July 31, Streamers Weigh on TV Outlook

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1 July 31, 2015 Media Streamers Weigh on TV Outlook We estimate primetime upfront dollars for the '15/'16 season will fall mid-single digits, as ratings trends offset modest pricing growth. While online video continues to evolve, Netflix and YouTube's growth highlight pressure on TV advertising as consumers shift time spent to streaming video. Trimming cable TV, raising online and overall U.S. ad growth: We see total video ad spending growth of ~5% over the next 3 years ('15-'18E), but 60% of that growth is online video, led by YouTube. YouTube's opening up of its top ad inventory - YouTube Preferred - to buying through DoubleClick Bid Manager makes it easier for more advertisers to tap into this TV-like inventory. Its Trueview ad product also allows advertisers to only pay for ad impressions. While YouTube is not necessarily cheaper than TV on a demoadjusted basis, and viewability online is generally an issue, it has and continues to gain traction with agencies and advertisers and its usage growth against TV ratings declines is helping it take share. While FB video is ramping, we do not believe it is yet taking dollars from TV. Upfront volumes down as expected, with ratings declines the primary issue, but pricing growth better than feared: It is a testament to TV's position with advertisers that pricing grew ~3% YoY and was perhaps slightly better than expected. In broadcast, we believe ABC led in pricing at +4-5%, with Fox down ~1%. We estimate ratings guarantees for the '15/'16 TV upfronts were down high-single digits YoY across broadcast and cable from last year's upfront, driven by continued C3 ratings erosion into this year. For the '14/'15 season, C3 ratings were down 8% at broadcast and 11% at the Top 50 cable networks. This ratings erosion is occurring within the context of Netflix usage of ~2 hours per subscriber per day (up +30% YoY) and aggregate time spent on YouTube up 60% YoY globally, with YouTube's average mobile viewing sessions now over 40 minutes. Yes, TV measurement is an issue, but we are not confident a fix is coming soon. Is this all priced in? We continue to see the risk skewed to the downside on estimates across the TV-centric media companies. On valuation, however, multiple compression has been fairly significant (excluding DIS/TWX) and multiples now lag the market, providing some hope for valuation support. We adjust our 12 month PT's on several stocks (lower VIAb and SNI to $60 and $64 respectively, DIS up to $120 and TWX up to $93 - see Bull, Bear, Base Scenarios and Valuation Methodology section for more details). Cautious industry view, favor FOXA, CBS, DWA, MSG, and STRZA: We continue to recommend owning NFLX and FB (co-covered with Brian Nowak). Within traditional media, we see FOXA and CBS as outperforming in large-cap, and see DWA, MSG, and STRZA as more pure-content plays and/or benefiting from industry consolidation. MORGAN STANLEY & CO. LLC Benjamin Swinburne, CFA [email protected] Brian Nowak, CFA [email protected] Ryan Fiftal [email protected] Thomas Yeh [email protected] Maria Ripps, CFA [email protected] Media North America IndustryView Table of Contents: Changes to our US Advertising Forecast YouTube and Netflix Crash the Upfront Party Broadcast Networks Upfront Results Cable Networks Upfront Results Bull, Bear, Base Scenarios and Valuation Methodology Prior vs. Current Estimates Exhibit 1: In 2016, FB will pass DIS in US Ad Revenue, YouTube will pass VIA and TWX in US Ad Revenue in '17 Cautious Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 Changes to our US Advertising Forecast We lower our US traditional TV ad growth for 2016 ~40bp to +3.8% YoY: Based on tepid TV upfront results for the 2015/2016 season and continued ratings erosion through mid-2015, we have lowered our TV advertising forecast to down 1.7% YoY in 2015 (vs. our prior estimate for down 1.5%). We now forecast +3.8% ad growth in traditional TV during 2016E (down 40bp vs. prior), including a bp incremental tailwind from the 2016 Summer Olympics and political ad spending. We have layered in lower domestic ad growth across our individual company estimates. Our TV upfronts analysis implies total primetime upfront dollars were down mid-single digits, with low-single digit CPM growth offset by high-single digit declines in ratings guarantees (refer to the Broadcast and Cable Networks Upfronts sections below for additional details by company). Exhibit 2: Changes to our US Advertising Forecast we see ad growth of +4.6% in 16 Source: RAB, O AAA, NAAA, PIB, CMAG, IAB, Company data, Morgan Stanley Research 2

