Technology, Media & Telecom: Content & Distribution

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1 Technology, Media & Telecom: Content & Distribution December 4, 2014 Barton Crockett William Bird, CFA Howard Ma Michael Gallagher Marvin Fong, CFA Industry Update Loyalty Survey Reaffirms Content Leverage over Distribution; Highlights a la Carte Potential Summary and Recommendation In collaboration with ClearVoice Research, LLC, we have completed our fourth Loyalty Index survey, gauging consumer allegiance to major TV networks. Despite ratings headwinds that buffeted TV networks this summer and fall, we find that average network loyalty grew 200 bps year over year, arguing that, despite recent ratings headwinds, content providers retain substantial leverage to extract higher affiliate and retransmission fees from multichannel TV service providers. In this report, we also find that: (1) An á la carte TV model is potentially economically viable, as the costs for average consumers to cover the revenues of networks they are loyal to would be less than the average current cost of a multichannel video subscription; and (2) There is potentially a niche opportunity for premium networks HBO, Showtime, and Starz to add subscribers with untethered over-the-top offerings. Key Points Important disclosures can be found on pages of this report. Loyalty, despite ratings headwinds, has grown. With ClearVoice Research, we conducted a nationally representative, online survey of over 2,000 consumers asking a key question: Would you cancel or switch your pay TV service if a network were dropped? We label the cancel or switch percent "loyalty." We focused on a group of 53 basic tier cable networks, plus leading regional sports networks and premium networks HBO, Showtime, and Starz. Our finding: average loyalty was 21%, up 200 bps from a similar survey a little over a year ago, and above the to 20% average range in the previous surveys. This, we believe, argues that despite ratings headwinds in the summer and fall, TV network companies continue to have as much leverage as ever to extract higher affiliate and retransmission fees from multichannel TV service providers. Broadcast nets, led by CBS, continue to lead in loyalty. Broadcast network loyalty rates ranged from a low of 41% at Fox to a high of 46% at CBS, the TV network ranked first in loyalty, overall. Among cable networks, regional sports networks, as a group, generate an average of 41% loyalty, followed by ESPN at 36%. FX, in this survey, was the biggest gainer among nationally distributed networks, rising 500 bps in loyalty to 26%, while A&E was the biggest decliner, down 600 bps to 20%. Measured by company, Comcast/NBCU led in loyalty share, at 11.6%. But CBS would have the most to gain in a readjustment of fees to loyalty share, with this exercise arguing for a nearly 530% rise in its retransmission fees. While Disney would be the biggest loser in such a scenario, with its fee revenues dropping over 50% if adjusted to match loyalty share, Disney's fees, we believe, are in no danger of going down, with nearly all of its distribution locked into multiyear deals driving long-term, high-single-digit affiliate fee growth. A la carte lens. Since our last survey, TV network companies have raised the profile of á la carte, with Time Warner announcing plans next year for an á la carte HBO, and CBS announcing an á la carte subscription-based CBS app. So this year we used our survey to analyze the potential viability of a fully á la carte industry structure. To do this, we calculated how much consumers would have to spend to cover all of the affiliate, retransmission, and advertising revenues of those networks to which they are loyal. Our conclusion: average spending for the nine networks an average consumer is loyal to would total nearly $37, below the average video ARPU nationally of nearly $93 in 2014, as estimated by SNL Kagan. Premium opportunity. According to our survey, 32% of respondents would be interested in an untethered HBO, 26% in Showtime, and 24% in Starz; 7% would be willing to pay $15 or more per month for these services FBR CAPITAL MARKETS & CO.

