Battle of the TV Network Bundle You Get What You Pay For (Sometimes Even Less)
1. EQUITYRESEARCH
RBC Capital Markets appreciates your consideration in the 2015 Institutional Investor All-America Research Team survey.
RBC Capital Markets, LLC
David Bank (Analyst)
(212) 858-7333
david.bank@rbccm.com
Kristina Warmus (Associate)
(212) 428-6622
kristina.warmus@rbccm.com
Kutgun Maral (Associate)
(212) 437-9151
kutgun.maral@rbccm.com
Leo Kulp
(Associate Analyst)
(212) 301-1457
leo.kulp@rbccm.com
May 1, 2015
Battle of the TV Network Bundle: You Get What You
Pay For (Sometimes Even Less)
Media and Entertainment Deep Dive Series: OTT "Light" Bundles And
Cord Shaving
In this deep dive analysis of the dynamic content distribution paradigm, we use proprietary analysis
to examine:
• The economics of new OTT pay-TV bundle services such as Sling, as well as “synthetic” bundles with
direct-to-consumer products such as HBONow, CBS All Access, etc., and subscription SVOD services
combined relative to the traditional linear pay-TV bundle;
• Consumer preferences for lighter bundles and key factors influencing those preferences from our
proprietary consumer survey;
• The evolution of the traditional linear pay-TV bundle (which is undergoing a “lightening” of its own);
and
• The challenge in determining "winners and losers" in a rapidly evolving landscape.
The cost savings from migrating to OTT light (or synthetic) bundles probably isn’t as compelling
as investor sentiment would seem to reflect, especially when considering the incremental cost of
unbundled broadband and change in utility (number of streams allowed, ability to DVR, etc.). As a
result, we think concerns over a sea change in distribution and how it might impact content companies
are somewhat overstated.
• Evolving technology and the ability to self-program probably drive change as much as economics do.
We think this call for greater “choice” in the bundle, has been demonstrated on a traditional linear
basis — While total pay-TV subscriptions have been largely unchanged for the past several years, most
fully distributed networks (ESPN, HGTV, TNT, MTV, FX, etc.) have lost 2-3 million subs during that period.
Consumers, on some level, are shaving the cord.
• This traditional linear cord shaving, while potentially being offset by premiums paid by new entrants
into pay-TV distribution, is still troubling and implies a persistent slowdown in the growth of affiliate
revenue for most cable network players.
• New OTT-based pay-TV providers will pay a premium on carriage fees, offsetting cord shaving on some
level, but it's still too early to quantify the off-sets.
• Absolute growth in subscription-related revenues should continue for our investable time horizon,
but the rate of growth will likely slow from current levels.
We don’t think inclusion or exclusion in the Sling bundle tells us much about long-term winners or
losers — The linear pay-TV world (with broader utility and a broader sample set) may tell us more.
Additionally, we will learn more with the launch of new services as they arise (Sony PlayStation Vue,
or potentially Apple, etc.).
• CBS emerges as the biggest winner to us. While virtually all fully distributed cable networks have lost
linear subscribers, broadcast Network O&O’s have not lost subscribers and CBS generates virtually all
of it's affiliate revenue from a single source -- it's O&O's.
• Vulnerability to smaller bundles is lower for players with viewership and affiliate fees concentrated
in a small number of channels, such as TWX and SNI, and stronger for larger network groups where
viewership and affiliate fees are less concentrated, such as Discovery and VIAB.
Priced as of prior trading day's market close, EST (unless otherwise noted).
All values in USD unless otherwise noted.
For Required Conflicts Disclosures, see Page 68.
2. Table of Contents
Key Investment Theme: Battle of the Bundle .......................................................................3
Unbundling Cable: You (Only) Get What You Pay For, and Sometimes Even Less .................9
Synthetic Bundles.....................................................................................................................15
Dish’s Sling: A Case Study ...................................................................................................17
Subscriber Trends: Accelerating Cord Shaving Currently Being Offset By Pricing ................29
Subscriber Trends by Company ..........................................................................................49
21st Century Fox ......................................................................................................................49
AMC Networks .........................................................................................................................51
CBS ...........................................................................................................................................52
Comcast Corp - NBCU...............................................................................................................53
Discovery Communications......................................................................................................54
Scripps Network Interactive.....................................................................................................55
Time Warner ............................................................................................................................56
Viacom......................................................................................................................................57
Walt Disney Co. ........................................................................................................................58
Appendix: RBC Capital Markets Consumer Survey..............................................................60
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 2
3. Key Investment Theme: Battle of the Bundle
Media conglomerates and smaller channel operators have benefited for decades from the
“full distribution” model of a bundle of basic channels over every major Multichannel Video
Programming Distributor (MVPD) in the U.S. An MVPD was historically unable to cherry pick
the channels it wanted to carry out of what a media operator aimed to make its most
distributed package of channels. The MVPD essentially either carried (or paid for) all the
channels the media operator was intent upon distributing or none. As a result, consumers
had little ability to select customized channel packages and MVPDs had relatively strong
ability to change pricing.
Bundling made things like new channel launches easier for existing players. It also gave
media operators pricing power on less popular channels since, in a sense, they were tied to
the ability to receive channels that are more popular. Media operators have had to serve as
little more than “wholesale” bundlers to the MVPDs, without having to market directly to
consumers. Further, as the MVPD distribution landscape morphed into a highly competitive
field (one platform couldn’t compete without the popular channels another had), and a
handful of players controlled ~90% of video subscription homes in the US, 10 or so
distribution deals where the media operators had the upper hand would ensure full coverage
of a basic bundle across ~100 million subscribers. Typically, an MVPD could offer a smaller
bundle of channels, but channel operators would require that fewer than ~85% of
subscribers would get access to it. The typical 1%-3% of sub growth investors came to expect
would simply turbo charge the impact of the bundle and its pricing power.
Because of the bundled distribution offering, the pricing scheme for cable networks (and
even broadcast O&Os) has become something of an allocation game from the media
operator to the MVPD. On an individual basis, most Top 20 cable networks are priced at
~$0.50-$1.00 per month to the MVPD while most channels below that level are priced at
$0.50 or less (some as little as a few pennies). Sports properties like ESPN or the Regional
Sports Networks (RSNs) are exceptions, garnering much higher affiliate fees, while broadcast
network owned and operated station affiliates are closer to $2.00/month. Pricing could be
driven by many things: ratings, “rabidity” of viewers (maybe few viewers, but highly
passionate ones), investment in content or simply relationship to the bundle overall (subsidy
or subsidizer). If this seems complicated (or somewhat arbitrary) to the MVPD, imagine how
it would feel for the consumer.
While it is sometimes popular to characterize the basic bundle as being, as Bruce Springsteen
said, “57 Channels And Nothin’ On” because consumers typically regularly only watch ~20
channels, on average. However, one subscriber’s channels may be different from another’s.
Only through the cross-subsidization of the bundle do the economics of more niche channels
exist. We estimate that the current MVPD invests ~$40 billion in programming spend across
the top 200 channels in the typical extended digital basic tier and closer to $35 billion in the
slightly less extended ~70-channel lighter digital tier many MVPDs offer.
In other words, the consumer may not perceive value in having Animal Planet or MTV2 or
TruTV, or even Disney Channel (even if you don’t have kids). However, for a small
incremental cost per month, they had the potential to collide with those channels (or give
access to visiting nieces and nephews) and get to content that just might be worth a half an
hour of viewing.
The existing TV media
ecosystem was born out of
the extended bundle on
traditional pay-TV;
investors benefited from
certainty in contractual
distribution revenues and
pricing power
Pricing in a large basic
bundle has led to a
somewhat opaque process
for the consumer: they got
channels they probably
didn’t watch much, but
they also got access to a
massive amount of
programming
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 3
4. The legacy of pricing and the bundle seems to be coming to an inflection point just as sub
growth overall is expected decline. Historically, consumers were programmed in a linear
fashion; shows were broadcast on TV and came on at a set point in time and you had to be in
front of your TV (or at least “a” TV) when they did or you missed them. As a consumer, you
didn’t have much input into that process except choosing which of the channels you would
watch.
There have been some pretty big changes to the system, such as time shifting (as far back as
the unwieldy VCR, but more recently with the easy-to-use DVR and even App-based Video on
Demand) and platform shifting (you could watch a show not only on a cable app for your
tablet, but you could view it on ad-supported websites such as ABC.com, Fox.com, NBC.com,
CBS.com and Hulu.com, etc.).
The biggest change in self-programming and consumer choice probably came from the rise of
online Subscription Video-on-Demand (SVOD) services such as Netflix, Amazon and HuluPlus.
These services gave consumers access to libraries with millions of hours of titles and allowed
(sometimes with the help of recommendation engines and algorithms) the consumers to pick
what they wanted to watch. Further, the price of the SVOD service was relatively low (less
than ~$10 per month) and it seemed to have “the best of TV” on it (though we would argue
there is a fallacy in that interpretation).
The bottom line is that consumers began actively engaging in curating the programming they
wanted, rather than taking what was being distributed to them. Further, they saw that they
could do it at a much lower price than traditional pay-TV and could view it on almost any
platform. We believe this is a critical element driving the changing consumer dynamics in the
video market place. Our own proprietary survey indicates that 9% of consumers are seriously
considering “cutting the cord” sometime during the next 12 months.
Media investors are facing a conundrum, as the tectonic plates of the ecosystem now seem
to be in motion. Whether or not the vast majority of consumers want them, light bundles are
now offered by both traditional linear MVPDs (the legality of mass distribution of such
bundles, such as the one announced by Verizon Fios recently, is still being called into
question) and IP-based or Over-the-Top (OTT) non-traditional streaming MVPDs.
Total overall pay-TV subscribers have not declined materially. However, there is a sense that
as options increase for alternative sources of programming with more flexibility in pricing
and content like OTT bundles such as Sling or even “synthetic” bundles (combining OTT
services), we will see a decline in pay-TV subscriptions. Further, MVPDs are seeking ways to
control the growth of programming costs as sub growth slows. This, in turn, is leading cable
companies to push for lighter bundles and more a la carte-based options.
Many investors are taking it at face value that OTT light bundles will be adopted at rapid
pace as soon as they are introduced. On an almost daily basis, it seems as if we see a new
“light bundle” offering from a cable service, or a new OTT entrant (Sling, for example) or
even an a la carte, direct-to-consumer offering from the networks themselves (such as CBS
All Access, HBONow, etc.). Investors (and consumers) have been waiting for Godot for half a
decade for an Apple subscription product as well. These products will complement streaming
SVOD services (such as Netflix) which have been steadily gaining traction since the beginning
of the decade. We find it remarkable that investor sentiment seemed convinced that
consumer adoption of these services away from the traditional bundle would be swift and
punitive to the existing ecosystem.