3 As we expect modestly higher GDP growth in 2016 vs. 2015, we are forecasting underlying ad revenue growth to accelerate modestly, including TV. We have total national TV moving from flat to up 1% excluding the impact of the Olympics (see below): Exhibit 3: Our individual company estimates reflect tepid TV advertising to continue Exhibit 4: Nominal US advertising spend near prior peak levels, highlighting we are late-cycle Exhibit 5: We forecast overall US advertising spend below GDP growth in 2015, and slightly ahead in 2016, aided by Olympics and political spend Source: RAB, OAAA, NAAA, PIB, CMAG, IAB, Company data, Morgan Stanley Research 3

4 Exhibit 6: DVR+VOD growth moderating per Nielsen: Time-shifted viewing of traditional TV growth appears to be slowing, not encouraging for TV Everywhere initiatives Exhibit 7: Live traditional TV viewing has declined more steeply over the last year Source: Nielsen Audience Report, Morgan Stanley Research Source: Nielsen Audience Report, Morgan Stanley Research Exhibit 8: Spending by vertical: Pharma spending, likely targeting older consumers, has helped TV grow Source: Kantar, Morgan Stanley Research 4

5 Exhibit 9: US Advertising Forecast Source: Morgan Stanley Research, Magna, RAB, O AAA, IAB, NAA, & PIB 5

6 YouTube and Netflix Crash the Upfront Party The evolution of online video continues: Netflix's 2Q15 subscriber momentum highlights the continued global adoption of ad-free subscription online video, and recent press reports (including the WSJ) suggest that Hulu is also exploring a premium ad-free option. While there is clear consumer interest for streaming video content without ads, we see solid growth in online video ad spending as well, evidenced by significant acceleration in both usage and revenue growth at YouTube. We raise our US online video advertising outlook to $6bn in 2015 and ~$8.2bn in 2016 based on continued growth in user time spent. Our estimates imply online video now represents nearly 15% of aggregate time spent and ~10% of total video ad spend in 2015E. Exhibit 10: We forecast time spent watching Netflix growing from ~2 hours per sub per day to ~3.5 hours per sub per day in 2025E Exhibit 11: Youtube's revenue growth is accelerating Exhibit 12: We estimate online video represents ~10% of video ad spend Exhibit 13: We estimate online video represents ~15% of time spent watching video 6

7 Exhibit 14: We see total video ad spend growing ~5% annually over the next few years, with over 60% of the growth from online video Exhibit 15: Online video advertising spend continues to take share from cable and broadcast 7

8 Navigating a complex video landscape: We estimate TV remains the bulk of existing video ad inventory, representing over 95% of ad impressions by our estimates. As we highlighted in our recent report with our Internet analyst Brian Nowak, Riding the Mobile and Video Waves into 2Q Results, the online video ecosystem outside of YouTube continues to be quite nascent, particularly as issues like ad formats, attribution, pricing models, and viewability standards continue to evolve. YouTube s TrueView and Google Preferred are winning with advertisers because they can buy scale with a guarantee, or only pay for ads that are seen. Facebook on the other hand, is allowing mobile display to morph into video, which will potentially take other display dollars more rapidly at first than TV. Exhibit 16: Marketers face an increasingly complex video ad landscape Exhibit 17: Facebook will pass Disney in 2016 in U.S. advertising revenue, and YouTube will pass VIA and TWX in US Ad Revenue in 2017 ; Note: Includes video/display/other traditional, excludes search related revenue 8