2 Survey Highlights Continuing Loyalty to TV Networks Since May 2012, we have worked with ClearVoice Research, LLC to conduct an online survey measuring consumer loyalty to TV networks. We measure this by asking consumers if they would cancel or switch multichannel pay TV service providers if a specific TV network or channel were dropped. We see this as a way to gauge content leverage over distribution. TV networks ability to demand higher affiliate and retransmission fees rests mainly on consumer loyalty. This loyalty is most clearly expressed in a willingness to switch TV service providers if a network is dropped in a dispute over fees. It has been our view that TV networks have leverage over pay TV services because pay TV services are, to a large degree, commoditized. By and large, the major multichannel TV services all carry the same core networks. And these networks are why people subscribe. Everywhere in the country, there are at least two satellite service providers (Dish and DirecTV). In most of the country there is at least one cable provider. In many places there is also a telco TV service such as Verizon FiOs. So consumers can switch, and their loyalty has been seized upon by TV network companies to drive high-single-digit growth in cable network affiliate fees and triple-digit growth in retransmission fees for TV stations. Similar to our methodology before, in this survey, we queried over 2,000 consumers, broadly similar to overall national averages in gender, race, household income and geographic dispersion, pay TV service profile, and usage of online services like Netflix. The survey has a margin of error of +/ 2% in most questions. Key conclusions include: Broadcast networks led the pack in loyalty share, consistent with our prior surveys, topped by CBS, with 46%, and followed by NBC, ABC, and Fox with 42%, 42%, and 41%, respectively. This compares with the average across 53 major networks of 21%, up 200 bps from the last survey in August CBS has the greatest imbalance between loyalty share and fees for TV networks (retransmission and affiliate), suggestive of significant room for growth. Among cable networks, the leaders in loyalty are those focused on sports. Regional sports networks, as a group, had 41% average loyalty. ESPN had 36%. After sports, cable networks that ranked high in loyalty included the History Channel (27%), and TNT and FX, each at 26%. Among premium networks, HBO led in loyalty with an adjusted share of 21%, followed by Showtime with and Starz with. We found substantial consumer interest in accessing TV networks via apps. Page 2

3 TV Network Loyalty Index CBS TV station NBC TV station ABC TV station RSNs Average FOX TV station ESPN History Channel TNT FX USA Discovery Channel Food Network AMC Fox News Channel The Weather Channel Syfy HGTV TBS Fox Sports 1 National Geographic Channel HBO A&E Network Lifetime CNN/HLN TV Land Comedy Central TLC Investigation Discovery Travel Channel TruTV Hallmark Channel Cartoon Network/Adult Swim Disney Channel Science Channel Animal Planet MSNBC Nickelodeon Showtime CW TV station Bravo ABC Family E! Entertainment TV Spike CNBC BET VH1 OWN MTV Military Channel The HUB Starz Oxygen WeTv CMT "Get Country" Nick Jr. FYI Sprout 36% 42% 42% 41% 41% 29% 27% 26% 26% 25% 24% 24% 23% 23% 23% 23% 22% 22% 21% 21% 20% Oct. 2014: Avg. 21% Aug. 2013: Avg. Dec. 2012: Avg. 20% May 2012: Avg. 15% 15% 15% 14% 14% 14% 14% 14% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% % of respondents that would cancel or switch if network dropped 46% The biggest gainer in loyalty among nationally distributed networks was FX, up 500 bps. Premium networks also improved, each up 300 bps to 400 bps. The biggest decliners were A&E, down 600 bps, and the Discovery Channel, down 200 bps. Page 3

4 Change in Loyalty Change in percent of respondents that would cancel or switch if network dropped (from Aug to Oct. 2014) FX Starz TV Land Fox Sports 1 The Weather Channel FOX TV station HGTV HBO Investigation Discovery CNBC CMT "Get Country" Showtime WeTv Spike The HUB BET USA Oxygen Military Channel MSNBC ESPN Hallmark Channel VH1 TLC OWN CNN/HLN Travel Channel E! Entertainment TV Science Channel Sprout History Channel Fox News Channel CBS TV station Syfy MTV Bravo TruTV Cartoon Network/Adult Swim FYI Lifetime TBS TNT Nick Jr. Food Network National Geographic Channel CW TV station ABC TV station Comedy Central Nickelodeon NBC TV station Disney Channel ABC Family Animal Planet AMC Discovery Channel A&E Network -6% -2% -2%-1% -1% -1% -1% -1% -1%0%0% 1% 1%1% 0% 1% 1% 1% 1%1%1% 0% 0% 0% 2% 2% 2% 2% 2% 2% 2% 2% 2%2%2% 3% 3% 3% 3%3% 2% 3%3% 4%4%4% 3% 3% 3%4% 4% 4% 4%4%4% Avg. +2% -6% -4% -2% 0% 2% 4% 6% 5% Ratings are not necessarily the best gauge of loyalty. In general, cable networks garner greater loyalty share than their TV audience share, and broadcast networks less. Some cable networks with big brands have hefty loyalty and modest ratings, including the new Fox Sports 1 (22% loyalty, up 400 bps) and the National Geographic channel (21% loyalty). Page 4