Belief that increased
flexibility could halt cord
cutting and lower costs is
causing traditional MVPDs
to push for change
Technology is giving
consumers who have
become increasingly
comfortable programming
for themselves a desire to
construct their own bundle
Investors seemed convinced
that a tsunami of
ecosystem-altering demand
is coming for new OTT light
bundles
For OTT light bundles truly
to be a threat, something
else beyond economics has
to be the driver
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 4
5. However, simple economic analysis and consumer surveys tell us one thing for sure.
Logically, consumers would not choose these services simply to save money. The saving is
too small to offset the utility and access to content lost. A household could save more money
forgoing two bottles of wine in a month rather than replacing traditional cable TV with an
OTT-based lighter bundle. They would also lose access to the most popular sports
programming (or at least need to install rabbit ears and wouldn’t be able to DVR it), and in
many cases, they wouldn’t be able to watch it on a television.
We would also note that other OTT linear subscription products have debuted (such as the
Sony PlayStation Vue service) that offer OTT utility, but also have relatively full bundles.
PlayStation Vue launched in several large markets last month with ~50-75 channels
(including broadcast networks such as CBS). Pricing for the service runs between
$49.99/month and $69.99/month, competitive with most bundled cable services. Utility and
the bundle with Sony’s gaming products appear to be the consumer proposition as opposed
to pure price.
Something else beyond simple economics would have to drive the decision, and we think
that something else has to do with control and choice. In some cases, there might simply be
a psychological income associated with not paying more (even if it is not much) for
something you believe you do not consume, it means you can’t consume other things you do
want even if you can’t get utility that you would miss. Our proprietary survey indicates that
of those consumers who would consider cutting the cord, the most important reason (for
about 70% of respondents) was cost. However, the balance argued that it was about a need
for a more customized solution, or that they did not find value in pay-TV at any price since
they had access to other content.
Before Sling, Apple or any other new OTT providers can affect the landscape in any real way,
cord shaving (or light bundles) is already having an impact on the ecosystem. While the total
reported pay-TV subscriber base in the U.S. has remained basically flat for the past several
years, virtually every “mature” major media network, with the exception of the broadcast
network O&Os, has lost 1-3 million subs. Media operators with emerging platforms (newly
launched or rebranded networks – Discovery with ID, Disney with SEC, Fox with FS1, etc.)
have been able to offset this somewhat. However, it is abundantly clear that with or without
new platforms, consumers are cord shaving, making current levels of affiliate growth
vulnerable not just to pricing, but to subscriber bases.
We ran regressions on several variables across major networks within each conglomerate
and smaller channel operator to examine factors that could be affecting which networks are
being dropped from the bundle today. Year-over-year (Y/Y) changes in ratings have ~0.5 R
squared relative to sub count, which intuitively makes sense (if you don’t watch them, you
probably don’t want to pay for them). Ironically, we find little correlation between affiliate
fee per month and sub losses or even content spend versus sub losses. The sub losses seem
universal across many major networks, which is surprising since overall pay-TV subscriptions
aren’t experiencing Y/Y declines anywhere near the magnitude of these types of individual
sub losses.
We are somewhat skeptical the inflection point on consumers choosing lighter (or
“synthetic”) OTT bundles (combining various direct to consumer SVOD services with ad
supported online content) will have a steep slope. We have analyzed the pricing and utility
implications to consumers of terminating a traditional cable TV subscription and substituting
it with lighter bundles and/or synthetic bundles. The cost savings, especially in light of the
lost access to content and utility, just does not seem all that compelling.
While total pay-TV sub
counts are not down, most
major networks lost ~2mm
subs last year, so clearly
traditional MVPDs are
allowing consumers to
shave bundles
Consumers are often
unaware of the impact on
broadband pricing to
unbundling from pay-TV
We ran regression analysis
against key variables to help
determine why channels
were being “shaved” in the
traditional ecosystem
Not all OTT pay-TV services
will be light bundles and the
launch of the PlayStation
Prevue by Sony
demonstrates that
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 5
6. We think there will be consumers who want the product, but they will tend to be more
niche. They would be consumers who live alone and who don’t watch much mainstream TV.
Consumers probably have a lack of awareness of how much de-bundling will increase their
cost of broadband. Additionally, from our proprietary survey, our sense is that a substantial
proportion of consumers (at least 40%) do not fully comprehend that the incremental cost of
moving to an unbundled broadband subscription could wipe out a fair amount of cost
savings from moving to the OTT bundle. Additionally, simply paying “more” in principle for
Internet service could dissuade consumers. That said, we could see more aggressive
broadband pricing from the MVPDs.
Consumers do not appear to save much money by cutting the cord or moving to synthetic
bundles, and they lose access to massive amounts of programming and utility. In our
proprietary survey, 60% of respondents indicated that cancelling traditional pay-TV and
substituting it with a light or synthetic OTT bundle would be compelling only if they saved at
least $35. Another 10% would need to save at least $25. Our analysis suggests that the
incremental cost of unbundled Internet and the cost of assembling a reasonable substitute
would make those kinds of costs savings difficult to achieve.
Further, the utility lost (Sling, for instance, only supports a single stream with limited DVR
capability) would also have to be factored into the equation, intrinsically affecting the
economics negatively. For those seeking lighter bundle or solutions that exclude broadcast
networks, utility to watch through the online cable app, according to our proprietary survey,
would be missed at least moderately, by 50% of pay-TV subscribers with access to these
services.
There probably is enough utility in the “middle” bundle to force some cord cutting. We do
think cord shaving on traditional pay-TV will be a compelling option for consumers. Several of
the premium light bundles (offering 70 channels, for example) in seem to achieve many of
consumers’ goals. When we compare the Comcast Digital Starter Double Play product, for
example, to the Sling product, we cannot understand why consumers would choose Sling.
For ~$25 more (out of pocket, when adjusted for Internet), consumers get 100+ more
channels, with (underlying program spend of about $40 billion) as well as multi-streaming
capacity and DVR capability. The “medium” bundle in pay-TV makes too much sense.
We probably cannot use Sling as a case study of “winners” and “losers”. There is a
temptation on the part of investors to look at the bundle of the first mass market (at least, as
mass market as a service capped at ~2 million subscribers could be) OTT light bundle service
and assume that whatever content is on that service is the content that will be on all OTT
light bundle services. In other words, investors have asked us if the Sling bundle (which
includes much of the Disney/ESPN bundles, the Scripps bundle, the Turner bundles and much
of the AMC bundles) were chosen because they were viewed as “must haves” that were the
only pieces of content consumers were willing to pay for. We do not believe the Sling basic
offering was chosen because it contains the universal “must haves”. Remember, ESPN lost
2.4mm subs in 2014 largely through MVPD cord shaving, similar to most other major fully
distributed franchise channels.
For starters, the Sling bundle does not include the broadcast TV networks. We suspect this
represents an incomplete solution for many consumers. Further, we believe the Sling bundle
was greatly influence by a combination of price and the reality that getting ESPN dramatically
limited the amount of content budget allocated for the rest of the bundle, assuming the goal
of Sling is to make a meaningful margin. With a $20/month revenue opportunity (the
Winners and losers probably
cannot be determined by the
Sling case study, but it could
be a case study on ESPN a la
carte pricing
To displace linear pay-TV in a
meaningful way, Apple will
probably need to offer more
of a value proposition than it
is likely to
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 6
7. monthly subscription cost), Sling’s programming budget for its ~20 basic channels is
~$14.68/month. Roughly half of the programming cost is allocated to ESPN.
If anything, we would argue that Sling is more a case study of what consumers are willing to
pay for ESPN on an a la carte basis. Consumers clearly place a value on other content (even
for sports, Turner offers MLB, NBA and NCAA March Madness). However, given that so much
of the cost of the bundle is allocated to the ESPN bundle, whether or not consumers realize
it, the one product they largely are buying is ESPN.
We think the appeal of the “synthetic bundle” has been overstated in the investment
community. Our own analysis indicates that consumers would save only ~$29/month by
dropping traditional pay-TV, purchasing unbundled broadband service, one or two SVOD
streaming services and then a premium service such as HBONow. Almost above all, this
“product” seems like a solution looking for a problem in that key content is missing, savings
are not substantial, and utility is lost.
The presumption is that Apple will launch a subscription streaming OTT MVPD sometime in
the near future. Press reports have indicated Apple is negotiating with numerous media
operators for a light OTT streaming product. That product would cost $25-$35
1
, and would
include ~25 channels. The product would be more expensive than the basic Sling product,
but it would also include the broadcast networks. Our survey indicates that while many
consumers would be interested in an Apple TV streaming service, it would need to have the
same channel lineup as typical linear pay-TV services or it would need to result in 50%
savings and still have more channels than media reports indicate Apple TV would actually
launch with. So, while we think there is a market for Apple TV, we do not think it is the
traditional pay-TV killer some view it as.
So calling winners and losers, especially at this early juncture, is tough, outside of the reality
that we think a move away from full distribution of bundles is a negative for virtually any
player. However, we will hypothesize that the media operators who stand to have the least
disruption will be those players who enjoy concentration in affiliate revenue and viewership
across the same group of channels (we will pick the relatively arbitrary number of three
channels, but in a potentially light bundled world with 30-40 channels and at least 10 media
operators, this seems logical). In this respect, CBS and SNI stand out the most favorably while
VIAB and DISCA stand out as the most disadvantaged (they have 12-25 networks each and
only garner ~55% of their affiliate revenues from their top three networks).
We are also concerned about the second derivative impact of growth slowing for those
players who used secondary, and niche networks to “turbo charge” sub growth over the past
decade. As the bundle begins to shrink, one thing seems certain: gaining carriage of a new
network or expanding coverage of a nascent one, if it is not already fully carried, is probably
going to get harder. It appears that DISCA and SNI and even DIS (the launch of SEC Network)
and Fox (expansion of FS1, FXX, etc.) will face headwinds here while TWX, VIAB, CBS have
benefited far less.
The broadcast network affiliates are the only the part of the ecosystem that we view as
highly protected. Some might argue they could easily fall out of the bundle since viewers can
simply pull them off the air; the reality is they have seen virtually no sub shrinkage versus the
cable operators, which have had 2-3 million sub losses, on average. There is utility beyond
the simple signal being pulled off the air (on-demand viewing, ability to have non-partitioned
1
Wall Street Journal
CBS is probably the single
best-positioned channel in
the push toward light
bundles
Players with concentrated
audiences and affiliate fees
(overlapping) are positioned
best as the bundle evolves
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 7
8. DVR/Tuner box, etc.). CBS, in particular, has always been sold as one single channel. Its
economics haven’t benefited from a bundle historically (though we’d argue it has benefited
from being adjacent to other bundles), so it essentially already is subject to “a la carte”
pricing. NFL Football and the most watched shows in primetime as well other events
(Grammy’s, etc.) would likely satisfy the consumer case at current pricing ($1.50-$2.00 per
sub/month). We would note that CBS O&O’s MVPD subs are basically unchanged over the
past year while most flagship cable networks have lost ~2 million subscribers. We believe
other network O&O trends would be similar.
We might have thought that the sports networks would be the big loser in all this. After all,
how many times have we heard the anecdote of the little old lady from Pasadena who gets
charged in her cable bill $6/month for ESPN and $8/month for two RSNs that she never
watches. Additionally, we are told time and again that while viewership might be passionate
among sports fans, ratings on an RSN rarely go above a 10 rating (a remarkable result relative
to TV, but still an indication that only 10% of TV households really care on any given night
while 100% of them pay for it).