9 Broadcast Networks Upfront Results - ABC Leads in Pricing, Time Shifting Benefiting Networks vs. Cable We estimate broadcast network upfront CPMs up 3% YoY on average during the 2015/2016 season, with aggregate upfront dollars down low single digits based on lower ratings guarantees. Based on our estimates, ABC leads the Big 4 broadcast networks with +4-5% CPM growth and low-single digit declines in ratings guarantees. Primetime ratings at ABC have generally outperformed broadcast peers during the last year, roughly flat YoY during the September to May timeframe (including the benefit of comping the Winter Olympics at NBC in February 2014). Given FOXA's ratings underperformance relative to peers, we estimate primetime upfront sales down ~8% YoY based on lower CPMs and high-single digit declines in YoY ratings guarantees. Exhibit 18: Across the Big 4 broadcast networks, we estimate total upfront dollars down ~3% YoY, with slight increases in CPMs offset by lower ratings guarantees 9

10 Exhibit 19: Broadcast C3 ratings for 2014/2015 season under pressure Source: Nielsen, Morgan Stanley Research. Note: CBS excludes September/O ctober to adjust for NFL Thursday benefit. FO X and NBC exclude February ratings to adjust for Superbow l shift and NBC Olympics. Nielsen ratings are based on a w eighted average of ratings for non -syndicated programming. Fox s non -primetime programming includes more syndicated programming, causing TD ratings to be higher than other broadcast n ets. Broadcast networks continue see greater lift from time-shifted viewing: Despite broad-based ratings pressure across both broadcast and cable networks, we note that broadcast networks represent 60-65% of timeshifted viewing on traditional TV. Nielsen ratings suggest broadcast C3 ratings reflect a ~30% lift from live-only commercial ratings during the '14/'15 season, up from the +25% lift in the prior season. As we highlighted in our industry downgrade 2015 Media Outlook - Pressure in the System, time-shifting trends are likely having outsized impact on cable networks that historically benefited from viewership of TV re-runs. Over the last three seasons, broadcast C3 ratings share has stabilized vs. the Top 50 cable networks. 10

11 Exhibit 20: During S14/15, C3 ratings lifted broadcast live viewing by nearly 30% Sou rce: Nielsen Exhibit 21: On a C3 basis, broadcast share of ratings has stabilized over past 3 seasons Source: Nielsen, Morgan Stanley Research. Note: Based on top 50 cable netw ork ratings and Broadcast Netw orks 11

12 Cable Networks Upfront Results Less Bad Than Feared We expect low-single digit pricing growth in the cable network upfronts, leading to total cable upfront dollars down mid-single digits YoY based on double digit declines in ratings guarantees. We note that AMCX likely benefits from a position of relative strength given its growing slate of higher-cpm original series at its flagship network, including inventory for the upcoming series Fear the Walking Dead. On a primetime upfront dollar basis, we estimate pressure at NBCU and Viacom's cable networks based on ratings underperformance during the prior season. Viacom likely benefited from increasing non-nielsen dependent monetization and NBC's overall portfolio likely benefited from late-night, sports, and Olympics inventory. Based on our revised individual company estimates, we lower our US national cable advertising growth in 2016 to 2.2% (vs. +3.3% prior). Cable ratings erosion remains a key risk to additional downward estimate revisions, with C3 PT18-49 rating for the Top 50 cable networks remaining down double digits YoY through June Exhibit 22: We estimate primetime cable upfront dollars down 5% YoY 12

13 Exhibit 23: Season 14/ 15 C3 cable network ratings Source: Nielsen. Note: Ratings show n on a broadcast season, from September through May; VIA ratings based on key demo ratings for Nick (2-11) an d MTV (12-34) an d demos for oth er n etw orks MTV based on live TD ratin gs Total day ratings continue to underperform vs. primetime, as audiences shift towards high-affinity content: Since the 2009/2010 season, total day C3 ratings have declined more severely vs. primetime C3 ratings at the cable networks. The relative underperformance of total day ratings potentially reflects the ongoing shift in audience behavior, particularly as time spent watching TV increasingly skews towards on-demand content consumption (DVR, VOD, NFLX streaming, etc.). Exhibit 24: Since 09, cable PT ratings have outperformed total day Source: Nielsen, Morgan Stanley Research estimates 13

