Cable expansion abroad is where it was seven years in the U.S., grabbing viewer ratings and ad dollars away from broadcast television and other rival media. Despite what is expected to be a strong showing in this spring's upfront market, industry analysts have questioned the sustainability of cable network rating and ad revenue shares domestically -- even as the economy gradually improves.
International growth is more important than ever to U.S. media. Foreign exchange fluctuations and the diverse economic environments in foreign countries are primary obstacles to international pay television growth, according to a new report by JP Morgan Chase analyst Imran Khan.
But there is a third risk dominating the headlines, dramatized by Google's testy stand-off with China: contrary government regulation and cultural and economic expectations at odds with U.S. content, communications and advertising. Having hampered companies from Yahoo to Microsoft to Walt Disney, such foreign conflicts can clearly disrupt the promise of international revenue gains desperately needed after a deep, prolonged recession.
Eleven of the top 15 global advertising markets heave "headroom" for an increase in pay-TV penetration "which would drive growth in both advertising and affiliate revenues," Khan said. Those target markets include Brazil, Australia, Italy, France, Spain, Mexico, China and Russia.
Above average growth in gross domestic product in emerging markets should result in above-average ad spending growth of about 12%. An increase in the number and size of pay-TV platforms, as well as the launch of new channels, translate into more affiliate revenues. Total international television spending in 2011 is expected to top $47 billion in Asia Pacific, $33 billion in Western Europe$20 billion in Latin America and $17 billion in Central and Eastern Europe, Khan said.
No one comes close to Discovery, whose international cable networks represent 53% of the growth in 2010 of its adjusted operating income before depreciation and amortization (OIBDA), or $545 million. Viacom is a distant second with 20%. Time Warner (at 13%), News Corp. (at 10%)and Walt Disney (with just 3%) are low with plenty of room to grow.
Some of the anomalies noted in the report may not be easily reversed in a tough global economy.
Viacom's overseas growth will hinge on a forecast 14.5% rise in affiliate revenues, compared with a mere 3.2% increase in advertising after several years of decline. Viacom also is hurt by having to localize and regionalize its cable network content, which invariably increases program costs and depresses margins. Discovery's universal niche channels, including Discovery Channel, Discovery Science, Discovery World and Animal Planet, play the same everywhere in the world. Program cost containment and maximum monetization can result in whopping 75% incremental margins. p> Other major media players struggle with a yawning gap between the strategic significance of and the actual returns on their international game plans. That gap could be narrowed by the launch of new cable networks abroad. Because it directly owns or shares controlling interests in satellite platforms in places like Europe and New Zealand, News Corp. has hastened the launch of 42 new international channels each of the past two fiscal years.
But as we have seen in the U.S., gaining traction with viewers and advertisers takes time. While retransmission or affiliate fees provide some stable growth now, it won't always be that way in a rapidly changing, highly competitive media landscape.
All big media players will be confronted by increasing competition, some of it at home from Scripps Networks Interactive. It is on track for the fastest overall 2010 growth (with 35% projected increase in affiliate fees and 7% in advertising comprising more than 60% of its total revenues), according to Barclays Capital analyst Anthony DiClemente. Scripps has yet to tap international expansion prospects for its generic Travel Channel, Food Network and HGTV.
Why is this important? Cable networks are the anchor of stable profits and (albeit slowing) revenue growth for media companies domestically. They are among the few solid global growth engines with relatively minimal, manageable costs.
Unfortunately, international pay television growth is vulnerable to elements beyond media company control, such as volatile foreign currency, local economics and regulation, and cultural and political divides.
At best, cable networks are as good a media bet as it gets -- but not a sure thing.