Surely, the light bundle would lead to liberation of from such a burden. In our proprietary
survey, ~60% of respondents indicated they would give up sports channels such as ESPN or
the RSNs if they could pay half as much for their cable bill. In other words, it would seem as if
they would move to a light bundle (given the Sling pricing scheme) even if it didn’t have
sports, for a significant savings.
However, this doesn’t necessarily seem to be playing out. The first major deal Sling cut was
with ESPN. We could make the argument that Sling made it a priority to sign ESPN simply to
catalyze the other channel operators (something we believe, on some level, is valid).
However, it appears that Sling must have believed there was a genuine demand for sports,
for its target market.
Sports may not be the loser
many investors think it
could be…but then again,
maybe it will
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 8
9. Unbundling Cable: You (Only) Get What You Pay For, and Sometimes Even Less
In a world where consumers have so many choices for viewing and accessing content, both
live stream and on demand, what does it all mean? Today, consumers can choose from
traditional cable, satellite, and telco carrier options, such as Time Warner Cable, Comcast,
Dish, DirecTV, Verizon Fios, and AT&T U-Verse. As well, on demand over-the-top options, like
Netflix, Amazon, and Hulu Plus, are seeing modest competition from single-channel options
like CBS All Access, HBO Now, Noggin, and WWE Network. We are also seeing emerging live
TV options with Sling, Apple TV, and PlayStation Vue.
Exhibit 1: Increasing Consumer Choice for Accessing Content – On Demand or Live Streams
Carrier Options On Demand Over-the-Top Options
Single Channel Over-the-Top Options Emerging Live TV Options
Source: Company websites, RBC Capital Markets
With so many options for accessing content today, does the consumer actually save enough
money to warrant giving up the traditional cable bundle? We plotted the expected monthly
out-of-pocket expense associated with linear and Over-the-Top viewing options and found
that savings probably range from just $10 per month with Sling and $39 with CBS All Access.
Exhibit 2: Total Monthly Out of Pocket Expense Savings Associated with Downgrading from Cable Double Play
$79.99
$10.01
$25.01
$29.02 $30.01
$36.75 $37.01 $37.01 $39.01
$0
$15
$30
$45
$60
$75
$90
CMCSA Digital
Starter DP
Premium Sling Sling Synthetic bundle HBO Now Amazon Netflix Hulu CBS All Access
MonthlyOutofPocketExpenseSavings
We estimate that cutting cable and subscribing to internet and another
video option saves a consumer between $10 and $39 per month
Includes $34.99 montlhly internet cost required for use of serviceIncludes 140 networks + 25 Mbps
HSI
Source: Company websites, RBC Capital Markets estimates
While there are significant
options outside of a
traditional cable
subscription, saving a small
amount of money results in
giving up significant utility
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 9
10. For some perspective, saving $25 per month by switching from the Comcast Double Play
Starter package (140+ cable networks + 25 Mbps internet) to Sling equates to five fewer
beers, about two fewer bottles of wine, or two and half fewer takeout lunches over the
course of the month.
Exhibit 3: Average Cost of Select Goods or Event Tickets
Imported Beer Movie Ticket Lunch Bottle of Wine MLB Ticket Theme park ticket NFL Ticket
$5.00 $8.17 $10.08 $12.00 $27.93 $52.23 $84.43
Average Cost
$25/month of incremental savings from downgrading a cable
package is the equivalent of 2.5 fewer takeout lunches or 2
fewer bottles of wine consumed each month
Source: MPAA, Forbes, Bureau of Labor Statistics, RBC Capital Markets
Based on responses from our proprietary survey, the most common response was that
cutting or downgrading cable would be compelling at $45 per month. This is well above the
cost savings we expect with Sling and OTT options.
Exhibit 4: What Would Be a Compelling Amount of Money to Save from Cancelling Your Pay-
TV Service and Substituting it With Either Free Options (like YouTube) and/or Paid OTT
Services (like Netflix, HBO Now, etc.)?
10.7%
8.7%
13.9%
45.2%
21.5%
$15
$25
$35
$45
Other (please specify)
Source: RBC Capital Markets Proprietary Survey
Two fewer bottles of wine
over the course of the
month would make up for
the savings associated with
downgrading a cable
bundle to Sling plus
Internet
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 10
11. The annualized savings associated with downgrading from the Comcast Double Play Digital
Starter (25 Mbps + 140 networks) and unbundling Internet as a consumer moves to any of
the other options ranges from annualized savings of $300 with Sling to $468 with CBS All
Access. The cost savings range from 0.6% to 0.9% of U.S. median real household income.
While this not insignificant, it is also not hugely impactful.
Exhibit 5: Annualized Savings of Downgrading and Unbundling
$300
$348
$360
$441 $444 $444
$468
0.6%
0.7% 0.7%
0.8% 0.9% 0.9%
0.9%
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Sling Synthetic bundle HBO Now Amazon Netflix Hulu CBS All Access
AnnualizedDollarsSaved
%ofU.S.RealHouseholdMedianIncome
Annualized savings from switching (RHS) Savings as % of median real household income (LHS)
Annualized savings associated with downgrading cable and
unbundling internet service would equate to savings of less than 1%
of US median household income over the course of one year
Source: U.S. Census Bureau, RBC Capital Markets estimates
We would note that respondents from our proprietary survey overwhelmingly (69%) cited
cost as the reason they were considering cutting their pay TV service. The desire for a more
customizable or lighter bundle came in second at 36.8% of respondents.
Exhibit 6: Why Are You Considering Canceling Your Pay TV Service? (select all that apply)
69.4%
17.6%
21.8%
36.8%
9.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Cost (I want Pay-TV but it's just
getting too expensive to justify)
Just don't need the content Pay-TV
gives access to because I don't
watch TV content
Have enough options available for
free given free broadcast options
and ad-supported internet options
Want a more customized or
"lighter" bundle that isn't available
(current offerings are "all or
nothing")
Other
Source: RBC Capital Markets Proprietary Survey
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 11
12. While it is certainly understandable that saving a few dollars a month might be worth it to
some consumers, but what is the cost in terms of utility lost? We went through a few
standard cable options (at Time Warner Cable and Comcast), Dish’s Sling offering, and a few
OTT options to see how much programming spend there is, and in turn, what programming
utility is lost in terms of content that subscribers have access to.
Using data from SNL Kagan, we were able to estimate just how much content is available on
each of the cable, broadcast, Sling, and online content viewing options. Based on the data
available, we estimate that Comcast’s Premier Cable option, which consists of 180+ channels,
provides consumers with the highest access to content.
Coming as no surprise, each of the higher-tiered traditional cable options has greater access
to programing than do lower-priced Sling, Netflix, Amazon, or Hulu. We note each of these
options does have the ability to access $14.3 billion of content via the broadcast networks
over-the-air (but without any functionality such as on demand access).
This suggests that consumers do save absolute dollars when downgrading their cable
package, but give up a tremendous amount of access to content as a trade-off.
Exhibit 7: Consumer Access to Content Spend Via Various Viewing Options
$43.6 bn
$39.7 bn
$39.5 bn
$35.2 bn $35.1 bn
$14.6 bn $14.3 bn
$12.9 bn
$2.8 bn
$1.3 bn $0.8 bn
$0
$10
$20
$30
$40
$50
CMCSA
Premier
TWC
Preferred
TV
Comcast
Preferred
TWC
Standard TV
CMCSA
Digital
Starter
TWC Starter
TV
Broadcast Dish Sling Netflix Amazon Hulu
2014ContentSpend(billions)
Upper tier traditional cable packages TV provide
consumers with the highest degree of access to
programming content spend
Source: SNL Kagan, Sling.com, Timewarnercable.com, Netflix, RBC Capital Markets estimates
We’ve laid out a comparison of each of Time Warner Cable’s Cable options in the following
exhibit. We can see that paying slightly more money to move to a higher-tier cable option
results in a consumer having a significantly higher number of networks and content access.
By moving from Time Warner’s Starter TV to Standard TV, subscribers gain access to $20
billion worth of more content and also gain significant on demand capabilities, all for about
$20 per month.
Consumers do save
absolute dollars when
downgrading their cable
package, but they give up a
tremendous amount of
access to content as a
trade-off
consumers do save absolute
dollars when downgrading
their cable package, but
give up a tremendous
amount of access to
content as a trade-off.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 12
13. Exhibit 8: Time Warner Cable Television Subscription Options
Preferred TV Standard TV Starter TV
Cost per month (with
equipment)
$61.24 $51.24 $31.24
Programming Access $39.7 bn $35.2 bn $14.6 bn
Number of networks 200+ 70+ 20+
Equipment rental required Yes Yes Yes
Watch online with app
Access to Broadcast On
Demand
Entertainment On Demand
Time Warner Cable
Consumers can gain access to more than $20
billion of content and roughly 50 Cable Networks
by spending just $20 more per month
Source: Timewarnercable.com, RBC Capital Markets estimates
We plot our estimated access to programming versus the all-in estimated monthly
subscription cost, including HD box rental for Time Warner Cable and the incremental
Internet cost associated with unbundling for Sling and online services, in the following
exhibit. We can see there is a general relationship between the annual programming spend
and the monthly subscription cost of each option.
Exhibit 9: Access to Content Spend Across Various Options
$43.6 bn
$39.7 bn $39.5 bn
$35.2 bn $35.1 bn
$14.6 bn
$11.6 bn
$5.0 bn $3.7 bn $2.8 bn $2.0 bn $1.5 bn $0.8 bn
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
CMCSA
Premier
TWC
Preferred
TV
CMCSA
Preferred
TWC
Standard
TV
CMCSA
Digital
Starter
TWC
Starter TV
Sling Synthetic
bundle
CBS All
Access
Netflix HBO Now Amazon Hulu
Monthlysubscriptioncost
ContentSpend(billions)
Content Spend (LHS) Monthly Subscription Cost (RHS)
Source: SNL Kagan, Company websites, RBC Capital Markets estimates
For about $20/month,
consumers gain significant
utility by moving to a
higher-tiered cable package
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 13
14. Next, we look at the ratio of total annual content spend at each product offering versus the
total annual programming spend. We can see that consumers get the biggest bang for their
buck with traditional cable options, while less so with over-the-air only options.
We would be remiss not to mention that for CBS All Access and HBO Now, we are only using
the programming spend that each of the CBS Broadcast Network and HBO spent during
2014. However, each product has tremendous library content value available on them, which
we have not shown here. As such, the value ratio for CBS All Access is probably significantly
better than the 4.3x shown in the following exhibit and similarly for HBO Now.
Even by only including current content spend, we note that there is significant value to the
consumer here (despite including an incremental unbundled Internet cost to the $5.99
subscription price).