14 Exhibit 25: Top cable networks during 14/ 15 season Exhibit 26: Largest YoY ratings declines within Top 50 cable networks Source: Nielsen. Note: Based on Top 50 cable networks ranked by average monthly gross rating point (C3 PT 18-49); Season includes ratings from September 2014 to May 2015 Source: Nielsen. Note: Based on Top 50 cable networks ranked by average monthly gross rating point (C3 PT 18-49); Season includes ratings from September 2014 to May

15 Bull, Bear, Base Scenarios and Valuation Methodology For Discovery: Our $32 price target represents ~15x forward EPS and ~11x forward EBITDA, similar to cable network peers. Key risks include macro slowdown weighing on ad revenue growth more than our forecast and ratings underperformance leading to significant programming investment. Upside risks include stronger than expected step-ups from affiliate contract renewals, strong ratings improvement and accelerated share repurchases. Exhibit 27: Discovery Bull, Bear, Base Scenarios 15

16 For Disney: Our $120 PT implies ~20x forward P/E, reflecting a premium relative to peers due to strong earnings growth outside of TV. Macroeconomic weakness would negatively affect DIS, particularly the Parks segment. Pay-TV cord-cutting remains a risk, given DIS ~$15 monthly rev per pay-tv HH. ESPN programming rights costs may grow more quickly than expected. Upside risks include improving consumer sentiment driving strength in advertising, theme parks, and consumer products. Exhibit 28: Disney Bull, Bear, Base Scenarios Morgan Stanley & Co. International plc ( Morgan Stanley ) is currently acting as financial advisor to Euro Disney S.C.A. ( Euro Disney ) in regards to the proposed recapitalization plan backed by The Walt Disney Company as announced on 6 October Euro Disney has agreed to pay fees to Morgan Stanley for its financial services, including transaction fees that are subject to the consummation of any resulting transaction. Please refer to the notes at the end of the report. 16

