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Content Economics Could Play In Cable’s Favor

5/28/2012 12:01 AM Eastern

Boston — Programmers might ultimately hold
the knife that inflicts the fatal wound to over-the-top
television services, a panel of cable analysts
said at the Cable Show here last week.

The recent ratings problems at Nickelodeon,
thought by many to be because of viewing of the kids’ network
on Netflix and other subscription video-on-demand
services, could be the catalyst that pushes programmers
away from over-the-top deals, in UBS cable analyst John
Hodulik’s view.

Nickelodeon ratings have plunged more than 30% in the
past several months, in part because of cannibalization
by Netflix. Sanford Bernstein media analyst Todd Juenger,
who in a report in April compared set-top data from TiVo
that showed that Netflix viewing helped fuel the ratings
decline, first pointed out this trend.

Other programmers, like Time Warner Inc. CEO Jeff Bewkes,
have cited Netflix and other subscription VOD services
as a factor in depressing ratings, as Hodulik noted.
On a recent earnings call, Bewkes pointed out that Cartoon
Network, which does not have a Netflix deal, saw its
ratings rise about 16% in the first quarter.

ECONOMICS PROBLEM

“That’s phenomenal that the media industry is seeing the
pain before the cable industry,” Hodulik said. “That’s going
to be top-of-mind for Jeff Bewkes and [Viacom CEO]
Philippe [Dauman] and it came at just the right time.
They’ve got to realize that there is a problem with
the front-line economics.”

According to Dauman, Netflix viewing only represents
about 2% of Nickelodeon’s total viewership
time, while ratings have dipped about 30% to
date, Deutsche
Bank media analyst
Doug Mitchelson
observed. “Nickelodeon
has issues well beyond
cannibalization
from online,” he said.

Netflix has been
wading into original
content creation, planning
to launch political
thriller House of Cards
in late 2012.

But it ’s too early
to tell if the SVOD
giant will actually
become a force in original
content, Sanford Bernstein cable and satellite analyst
Craig Moffett said. “It’s really hard for anyone in the
original-content business to change the economics of
that business. It’s hit-driven, and the rules of thumb are
horrifically challenging.”

Wells Fargo media analyst Marci Ryvicker theorized that
Netflix would likely become another network, rather than a
distribution rival to cable and satellite.

She pointed to Dish Network’s purchase of video rental
giant Blockbuster, which some feared would give the
satellite giant an over-the-top play to battle against cable.
Blockbuster had considered making an over-thetop
play, but was put off by the high programming costs,
which Ryvicker estimated
at $6 billion to $8
billion. Similar considerations
would likely factor
into any Netflix decision
along the same lines, she
said.

LITTLE M&A AT MSOS

On an other topic, the
panel didn’t foresee
much more significant
cable consolidation.
Mitchelson said most
operators see better returns
in repurchasing
their own stock. “They
already have scale,” he said. “To roll up all of these small
guys is a lot of work for little gain.”

Moffett said any more consolidation would likely involve
smaller operators. Midsized cable firms like Suddenlink
Communications could benefit from rolling up
smaller operators, he said, but such deals would be small
and not attract much notice. “That’s probably where the
action is going to be,” he said.

September