5 Comparison to TV Audiences TV network loyalty share is comparable to 24-hour TV household audience share, except that loyalty to cable networks tends to be larger than household audience share, while loyalty to broadcast networks tends to be lower than household audience share. This makes sense, as cable networks target avid fans in niche audiences, while broadcast networks reach broader audiences, including some who may not have an avid interest in the programming. TV Network Loyalty Share Versus Audience Share (24-hour TV Household Delivery) Fox Sports 1 The Weather Channel National Geographic Channel ESPN Travel Channel Science Channel Discovery Channel CNBC The HUB Syfy Military Channel FX Food Network AMC FYI OWN CMT "Get Country" WeTv Oxygen VH1 Comedy Central TruTV E! Entertainment TV Animal Planet Nick Jr. History Channel Bravo MSNBC TLC Lifetime TV Land Spike TBS HGTV BET MTV ABC Family Investigation Discovery CNN/HLN A&E Network TNT Fox News Channel USA CW TV station Cartoon Network/Adult Swim Nickelodeon Disney Channel NBC TV station ABC TV station CBS TV station FOX TV station-7.6% -5.1% Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan -3.4% -4.1% Avg. 0% 0.0% -0.4% -0.6% -0.7% -0.9% -1.8% -2.0% 1.6% 1.4% 1.2% 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.1% 0.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% % Adj. loyalty share in excess of 24 hour TVHH delivery share Page 5

6 Loyalty and Fee Share by Company We tally up the unduplicated loyalty responses by company. We do this by assuming that one individual can only cancel a service once, so that one individual canceling for four Viacom networks carries the same weight as one individual canceling or switching only for CBS. We add up this loyalty by company, using this to create a loyalty pie within which we allocate share by company. The data places Comcast/NBCU number one in loyalty, followed by Fox and Disney. Interestingly, CBS ranked above Time Warner and Discovery, a testament to audience loyalty to broadcast networks. Time Warner and Discovery ranked at the top of the cable network companies, reflective of loyalty generated by having multiple networks touching multiple different demographics. Basic Tier TV Network Loyalty Share by Company Comcast/NBCU 11.6% 21st Century Fox Disney 10.6% 10.5% CBS Time Warner Discovery A&E Viacom 8.7% 8.7% 8.7% 8.0% 7.9% Scripps Networks 6.7% AMC Networks 5.4% 0% 2% 4% 6% 8% 10% 12% 14% % of loyalty-share (Oct. 2014) Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan We compare this share of loyalty to a content company s share of program fees (affiliate plus retransmission/reverse retransmission). This exercise, we believe, highlights who has the most potential to grow affiliate and retransmissions fees, assuming that fees can be matched to loyalty. This data supports the notion that CBS has significant room to grow its fees, with a reset to loyalty share arguing for a 528% rise in retransmission fees. Interestingly, Discovery also skewed well in this exercise, even though its affiliate fee growth domestically lags peers with growth at a mid-single-digit pace. CBS s success in raising fees much faster than Discovery suggests that CBS is either more aggressive, or that CBS has more leverage by concentrating its loyalty into a single popular network, or both. Perhaps the difference is akin to local advertising power ratios that illustrate ad market share in excess of audience share among local TV stations that are audience share leaders. Disney is the leader in share of program fees. It is not the leader in loyalty. A reset in fee share to its loyalty share would, in theory, drive a 53% decline in its program fees. But Disney, in our opinion, is in no danger of seeing its program fees decline. Instead, Disney is wrapping up a cycle of negotiating multiyear distribution deals with leading multichannel TV services driving long-term high-single-digit Page 6

7 growth in cable network affiliate fees. This again is supportive of the notion that there is a power ratio aspect to program fee strength. Program Fee Potential Based on Basic Tier TV Network Loyalty Share Company Program Fees, 2014E % Share % of loyalty-share (Oct. 2014) Potential Fees, based on loyaltyshare + / - % CBS $ % 8.7% $3, % Scripps Networks $ % 6.7% $2, % Discovery $1, % 8.7% $3, % AMC Networks $ % 5.4% $2, % A&E $1, % 8.0% $3, % Other $5, % 13.1% $5, % Time Warner $4, % 8.7% $3, % Comcast/NBCU $5, % 11.6% $4, % Viacom $3, % 7.9% $3, % 21st Century Fox $7, % 10.6% $4, % Disney $9, % 10.5% $4, % Industry Total $40, % 100.0% $40,797 Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan Substantial Interest in Online Apps We found substantial interest in accessing TV networks via apps, led again by the broadcast networks, and with ESPN the leader among cable networks, soundly topping RSNs, perhaps illustrating the depth of content on ESPN s well-regarded app, versus the thinner local game-specific content and lack of apps for most RSNs. In general, this is supportive of the notion of substantial potential consumer interest in authenticated TV everywhere architectures with apps tethered to traditional multichannel bundles, or untethered over-the-top apps tied to network brands. Page 7