17 For Scripps Networks: Our $64 price target represents ~8.5x our base case forward EBITDA and ~12x fwd EPS. This is a slight discount to media peers, given SNI s higher ad exposure. Our base case estimates reflect the purchase of the remaining stakes Travel Channel from Cox. Risks: Ratings trends stagnate, leading to lower than expected ad growth. Capital structure remains at suboptimal levels. Exhibit 29: Scripps Networks Bull, Bear, Base Scenarios SNI Scenarios Base Case Bear Case Bull Case ($ millions) 2015E 2016E 2017E ($ millions) 2015E 2016E 2017E ($ millions) 2015E 2016E 2017E EPS $4.29 $5.14 $5.40 EPS $4.27 $4.65 $4.74 EPS $4.19 $6.54 $6.98 Growth % 12.1% 19.8% 5.0% Growth % 11.7% 8.9% 1.9% Growth % 9.5% 56.1% 6.7% Revenue 2,991 3,348 3,485 Revenue 2,988 3,309 3,408 Revenue 3,005 3,401 3,582 Growth % 12.2% 4.1% 4.1% Growth % 12.1% 3.0% 3.0% Growth % 12.7% 5.3% 5.3% Cost of Services 972 1,168 1,263 Cost of Services 967 1,213 1,307 Cost of Services 973 1,156 1,257 Growth % 24.8% 20.2% 8.1% Growth % 24.2% 25.5% 7.7% Growth % 24.9% 18.8% 8.8% SG&A SG&A SG&A Growth % 3.7% -0.2% 1.2% Growth % 3.6% -0.2% 0.7% Growth % 3.7% -0.2% 1.7% EBITDA 1,226 1,388 1,420 EBITDA 1,229 1,305 1,304 EBITDA 1,239 1,454 1,519 Growth % 9.3% 13.2% 2.3% Growth % 9.5% 6.2% 0.0% Growth % 10.5% 17.3% 4.4% Margin % 41.0% 41.5% 40.7% Margin % 41.1% 39.4% 38.3% Margin % 41.2% 42.7% 42.4% EBIT 1,108 1,255 1,291 EBIT 1,111 1,172 1,176 EBIT 1,121 1,321 1,390 Growth % 11.6% 13.3% 2.9% Growth % 11.8% 5.5% 0.3% Growth % 12.9% 17.8% 5.2% Margin % 37.1% 37.5% 37.1% Margin % 37.2% 35.4% 34.5% Margin % 37.3% 38.8% 38.8% Lifestyle Networks Lifestyle Networks Lifestyle Networks Total Revenue $2,651 $2,745 $2,849 Total Revenue $2,649 $2,707 $2,772 Total Revenue $2,666 $2,799 $2,946 Recurring EBITDA 1,291 1,356 1,359 Recurring EBITDA 1,293 1,274 1,244 Recurring EBITDA 1,304 1,423 1,458 EBITDA margin 48.7% 49.4% 47.7% EBITDA margin 48.8% 47.0% 44.9% EBITDA margin 48.9% 50.8% 49.5% Affiliate Revenue Growth 5.9% 7.0% 5.7% Affiliate Revenue Growth 5.5% 5.7% 4.3% Affiliate Revenue Growth 7.7% 7.6% 6.4% Core affil growth (ex-digital) 5.9% 6.2% 5.6% Core affil growth (ex-digital) 5.5% 4.9% 4.2% Core affil growth (ex-digital) 7.8% 6.8% 6.3% Advertising Revenue Growth 2.1% 2.0% 2.9% Advertising Revenue Growth 2.1% 0.6% 1.5% Advertising Revenue Growth 2.1% 3.9% 4.7% Other Items Other Items Other Items Share Repurchases $599 $200 $300 Share Repurchases $449 $180 $270 Share Repurchases $749 $50 $330 # Shares Repurchased # Shares Repurchased # Shares Repurchased Cash Spent on Programming 854 1,100 1,170 Cash Spent on Programming 843 1,076 1,132 Cash Spent on Programming 868 1,132 1,222 Cash spend growth (YoY) 17.7% 28.8% 6.4% Cash spend growth (YoY) 16.2% 27.6% 5.2% Cash spend growth (YoY) 19.7% 30.3% 8.0% Program amort. growth (YoY) 26.4% 7.7% 4.6% Program amort. growth (YoY) 25.7% 8.4% 4.0% Program amort. growth (YoY) 26.6% 7.6% 4.7% Gross Debt / EBITDA 3.0x 3.1x 2.9x Gross Debt / EBITDA 3.0x 3.3x 3.1x Gross Debt / EBITDA 4.2x 4.0x 3.7x Net Debt / EBITDA 2.5x 2.7x 2.4x Net Debt / EBITDA 2.3x 2.6x 2.3x Net Debt / EBITDA 4.0x 3.8x 3.4x Levered FCF / share $3.81 $4.35 $5.11 Levered FCF / share $4.18 $4.53 $5.16 Levered FCF / share $3.45 $5.26 $6.12 Current Trading Current Trading Current Trading Current Price $61.95 Current Price $61.95 Current Price $61.95 Fwd P/E 14.5x Fwd P/E 15.1x Fwd P/E 13.4x Fwd EV/EBITDA 8.7x Fwd EV/EBITDA 8.9x Fwd EV/EBITDA 8.3x Scenario Price $64 Scenario Price $54 Scenario Price $83 Implied Fwd P / E 12.2x Implied Fwd P / E 11.5x Implied Fwd P / E 12.3x Implied Fwd EV / EBITDA 8.4x Implied Fwd EV / EBITDA 7.9x Implied Fwd EV / EBITDA 10.0x 17