Exhibit 10: Ratio of Annual Content Spend to Monthly Subscription Cost
1.4x 1.5x 1.5x 1.5x 1.6x 2.1x 2.6x
4.3x
6.5x 7.4x
12.7x
14.0x
24.0x
0x
5x
10x
15x
20x
25x
30x
35x
TWC
StandardTV
CMCSA
Digital
Starter
CMCSA
Preferred
TWC
PreferredTV
CMCSA
Premier
TWCStarter
TV
Sling
CBSAll
Access
Netflix
Synthetic
bundle
HBONow
Amazon
Hulu
SubscriptioncosttoContentSpend
We believe consumers get the biggest "bang for their
buck" with traditional cable subscriptions
Includes $9.99 monthly estimated incremental internet
cost associated with unbundling cable + internet
Source: SNL Kagan, Sling.com, Timewarnercable.com, Netflix, RBC Capital Markets estimates
Consumers receive the
biggest “bang for their
buck” with traditional
cable packages
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 14
15. Synthetic Bundles
So how does the cost of the “synthetic bundle” compare to that of traditional linear cable?
For our purposes, we define the synthetic bundle as that which is comprised of a Netflix,
Amazon, and Hulu subscription. Keeping in mind that these services require an Internet
connection, we consider the incremental cost associated with unbundling a cable and
Internet bill. We estimate the bundled Internet cost to be $25 per month.
The current Time Warner Cable offering for unbundled standalone Internet (with speeds up
to 50 Mbps, which should suffice for streaming content online) is $34.99 per month. As such,
the incremental Internet cost associated with unbundling a cable and Internet subscription is
$9.99 per month.
We note that the savings can range significantly depending on the bundle chosen, but
roughly $10 seems to come out in the middle. As such, we use this as a general proxy figure.
Exhibit 11: Incremental Cost Associated with Unbundling Cable + Internet Subscription
$44.99
$19.99
$25.00
$0
$10
$20
$30
$40
$50
Starter TV + Internet Starter TV Bundled Internet
Costpermonth
Starter TV + Internet Starter TV Bundled Internet
_ =
$34.99
$25.00
$9.99
Unbundled internet Bundled internet Delta
Unbundled internet Bundled internet Delta
_ =
Incremental cost of internet - associated
with unbundling cable - is $9.99/month
Source: Timewarnercable.com, RBC Capital Markets estimates
Interestingly, our survey results showed that more than 40% of consumers would not expect
their Internet cost to increase as the result of unbundling. 24% expected it would increase
$10 or less, which matches our analysis in the previous exhibit. We think consumers overlook
this incremental cost of Internet.
Exhibit 12: Do You Think Your Stand-Alone Broadband Bill Would Increase if You Stopped
Paying for it as Part of a Pay-TV Bundle and if so, By How Much?
41.6%
12.1%
24.4%
12.1%
9.9%
No, I don't think it would increase
Yes, I think it would increase by $10 or less
Yes, I think it would increase by $10-$20
Yes, I think it would increase by $20-$30
Yes, I think it would increase by $30 or more
Source: RBC Capital Markets Proprietary Survey
Consumers should consider
the incremental cost
associated with unbundling
their cable from Internet
bill as part of the cost of
moving to an OTT package
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 15
16. Rather than taking the total Internet cost and using it in the synthetic bundle, we use the
incremental $9.99 monthly cost associated with unbundling cable and Internet (and
therefore having to pay a higher rate for the Internet subscription). Next, we add the
monthly costs for each of Netflix and Hulu subscriptions, and arrive at a total monthly cost
estimate of $25.97 per month for a synthetic content bundle. We could also add HBO
($14.99 per month), Amazon ($8.25 per month) and CBS ($5.99 per month) to arrive at a
premium synthetic bundle (including CBS and HBO) cost of $55.20 per month.
We estimate that the standard synthetic bundle – at $25.97 per month – gives a user access
to roughly $3.5 billion of content ($2.8 billion at Netflix and $750 million at Hulu).
Exhibit 13: Incremental Cost of Synthetic Bundle
$9.99
$7.99
$7.99
0
10
20
30
40
50
60
70
Incremental internet
Monthlysubscriptioncost
Synthetic Bundle
NetflixNetflix
Hulu
$25.97
Internet $9.99
$7.99
$7.99
$14.99
$5.99
$8.25
Incremental internetPremium Synthetic Bundle
Netflix
Amazon
Netflix
Hulu
$55.20
HBO
CBS
Internet
Source: Company websites, RBC Capital Markets estimates
Respondents to our survey overwhelmingly (88%) subscribe to Netflix, with Amazon Prime
coming in second at 42%. Hulu came in at 18% and other products comprised 3%.
Exhibit 14: Which Video Services Do You Subscribe To? (Select all that apply)
87.6%
42.1%
18.4%
3.1%
0%
20%
40%
60%
80%
100%
Netflix AmazonPrime Streaming HuluPlus Other
Source: RBC Capital Markets Proprietary Survey
A synthetic bundle is one
comprised of incremental
internet cost associated
with unbundling and one
or more OTT options
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 16
17. Dish’s Sling: A Case Study
Adding to the previous few pages of analysis on linear cable bundles and synthetic OTT
bundles, we next take a look at the recently launched Dish Sling product. We believe Charlie
Ergen has been working on the Sling product for many years, and that many are concerned
this is the beginning of breaking down the bundle into a more a la carte skinny version that
has only those networks the consumer most wants.
We would note that our sense from the industry is that the service is capped at having no
more than 2 million subscribers at any given time. As such, we wouldn’t expect it to pose a
risk to the current ecosystem in terms of breaking the bundle down; however, we do think it
provides an interesting case study, particularly in terms of a la carte pricing.
Sling’s main product offering, the Best of Live TV, is comprised of 20 networks at a cost of
$19.99/month. Subscribers also have the option to add one or all of five packages, including
Sports Extra, World News Extra, Kids Extra, Hollywood Extra, and Lifestyle Extra. While each
add-on has a different number of networks included, the price is a uniform $5/month across
each. Consumers most recently were given the option to add HBO for $15 per month, a
similar cost as that paid with a more traditional cable bundle.
Exhibit 15: Sling Package Options
Best of Live TV Sling Sports Extra World News Extra Lifestyle Extra Kids Extra Hollywood Extra HBO
Cost per month $19.99/mo Add $5/mo Add $5/mo Add $5/mo Add $5/mo Add $5/mo Add $15/mo
Number of Networks 20 total 9 extras 7 extras 6 extras 5 extras 5 extras 1 extra
A&E
ABC Family
Adult Swim*
AMC
Cartoon network*
CNN Bases Loaded
Disney Channel beinsport HD HLN
El Rey Network ESPN Buzzer Beater Bloomberg Cooking Channel
ESPN ESPN SEC Network News 18 India DIY Baby TV epix
ESPN2 ESPNews EuroNews fyi Boomerang epix2
Food Network ESPNU NDTV 24x7 lmn Disney Junior epix3
Galavision Goal Line France 24 truTV Disney XD epix drive-in
H2 Universal Sports RT WeTV Duck TV Sundance TV
HGTV Univision TDN
History
IFC
Lifetime
Maker
TBS
TNT
Travel Channel
* Sister networks
HBO
For $45/month plus $9.99 for incremental unbundled internet cost,
consumers can have access to ~50 total networks with Dish Sling,
for a total cost of $54.98/month.
Source: Source: Sling.com, RBC Capital Markets estimates
We do not believe Sling
poses a risk to the current
TV ecosystem, but that it
has a niche target
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 17
18. Similar to the synthetic bundle concept, Sling also requires a high-speed Internet connection
subscription from an MSO (and a high-speed one, at that, to avoid buffering or choppy
feeds). As such, we add in $9.99 of incremental Internet cost associated with unbundling
cable plus Internet. All told, we find that for $54.98 per month, Sling subscriber can have
access to 52 networks, about 150 networks fewer than with Standard TV.
Below, we’ve laid out our estimated cost for Sling. At the Basic bundle level – including an
Internet connection – we estimate Sling Basic costs $54.98 per month. Adding on HBO – the
equivalent of three extras – brings this total to $69.98. If a consumer were to choose each of
the add-ons, as well as HBO, the Premium plus HBO bundle would cost $94.98 per month.
Exhibit 16: Total Monthly Out of Pocket Sling Expense – Sling Plus Internet Plus Extras
34.99
19.99
15.00
5.00
5.00
5.00
5.00
5.00
0
20
40
60
80
100
120
1
Subscriptioncostpermonth
Lifestyle Hollywood Kids World News Sports HBO Sling Internet
$94.98
Premium
$69.98
$54.98
Basic Sling
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
Interestingly, our survey showed that today, most consumers (57%) do not know what the
Dish Sling product is.
Exhibit 17: Do You Subscribe to Sling TV?
0.3% 0.9%
41.9%
56.9%
Yes, and I canceled my Pay-TV subscription for it
Yes, and I didn't have a Pay-TV subscription in the
past six months before I signed up for Sling TV
No
I don't know what Sling TV is
Source: RBC Capital Markets Proprietary Survey
While consumers could use
an antenna to access the
broadcast networks with
Sling, there is significantly
reduced utility, including
no access to on demand
content or recording
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 18
19. One major differentiating factor between Sling and Starter TV is the networks included. We’d
note only two networks are included across both Sling and Starter TV: TBS and Galavision.
Also, while the total network count is a bit lower for Sling (at ~17 versus 20+ for Starter TV),
the networks included are more “premium” in nature. Starter includes the broadcast
networks – ABC, CBS, FOX, and NBC – but little else (three CSPANs, for instance). Sling has
ESPN, AMC, Food Network, TNT, Travel Channel, Disney Channel, among others. It does lack
the broadcast networks at this time. At a cost of $20/month, we can see this being an
attractive network mix to many customers.
The Negatives for Sling
As laid out in the following exhibit, we think there are a number of positives and negatives
for each of the cable options and Sling. We’ve marked the positives with green shading and
the negatives with red shading. The three biggest negatives on the product are:
1. No functionality while accessing broadcast networks via an antenna. Sling does not
have the broadcast networks at this time. However, we would note that consumers do
have the option to use an antenna to access them, but would have no functionality (in
terms of accessing content on demand, recording, pausing, etc.).
2. Single stream only on Sling. At this time, consumers can only access a single stream with
Sling. This is a significant limitation to functionality versus cable, and probably not
suitable for a family. However, for a single person, this would likely not pose too much of
an issue. We would note consumers can access ESPN via the Watch app as a bit of a
work-around.
Exhibit 18: Single Stream On Sling
Source: Sling.com
As shown in the following exhibit, one user complained that this was a “deal breaker” online
(particularly versus Netflix, which now allows for multi-streams).
Exhibit 19: Consumer Complain on Reddit Regarding Single Sling Streams
Source: reddit.com
Single-stream only and
limited functionality when
accessing Broadcast
networks via antenna are
major limitations of Sling
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 19
20. 3. Little access to on demand content. Arguably one of most convenient features of cable
is the ability to access primetime on demand (with Starter TV, Standard TV, and
Preferred TV) and entertainment on demand (with Standard and Preferred TV). With
Sling, consumers can access live streams of content but have little access to an on
demand library like with Cable. This is said to be something they are working to build,
however.
The Positives for Sling
We also think there are attractive positives for Sling as a product, including:
1. Feeling of control over the bundle. While not depicted in the following exhibit, we think
one of the biggest draws to consumers is the sense of a feeling of control over what
networks they are receiving. Rather than paying for 20 channels that only really include
broadcast networks, or 70/200 channels that may have too many networks, we think
consumers appreciate the bundle choices for Sling (especially in light of its add-on
options).