8 Interest in Online Bundle Some companies, such as Sony and Dish Network, are planning to launch online subscription TV packages, which, for a monthly fee similar to or less than the cost of a standard cable or satellite TV subscription, would offer online access to a package of TV networks. Would you be interested in such an online bundle? NBC TV station CBS TV station ABC TV station FOX TV station ESPN History Channel Discovery Channel HBO AMC A&E Network TNT FX The Weather Channel National Geographic Channel RSNs Average USA Food Network TBS Syfy Showtime Comedy Central Travel Channel Animal Planet Fox Sports 1 HGTV Fox News Channel Investigation Discovery Starz Lifetime Science Channel TV Land CNN/HLN Disney Channel TLC TruTV ABC Family Cartoon Network/Adult Swim CW TV station Hallmark Channel Nickelodeon Spike Bravo MSNBC E! Entertainment TV CNBC MTV Military Channel Nick Jr. FYI VH1 Oxygen OWN WeTv The HUB BET CMT "Get Country" Sprout 24% 25% 26%27%29% 23% 20% 22% 22% 23% 23% 20% 33% 34%35% 33% 32% 31% 31% 31% 32% 32% 31% 30% 30% 30% 29% 29% 60% 61%64% 60% 48% 48%51% 47% 47% 43% 41% 42% 43% 41% 39% 40% 40% 36% 37% 38% 39% 36% 35% Avg. 34% 0% 10% 20% 30% 40% 50% 60% 70% Survey Highlights Potential for á la Carte Over the past few weeks, á la carte structures have risen in prominence as an issue for the industry because of announcements by Time Warner of plans for an untethered HBO app next year and from CBS for a subscription-based app. Many, reasonably, wonder if this is a trend, and, if an era of Page 8

9 % of respondents loyal to at least 1 TV net 2014 FBR CAPITAL MARKETS & CO. unbundled access to TV networks is upon us, if other networks follow this lead. Our own view is that there is probably meaningful consumer interest in á la carte access. Our analysis suggests that á la carte could be an economically viable outcome for content providers. To test this hypothesis, we utilized our loyalty results to derive the subscription price and revenue threshold necessary for a content provider to charge in order to be no worse off than under the current bloated-bundle distribution model. As the analysis below demonstrates, if half of all consumers could maintain what they really want and save money, while the networks revenues are at least no worse off, this could work. Of course, some consumers would have to pay more. But there is clearly an affluent consumer niche willing to buy more subscription content. To derive the appropriate pricing threshold for an unbundled offering, we calculated the monthly fee that networks would want to charge by dividing a network s affiliate, retransmission, and advertising revenues by its total count of loyal households, as determined by our survey. We also made a few assumptions: (1) We assumed that, in an á la carte world, consumers would only choose to subscribe to those networks they are loyal to in other words, that they would only discretely pay for those networks that they said they would cancel or switch TV service providers to maintain; and (2) We assumed that TV network companies would want to charge a fee to those consumers that would allow them to recoup all of their affiliate, retransmission, and advertising revenues, even if all consumers moved to the á la carte model. Among our respondents, 31% were not loyal to any network, the average count of networks people were loyal to was nine, the median six, and the standard deviation approximately 11. Number of National Basic Networks Consumers Are Loyal To 7% 6% 5% 4% Loyal to 0 Networks: 31% Median: 6 Average: 9 St. Dev % 2% 1% 0% number of basic networks Loyal To Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan The ARPU per month was calculated by using SNL Kagan s estimate for 2014 affiliate and advertising revenues for each network. We allocated Kagan s estimate for industry retransmission revenues equally between the four major broadcast networks. We calculated loyal households for a network by multiplying Kagan s estimate of pay TV households by a network s loyalty share. Dividing the revenues by loyal households resulted in monthly ARPUs ranging from a high of nearly $18 at ESPN to $0.14 at the Military Network. The cost to obtain all of these basic tier networks would be nearly $188 per month. Page 9

