Wible's Weekly - NFLX Updates, Media Battle, and Media Predictions - Janney/MediaEntertainment

Predictions

Retrans Battle – CBS and TWC are entangled in the latest high profile nasty retrans negotiation. TWC suggested it may use Aereo as an alternative. This helps validate our view that Aereo and other technologies, including DISH's ad-Hopper, are bargaining chips to curb programming cost inflation. CBS is running ads against TWC on its networks and is now touting the online demand for its video traffic. Its new series "Under The Dome" generated 1.6 million VOD views in the first 22 days after broadcast, as well as 484,542 online views. Our prior analysis predicted retrans could grow to about $15 billion if left unchecked. MVPDs cannot offset this with higher rates, and so must fight to preserve margins and ease consumer pricing pressure. We believe all of this is rooted in NFLX use, which has pressured the ad market and forced networks to find alternative sources of revenue.

NFLX Consumption – A survey by GfK shows 77% of NFLX users prefer TV content over movies, which is not entirely surprising given NFLX's investment in TV programming. However, it also shows a low level of viewing concentration – where consumers enjoy a wide variety of niche content. It appears that only a few series draw slightly more than 2% of viewing. This long tail consumption dynamic may be tied to NFLX's recommendation system, which NFLX reported accounts for 75% of viewing. Separately, eMarketer suggests that multi-screen availability is an important element for subscription content, as consumers expect paid content to be accessible across multiple devices. The firm estimates mobile video subscriptions will exceed $2bn by 2017 (vs. $1.25bn in 2013), representing over 50% of mobile video revenues.

Native Ads – US Native ad spending on social sites is expected to reach $2.36 billion this year, or 38.9% of total US paid social ad expenditures, according to research by BIA/Kelsey. This is expected to grow to $4.57 billion (41.7% of total) by 2017. Native advertising is gaining steam with publishers, as 73% of US publishers already offer native advertising on their site and another 17% are considering to do so this year, according to a survey by the OPA and Radar Research. Engagement appears to be the leading metric used to evaluate the campaigns, cited by 57% of respondents, while traffic and social sharing followed at 43% and 33% respectively. We believe that while native advertising is one of the key opportunities to drive revenue growth for social (and other content) sites, publishers must walk a fine line in order not to turn consumers off from the content altogether.

Spectrum Arbitrage – In addition to reallocating broadcast spectrum, the FCC is trying to free up government and military spectrum for inclusion in future auctions. Wireless operators, for their part, are involved in a spectrum land-grab, which has spurred consolidation. Outsider DISH, which has sizable repurposed satellite spectrum, but no wireless infrastructure, could add even more spectrum by buying Lightsquared out of bankruptcy. We believe that DISH is amassing spectrum as bargaining chips to either strike a partnership with a wireless infrastructure player (after its efforts to acquire ClearWire and Sprint failed), or to sell itself. Our view is that DISH is trying to transition to an IPTV provider over time, using (its own) wireless infrastructure.

Media Predictions - Industry Consultant Jack Myers came out with several long-term predictions. We thought that the following five were the most interesting and merit a broader discussion on potential consequences in media: 1) Wearable smart products will create a constant digital presence while Devices will be always on, charged by solar and "human generated energy"; 2) GOOG will acquire a large TV networks and smaller content producers to become the largest media company on earth; 3) NFLX/AMZN will accept sponsorships and cobranded advertising partnerships; 4) Sony and AAPL will become major ad players, competing directly with GOOG; 5) TV network upfronts will continue but joined by a "far upfront" for projects with a longer time horizon (12-24 months).

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 IndustryRegulatory Authority and the Securities Investor Protection Corp. Disclosures may be reviewed at Wible's Weekly.

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