Wible's Weekly - Cord-Cutting, Aereo Aggravation and the Demise of Films on TV - Janney/MediaEntertainment

* Cord Cutting – Approximately 1.08 million U.S. MVPD customers (1.1% of accounts) canceled their service in 2012, according to a report by Convergence Consulting Group. Approximately 3.74 million subscribers have cut the cord since 2008, potentially growing to 4.7 million in 2013. The number of alternatives, including NFLX, as well as improving broadband speeds have made it easier for users to cut the cord. Interestingly, the proportion of TV viewers watching full episodes online for free declined. The increase in TV Everywhere deals and broader increases of content behind paywalls will continue to drive this number down. We expect the recent Nielsen announcements on device measurement to drive TV Everywhere content increases.

* Films Fade on TV – Movies are becoming a smaller part of US broadcast programming, according to SNL Kagan. Prime time broadcasts totaled just 35 films on the big four broadcasters in 2012, compared to a high of 375 in 1999, despite windows tightening, which has made films available for TV earlier. This decline cuts into studio revenues, which generate approximately 2%-5% of a film ultimate from the broadcast TV window. The analysis notes that increasingly, broadcast networks opt to share with cable networks, rather than pay to have exclusive rights. While the analysis is for US broadcast, we could start to see this internationally as well, further pressuring film ultimates.

* Mobile Advertising – Mobile advertising will reach $7.3 billion (+77%) in 2013, after growing 178% in 2012, according to eMarketer. New entrants Twitter and FB are driving part of this growth, although GOOG is still the largest player, driven by its dominance of mobile search. In mobile display, FB is set to expand its market share to 29% (from 21%), outpacing GOOG's 20% (from 17%) by a significant margin. FB and Twitter have been able to deliver higher ad volume than traditional publishers due to their use of native ad formats. Pricing metrics for impressions may move up as programmatic (or RTB) buying proportionally increases, helping to improve targeting and the sale of unused inventory.

* Aereo Updates – Aereo prevailed in a Court of Appeals decision, which rejected an appeal from broadcasters. The Court concluded that Aereo's system does not infringe on broadcasters' copyrights. While broadcasters are likely to press on with legal challenges, the decision should give Aereo additional momentum in its expansion plans and discussions with potential partners. A recent WSJ article mentions DISH and T as potential partners, which we believe will be a way for MVPDs to ease the massive inflationary pressure coming from retransmission fees.

* Gaming Updates – Sources from Kotaku believe the next Xbox console will need an Internet connection at all times. While we are skeptical, we believe any such feature would be designed to aid game/system downloads/updates, but others believe it will block used games; however, any such move by MSFT could competitively disadvantage the Xbox vs the PS4 which will not require a connection or block used product. Core gamers overwhelmingly (by almost 4:1) prefer physical media, according to a recent poll by NPD. Separately, GME is investing in PlayJam, which is developing GameStick, a small Android gaming console that fits into the trend of manufacturers (including AAPL, Samsung, GOOG, and others) trying to bridge the gap between mobile/tablets and traditional consoles.

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 Wible's Weekly.

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