18 For Time Warner: Our $93 PT implies ~10x EV / 1yr fwd EBITDA, roughly in-line with the large-cap media peer average. Risks: Ratings weakness at Turner leads to below market advertising growth. Domestic affiliate renewal growth slower than expected. Capital returns slow meaningfully, leading to EPS downside. Over-the-top competitors significantly disrupt the premium network ecosystem, leading to HBO sub declines. Exhibit 30: Time Warner Bull, Bear, Base Scenarios TWX Scenarios Base Case Bear Case Bull Case 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E EPS $4.66 $5.73 $6.65 EPS $4.56 $5.23 $5.79 EPS $4.77 $6.34 $7.71 % growth 12% 23% 16% % growth 10% 15% 11% % growth 15% 33% 22% Revenue $29,023 $30,927 $32,617 Revenue $28,784 $30,219 $31,424 Revenue $29,266 $31,586 $33,671 % growth 6% 7% 5% % growth 5% 5% 4% % growth 7% 8% 7% Reported EBITDA $7,909 $9,154 $9,874 Reported EBITDA $7,778 $8,596 $9,017 Reported EBITDA $8,031 $9,797 $10,809 % growth 19% 16% 8% % growth 17% 11% 5% % growth 21% 22% 10% Adjusted OI $7,227 $8,421 $9,120 Adjusted OI $7,096 $7,869 $8,276 Adjusted OI $7,349 $9,059 $10,043 % growth 16% 17% 8% % growth 14% 11% 5% % growth 18% 23% 11% Reported EBIT $7,199 $8,421 $9,120 Reported EBIT $7,068 $7,869 $8,276 Reported EBIT $7,321 $9,059 $10,043 % growth 22% 17% 8% % growth 19% 11% 5% % growth 24% 24% 11% Margin (%) 24.8% 27.2% 28.0% Margin (%) 24.6% 26.0% 26.3% Margin (%) 25.0% 28.7% 29.8% Networks Networks Networks Turner Turner Turner Revenue $10,702 $11,730 $12,569 Revenue $10,647 $11,388 $11,910 Revenue $10,753 $11,976 $13,004 % Growth YoY 2.9% 9.6% 7.2% % Growth YoY 2.4% 7.0% 4.6% % Growth YoY 3.4% 11.4% 8.6% Adjusted OI $4,230 $4,854 $5,155 Adjusted OI $4,185 $4,497 $4,604 Adjusted OI $4,303 $5,264 $5,717 % Growth YoY 16.5% 14.8% 6.2% % Growth YoY 15.2% 7.4% 2.4% % Growth YoY 18.5% 22.3% 8.6% Domestic Ad Growth 2.7% 3.2% 0.2% Domestic Ad Growth 1.8% 0.4% -2.8% Domestic Ad Growth 3.5% 5.6% 2.7% Int'l Ad Growth -2.2% 4.0% 9.0% Int'l Ad Growth -2.9% 2.0% 6.0% Int'l Ad Growth -1.8% 6.1% 9.5% Domestic Affiliate Growth 4.4% 16.9% 