2. Ease of subscribing and changing or canceling account. The ease with which consumers
sign up for Sling is very attractive. If connected to the Internet, it takes only a few
minutes to sign up for an account. Also, no contract is required, and neither is a social
security number nor a credit card. This differs significantly from Time Warner Cable’s
Starter TV, which requires equipment installation and an appointment, a 12-month
contract, and personal information to sign up. Similarly, choosing add-ons or canceling
your account requires only the click of a button at any time. No contracts, no phone
calls.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 20
21. Exhibit 20: Sling Versus Time Warner Cable Television Options
Sling Best of TV TWC Starter TV TWC Standard TV TWC Preferred TV
Live TV Yes Yes Yes Yes
App Sling app Watch TV on TWC TV app Watch TV on TWC TV app Watch TV on TWC TV app
TV cost per month $19.99/mo (excludes internet) $19.99/mo (excludes equipment rental) $39.99/mo (excludes equipment rental) $49.99/mo (excludes equipment rental)
Total monthly comparable cost
option estimate w/internet,
equipment
$29.98/mo - includes high speed internet
cost of $9.99/mo from unbundling cable +
internet
$31.24/mo - includes cost of HD Box rental
$44.49/mo - includes cost of HD DVR Box
$51.24/mo - includes cost of HD Box rental
$64.49/mo - includes cost of HD DVR Box
$61.24/mo - includes cost of HD Box rental
$74.99/mo - includes cost of HD DVR Box
Broadcast Networks No Yes Yes Yes
Multi-stream functionality No Yes Yes Yes
Access to On Demand No Yes Yes Yes
Installation
None required; users go online and sign up to
watch instantly. No social security number or
credit check required.
Installation and appointment necessary Installation and appointment necessary Installation and appointment necessary
Contract Cancel anytime online 12-month contract 12-month contract 12-month contract
Equipment cost
Fire Stick $39 - Free when you sign up
Amazon Fire TV $99 - $50 off (3-mo sign up)
Roku Stick $49.99 - Free with 3-mo sign up
Roku 3 $99.99 - 50% off with 3-mo sign up
HD Box; $11.25/mo or HD DVR for $24.50/mo HD Box; $11.25/mo or HD DVR for $24.50/mo HD Box; $11.25/mo or HD DVR for $24.50/mo
Source: Sling.com, Timewarnercable.com, RBC Capital Markets
Network Comparison Between Different Television Options
In the following exhibit, we’ve laid a few of the simpler comparisons between Sling, Starter,
Standard, and Preferred TV. Interestingly, the only networks that seem to be in common
between Sling and Starter TV are Galavision and TBS. As we’ve mentioned, Sling does not
currently have the broadcast networks available, while Starter TV has primarily broadcast
networks.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 21
22. Exhibit 21: Sling Versus Time Warner Cable Starter TV – Continued
Sling Best of TV TWC Starter TV TWC Standard TV TWC Preferred TV
Equipment requirement Internet connection required HD Box or HD DVR box rental required HD Box or HD DVR box rental required HD Box or HD DVR box rental required
Features
Rewind, fast-forward, pause on most
channels. Look back on certain channels for
up to 3 days. No DVR required.
Access to the Guide, Start Over, Look Back,
Parental Controls, On Demand and Pay-Per-
View; Prime Time On Demand
Access to the Guide, Start Over, Look Back,
Parental Controls, On Demand and Pay-Per-
View; Prime Time and Entertainment On
Demand
Access to the Guide, Start Over, Look Back,
Parental Controls, On Demand and Pay-Per-
View; Prime Time and Entertainment On
Demand
TV Equipment rental
All Amazon FireTV players, Roku LT and
higher
HD Box or HD DVR HD Box or HD DVR HD Box or HD DVR
Number of Networks ~20 20+ 70+ 200+
Galavision Galavision
TBS TBS
A&E
ABC Family ABC
Adult Swim* CBS
AMC CSPAN
Cartoon network* CSPAN 2
CNN CSPAN 3
Disney Channel CW
El Rey Network Fox
ESPN HSN
ESPN2 NBC
Food Network PBS
H2 QVC
HGTV Shop NBC
History TBN
IFC Telemundo
Lifetime Univision
TNT
Travel Channel
See following exhibit See following exhibitNetworks Included
Source: Sling.com, Timewarnercable.com, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 22
23. In the following exhibit, we’ve laid out which networks are in common between Time Warner
Cable’s Preferred and Standard TV, which are unique to Preferred, and which are unique to
Standard. We’ve also highlighted in blue those networks that are available on Sling’s Best of
Television option.
Interestingly, most of the networks available on Sling come from the Standard TV (70+
networks options) package offered by Time Warner Cable. We have shaded these in blue. For
those networks that can be added to Sling as an add-on, we’ve shaded those in purple. We
can see most of those also lie within Time Warner Cable’s Preferred TV option.
Exhibit 22: Networks on Time Warner Cable’s Preferred Versus Standard TV
BBC America Lifetime Movie Network
A&E HGTV BIO Lifetime Real Women
ABC HISTORY Bloomberg Logo
ABC Family HLN CLOO Military Channel
AMC HSN CMT MLB
Animal Planet Lifetime CNBC World MTV 2
Azteca MSNBC Cooking Channel MTV Hits
BET MTV Destination America MTV Jams
Bravo National Geographic Discovery - Fit & Health National Geographic Wild
Cartoon Network NBC Disney Junior NBA
CBS Nickelodeon Disney XD NBC Sports Network
CNBC Oxygen DIY NFL NETWORK
CNN Palladia ESPN Deportes Nick JR
Comedy Central PBS ESPN News Nick Toons
CSPAN QVC ESPN University Outdoor Channel
CSPAN 2 Spike TV EWTN OWN
CSPAN 3 SyFy Fox Deportes REELZ
CW TBS Fox Movie Channel SCIENCE
Discovery TLC Fox Sports 2 SHOP NBC
Disney TNT FUSE SoapNet
E! truTV FXX Speed
ESPN TV Guide Network G4 Style
ESPN 2 TV Land Gospel Music Channel Sundance
Food Network Univision GSN TBN
Fox USA Hallmark TCM
Fox Business News Velocity Hallmark Movies & Mysteries Teen Nick
Fox News Channel VH1 ID Telemundo 2
Fox Sports Telemundo Independent Film Channel Travel Channel
FX The Weather Channel ION VH1 Classic
Golf Jewelry Television
Networks in Common Between Standard and Preferred
TV
Networks Unique to Preferred TV
Source: Timewarnercable.com, RBC Capital Markets
Most of the Sling standard
network choices fall within
the Standard linear option,
while most of the premium
Sling add-ons come from
the preferred traditional
offerings
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 23
24. Economics of Sling
The previous analysis looked at Sling in terms of consumer value. How does it look from the
providers’ perspective? By using Kagan data as a proxy, and applying a proportionate affiliate
fee per network based on the total Sling bundle price of $19.99, we can derive illustrative
affiliate revenues/month/subscriber for each network within the Sling bundle. This analysis
suggests ESPN and ESPN2 are receiving a combined $10.13, more than half of the total
bundle cost.
Exhibit 23: Illustrative Affiliate Fees for Best of TV Sling Basic Bundle
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend ($MM)
ESPN 9.00 6.61 6,231
+ ESPN2 1.13 0.83 562
+ AMC 0.57 0.42 364
+ Food Network 0.27 0.20 314
+ A&E 0.42 0.31 441
+ Lifetime 0.46 0.34 435
+ History 0.38 0.28 341
+ El Rey Network 0.10 0.07 88
+ HGTV 0.23 0.17 340
+ H2 0.10 0.07 41
+ IFC 0.27 0.20 85
+ TNT 2.25 1.65 1,346
+ Travel Channel 0.19 0.14 230
+ TBS 1.16 0.85 702
+ Maker 0.00 0.00 0
+ Adult Swim 0.16 0.12 139
+ CNN 0.87 0.64 405
+ Disney Channel 1.82 1.34 345
+ Cartoon network 0.16 0.12 139
+ ABC Family 0.39 0.29 308
+ Galavision 0.04 0.03 47
= Total per month $19.99 $14.68 $12,903
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
From the following exhibit, we can see Disney is receiving the largest portion of the
economics of the Sling bundle. We estimate almost 70% of the cost is being ascribed to
Disney networks and 23% to Time Warner networks.
Our analysis suggests ESPN
and ESPN2 comprise more
than half of the economics
of Sling, and Disney is
receiving more than two-
thirds, making it largely a
Disney a la carte product
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 24
25. Exhibit 24: Illustrative Company Benefits on the Best of TV Sling Basic Bundle
69%
23%
5%
3%
0%
20%
40%
60%
80%
100%
Portionoftotalbundle
Disney Time Warner Other Scripps
$13.71
$4.60
$0.98
$0.69
$0.00
$5.00
$10.00
$15.00
$20.00
Subscribercostpermonth
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 25
26. When we surveyed consumers, 46% said having ESPN on Sling as a service was extremely
important, while 15% said it was very important. 23% said it was not at all important.
Exhibit 25: How Important Was Having ESPN on the Service to Your Decision to Subscribe to
Sling TV?
46.2%
15.4%
15.4%
23.1%
Extremely important
Very important
Moderately important
Slightly important
Not at all important
Source: RBC Capital Markets Proprietary Survey
Sling Add-Ons
Sling also offers five add-on options, each for an incremental $5/month. The add-ons include
Sports Extra, World News Extra, Kids Extra, Hollywood Extra, and Lifestyle Extra. Subscribers
also have the option to add HBO for $14.99 per month.
The Sports Extra add-on comes with six additional networks, including ESPNU, the SEC
Network, ESPNews, beingsport HD, Universal Sports, and Univision TDN. Our analysis
suggests the package costs roughly $1.57 but that the consumer pays $5.00.
Exhibit 26: Illustrative Costs for the Sports Extra Add-On
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend ($MM)
ESPNU $0.67 $0.21 $108
+ ESPN SEC Network $2.04 $0.64 $154
+ ESPNews $0.73 $0.23 $92
+ beIN SPORTS $0.45 $0.14 $18
+ Universal Sports $0.67 $0.21 $25
+ Univision TDN $0.45 $0.14 $49
= Total sports bundle $5.00 $1.57 $448
* excludes Bases Loaded, ESPN Buzzer Beater, and Goal Line
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
Even if consumers are
overpaying for Sling
networks, the power of
having a choice over which
networks they receive
probably has some
immeasurable utility to
certain consumers
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 26
27. The Kids Extra add-on comes primarily with Disney Junior, Disney XD, and Boomerang. Our
analysis suggests the package costs just $0.45 but that the consumer pays $5.00.
Exhibit 27: Illustrative Affiliate Fees for the Kids Extras Package Add-On
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend ($MM)
Disney Junior 1.89 0.17 $50
+ Disney XD 2.11 0.19 $147
+ Boomerang 1.00 0.09 $22
+ Duck TV - - -
+ Baby TV - - -
= Total Kids bundle $5.00 $0.45 $219
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
The Lifestyle Extra add-on comes with four additional networks, including The Cooking
Channel, DIY, truTV, and WeTV. Our analysis suggests the package costs just $0.58 but that
the consumer pays $5.00.