10 Network 2014 FBR CAPITAL MARKETS & CO. Total ARPU Required for Loyalists to Cover Affiliate/Retrans + Advertising Revenues ESPN NBC CBS Nick ABC TNT FOX MTV USA Fox News TBS CNN/HLN FX Disney Channel Discovery Bravo Spike Cartoon Network ABC Family Lifetime CNBC VH1 A&E History BET AMC FS1 Food Network HGTV Comedy Syfy E! TLC CW MSNBC Tru TV Own TV Land WeTV Oxygen ID National Geographic Animal Planet Nick Jr. Travel Hallmark CMT Weather FYI Science Sprout HUB Military $17.78 $9.68 $9.61 $8.13 $8.07 $7.73 $7.41 $6.99 $6.11 $5.75 $5.72 $4.76 $4.02 Loyal to 0 TV networks: 31% $3.82 Total for all TV networks: $ $3.92 Average: $3.54 $3.78 $3.77 $3.74 $3.37 $3.29 $3.25 $3.13 $3.13 $3.04 $2.98 $2.79 $2.72 $2.71 $2.58 $2.56 $2.37 $2.27 $2.16 $2.12 $2.09 $1.68 $1.68 $1.55 $1.54 $1.49 $1.48 $1.38 $1.33 $1.27 $1.23 $1.03 $1.00 ARPU Required for "Loyalists" to Cover Affiliate/Retrans Fees $0.99 ARPU Required for "Loyalists" to Cover Advertising Revenues $0.78 $0.69 $0.57 $0.38 $0.14 $0 $5 $10 $15 $20 ARPU Per Month Per Loyalist Hallmark Travel Nick Jr. ID Oxygen WeTV TV Land Own Tru TV MSNBC CW TLC E! Syfy Comedy HGTV FS1 AMC BET History A&E VH1 CNBC Lifetime Spike Bravo FX CNN/HLN TBS USA MTV FOX Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan Page 10

11 % of respondents loyal to at least 1 TV net 2014 FBR CAPITAL MARKETS & CO. The majority of ESPN s ARPU is driven by affiliate fees, at nearly $14 per month. The total cost of affiliate and retransmission fees for all of these networks is nearly $88 per month. The bulk of the nearly $7 to $10 total ARPUs for broadcast networks is from advertising. This is interesting, because, in an á la carte world, we suppose it is possible that a meaningful percentage of, and perhaps nearly all, ad revenues could be sustained, with higher CPMs for targeting mitigating the impact of lower audiences, or that audiences might not decline much, because the loyalists are the main people watching anyway. This would suggest that ARPUs could be set lower than we assume to break even. We then went across each respondent and tallied up the monthly ARPU for each respondent to maintain all of the networks they said they were loyal to. Again, 31% did not want any network, so we assume they don t subscribe to anything. The average cost for the nine networks on average that other respondents were loyal to was nearly $37 per month; the median was $28. That is well below the nearly $93 average ARPU for a multichannel video subscription in 2014, as estimated by SNL Kagan. Fees per Loyalist Required to Cover National Basic Tier Affiliate/Retrans + Advertising Revenues 3% 2014E Avg Video ARPU $ % 2% 1% Loyal to 0 TV networks: 31% Median: $27.64 Average: $36.59 St. Dev. $ % 0% $180 $170 $160 $150 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Source: FBR Research, ClearVoice Research, LLC, and SNL Kagan Total ARPU per loyalist to pay for channels loyal to Page 11

12 Potential Niche for Premium Network Stand-Alone Apps We estimated loyalty for premium networks HBO, Showtime, and Starz by multiplying the percent of respondents who said they had the networks by the percent who said they would cancel or switch to maintain them. This resulted in loyalty of 21% for HBO, for Showtime, and for Starz. Among respondents, 32%, 26%, and 24%, respectively, expressed interest in an untethered app from HBO, Showtime, and Starz, respectively; 7% would be willing to pay $15 per month or more for such apps. Premium Network Loyalty 38% HBO 55% 21% % of Respondents who subscribe to premium network Showtime 32% 50% Yes, I definitely would cancel or switch 31% Calculated loyalty share (subs % x loyalty %) Starz 43% 0% 10% 20% 30% 40% 50% 60% Interest in Over-the-Top (OTT) Premium Network Service Interested in online app or video service separate from Pay TV service? HBO 32% Showtime 26% Starz 24% 0% 5% 10% 15% 20% 25% 30% 35% Page 12

13 Willingness to Pay for Over-the-Top (OTT) Premium Network Service How much would you be willing to pay per month per app? $5 or less 82% $10 11% $15 4% $20 or more 3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Page 13

