Large Broadcast and Cable TV Operators Best Situated to Profit From Digital Television Bill, Says S&P Equity Research

NEW YORK, Dec. 22  /PRNewswire-FirstCall/ -- With the growing likelihood that the U.S. House and Senate will pass the Digital Transition and Public Safety Act of 2005 early next year, Standard & Poor's Equity Research forecasts that large media operators may be in the best position to exploit the many opportunities the new legislation creates.  Standard & Poor's made this announcement Tuesday on Standard & Poor's MarketScope, the firm's electronic platform for financial advisors and asset managers featuring intra-day market commentary and independent investment research and analysis.

In effect, the current bill wending its way through both houses of Congress sets a Digital Television (DTV) "hard date" of 2/17/09, by which time local TV broadcasters would surrender analog broadcast spectrum to the US government, a process which could fetch over $10 billion in a public auction. According to Tuna Amobi, Standard & Poor's equity analyst for the Broadcasting, Cable & Satellite industries, the final Bill may also include a pro-consumer provision on the potentially thorny issue of government subsidies for digital-to-analog downconverter boxes for qualifying US households. Still, with a total of $1.5 billion designated to subsidize what S&P estimates to be over 20 million US homes relying exclusively on free over-the-air broadcasting, combined with 35 million or so analog cable homes (in many cases several homes with multiple TV sets), the proposal could fall short of insuring an orderly transition.

Mr. Amobi states in his S&P MarketScope comments that, "conspicuously missing from the proposed DTV Bill is the intertwined issue of digital 'multi-cast must-carry' -- which would address the pre- and post-DTV mandate for cable carriage of dual analog/digital broadcast signals, as well as multiple digital streams from local TV stations."  While the cable industry scored a key win with a favorable FCC vote on digital multicasting earlier in 2005, the issue is likely to resurface on the Congressional agenda in 2006, perhaps through a separate Bill or an Appropriations amendment.  Over the course of the DTV transition, however, Amobi expects local TV broadcasters to increasingly attempt to extract additional revenues from cable operators, through increased "cash-for-carriage" demands for retransmission consent.

In terms of impacts on specific companies' fortunes, Amobi suggests that these developments will continue to favor larger media operators.  "Local TV broadcasters that are part of media conglomerates such as Disney (DIS: Buy; $24), Viacom (VIA.B: Hold; $34) and News Corp.'s (NWS: Hold; $17; NWS.A: Hold; $16) Fox TV, mostly with leading O&O stations in major US markets, are well-positioned to negotiate adequate "in-kind" compensation, including further launches of branded cable networks, or increasingly, forced carriage of multiple digital streams," he says.  "Furthermore, bigger cable operators such as Comcast (CMCSA: Hold; $27; CMCSK: Hold; $26), vertically integrated Time Warner (TWX: Buy; $18) or well-clustered Cablevision (CVC), with relatively manageable spectrum constraints, are likely to face relatively minimal DTV or retransmission consent exposure."

S&P believes that not all operators will do as well by the legislation. Amobi predicts a possible squeeze for smaller cable operators such as Mediacom (MCCC: Hold; $5), RCN (RCNI: $24), Insight or Cable One, and similarly for independent local broadcasters such as LIN TV (TVL: Avoid; $12), Young Broadcasting (YBTVA: Avoid; $3) and Hearst Argyle (HTV: Hold; $24) -- many of who now already face declines in network compensation, amid tepid growth in traditional advertising revenues.

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Tuna Amobi

Standard & Poor's Equity Research

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