Exhibit 28: Illustrative Affiliate Fees for the Lifestyle Package Add-On
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend
Cooking Channel 0.78 0.09 $43
+ DIY 1.03 0.12 $69
+ truTV 1.98 0.23 $317
+ WeTV 1.21 0.14 $161
= Total Lifestyle bundle $5.00 $0.58 $590
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
The World News Extra add-on comes with seven additional networks, including HLN,
Bloomberg, News 18 India, EuroNews, NDTV 24x7, France 24, and RT. It is a little more
difficult for us to come up with estimates for most of these networks, given they are
international in nature.
Exhibit 29: Illustrative Affiliate Fees for the World News Extras Add-On
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend ($MM)
HLN 0.00 $67
+ Bloomberg 0.07 $92
+ News 18 India - -
+ EuroNews - -
+ NDTV 24x7 - -
+ France 24 - -
+ RT - -
= Total World News bundle $5.00 $0.07 $159
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
The Hollywood Extra package comes largely with Epix and Sundance TV.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 27
28. Exhibit 30: Illustrative Affiliate Fees for the World News Extras Add-On
Sling Cost to
Consumer
Kagan Affiliate
Fee/sub/mo
Programming
Spend ($MM)
Epix 4.63 1.61 $220
+ Sundance TV 0.37 0.13 $60
= Total Lifestyle bundle $5.00 $1.74 $279
Source: SNL Kagan, Sling.com, RBC Capital Markets estimates
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 28
29. Subscriber Trends: Accelerating Cord Shaving Currently Being Offset By Pricing
Media conglomerates and smaller channel operators have benefited for decades from the
“full distribution” model of a bundle of basic channels over every major MVPD in the U.S. An
MVPD historically was unable to cherry pick the channels it wanted to carry out of what a
media operator aimed to make its most distributed package of channels. The MVPD
essentially either carried (and paid for) all the channels the media operator was intent upon
distributing or none. As a result, consumers had little ability to select customized channel
packages and MVPDs had relatively strong ability to change pricing.
Bundling made things like new channel launches easier for existing players and it also gave
pricing power on less popular channels to media operators since, in a sense, they were tied
to the ability to receive more popular channels. Media operators have had to serve as little
more than “wholesale” bundlers to the MVPDs, without having to market directly to
consumers. Further, as the MVPD distribution landscape morphed into a highly competitive
field (one platform couldn’t compete without popular channels another had) with a handful
of players controlling ~90% video subscription homes in the US, 10 or so distribution deals
where the media operators had the upper hand would ensure full coverage of a basic bundle
across ~100 million subscribers.
Typically, an MVPD could offer a smaller bundle of channels, but channel operators would
require that fewer than ~85% of subscribers would get access to it. The typical 1%-3% of sub
growth investors came to expect would simply turbo charge the impact of the bundle and its
pricing power. The following chart shows the number of basic cable networks for each
company.
Exhibit 31: Number of Basic Cable Networks by Company
4
2
16
22
13
14
6
11
25
0
5
10
15
20
25
AMCX CBS CMCSA DIS DISCA FOXA SNI TWX VIAB
Number of Basic Cable Networks
Note: Excludes AMCX’s 49.9% interest in BBC America, CBS’ 50% interest in POP, and CMCSA’s <50% interests in six networks
Source: Company reports, SNL Kagan, RBC Capital Markets estimates
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 29
30. Below, we include broadcast, premium, and RSN networks along with the basic cable
networks illustrated above.
Exhibit 32: Basic Cable, Premium, Broadcast, and Regional Sports Networks by Company
4
2
16
22
13
14
6
11
25
1
2
1 11 1
6
20
0
5
10
15
20
25
AMCX CBS CMCSA DIS DISCA FOXA SNI TWX VIAB
Cable Broadcast
Premium RSNs
Number of Networks
Note: Excludes AMCX’s 49.9% interest in BBC America, CBS’ 50% interest in POP, and CMCSA’s <50% interests in six networks
Source: Company reports, SNL Kagan, RBC Capital Markets estimates
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 30
31. Meaningful Cord Cutting Hasn’t Occurred; U.S. Pay TV Subs Have Remained Flat
Although the US pay TV industry is mature, we have seen little cord cutting and do not
expect it to be a major factor for years. At the same time, we do not see much probability of
core sub growth, even with the entry of new virtual MVPDs.
Exhibit 33: U.S. Pay TV Subs
-1%
0%
1%
2%
3%
4%
5%
6%
7%
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
PayTVSubs-YoY%Change
PayTVSubs(000)
Pay TV Subs (000) Pay TV Sub Growth (right scale)
Source: SNL Kagan, RBC Capital Markets estimates
Exhibit 34: U.S. Pay TV Net Adds
(500)
0
500
1,000
1,500
2,000
2,500
3,000
PayTVNetAdds(000)
Pay TV Net Adds (000)
Source: SNL Kagan, RBC Capital Markets estimates
Thus far, we have seen
little cord cutting…
…but more recently, net
sub growth has begun to
decline ever so slightly
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 31
32. Looking at quarterly results of the major distributors, we again highlight that, in the context
of +100mm pay-TV subs, the ~300,000 decline in 2014 is not particularly ecosystem-
shattering.
Exhibit 35: Quarterly Net Adds across the Major Distributors Hasn’t Shown a Material Decline in Pay TV Subs (000s)
1Q13 2Q13 3Q13 4Q13 2013 1Q14 2Q14 3Q14 4Q14 2014
Cable
CHTR - Total Video (35) (58) (25) (3) (121) 13 (35) (24) (3) (49)
CMCSA (25) (161) (127) 46 (267) 24 (144) (81) 7 (194)
CVC (5) (20) (37) (18) (80) (14) (28) (56) (34) (132)
TWC - Total Video (118) (189) (304) (214) (825) (34) (147) (182) (38) (401)
Cox- SNL (27) (56) (89) (66) (238) (13) (43) (37) (98) (191)
Mediacom (1) (16) (23) (15) (55) (8) (18) (19) (10) (55)
Suddenlink 1 (23) (3) (9) (34) 10 (19) 2 (33) (39)
WideOpenWest Networks (WOW!) (11) (9) 9 4 (8) (0) 5 (45) 0 (41)
Cable ONE (5) (12) (15) (22) (55) (14) (34) (14) (25) (88)
Total Cable (227) (545) (614) (297) (1,683) (37) (463) (456) (234) (1,189)
Satellite
DISH 36 (78) 35 8 1 40 (44) (12) (63) (79)
DTV 21 (84) 139 93 169 12 (34) (28) 149 99
Total DBS 57 (162) 174 101 170 52 (78) (40) 86 20
Telco
T-U-verse 231 231 263 193 918 200 189 214 (125) 478
VZ-FiOS 169 140 135 92 536 57 100 114 116 387
Total Telco 400 371 398 285 1,454 257 289 328 (9) 865
Total Pay TV Subs 230 (336) (42) 89 (59) 272 (252) (168) (157) (304)
Source: SNL Kagan, RBC Capital Markets estimates, company reports
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 32
33. Cable Networks Have Been Seeing Subscriber Declines, Highlighting Concerns Over Cord Shaving
While total Pay TV subs have been flattish, Cable TV Networks have generally been losing subs, likely driven by the migration of subs to
lower-priced distributor tiers as well as erosion in the underlying basic cable universe
Looking deeper, we note that sub losses have been more prominent in mature networks that have full-distribution (i.e., +85mm subs),
with 1-2mm sub losses in 2014. Growth at more broadly but not fully distributed networks (50-85mm subs) has also decelerated. While
we have seen a few successful network launches over the last few years (e.g., the SEC Network, Disney Junior), we believe media
companies will find it increasingly difficult to do so in a rapidly fragmenting ecosystem. We note that rebranding existed broadly
distributed networks and ramping its content spend has also resulted in sub gains, most notably at FOX’s FS1, FS2 and FXX.
Exhibit 36: Y/Y Change in Subs – 2014 (mm)
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
ChangesinSubsY/Y(2014;mm)
AMCX CMCSA DIS + A&E DISCA FOXA SNI TWX VIAB
12 63 14
(35) (66)
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count
changes) when Nielsen figures were not available.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Cord shaving – not cutting
– is real, but has been more
than offset by rate
increases
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 33
34. Sub Losses Have Been More Pronounced At Fully Distributed Networks; Broadcast
O&Os Stable
The broadcast network affiliates are the only the part of the ecosystem that we view as
highly protected. Some might argue they could easily fall out of the bundle since viewers can
simply pull them off the air; the reality is they have seen virtually no sub shrinkage versus the
cable operators, which have had 2-3 million sub losses, on average. There is utility beyond
the simple signal being pulled off the air (on-demand viewing, ability to have non-partitioned
DVR/Tuner box, etc.).
Exhibit 37: Y/Y Change in Subs at Networks with +85mm Subs in 2014
(0.6)
(1.6) (1.8)
(0.9)
(1.5) (1.9) (1.8)
(3.2)
0.3
2 6 7 4 4 3 6 8
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB Broadcast
O&Os
( CBS, FOXA,
etc.)
(8.0)
(7.0)
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
0.0
1.0
Average = (1.9) mm
Network Count
Average Y/Y Change in Subs at Networks with +85mm Subs (mm; 2014)
Outsized impact from being taken off Cable
One and Suddenlink
Excluding Investigation Discovery's 1.9mm sub gains, other
networks at (1.8) mm
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have
been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available.
Source: Nielsen, SNL Kagan, RBC Capital Markets
CBS, in particular, has always been sold as one single channel. Its economics haven’t
benefited from a bundle historically (though we’d argue it has benefited from being adjacent
to other bundles), so it essentially already is subject to “a la carte” pricing. NFL Football and
the most watched shows in primetime as well other events (Grammy’s, etc.) would likely
satisfy the consumer case at current pricing ($1.50-$2.00 per sub/month). We would note
that CBS O&O’s MVPD subs are basically unchanged over the past year while most cable
networks have lost ~2 million subscribers. We believe other network O&O trends would be
similar
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 34
35. Exhibit 38: Broadcast Networks’ O&O TV Station Subscribers
Multichannel Video Subs (mm)
Company Station Count 4Q13 4Q14 Y/Y Change Y/Y % Change
CBS 30 67.9 67.9 0.0 0.0%
CMCSA-NBCU 26 59.2 59.3 0.1 0.1%
DIS 8 22.6 22.6 (0.0) 0.0%
FOXA 28 64.6 64.8 0.2 0.2%
Broadcastcast Networks' O&O TV stations have experienced
virtually no changes in Multichannel video subs in 2014
Note: Multichannel video subs reflect the sum of cable, DBS, and telco video subs in each TV stations’ market. FOXA includes 10 MyNetworkTV affiliates
and excludes one O&O satellite station in Minneapolis; CMCSA-NBCU includes 10 NBC and 16 Telemundo stations in the U.S.
Source: SNL Kagan, RBC Capital Markets estimates
We are also concerned about the second derivative impact of growth slowing for those
players who were using secondary, and niche networks to “turbo charge” sub growth over
the past decade.
