Wall St. Speaks Out on the Fox Upfront - Anthony DiClemente

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We attended the Fox Broadcasting 2015 Upfront Programming Presentation at The Beacon Theatre in New York, which marked the first upfront for Fox Broadcasting under the helm of Dana Walden and Gary Newman, both of whom also have oversight of Fox's TV studio. FOX's Television segment represents ~20% of FOXA's revenue and ~14% of EBITDA (with the broadcast network a smaller portion thereof); given its impact on the stations group, the broadcast network continues to be of considerable strategic significance for FOXA. Given this year's ratings headwinds at the Fox broadcast network, which in fact contributed to the December quarter's modest downward revision to FOXA's fiscal 2015E guidance, we were interested to hear about the company's new programming strategy for the upcoming season. FOXA had previously highlighted that 2015 would be a year of investment with a priority focused on building hit shows.

We came away with 3 takeaways from Fox's upfront event: 1) Gotham, Empire, and Fox's sports programming remain very strong building blocks upon which to launch new shows, like comedies Grandfathered and The Grinder; 2) unifying the operations and management of the Fox networks could represent an opportunity in terms of both strategy and efficiencies; and 3) innovative digital ad formats are going to matter more over time.

Please refer to our 04/21/2015 upfront preview; we estimate that Fox will experience a 9% YoY decline in dollar volume commitments, this based on 4% CPM increases and 78% sell-through rate.

Building blocks are in place

Fox broadcast network clearly has a strong foundation with major sports rights in place under long-term contracts along with Gotham and Empire, which present promising building blocks. New shows Rosewood (medical-crime drama procedural) and Minority Report (based on Steven Spielberg's 2002 theatrical release) will lead out and lead into Gotham and Empire, respectively. The company completely overhauled its Tuesday lineup with Grandfathered (John Stamos comedy), The Grinder (Rob Lowe legal comedy), and Scream Queens (Ryan Murphy's anthology horror-comedy mashup). We are more optimistic on Fox's Tuesday comedy lineup as we believe the star-power has the potential to appeal to the coveted young affluent female demographic. Overall, our take is that there may be an element of cost-consciousness at the Fox network, with a lineup of reasonably-budgeted shows that will benefit from strong lead ins/outs.

Bigger (and better) together

On a combined basis, the Fox Networks (Broadcast and Cable) deliver roughly 11bn impressions a month, and the cross-network partnership has created powerful scale with brand familiarity and sales impact that is 3x and 4x that of "sub-premium online video," respectively. A common theme throughout this year's broadcast networks upfront has been the quality of video. The company highlighted the ability to buy Fox premium video across platforms which go a long way towards optimization of advertiser buys. However, to show the effectiveness of these buys, Fox emphasized the progress the company has made in data analytics and noted it expects to demonstrate the value of a Fox partnership through data sourced from recently acquired TrueX Media (more on TrueX below).

Ad formats matter

FOXA has also stepped up its investments in the digital arena, whereby the company will look to deliver more efficient and effective capabilities to advertisers. The acquisition of TrueX (an online advertising company) comports to the company's objective to deliver different ad loads along with improved targeting and increased product engagement.TrueX allows digital viewers to opt to interact with a full-screen multifaceted ad in lieu of sitting through a series of ads (as they would on linear TV) while streaming online content. Further, management spoke about increased availability of VOD (that is gradually replacing DVR) which is facilitating dynamic ad insertion. We believe these ad technologies should increase the targetability (and CPMs) of digital ads while simultaneously improving the user experience.

Fig.1: Renewed and New Fox Shows

Fox's 2015/16 lineup

Source: The Hollywood Reporter, Nomura research

Fig.2: Season-to-date broadcast ratings (ex-sports)

 Fox's ratings have declined YoY

Note: Viewership based on live, primetime (ex-sports), total household data.
Source: Nielsen, Nomura research

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U.S. Media - Quick Thoughts on the Fox Upfront

Prepared by Nomura Securities International, Inc. For complete details of the research together with the associated important disclosures, analyst certification, valuation methodology and discussion of risks, please see the full publication attached.

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