We believe 2014 could be a monumental year for TV, as new business models may be introduced and we will likely see a wave of M&A that will ripple through the media supply chain. The push for a Virtual Multichannel Video Programing Distributor (VMVPD) model could set the stage for a debate around Usage Based Billing, create pricing opportunities for TV Networks, and break the oligopoly model for traditional MVPDs. The TV ecosystem will also have to cope with retransmission fees, a potential legal victory for Areo, and the onset of new NFL licensing terms. However, technology may also provide new ways to monetize content and a gradual economic recovery should provide a tailwind for the space. We continue to favor VIA in the traditional large cap media landscape and NFLX and FB for media investors capable of skewing towards the online players.

Moving Parts - We foresee a VMVPD launch that will create new demand for content and allow for content to be sold at a premium price. However, this model would tax the broadband infrastructure and push cable operators towards UBB. While we cannot envision any scenario where UBB does not exist, we are uncertain of price levels as many powerful Internet company will likely argue that the practice is anti-competitive. Investors may underestimate the collective power of these Internet companies to sway public opinion. Separately, a legal victory for Aereo (another OTT) could force broadcast networks to move to cable networks to preserve their business models but would jeopardize their O&Os, reverse network comp, and ratings.

Cost Dynamics - We see sports and retransmission fees as the largest sources of programing cost inflation. The new NFL deal terms will start this next season and may pressure numbers for CBS, DIS, and CMCSA. We estimate there is an $800 million incremental annual cost increase on average over the DIS deal life alone. Headlines will soon emerge detailing the step up in cost facing DTV for its Sunday Ticket. We estimate MVPDs will also face a $500 million incremental payment for retransmission fees in 2014.

Consolidation - Ad agencies are merging and MVPDs may consolidate as they seek relief from programing costs and opportunities to monetize their broadband businesses. This could threaten TV Networks as advertising and affiliate revenue face pricing pressure, but could also act as a catalyst for smaller TV Networks to merge. Stations may also continue to merger to bolster retransmission leverage and to reduce operating cost.

Our Picks - VIA should benefit from its second screen exposure and continued ratings momentum. Its position as a TV Network should benefit from a VMVPD and it lacks exposure to sports. The massive buyback also provides more leverage to these factors. NFLX use may improve if consumers are conditioned to watching OTT via a VMVPD and the emergence of these models would provide a powerful advocate and anti-competitive argument against UBB. FB provides exposure to the secular shift to mobile advertising that will continue to gain relative share of all ad spend without having to worry about all the risk permutations in the TV landscape. New online video ad inventory will amplify the already rapid increase in mobile ad pricing.

Tony Wible joined Janney Montgomery Scott in 2008 and is a Managing Director covering the Media and Entertainment sector after spending the previous 10 years at Citigroup Investment Research—most recently covering the Broadcasting and Entertainment Services industries.
Tony can be reached at twible@janney.com.

Janney Montgomery Scott LLC, is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp. Disclosures may be reviewed at Tony WibleWible's Weekly.

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