As the bundle begins to shrink, one thing seems certain: gaining carriage of a new network or
expanding coverage of a nascent one, if it is not already fully carried, is probably going to get
harder. It appears that DISCA and SNI and even DIS (the launch of SEC Network) and Fox
(expansion of FS1, FXX, etc.) will face headwinds here while TWX, VIAB, CBS have benefited
far less.
Exhibit 39: Y/Y Change in Subs at Networks with 50-85mm Subs in 2014
0.9 1.2
0.2
9.0
(0.4)
4.0
(0.4)
0.2
(1.0)
3 2 5 7 6 7 3 1 8
AMCX CBS CMCSA DIS DISCA FOXA SNI TWX VIAB
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
Average = 1.9 mm
Network
Count Average Y/Y Change in Subs at Networks with 50-85mm Subs (mm; 2014)
Excluding the launch of the SEC Network, which had 63mm subs at the end of
2014, other networks' sub counts were were flat on average
Outsized impact
from being taken
off Cable One and
Suddenlink
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have
been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 35
36. Affiliate revenue typically has grown at a high-single-digit rate over the last few years. We believe it likely will become increasingly
difficult to sustain that level of annual increase due to more pressure on sub-fee pricing as well as an increased drag from subscriber
declines at mature networks (which drive most of the network economics).
We estimate that "core" pricing recently has grown mid- to high-single digits supported by TV Everywhere rights. While the sustainability
of pricing power and the next leg of growth are not as visible as a few years ago, it's possible we'll see high-single-digit growth in any
given year due to carriage-agreements timing. We are incrementally more cautious on the drag that declining subscribers will have on
total affiliate revenue growth. Depending on pricing growth and the rate of sub declines, affiliate revenue increases could very well
decelerate to mid- or a bear-case low-single digits.
Exhibit 40: Affiliate Revenue Growth Breakdown (excludes SVOD revenue)
1.0%
0.5% 0.2%
-0.9%
(1%) to (3%)
0.1%
-0.1%
0.3%
0.7%
0.0%
7.6%
5.2%
8.5%
9.7%
3% to 9%
8.7%
5.6%
9.0%
9.5%
0% to 8%
-4%
-2%
0%
2%
4%
6%
8%
10%
2011 2012 2013 2014 201XE
Sub Growth Network launches (closures), net
Pricing Growth Total affiliate revenue growth
Components of U.S. Affiliate Revenue Growth
Does not include carriage
by new OTT services
and/or SVOD revenue
Note: Subscriber numbers used in the analysis reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate
revenue used are illustrative estimates based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 36
37. Sub Losses Could Potentially Be Offset by New Entrants
In response to rising programming costs, including retransmission consent, and continued
consumer adoption of SVOD services, smaller cable distributors have begun to either drop
major network portfolios (e.g., Suddenlink and Viacom) or even exit pay-TV and switch to
only providing Internet and phone services (e.g., Ringgold Telephone Co. in Georgia and BTC
Broadband in Oklahoma).
We expect this trend to remain largely limited to smaller players that aren’t as well
positioned to absorb rising programming costs compared to the leading scale MSOs. In this
context, we highlight that operators with less than 1mm subscribers cumulatively account for
~5mm subscribers. While the success of the new (Sony) and other potential entrants (Intel,
Google, etc.) into the pay-TV ecosystem is uncertain, it is possible that they could potentially
offset losses from small cable MSOs dropping video (especially as they likely would have to
pay higher affiliate fees than incumbents) or provide a relative benefit to networks that are
more in-demand on the new offerings.
Exhibit 41: Video Subscribers – Smaller Cable MSOs (>1mm subs) represent ~5% of the Pay TV Universe
26.3
22.4
14.0
10.8 6.3
5.7
4.1 2.7
1.1
4.9
?
0
5
10
15
20
25
30
35
40
45
DTV
+ AT&T
Comcast DISH Time Warner
Cable
Charter +
Brighthouse
Verizon Cox CVC Suddenlink Cable MSOs
With
<1mm Subs
Potential
New Entrants
VideoSubscribers(mm)
Smaller MSOs have been
more aggressive in switching
to broadband-only offerings;
Operators with less than 1mm
subs represents ~5mm Subs...
...subs lost could potentially
be offset by new entrants
coming to market (e.g.,
Sony, Intel, Google)
Distributors with scale are better
positioned to absorb rising
programming costs
Note: Pro forma for pending/proposed mergers transactions between AT&T and DIRECTV as well Charter and Brighthouse. Data is as of 4Q14 for DTV, DISH, CMCSA, Charter, Brighthouse, Cox, CVC, Suddenlink, and
Cable MSOs with <1mm subs; 1Q15 for T, TWC, and VZ.
Source: Company Reports, SNL Kagan, RBC Capital Markets research.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 37
38. Below, we have illustrated the annual affiliate fee per sub increases required to achieve
various affiliate revenue targets. Assuming 1%-2% annual sub losses for a mature network,
we estimate that affiliate fee per sub pricing would have to increase in the high-single to low-
double digits in order to hit the low-end affiliate revenue guidance a number of our
companies have provided (see Exhibit 45), above our estimate of the typical 5% “core”
annual growth pricing increase.
Exhibit 42: Sub Loss Sensitivity - Required Annual Affiliate Fee Per Sub Increases To Achieve Various Total Affiliate Revenue
Growth Targets
YoY % Change in Average Subscribers
0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
5% 5.0% 5.8% 6.7% 7.6% 8.5% 9.4%
6% 6.0% 6.9% 7.7% 8.6% 9.5% 10.4%
7% 7.0% 7.9% 8.7% 9.6% 10.6% 11.5%
8% 8.0% 8.9% 9.8% 10.7% 11.6% 12.5%
9% 9.0% 9.9% 10.8% 11.7% 12.6% 13.6%
10% 10.0% 10.9% 11.8% 12.7% 13.7% 14.6%
5-Year
Affiliate
Revenue
CAGR
We believe it's reasonable to assume modest sub losses at
mature networks at 1%-2% going forward
With 1%-2% sub losses, all else constant, in order to
drive high-single digit affilate revenue growth,
networks would need to command high-single to
low-double-digit pricing increases, above the typical
5% "core" annual increase ex-incremental rights
(e.g., TV Everywhere, multiplatform, etc.)
Source: RBC Capital Markets estimates
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 38
39. Affiliate Revenue Per Sub Increases Have More Than Offset Sub Declines In Recent Years
Annual sub losses at the most distributed networks (+85mm subs) accelerated in 2014 from 1% to 2% while the sub growth at the
Broadly but Not Fully Distributed Networks (50-85mm subs) decelerate d from 3% to 1% growth.
Exhibit 43: Total Subscriber Trends Across Cable Networks
Subscribers (mm) Subs Y/Y (mm) Subs Y/Y % Sub-Weigh
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Fully Distributed Networks (+85mm subs)
21st Century Fox 342 353 361 366 360 4 11 8 5 (6) 1.1% 3.3% 2.3% 1.3% -1.7%
AMC Networks 173 172 180 182 180 3 (1) 8 1 (1) 1.8% -0.4% 4.6% 0.6% -0.6%
CBS 0 0 0 0 0 0 0 0 0 0 na na na na na
Comcast-NBCU 583 582 581 576 566 8 (1) (1) (5) (9) 1.4% -0.2% -0.2% -0.9% -1.6%
Discovery Communications 367 373 375 376 372 17 6 2 1 (4) 5.0% 1.6% 0.5% 0.3% -1.0%
Scripps Networks Interactive 295 293 293 290 284 2 (2) (0) (3) (6) 0.8% -0.7% -0.1% -0.9% -2.0%
Time Warner 593 588 587 580 570 4 (5) (1) (7) (11) 0.7% -0.9% -0.2% -1.1% -1.8%
Viacom 777 772 771 763 737 7 (5) (1) (8) (25) 0.9% -0.6% -0.2% -1.1% -3.3%
Walt Disney - Incl. Equity in the Income of Investees 696 691 688 681 668 4 (5) (3) (8) (12) 0.6% -0.7% -0.4% -1.1% -1.8%
Total Fully Distributed Networks 3,826.9 3,825.0 3,836.2 3,812.5 3,738.1 50 (2) 11 (24) (74) 1.3% 0.0% 0.3% -0.6% -2.0%
Broadly but Not Fully Distributed Networks (50-85mm subs)
21st Century Fox 326 326 346 394 422 26 0 20 48 28 8.8% 0.0% 6.1% 13.9% 7.0%
AMC Networks 170 180 200 206 209 16 10 20 6 3 10.6% 5.8% 11.3% 2.8% 1.3%
CBS 120 125 125 128 130 4 5 0 3 2 3.4% 4.5% 0.0% 2.4% 1.8%
Comcast-NBCU 348 365 371 365 367 16 17 5 (5) 1 4.8% 5.0% 1.5% -1.4% 0.3%
Discovery Communications 350 362 393 407 405 19 11 31 15 (2) 5.7% 3.3% 8.4% 3.7% -0.6%
Scripps Networks Interactive 170 176 180 181 180 3 6 4 1 (1) 1.5% 3.6% 2.0% 0.7% -0.7%
Time Warner 81 81 82 82 82 1 0 1 (0) 0 0.9% 0.5% 0.6% -0.1% 0.2%
Viacom 472 480 503 516 508 26 9 23 12 (8) 5.8% 1.9% 4.8% 2.4% -1.5%
Walt Disney - Incl. Equity in the Income of Investees 503 514 573 578 588 30 11 59 6 9 6.3% 2.2% 11.4% 1.0% 1.6%
Total Broadly but Not Fully Distributed Networks 2,539.1 2,609.8 2,771.7 2,857.0 2,889.0 140 71 162 85 32 5.8% 2.8% 6.2% 3.1% 1.1%
Total Large Cap Universe 6,973 7,079 7,289 7,377 7,325 220 105 211 87 (52) 3.3% 1.5% 3.0% 1.2% -0.7%
Annual sub losses at the most distributed networks (+85mm subs) accelerated in 2014 from
1% to 2% while the sub growth at the Broadly but Not Fully Distributed Networks (50-85mm
subs) decelerated from 3% to 1% growth
Total affiliate revenue per sub per month figures represent a sub-weighted average.
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count
changes) when Nielsen figures were not available. The affiliate revenue listed is an illustrative estimate based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 39
40. Fully Distributed Networks (+85mm subs) typically garner ~4x the affiliate fee per sub compared to less distributed networks. While sub
losses were a drag to affiliate revenue growth, it has thus far been more than offset by continued strength in pricing gains.
