Study: Falling Ad Rev Threatens Big 4 Growth

The “godsend” of retransmission consent revenue and reverse compensation may not be enough to keep the Big Four networks prospering over the next five years because of declining ratings, according to MoffettNathanson Research.

“[W]hile we estimate profits to accelerate as retrans continues to ramp, we worry about the undercurrent of ad trends and subscriber declines,” says the research entitled “Broadcast Nets: How Long Can This Balancing Act Last?”

The ad trends are not good, the research says. Over the past five seasons, viewership has dropped 8%, it says. What’s more, it says, the median age of all the networks except Fox is outside the “coveted” 18-49 demo and Fox is barely inside with a median viewer age of 49. The median age of the entire population is 38, it notes.

Nonetheless, it says, thanks to retrans, total revenue (advertising plus retrans and reverse comp) grew 5% annually (CAGR) over the past five years (2011-15), while EBITDA climbed 6% a year over that span and the margin bounced between 10% and 12%.

The networks “appear to be perfectly budgeting expenses to mirror advertising dollars (in other words, it’s a break-even business) and allowing retrans to drive … profitability.”

Because of the troublesome advertising trends, the research says, total revenue will slow to 3% a year over the next five years (2016-20). However, by keeping the lid on expenses (1% growth per year) and continuing to grow retrans and reverse comp, the networks should be able to grow EBITDA at a 12% annual pace over the five years and drive the margin to 16% in 2020.

But the bullish outlook depends on all going well.

“Looming questions remain over the pace of pay TV sub declines and how fast ad budgets are shifting away from linear TV. Both of these could negatively impact our current thinking for advertising and retrans, but also likely come with lower expense growth in the out years.

“Said another way,” the research adds, “if we are too optimistic on advertising, the growth in retrans and any potential cost savings might not be big enough to offset losses associated with the traditional broadcast business.”