14 Regional Sports Networks We calculated a 41% national loyalty level for regional sports networks by averaging loyalty across the 36 RSNs we covered in our survey. While no RSN has national coverage, nearly all multichannel homes have RSNs on their basic tier, so we found the averaging approach to be a reasonable proxy for the group. TV Network Loyalty Index Regional Sports Networks (RSNs) Altitude Sports & Entertainment New England Sports Network Prime Ticket Comcast SportsNet Washington Root Sports Northwest SportSouth YES Network FOX Sports Tennessee FOX Sports Wisconsin SportsNet New York Root Sports Pittsburgh FOX Sports Detroit Sun Sports Time Warner Cable SportsNet LA Comcast SportsNet California Root Sports Rocky Mountain Mid-Atlantic Sports Network FOX Sports Ohio FOX Sports North Comcast SportsNet Northwest Comcast SportsNet New England FOX Sports Midwest SportsTime Ohio Comcast SportsNet Chicago FOX Sports South Comcast/Charter Sports Southeast Comcast SportsNet Philadelphia Comcast SportsNet Bay Area Comcast SportsNet Houston FOX Sports Arizona MSG -- Madison Square Garden Network FOX Sports Southwest Time Warner Cable SportsNet/Deportes FOX Sports West FOX Sports Carolinas FOX Sports Florida 30% 57% 49% 47% 46% 46% 46% 46% 45% 45% 44% 44% 42% 42% 41% 41% 40% 40% 40% 40% 40% Avg. 41% 40% 39% 39% 39% 39% 38% 38% 38% 38% 37% 37% 37% 37% 36% 35% 0% 10% 20% 30% 40% 50% 60% % of respondents that would cancel or switch if network dropped Page 14

15 FX Gains in General Entertainment We found loyalty for general entertainment networks in this survey to be 25%, within the past range. In this group, FX network stands out as a gainer, with a 500-bp rise in loyalty from the last survey to 26%. AMC s loyalty, by contrast, fell 200 bps to 24%. General Entertainment Loyalty % cancel or switch if network dropped TNT FX USA AMC TBS 21% 24% 22% 25% 26% 23% 26% 26% 24% 26% 27% 20% 22% 22% 25% 23% 27% 27% 29% 26% Oct Avg. 25% Aug Avg. 24% Dec Avg. 26% May 2012 Avg. 23% 0% 5% 10% 15% 20% 25% 30% 35% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 15

16 In Kids, Nick Slips, HUB Grows Gains In kids networks, total average loyalty near 15% was near the past range. But within the group, Nickelodeon has slipped from a to 20% level in 2012, to now. The Disney Channel had a similar trend. But The Hub (now Discovery Family) has grown from 10% to. Kids Networks % cancel or switch if network dropped The HUB Nick Jr. Cartoon Network/Adult Swim Disney Channel Nickelodeon 10% 10% 11% 12% 15% Oct Avg. 15% Aug Avg. 15% Dec.2012 Avg. May 2012 Avg. 20% 20% 20% 0% 5% 10% 15% 20% 25% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 16

17 Gains in Female Nets Driven by OWN and WE In female networks, average loyalty rose 200 bps to, fueled by gains at OWN and WE. Female-Focused Networks % cancel or switch if network dropped Lifetime TLC Bravo OWN Oxygen WeTV 9% 10% 10% 12% 11% 10% 11% 11% 12% 20% 20% 15% 14% Oct Avg. Aug Avg. 14% Dec Avg. 15% May 2012 Avg. 0% 5% 10% 15% 20% 25% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 17

18 Strengthening of News In news networks, Fox News leads in loyalty, at 23%, but the group enjoyed a 200-bp rise in average loyalty to 20%, fueled by gains at Fox, MSNBC, and CNN. News Networks % cancel or switch if network dropped Fox News Channel 23% 21% 21% MSNBC 14% Oct Avg. 20% Aug Avg. Dec Avg. May 2012 Avg. CNN/HLN 15% 0% 5% 10% 15% 20% 25% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 18

