Watching the TiVo Effect

It's hard to gauge how much advertising revenue may be lost to the DVR phenomenon. But it is shaping broadcasters' programming

From Standard & Poor's Equity Research

After generations of passive viewing, TV watchers are taking control. Using new technology from TiVo (TIVO; ranked 2 STARS, or sell; recent price: $6) or others, they can now pause, rewind, or watch live TV in slow motion, or advance through commercials on recorded programming.

Consumers in about 9% of U.S. homes currently use TiVo or devices known as digital video recorders (DVRs) to skip commercials, according to Standard & Poor's Equity Research. S&P expects that DVR penetration of U.S. homes will climb to between 30% and 35% by 2010.

That's great news for the average TV watcher, but not-so-great news for broadcasters and cable companies, which generate revenues from advertisements. If the content providers can no longer guarantee that viewers are actually watching the ads, what happens to ad revenues? These new TV-watching trends can be threatening to content providers, admits Tuna Amobi, S&P's media and entertainment equity analyst. However, he thinks there are opportunities, too.


  With the audience taking control, TV companies will likely focus on changing their programming to ensure they give viewers what they want. To get a clearer picture of the shift on how people watch TV, Nielsen's Media Research is collecting information to track viewers' TiVo habits. Ratings will be broken out by how shows are watched -- live, within 24 hours of original broadcast, or within a seven-day period after original broadcast. Also, Nielsen's is adding DVR households to its national sample.

Amobi and James Peters, S&P's advertising and publishing equity analyst, have noticed that news and sporting events are least likely to be TiVo'd, whereas prime-time dramas and comedies are most likely to "get the TiVo treatment."

Morning and evening news are increasingly driving broadcasters' profits, says Peters, while sports events for the most part are watched in "real-time" because most people prefer to watch a game before they hear about it at work the next day or inadvertently find the score on the Web. "Broadcasters are focused on improving programming in these areas in order to drive advertising revenue growth," Peters says.


  Indeed, advertising is a large source of revenue for broadcasters. Currently, six English-language national broadcast networks (CBS, ABC, FOX, NBC, UPN, and WB) garner more than $2.5 billion in network television advertising revenues. Additionally, three Spanish-language national networks (Univision, Telefutura, and Telemundo) capture nearly $1.5 billion in ad revenues.

Among the hundreds of ad-supported cable networks, S&P estimates that the top 10 -- ESPN, TNT, Nickelodeon, USA, MTV, CNN, TBS, Lifetime, Discovery, and A&E -- nab 40% of the more than $20 billion in advertising revenues for the cable networks.It's still too early to determine the impact of the DVR phenomenon on the major broadcasters that S&P covers, says Amobi. "The debate over which broadcaster might benefit or might not benefit will depend on the programs that are offered," he says.

Among the companies that S&P follows, Walt Disney (DIS; 4 STARS, or buy; $28) owns ESPN and ABC Networks. ESPN is a world leader in providing comprehensive sports coverage, and will be showing Monday Night Football. ABC Networks held this year's Super Bowl contract, a game that usually draws about 90 million viewers.


  The Super Bowl has become the largest launch-pad for commercials on TV, as many viewers are bolted to their seats in hopes of seeing Monday morning's most talked-about ad. For the 2006 Super Bowl, ABC charged $2.3 million for each 30-second ad. S&P is pleased about the increasing profitability of ABC and its contribution to Disney's overall profitability.

CBS Corp. (CBS; 3 STARS, hold; $25) has a huge contract with the National Football League. Last month, it acquired College Sports Network. However, S&P thinks it faces very high costs for its prime-time programming, which includes expensive shows like Survivor and CSI.

General Electric (GE; 3 STARS, hold; $33) owns the NBC television network and other affiliates like CNBC and MSNBC, which aired the 2006 Winter Olympics. NBC also just won a Sunday Night Football contract away from Disney's ESPN. However, GE is a large conglomerate with holdings in many other businesses, including corporate financing, health-care equipment, transportation, and energy. We think the company will post only modest profit growth.


  Fox, owned by News Corp. (NWS; 3 STARS, hold; $17), is well known for its news, sports, and entertainment programs, and is said to be America's most watched network among the young adults most coveted by advertisers. It has big contracts with Major League Baseball and the National Football League. Although S&P estimates revenue gains for the next two fiscal years (ending June), S&P thinks the company is vulnerable to the TiVo threat as well as pressure from alternative media, which have been aggressively courting advertisers.

Time Warner (TWX; 4 STARS, buy; $17) owns the CNN news channel, one of the most dominant news sources in the world. As for TiVo, S&P has a sell recommendation on the stock. With no major catalyst seen in 2006, S&P thinks the shares will be vulnerable to increased competition from generic DVR offerings from cable and other providers.

Nevertheless, S&P believes the TiVo effect will be felt beyond the company's shares. The increasingly popular use of DVRs could shift the promising fundamentals of media and advertising companies. "Although we do not think the industry has a clear understanding of the impact TiVo will have on how people watch TV, what needs to be determined is the effectiveness of advertisers' reach -- with and without TiVo," Peters says.

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