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Conan’s Contribution: Cash

5/03/2010 12:01 AM Eastern

Time Warner Inc.’s corporate
makeover is entering the
next chapter, as investments in
the company’s basic cable networks
benefit from a rebound in
advertising spending.

Gains should be apparent in
Time Warner’s first-quarter report
coming this week (May 5),
analysts are predicting.

Collins Stewart media analyst
Tom Eagan sees this as the third
phase of Time Warner’s remaking.

Phase one was splitting off
the Time Warner Cable assets
and AOL.

Phase two was emphasizing
shareholder returns by increasing
the dividend yield and upping
the authorization for buying back
shares.

Phase three is investing in the
Turner Broadcasting cable networks,
as seen in recent headline
deals: TBS is adding late-night
talk show host Conan O’Brien
and TNT has teamed with CBS
for the NCAA men’s basketball
tournament.

Eagan, in a note, said the $10.8
billion CBS deal should “enable
Time Warner to more effectively
package all the Turner networks’
dayparts to advertisers and
should likely translate to higher
affiliate fees from cable and satellite
operators.”

FORECASTING Q1
Eagan, Credit Suisse media analyst
Spencer Wang and Miller
Tabak media analyst David
Joyce all expect strong performance
from Time Warner in the
first quarter.

Joyce and Wang peg revenue
in the period at about $6.2 billion
(up about 3.6% from the
previous year) and AOIBDA, or
adjusted operating income before
depreciation and amortization,
at $1.4 billion (up 12%).

Eagan, along with quarterly
predictions mirroring the other
two, decreased his full-year
revenue estimate to $25.89 billion
from $26.2 billion, mainly
because of a change in the accounting
treatment of premium
channel Home Box Office International’s
partnerships.

His AOIBDA estimate rose to
$6.1 billion for the full year from
$5.7 billion because of higher than-
expected film revenue and
higher cash-flow margins at the
film studio and television networks.

In another sign the advertising
market is rebounding, Viacom
last Thursday said domestic ad
sales grew 1% in the first quarter,
versus a 4% decline in the fourth
quarter of 2009. That was the first
positive gain in domestic ad sales
for the MTV Networks parent in
more than a year.

Wang saw signs of a rebound in
the ad market in April, forecasting
the Turner networks would increase
domestic ad sales by about
2% in the first quarter, compared
to a 3.5% decline in the fourth
quarter of 2009.

“Several industry contacts indicated
that Turner entered [the
first quarter] well sold with limited
inventory and was flexible on
scatter pricing,” Wang wrote in a
note. He estimated scatter pricing
finished about 10% above upfront
levels.

Eagan sees particular upside
at TBS in recruiting O’Brien. He
believes TBS could more than
double the ad revenue it now
generates in the two-hour latenight
time slot he’ll share with
Lopez Tonight beginning in
November.

According to Eagan, TBS now
generates about $51.4 million in
annualized ad revenue from Lopez
(which has about 1.2 million
viewers) and reruns of My Name
Is Earl
(which has about 200,000
viewers) in the 11 p.m.-midnight
time slot.

He thinks O’Brien would draw
about 1.75 million nightly viewers
to TBS (about one third of
O’Brien’s Tonight Show audience
on NBC), generating $96.1 million
in annual ad revenue.

Lopez, whose hour-long talk
show moves to midnight, would
attract fewer viewers (900,000, according
to Eagan’s estimates) and
take in about $27 million in annual
ad revenue.

Between the two shows, that’s
a total of $123.1 million.

O’Brien’s show will cost more
to produce than Lopez Tonight,
but should still turn an annual
profit of about $15.6 million, Eagan
predicted.

Joyce, of Miller Tabak, sees an
even bigger Conan upside than
Eagan does.

He estimates Lopez alone took
in about $21.8 million in annualized
revenue, or about $18.22 per
viewer. O’Brien, whose Tonight
Show enjoyed a 2.92 Nielsen rating
on NBC, could generate better
than three times that amount per
viewer — or $60.24 — in the second
year of his deal.

UPGRADING TURNER

Wang stayed away from forecasting
Conan’s impact, instead
focusing on ratings growth at all
of the Turner networks.

While CNN has been hammered
— the 33% ratings dip
in March was an improvement
over the 38.9% decline in February
— the other networks are
rising. Overall, Wang estimated
total-day ratings in March for
Time Warner’s basic cable networks
declined 5.2% in March, a
sequential improvement over the
8.2% decline in February and the
11.9% dip in January.

TNT and TBS ratings overall
are on the rise: Wang estimates
TNT rat ings grew 10%
year-over-year and TBS’s declines
moderated to 6.5% yearover-
year.

Cartoon Network ratings declined
3% sequentially and
Adult Swim continued to show
strength with 15.9% year-overyear
growth.

September