus TV ad budgets continue to remain flattish against the declining ratings backdrop. Investors are concerned that these diverging trends will soon reach a tipping point, but neither our TV expert nor our channel checks around the upfronts suggest we're there yet (recent speed bumps in digital are also helping TV short-term).

Prefer Offsets to Cord Cutting: DIS, CBS

We also think the Media stocks that can pivot to direct content monetization are doing so, as evidenced by CBS's Star Trek Discovery going on CBS All Access, DIS's/Marvel's/ABC's The Inhumans premiering on Friday nights (presumably for DVR'ing) and FOXA focusing its creative talents on FX. Our preferred Media stocks are DIS for its non-Media growth assets (Studio/Parks/CP) and CBS for its improving earnings quality driven the ramp in retrans+reverse comp.

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