Exhibit 44: Affiliate Fee Per Network and Mix of Impact to Changes in Affiliate Revenue From Sub Count and Sub Rate Variances
Total Affiliate Revenue Change in Dollars and the Contribution from Changes in Subs vs. Pricing ($mm)
Sub-Weighted Avg. Monthly Affiliate Fee ($) Affiliate revenue (calculated; $mm) Sub Count Impact ($mm) Sub Rate Impact ($mm)
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Fully Distributed Networks (+85mm subs)
21st Century Fox 0.41 0.44 0.48 0.54 0.64 1,688 1,858 2,057 2,367 2,811 22 23 25 14 (13) 169 147 174 297 457
AMC Networks 0.19 0.19 0.24 0.24 0.27 388 402 512 532 581 6 2 8 8 (6) 11 12 102 12 55
CBS 0.00 0.00 0.00 0.00 0.00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Comcast-NBCU 0.31 0.33 0.35 0.37 0.41 2,188 2,337 2,424 2,585 2,793 24 9 (7) (14) (35) 292 140 94 175 243
Discovery Communications 0.18 0.19 0.19 0.20 0.21 780 837 870 925 939 13 9 0 (2) (9) 55 48 33 57 24
Scripps Networks Interactive 0.13 0.14 0.15 0.16 0.16 472 484 529 561 565 4 0 (2) (3) (8) 95 12 47 35 12
Time Warner 0.41 0.45 0.46 0.49 0.55 2,914 3,224 3,249 3,401 3,766 30 (0) (23) (24) (54) 225 310 48 176 419
Viacom 0.22 0.23 0.25 0.29 0.32 2,018 2,184 2,315 2,625 2,862 19 2 (10) (17) (62) 117 164 142 327 299
Walt Disney - Incl. Equity in the Income of Investees 0.98 1.07 1.13 1.22 1.32 8,193 8,938 9,357 10,009 10,739 71 (5) (56) (91) (188) 475 751 475 743 918
Total Fully Distributed Networks 0.59 0.63 0.67 0.72 0.79 18,639 20,263 21,312 23,004 25,057 189 40 (66) (130) (374) 1,440 1,584 1,115 1,822 2,427
Y/Y % Change 7.2% 8.1% 4.9% 7.8% 10.0% 9.6% 8.7% 5.2% 7.9% 8.9%
Broadly but Not Fully Distributed Networks (50-85mm subs)
21st Century Fox 0.19 0.21 0.21 0.23 0.24 722 800 864 1,010 1,195 65 36 35 81 104 16 41 29 65 82
AMC Networks 0.15 0.14 0.13 0.13 0.14 291 289 299 321 346 27 24 24 20 8 (2) (26) (14) 2 17
CBS 0.08 0.09 0.10 0.10 0.11 108 124 143 149 168 15 11 9 10 13 4 5 10 (4) 6
Comcast-NBCU 0.18 0.19 0.19 0.20 0.22 737 807 846 897 974 13 36 20 (2) (8) 52 34 19 54 85
Discovery Communications 0.06 0.07 0.08 0.11 0.11 250 289 338 536 545 22 16 23 31 12 3 22 26 168 (3)
Scripps Networks Interactive 0.04 0.05 0.06 0.07 0.07 86 95 126 142 157 3 2 3 2 1 13 6 27 14 14
Time Warner 0.26 0.27 0.28 0.28 0.29 251 262 273 274 284 4 2 1 1 0 0 10 10 0 10
Viacom 0.08 0.08 0.09 0.10 0.10 434 466 515 587 622 22 14 12 16 2 17 18 37 56 33
Walt Disney excl. equity in the income of investees 0.16 0.17 0.17 0.18 0.27 560 608 672 757 880 63 13 17 23 39 24 35 47 62 84
Walt Disney - Equity in the income of investees 0.09 0.09 0.09 0.09 0.09 204 229 239 241 249 17 15 10 2 (0) 0 10 0 0 8
Walt Disney - Incl. Equity in the Income of Investees 0.11 0.11 0.11 0.11 0.11 764 837 910 997 1,129 80 28 27 25 39 24 45 47 62 93
Total Broadly but Not Fully Distributed Networks 0.14 0.15 0.16 0.17 0.19 3,644 3,968 4,314 4,914 5,422 252 169 154 184 172 125 155 192 416 336
Y/Y % Change 4.2% 4.4% 3.1% 8.2% 12.9% 11.5% 8.9% 8.7% 13.9% 10.3%
Total Large Cap Universe 0.38 0.41 0.42 0.45 0.49 22,926 24,918 26,367 28,728 31,366 479 230 123 74 (208) 1,583 1,762 1,326 2,287 2,846
Y/Y % Change 5.1% 6.3% 2.8% 6.5% 9.6% 9.9% 8.7% 5.8% 9.0% 9.2%
23% 12% 9% 3% -8% 77% 88% 91% 97% 108%
Fully Distributed Networks (+85mm subs) typically garner ~4x the
affiliate fee per sub compared to less distributed Networks
While sub losses were a drag to affiliate revenue growth, it has thus for more
than offset by continued strength in pricing gains
Total affiliate revenue per sub per month figures represent a sub-weighted average.
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count
changes) when Nielsen figures were not available. The affiliate revenue listed is an illustrative estimate based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 40
41. Exhibit 45: Annualized Impact of Sub Count Changes as a % of U.S. Affiliate Revenue (pro
forma; excludes SVOD)
(0.2%)
(1.9%)
(1.4%) (1.2%)
0.8%
(1.4%) (1.6%)
(2.9%)
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB
Annualized Impact of Sub Count Changes as a % of Domestic Affiliate Revenue (PF; ex-
SVOD)
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers used in the analysis reflect Nielsen Household
Estimates as of December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count
changes) when Nielsen figures were not available. The affiliate revenues used are illustrative estimates based on the average sub count and average
monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
The exhibits below illustrate each company’s full network portfolio cost.
Exhibit 46: Cost of Full Network Portfolio by Company (2015E)
Basic Cable RSNs
Parent
Sum of Affiliate
Fee/Sub/Month
Sub-Weighted Avg. Affiliate
Fee/Sub/Month
Number of
Networks
Average Affiliate
Fee/Sub/Month
Number of
Networks
CBS $0.40 $0.12 3 - -
DIS $12.64 $0.73 23 $7.50 1
DISCA $2.06 $0.16 13 - -
FOXA $5.57 $0.48 14 $2.75 21
SNI $0.74 $0.13 6 - -
TWX $4.49 $0.52 11 - -
VIAB $4.17 $0.22 25 - -
Total RBC Large Cap Coverage $30.07 $0.40 95 nm 22
AMCX $1.00 $0.21 5 - -
Comcast-NBCU $4.47 $0.32 17 $3.16 5
Other Networks $11.83 $0.14 79 $3.74 22
Total Cable Networks $47.37 $0.32 196 $4.02 49
Illustrative of what a
company's full network
portfolio could cost; not
weighted by subscriber per
network
We estimate Retrans at
the O&Os per sub on
new deals is at ~$1.76
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have
been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate revenue listed is an illustrative estimate based on the average sub count and
average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 41
42. What’s Driving the Sub Losses?
We ran regressions on several variables across major networks within each conglomerate
and smaller channel operator to examine factors that could be impacting which networks are
being dropped from the bundle today.
Y/Y changes in ratings has ~0.5 R squared relative to sub count, which intuitively makes sense
(if you don’t watch them, you probably don’t want to pay for them).
Ironically, we find little correlation between affiliate fee per month and sub losses or even
content spend versus sub losses. The sub losses seem universal across many major networks
which is in turn surprising since overall pay-TV subscriptions aren’t experiencing Y/Y declines
anywhere near the magnitude of these types of individual sub losses.
Exhibit 47: Viewership Y/Y % Change vs. Sub Count Y/Y % Change
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
-6% -4% -2% 0% 2% 4% 6% 8% 10%
ViewershipY/Y%%Change(2014)
Sub Count Y/Y % Change (2014)
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB
Correlation = .47
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks; exclude new network launches or networks with <50 subs. Subscriber numbers reflect Nielsen Household Estimates as of
December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate revenue listed is
an illustrative estimate based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 42
43. Exhibit 48: Affiliate Fee Per Sub vs. Sub Count Y/Y % Change
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
-6% -4% -2% 0% 2% 4% 6% 8% 10%
AffiliateFeePerSub($)
Sub Count Y/Y % Change (2014)
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB
ESPN: (2%); $6.10
Correlation = (0.12)
FOXA RSNs Average:
0%; $2.54
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks; exclude new network launches or networks with <50 subs. Subscriber numbers reflect Nielsen Household Estimates as of
December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate revenue listed is
an illustrative estimate based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Exhibit 49: Content Spend per Sub vs. Viewership Y/Y % Change vs. Sub Count Y/Y % Change
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
-6% -4% -2% 0% 2% 4% 6% 8% 10%
ContentSpendPerSub($)
Sub Count Y/Y % Change (2014)
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB
ESPN: (2%); $66.06
Correlation = (0.12)
FOXA RSNs Average:
0%; $22.10
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks; exclude new network launches or networks with <50 subs. Subscriber numbers reflect Nielsen Household Estimates as of
December for the years presented. SNL Kagan estimates have been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate revenue listed is
an illustrative estimate based on the average sub count and average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 43
44. Exhibit 50: Content Spend Per Sub vs. Affiliate Fee Per Sub
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 $1.60 $1.80
ContentSpendPerSub($)
Affiliate Fee Per Sub ($)
AMCX CMCSA DIS DISCA FOXA SNI TWX VIAB
ESPN:
Correlation = 0.98
FOXA RSNs Average:
$22.10; $2.54
Note: Estimates are pro forma for acquisitions and reflect full ownership of networks. Subscriber numbers reflect Nielsen Household Estimates as of December for the years presented. SNL Kagan estimates have
been incorporated (including applying their estimates of Y/Y sub count changes) when Nielsen figures were not available. The affiliate revenue listed is an illustrative estimate based on the average sub count and
average monthly affiliate fee per sub.
Source: Nielsen, SNL Kagan, RBC Capital Markets
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 44
45. With sub losses, heightened concern over skinny packages, etc., what’s the next
leg of growth in affiliate fees?
While this may prove to be challenging, incremental programming rights (e.g., TV
Everywhere, out-of-home, mobile, etc.), emerging distribution partners (Sony, Google) and
international growth could compensate for the estimated impact of sub losses.
Exhibit 51: Progression of Programming Rights
Live TV Catch-up TV Catch-up Plus Deep Library Out-of-Home Mobile
Rights:
Live streaming of
linear TV
Rolling three-to-five
episodes on demand
Full current and
prior seasons on
demand
Older TV series and
movie libraries
Access content via
internet devices on
the go
Ability to access
content on mobile
Progression of Programming Rights
Content
Rights
Source: DIRECTV investor presentation, RBC Capital Markets
We note that, while we believe that MVPDs continue to value TV Everywhere rights such that
media operators should be able to continue to monetize them, especially for “must have”
content such as sports, we also believe the MVPDs will be able to push back a bit more on
compensation, especially for smaller players with less premium programming.
The reality is that viewership is moving more and more toward a non-linear pattern. As such,
offering content on demand and everywhere offers something not just to the MVPD
(increased utility for customers), but it also offers the media operator something powerful
(the ability to monetize advertising-related viewership in a non-linear fashion that otherwise
could not be monetized).
As dynamic advertising insertion becomes more of a practical solution (something that
should evolve over the next few years), this point will be even more clear. As a result,
distribution brings a bit more to the table than it probably used to, which would make it
more difficult for networks to negotiate for incremental rights.
Battle of the TV Network Bundle: You Get What You Pay For (Sometimes Even Less)
May 1, 2015 45