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Technology, Media & Telecom
Cable Nets Struggle With Little Revenue Growth Expanding Programming Budgets

There have been many stories in the mainstream press about how bad cord cutting and cord shaving has been for cable networks. Although there is no question this is a difficult environment for them to operate in, executives have done a remarkable job of keeping selling, general and administrative costs in check as revenue growth has slowed. Programming costs, however, continue to rise.

Programming costs as a percentage of revenue have ballooned over the last seven years from 42.5% in 2012 to 48.9% in 2018. Networks at the top of the list are mostly startups, with Entertainment Studios Inc.'s Cars.TVPets.TVES.TVJustice Central and Recipe.TV, as well as CJ Group's Mnet all forking out more in programming costs than they garner in revenue.

However, sports networks are also having a difficult time as sports rights continue to escalate at a rapid rate while most sports cable networks continue to see a decline in subscribers and, in many instances, in the ratings, which negatively impacts the top line.

Fox Corp.'s FOX Sports 2 ranks high on the list, with 95% of revenues plowed back into programming costs; Comcast Corp.'s NBCSN is not far behind it at 86.7%. The latter will see an improvement in 2019 without the summer Olympics hitting programming costs.

Some of the league channels are in a pickle. We estimate programming costs for NFL Network are 80.5% of revenues, with MLB Network also fairly high at 67.4%. Based on the estimated fair market value of what the games aired would be worth if sold on the open market, these channels may find, if cord cutting continues, that they would make more money by simply shutting down and selling the games to another broadcaster.

There are, however, some well-known brands in the bottom 25 networks, along with a number of feeds of international channels that do not require additional programming investment. Walt Disney Co.'s Disney Channel comes in at just 21% of revenues despite having grown acquired programming at a CAGR of 9% per year since 2009. This has been due to keeping original programming costs in check while growing average license fee per sub from 76 cents to more than $1 during the same time frame.

Discovery Channel is another well-known brand that comes in very low on the metric of programming costs as a percentage of revenue. It has remained flat at 21% of revenue over the past seven years. This is due to Discovery Inc.'s strategy of producing or commissioning programming with global appeal, allowing amortization of production costs across channels all over the world.

Despite showing very little revenue growth over the past seven years, Discovery has one of the fattest margins in the industry at 61.4%. It has continued to expand abroad, where much of their growth will be going forward.  For an in-depth analysis of the data going back to 1989, click here.

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