11.9% Domestic Affiliate Growth 4.1% 13.8% 9.4% Domestic Affiliate Growth 4.7% 18.5% 12.9% Int'l Affiliate Growth -4.8% 10.8% 11.8% Int'l Affiliate Growth -5.0% 8.6% 8.5% Int'l Affiliate Growth -4.4% 11.8% 12.8% HBO HBO HBO Revenue $5,688 $6,131 $6,579 Revenue $5,659 $6,026 $6,386 Revenue $5,717 $6,297 $6,909 % Growth YoY 5.4% 7.8% 7.3% % Growth YoY 4.8% 6.5% 6.0% % Growth YoY 5.9% 10.1% 9.7% Adjusted OI $1,985 $2,286 $2,556 Adjusted OI $1,958 $2,193 $2,386 Adjusted OI $2,012 $2,413 $2,804 % Growth YoY 10.9% 15.2% 11.8% % Growth YoY 9.4% 12.0% 8.8% % Growth YoY 12.4% 19.9% 16.2% Studio Entertainment Studio Entertainment Studio Entertainment Revenue $13,801 $13,936 $14,362 Revenue $13,646 $13,670 $14,007 Revenue $13,965 $14,185 $14,658 % Growth YoY 10.2% 1.0% 3.1% % Growth YoY 8.9% 0.2% 2.5% % Growth YoY 11.5% 1.6% 3.3% Adjusted OI $1,527 $1,674 $1,805 Adjusted OI $1,468 $1,591 $1,701 Adjusted OI $1,549 $1,725 $1,869 % Growth YoY 22.4% 9.6% 7.9% % Growth YoY 17.6% 8.4% 6.9% % Growth YoY 24.1% 11.3% 8.4% Theatrical Rev Growth -1.1% 10.0% 4.2% Theatrical Rev Growth -1.8% 9.0% 4.2% Theatrical Rev Growth -0.4% 11.0% 4.2% Film HV Rev Growth 10.2% 2.0% 0.5% Film HV Rev Growth 4.6% -2.3% -3.8% Film HV Rev Growth 13.4% 4.5% 2.2% Television Rev Growth 12.1% -2.2% 3.9% Television Rev Growth 11.4% -2.3% 3.9% Television Rev Growth 13.8% -2.0% 4.0% Share Repurchases $3,890 $5,500 $5,500 Share Repurchases $3,390 $3,500 $4,350 Share Repurchases $4,890 $7,500 $7,500 Share Repurchase Price $85 $92 $99 Share Repurchase Price $82 $88 $95 Share Repurchase Price $88 $95 $102 Net Debt / EBITDA 2.73x 2.66x 2.70x Net Debt / EBITDA 2.72x 2.57x 2.62x Net Debt / EBITDA 2.81x 2.76x 2.86x Current Price $88.11 Current Price $88.11 Current Price $88.11 Fwd P/E 17.1x Fwd P/E 18.1x Fwd P/E 16.2x Fwd EV / EBITDA 10.9x Fwd EV / EBITDA 11.3x Fwd EV / EBITDA 10.5x Scenario Price Target $93.00 Scenario Price Target $74.00 Scenario Price Target $ Implied fwd P/E 15.1x Implied fwd P/E 13.5x Implied fwd P/E 16.7x Implied fwd EV / EBITDA 10.0x Implied fwd EV / EBITDA 9.0x Implied fwd EV / EBITDA 11.0x 18