19 Steady at Disney Disney s loyalty average at 28% is driven by ABC at 42% and ESPN at 36%. Disney TV Network Loyalty Index % cancel or switch if network dropped ABC TV station 42% 42% 45% 43% ESPN Disney Channel ABC Family 20% 36% 33% 35% 34% Oct Avg. 28% Aug Avg. 28% Dec Avg. 30% May 2012 Avg. 29% 0% 10% 20% 30% 40% 50% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Disney s half-owned A&E networks had 20% average loyalty, within past ranges, led by History. A&E TV Network Loyalty Index % cancel or switch if network dropped History Channel 29% 27% 29% 27% A&E Network 20% 21% 26% 26% Lifetime FYI 12% 11% 20% Oct Avg. 20% Aug Avg. 21% Dec Avg. 22% May 2012 Avg. 0% 5% 10% 15% 20% 25% 30% 35% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 19

20 At Discovery, OWN and ID Rise; Flagship Slips Discovery s flagship channel had a 300-bp decline in loyalty. But that was offset by rises at OWN and Discovery ID, pushing total average loyalty up 100 bps to. Discovery Communications TV Network Loyalty Index % cancel or switch if network dropped Discovery Channel TLC Investigation Discovery Science Channel Animal Planet OWN Military Channel The HUB 20% 15% 14% 15% 15% 15% 14% 12% 11% 9% 14% 11% 12% 12% 10% 10% 11% 25% 28% 29% 29% Oct Avg. Aug Avg. Dec Avg. May 2012 Avg. 15% 0% 5% 10% 15% 20% 25% 30% 35% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 20

21 FX and Sports Fuel Fox Fox had a 300-bp rise in average loyalty to 27%, fueled by rises at Fox broadcast, FX, and Fox Sports. 21st Century Fox TV Network Loyalty Index % cancel or switch if network dropped FOX TV station FX Fox News Channel Fox Sports 1 National Geographic Channel 10% 10% 26% 21% 24% 22% 23% 21% 21% 22% 21% 21% 22% 21% 41% 37% 41% 38% Oct Avg. 27% Aug Avg. 24% Dec Avg. 24% May 2012 Avg. 22% 0% 10% 20% 30% 40% 50% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 21

22 Steady at Time Warner Time Warner s average loyalty of 21% was within past ranges, led by TNT and TBS. Time Warner TV Network Loyalty Index % cancel or switch if network dropped TNT TBS CNN/HLN TruTV Cartoon Network/Adult Swim 15% 20% 27% 27% 29% 25% 22% 22% 25% 23% Oct Avg. 21% Aug Avg. 20% Dec Avg. 22% May 2012 Avg. 20% 0% 10% 20% 30% 40% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 22

23 Viacom in Past Ranges Viacom s average loyalty at 15% was up from last year but close to previous years, helped by improvements at TV Land, Spike, and BET. Viacom TV Network Loyalty Index % cancel or switch if network dropped Comedy Central Nickelodeon TV Land MTV Nick Jr. 14% Oct Avg. 15% Aug Avg. Dec. 212 Avg. 15% May 2012Avg. 15% Spike 15% VH1 BET CMT "Get Country" 14% 14% 0% 5% 10% 15% 20% 25% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Page 23

24 CBS Holds Strong CBS s average loyalty at 46% was up from last year and within the ranges of previous years, while average loyalty of to the CW Network was similar to previous years. CBS TV Network Loyalty Index % cancel or switch if network dropped CBS TV station CW TV station 15% 46% 44% 48% 43% Oct Avg. 31% Aug Avg. 30% Dec Avg. 32% May 2012 Avg. 30% 0% 10% 20% 30% 40% 50% 60% Yes, I would cancel or switch (Oct. 2014) Yes, I would cancel or switch (Aug. 2013) Yes, I would cancel or switch (Dec. 2012) Yes, I would cancel or switch (May 2012) Respondent Profile Charts The charts below provide more detail on our respondents, illustrating that their use of Netflix, major pay TV service providers, and demographic profile is near national averages. Subscriptions to Video Services Which of the following video services do you subscribe to? None of the Above 42.5% Netflix 31.8% Amazon Prime Video 16.4% Hulu Plus 9.3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Page 24

25 Subscriptions to Pay TV Providers Which of the following cable providers do you subscribe to? Comcast 21.5% DirecTV 17.1% Time Warner Cable 12.6% Dish Network AT&T U-verse Verizon Fios 8.3% 10.5% 9.8% Other 6.7% Cablevision Cox Charter 4.2% 3.8% 4.6% Suddenlink 0.9% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Page 25

