Madison & Wall - Programmers' Paradoxical Positive - Brian Wieser

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REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison & Wall 2-14-14.pdf

News of the proposed Comcast-Time Warner Cable merger is probably the biggest story in the media industry at the present time. It's also a topic that, on its face, looks alarming to media investors and industry participants who focus their time and efforts on the programming and broadcasting side of the business given the potentially threatening size of the combined entity. We think there is no reason to worry: if the deal goes through, we can paradoxically see it as favorable for CBS, and relatively benign for cable-centric programmers such as Viacom and Discovery Communications. Here are several considerations:

  • If Comcast, already the biggest MVPD in the Unites States, becomes substantially bigger, it will be much easier for other industry participants to portray Comcast (and cable as a whole) to Congress and regulators as "big bad cable", with broadcasters more likely viewed in a more positive light. Fair or not, a Comcast-Time Warner Cable transaction makes it more likely rather than less that other industry participants with powerful trade lobbies (such as broadcasters with the NAB) will be able to secure concessions from Comcast in any regulatory negotiations they engage in. As well, when new legislation is developed or when old legislation is renewed, it is more likely that other trade group members become relatively better off, as lawmakers and regulators alike will be better able to score political points against cable (which means a better chance of making choices that favor broadcasters)
  • The very notion of the concession that Comcast would likely have to make and that regulators will increase their presence in the industry suggests strongly that there will be an entrenchment for the status quo in many aspects of the industry (at least if one subscribes to a view that more regulation tends to benefit an industry's dominant participants). This would be helpful for broadcasters to the extent that a stable system increases the chances that retransmission consent rules remain in place for years, if not decades into the future.
  • Comcast would also be far less likely to aggressively fight retransmission consent fee growth than would, say, a combined Charter-Time Warner Cable. Comcast has an incentive to allow for higher benchmark prices across the industry, especially if they believe that on balance they (as a cable operator) can pass along most of the cost increases to consumers. This should ultimately facilitate broadcasters' efforts to drive ongoing gains in retransmission consent fees with every contract renewal.
  • There will presumably be some concessions offered to the FCC that presumably would benefit programmers, competitors and alternative providers of content (such as web-based video services). This probably helps increase the chances that alternative video services will evolve, many of which will license content from programmers and studios. It is possible that some services emerge to compete with today's MVPDs, but this would probably have happened anyways, so it is difficult to assess the incremental effects.
  • A larger Comcast is probably better able to negotiate with pure-play cable programmers such as Viacom and Discovery, but so long as there is one (if not two) competing services available to the bulk of homes, this advantage will remain limited. Programmers have demonstrated that their ad revenues will not suffer materially if their carriage is partially disrupted, but MVPDs are probably less likely to gain new subscribers looking to choose between services if the MVPD is in a dispute with a major programmer. While Comcast is certainly better positioned to get better pricing as a larger entity rather than as a smaller one, the underlying dynamics of the industry are unlikely to change by much, especially as Comcast knows that its overall business is probably better off if the programming industry remains healthy.

The timing of the news was in some ways coincidental, coming as it did mere hours after CBS exclaimed their expectations for $2bn in retrans-related revenue by 2020. While we have concerns over the long-term viability of the rules which enable Comcast to capture those revenues (or alternately in consumers' willingness to absorb the costs that MVPDs would likely try to pass through to them) retrans could very well equate to more than $100 in revenues per household per year for a given broadcast network. However, such concerns mostly won't phase investors. Of course, cable consolidation probably will phase investors, at least initially, but we think on further reflection most will come to appreciate that more regulation - and more regulation which favors broadcasters and programmers at cable's expense - will prove to be a paradoxical positive for the programmers.

Video Measurement: Keeping SCOR of the Leader

comScore made high profile announcements over the past couple of weeks, which on their face sound potentially transformative for advertising, if not outright threatening to the measurement industry's dominant company, Nielsen. While the opportunities that comScore is addressing are real, they are probably less significant than most observers appreciate, and unlikely to shake up the measurement industry or the broader media industry any time soon.

The primary piece of news released this week was that comScore's vCE product (which allows for demographic-based measurement of online campaigns) would be built "directly into (Google's) DoubleClick ad serving products, where it can serve as a transparent currency for both marketers and publishers to buy, sell and measure ad space across sites, formats and screens". It is also intended to provide data in real-time rather than over the multi-day period that it normally takes for vCE data to be updated. The time frame to establishing the product is expected to be six months. Several large media agencies and marketers were cited praising comScore's efforts, to boot.

Indeed, there is undoubtedly real interest in such a product, but the commercial scale and competitive dynamic to come is still unknown. One problem this product should solve is that it eliminates a step an agency or marketer desiring demographic-based data might choose to make in integrating the data associated with their campaigns (otherwise it would be necessary to work with one data set from comScore's vCE product or Nielsen's OCR product and another from the Google ad server for purposes of analysis). A second is that it speeds up the process with which demographic data is provided for a campaign, which if using comScore presently might take multiple days; if using Nielsen there is an overnight turnaround.

Of course, few advertisers who are TV-centric (i.e. large brands) actually need demographic data in real-time and few would know what to do with it, not least as data provided in association with the rest of their campaign activities - and arguably the most essential ones, such as television - takes a day for preliminary data and weeks for complete data to be provided. That noted, there will be some advertisers who undoubtedly want demographic-based data associated with their marketing campaigns in real-time so they can optimize, iterate or otherwise reach campaign goals. But then again, the bulk of advertisers who need to trade media in real time likely have media goals which won't be measured in age-gender-based demographic groups (there is no shortage of other data that such advertisers can get in real-time to optimize their media buying decisioning on this basis). Useful product improvement? Sure, it certainly seems so. But Nielsen will likely have their own real-time product soon, and Google's VP of display advertising Neal Mohan told Ad Age that their agreement "doesn't mean we're not going to work with other partners".

The media measurement industry can be very complicated, and video measurement in particular is no less complicated. It can be difficult to understand industry participants' real interests and separate their aspirations from their perspirations. Getting past those issues requires questioning some of the details in any piece of news, separating fact from fiction and aspiration from action. For example, Google may own the dominant ad server, but its dominance is primarily around display advertising, but it is far from the only one offering video ad serving (and in areas such as video and mobile, many advertisers have exhibited preferences around servers that are best-in-class for a given media platform / medium. Separately, agencies and advertisers may praise one vendor, but not actually be paying customers. They might be making statements as part of a negotiation that each agency (and marketer) has with the company they are talking about as well as its direct competitors. The vendor might reference an agency or marketer as having an exclusive relationship, although the definition of exclusive may be fungible.

Putting cynicism aside, simplification of ideas and puffery of others' ideas is often necessary as it helps the industry evolve over very long periods of time. But observers must be mindful that while some people try to lead and move their portion of the industry forward, many other parts of the industry will take a while to get there too. And this is largely why Nielsen not only has time to evolve and improve its own products, but is probably set to continue as the leading provider of video measurement services for many more years to come.

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which areBrian Wieserimpacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at brian@pvtl.com.

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