Valuation of the cable, TV broadcasting & multi-media industry

Valuation of the cable, TV broadcasting & multi-media industry

Although many people think of “television” as being one industry, it is actually three (Broadcast, Cable and Network) The cable segment is much like the utility industry (telephone and electric business). It requires a huge distribution system of wires either overhead or underground or by satellite into people’s homes.

The TV network business is much like being an automobile manufacturer (i.e. Ford, GM ). The network produces the “product” i.e. shows like Home Improvement or The Tonight Show with Jay Leno.

The broadcasting companies are like the car dealers. They take the “product” the network produced and get it to the consumer.

Over the years the industry has become vertically integrated.

Network companies own more and more TV stations. Cable companies now own parts of network companies.

There have been numerous acquisitions in the industry. Small cable companies buy large ones as the industry consolidates to fewer players.

What is surprising is that cable companies can actually be sold and even more so at the price they command. Cable companies have terrible looking financial statements in the traditional sense. Thei balance sheets show a tremendous amount o debt and a negative net worth. Their operating statements usually show a negative prof it Yet cable companies sell for $1,500 per customer. They have a big hidden asset on the balance sheet called the value of customer contracts.

The 60 plus advertising supported cable networks receive only $5 bil. of the TV advertising pie (See Table 1) but get another $12 billion from subscription fees.

The local TV stations depend almos entirely on ad revenues totaling $20 bil. for that segment of the industry. TV stations tha are affiliated with a network (i.e. ABC, NBC) also get a compensation fee in exchange for giving the network advertising time on their station. Of the 1,100 commercial TV stations in the US about 800 are affiliated with one of the four major networks (ABC, CBS, NBC & FOX).

From an investor’s standpoint this is a difficult industry to forecast The new federal rule changes are producing lots of M&A activity with high prices being paid. The result is bigger companies with a bigger mar ket share. When a supplier controls a markel that often leads to higher prices for the consumer. However, competition is arriving from other sources.

Telephone companies are starting to supply cable services and vise versa. Digital technologies are permitting 500 or more TV channels to choose from. There is also the “information superhighway” with the Internet delivering entertainment, news and education to the consumer. The only thing that is being guaranteed is that the future will be different than that of the past

Copyright Quality Services Company Jul 29, 1996

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