Cable Scatter Robust; Amazon Edging up on Netflix & More - RBC Capital Markets

Key takeaways:

TV content costs continue to rise. Costs associated with every part of the value chain within TV production continue to go up given the increased volume of content being produced and prices paid by SVOD players. The cost inflation pressures are being felt with writers, cameraman, technicians, crew members, and of course actors. One network executive said the higher costs are being absorbed with higher revenue expectations, with TV shows seeing bigger deficit financing than previous eras supported by international syndication assumptions. As such we think investors may become more sensitive to companies with amortization changes or frequent content write-downs. Notably, this trend is specific to TV production with theatrical cost growth said to be normal.

Netflix still the "prestige" platform, but Amazon consistently viewed more favorably as a partner. While there's no question that Netflix remains amongst the most coveted destinations for talent and projects, multiple contacts noted that they prefer deals elsewhere especially if the content has a true international market (happy to sell "global rights" when there's probably not a mass global market). Admittedly, this could have been specific to our contacts, but we also found it notable that Amazon was repeatedly referred to not only as a preferred partner ("more friendly") but also at times more financially aggressive as well. Hulu was said to still be trying to figure out their strategy and what kind of content they want to buy and be associated with. Procedural dramas remain "the holy grail" for SVOD (read: CBS). We also heard that both Netflix and Amazon are making forays into unscripted content - potentially not great for DISCA and SNI.

Electronic sell-through and new services offer improved monetization options. Lionsgate and Vimeo announced a partnership earlier this week whereby Lionsgate will license its entire catalog of TV content exclusively to Vimeo's global TV store across 150 countries, with LGF movie titles to be added for rental in the U.S. subsequent to launch. This notably marks Orange is the New Black, oft associated with the NFLX brand, outside the service. Per our commentary above, we think more a la carte stores for content will emerge.

Robust scatter market. We heard that scatter CPM pricing remains "robust" in cable. While ratings continue to track down across the industry we heard that most dollars are still transacted on C3 or C7 while broader measurements suggest around 300bps less drop to ratings. Execs think improved measurement will take 2-3 years to roll-out.

Big Studios sticking to the big movie strategy. Studio execs see the majors increasingly putting their capital into their big franchises, as that strategy is working for Disney, Universal/CMCSA and Warner/TWX. DIS and Universal are viewed by industry and investors to be on excellent footing. We did note investors questioning TWX's movie-making with worries that while tent-poles have been financially successful this year, the strategy is at risk if audience reactions don't improve. Paramount and 21st Century are viewed less favorably by investors, with Paramount appearing to face a crisis of confidence with staff and partners.

International content is a big opportunity. We met private entities that are focusing on local content in markets like South and East Asia. They say the major content companies aren't particularly active given the scale and complexity of these markets. We wouldn't be surprised to see local content houses in big growth markets like India and China become a focus of Large Cap Media M&A.

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