26 Survey Demographics versus U.S. Census Gender Age Group Region Income Race Survey Census Male 48.6% 49.1% Female 51.4% 50.9% TOTAL 100% 100% % 13.1% % 17.5% % 17.5% % 19.2% % 15.6% % 17.2% TOTAL 100% 100% Midwest 20.6% 21.7% Northeast 21.7% 17.9% South 38.3% 37.2% West 19.0% 23.3% TOTAL 100.0% 100.0% <$25K 18.6% 24.7% $25-$39K 17.0% 16.8% $40-$49K 10.2% 8.9% $50-$74K 18.7% 17.7% $75-$99K 11.5% 11.4% $100-$ % 7.6% $125-$149K 6.4% 4.5% $150K+ 9.1% 8.4% TOTAL 100.0% 100.0% White/Caucasian 73.2% 72.4% African American 8.1% 12.6% Asian 4.7% 4.8% Native American 0.8% 0.2% Pacific Islander 0.1% 0.9% Other 0.7% 6.3% 2 or more races 0.0% 2.8% Prefer not to answer 0.5% N/A Total 100.0% 100.0% Ethnicity Hispanic Origin 12.0% 16.3% Page 26

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28 Options transactions are not suitable for all investors. This brief statement does not address all of the risks or other significant aspects of entering into any particular transaction. Tax implications are an important consideration for options transactions. Prior to undertaking any trade you should discuss with your preferred tax, ERISA, legal, accounting, regulatory, or other advisor how such particular trade may affect you. Opinion with respect to options is distinct from fundamental research analysis. Opinion is current as of the time of publication, and there should be no expectation that it will be updated, supplemented, or reviewed as information changes. We make no commitment to continue to follow any ideas or information contained in this section. Analysis does not consider the cost of commissions. Research personnel may consult Options Sales and Trading personnel when preparing commentary concerning options. Supporting documentation is available upon request. Please ensure that you have read and understood the current options risk disclosure document before entering into any options transactions. The options risk disclosure document can be accessed at the following Web address: optionsclearing.com/about/publications/character-risks.jsp. If this link is inaccessible, please contact your representative. Risks Some options strategies may be complex, high risk, and speculative. There are potentially unlimited combinations of hedged and unhedged options strategies that expose investors to varying degrees of risk. Generally, buyers establishing long options positions risk the loss of the entire premium paid for the position, while sellers establishing short options positions have unlimited risk of loss. There are a number of commonly recognized options strategies, that expose investors to varying degrees of risk, some of which are summarized below: Buying Calls or Puts--Investors may lose the entire premium paid. Selling Covered Calls--Selling calls on long stock position. Risk is that the stock will be called away at strike, limiting investor profit to strike plus premium received. Selling Uncovered Calls--Unlimited risk that investors may experience losses much greater than premium received. Selling Uncovered Puts--Significant risk that investors will experience losses much greater than premium income received. Buying Vertical Spreads (Calls--long call and short call with higher strike; Puts--long put and short put with lower strike) Same expiration month for both options. Investors may lose the entire premium paid. Buying Calendar Spreads (different expiration months with short expiration earlier than long). Investors may lose the entire premium paid. Selling Call or Put Vertical Spreads (Calls--short call and long call with higher strike; Puts--short put and long put with a lower strike, same expiration month for both options.) Investors risk the loss of the difference between the strike prices, reduced by the premium received. Buying Straddle--Buying a put and a call with the same underlying strike and expiration. Investors risk loss of the entire premium paid. Selling Straddle--Sale of call and put with the same underlying strike and expiration.) Unlimited risk that investors will experience losses much greater than the premium income received. Buying Strangle--Long call and long put, both out of the money, with the same expiration and underlying security. Investors may lose the entire premium paid. Selling Strangle--Short call and put, both out of the money, with the same expiration and underlying security. Unlimited risk of loss in excess premium collected. Important Information about Convertible & Other Fixed-Income Securities and Financial Instruments: This discussion is directed to experienced professional investors with a high degree of sophistication and risk tolerance. Opinion with respect to convertible, other fixed-income securities and other financial instruments is distinct from fundamental research analysis. Opinion is current as of the time of publication, and there should be no expectation that it will be updated, supplemented, or reviewed as information changes. We make no commitment to continue to follow any ideas or information contained in this section. Research analysts may consult Credit Sales and Trading personnel when preparing commentary on convertible and fixedincome securities and other financial instruments. FBR may be a market maker in the company s convertible or fixed-income securities. FBR Capital Markets LT, Inc. may be a market maker in financial instruments that are not securities. Securities and financial instruments discussed may be unrated or rated below investment grade, may be considered speculative, and should only be considered by accounts qualified to invest in such securities. Page 28

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