19 For Viacom: Our $60 PT reflects 7-8x EV / 1yr fwd EBITDA, at the lower end relative to large-cap media peers given secular challenges. Risks include ratings improvement driving domestic advertising growth, further monetization of library content through online distribution agreements providing high incremental margins, and participation in industry consolidation. Exhibit 31: Viacom Bull, Bear, Base Scenarios 19

20 Company Prior vs. Current Estimates Exhibit 32: Discovery Prior vs. Current estimates 20

21 Exhibit 33: SNI Prior vs. Current estimates 21

22 Exhibit 34: Time Warner Prior vs. Current estimates 22

23 Exhibit 35: Viacom Prior vs. Current estimates 23

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Within the last 12 months, Morgan Stanley has received compensation for investment banking services from 21st Century Fox, CBS Corporation, Cinemark Holdings, Inc., Discovery Communications, Interpublic Group, Netflix Inc, OUTFRONT MEDIA INC, Regal Entertainment Group, Time Warner Inc., Viacom. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from 21st Century Fox, AMC Networks, Inc., CBS Corporation, Cinemark Holdings, Inc., Discovery Communications, Dreamworks Animation SKG, Inc., Interpublic Group, Lamar Advertising Co., Netflix Inc, Omnicom Group Inc., OUTFRONT MEDIA INC, Pandora Media Inc., Regal Entertainment Group, Scripps Networks Interactive, Starz, Time Warner Inc., Viacom, Walt Disney Co. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from AMC Networks, Inc., Cinemark Holdings, Inc., Discovery Communications, Interpublic Group, Lamar Advertising Co., Regal Entertainment Group, Time Warner Inc., Walt Disney Co. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: 21st Century Fox, AMC Networks, Inc., CBS Corporation, Cinemark Holdings, Inc., Discovery Communications, Dreamworks Animation SKG, Inc., Interpublic Group, Lamar Advertising Co., Netflix Inc, Omnicom Group Inc., OUTFRONT MEDIA INC, Pandora Media Inc., Regal Entertainment Group, Scripps Networks Interactive, Starz, Time Warner Inc., Viacom, Walt Disney Co. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: AMC Networks, Inc., CBS Corporation, Cinemark Holdings, Inc., Discovery Communications, Interpublic Group, Lamar Advertising Co., Netflix Inc, Regal Entertainment Group, Starz, Time Warner Inc., Walt Disney Co. Morgan Stanley & Co. LLC makes a market in the securities of 21st Century Fox, AMC Networks, Inc., CBS Corporation, Cinemark Holdings, Inc., Discovery Communications, Dreamworks Animation SKG, Inc., Interpublic Group, Lamar Advertising Co., Netflix Inc, Omnicom Group Inc., Pandora Media Inc., Regal Entertainment Group, Scripps Networks Interactive, Starz, Time Warner Inc., Viacom, Walt Disney Co. 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STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of June 30, 2015) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. 24

25 COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy % % 27% Equal-weight/Hold % % 23% Not-Rated/Hold 93 3% 9 1% 10% Underweight/Sell % 79 11% 13% TOTAL 3, Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at For Morgan Stanley specific disclosures, you may refer to Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of AMC Networks, Inc., CBS Corporation, Dreamworks Animation SKG, Inc., Interpublic Group, Netflix Inc, Omnicom Group Inc., Pandora Media Inc., Time Warner Inc., Viacom, Walt Disney Co. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. 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27 INDUSTRY COVERAGE: Media COMPANY (TICKER) RATING (AS OF) PRICE* (07/30/2015) Fiftal, Ryan AMC Networks, Inc. (AMCX.O) E (03/21/2014) $83.72 Cinemark Holdings, Inc. (CNK.N) E (04/23/2014) $39.17 Dreamworks Animation SKG, Inc. (DWA.O) O (11/26/2014) $24.47 Regal Entertainment Group (RGC.N) E (02/04/2015) $19.82 Starz (STRZA.O) O (01/20/2015) $40.90 The Madison Square Garden, Inc. (MSG.O) O (03/30/2015) $80.29 Swinburne CFA, Benjamin 21st Century Fox (FOXA.O) O (08/05/2014) $34.04 CBS Corporation (CBS.N) O (07/20/2009) $53.20 Discovery Communications (DISCK.O) E (07/20/2009) $29.67 Interpublic Group (IPG.N) E (01/11/2013) $21.22 Lamar Advertising Co. (LAMR.O) E (07/30/2014) $59.30 Netflix Inc (NFLX.O) O (06/17/2014) $ Omnicom Group Inc. (OMC.N) E (05/28/2014) $72.88 OUTFRONT MEDIA INC (OUT.N) E (07/30/2014) $24.84 Pandora Media Inc. (P.N) E (06/18/2014) $16.91 Scripps Networks Interactive (SNI.N) U (01/25/2013) $62.21 Time Warner Inc. (TWX.N) E (01/20/2015) $88.44 Viacom (VIAB.O) U (01/20/2015) $56.36 Walt Disney Co (DIS.N) E (09/19/2013) $ Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted Morgan Stanley 27