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Equity Research Industry Note October 2, 2013

Industry Update Media: Entertainment Barton Crockett 212-632-6625 3rd LCM network loyalty survey reaffirms content [email protected] leverage over distribution William Bird, CFA 212-632-6440 Highlights: Working with online survey specialist Clear Voice [email protected] Research, LLC, we've completed our third TV Network Loyalty Howard Ma Index, gauging networks' leverage to extract retransmission and 212-632-6012 affiliate fees from pay TV providers. Like before, we measure this [email protected] by asking over 2,000 consumers if they would cancel or switch Thomas Le, CFA 212-632-6852 pay TV providers if a network were dropped. Once again, we find [email protected] that content has sizable leverage. Average cancel intent across the group was little changed at 19%, with broadcast networks Companies Mentioned near or above 40%. ESPN at 33%, Discovery at 28%. We added Ticker Price Rating Price Target regional sports and premium networks to the survey and found CBS $55.76 BUY $61.00 they garner loyalty comparable to or higher than ESPN.

DIS $64.83 BUY $76.00 ■ While strong, seasonality lowered loyalty. We conducted DISCA $83.23 BUY $110.00 the survey over the week leading into Labor Day, a seasonally FOXA $33.98 BUY $42.00 slow period for TV that was further impacted by a high profile STRZA $29.02 NEUTRAL NM blackout of CBS-owned TV stations on Time Warner Cable. TWX $66.68 BUY $75.00 Yet average cancel intent across the group was little changed, 19% this time, vs. 20% in December 2012 and 19% in May VIAB $84.33 BUY $101.00 2012. Respondents were similar to national averages in key demographic categories. The survey has a margin of error of +/- 2%. ■ Broadcast, ESPN and Discovery retain loyalty leads. Broadcast networks retained their loyalty lead, topped by CBS at 44%, followed by NBC, ABC and Fox at 43%, 42%, and 37%, respectively. Average loyalty for RSNs was on par with ESPN's 33%. Premium nets garnered an average 38% cancel intent, but since only 33% on average subscribe, weighted average loyalty was 13%, topped by HBO at 17%. ■ Football bolstered CBS' leverage over Time Warner Cable. We asked Time Warner Cable subscribers if they would cancel or switch because of the CBS blackout, and 44% said they had or would, with 41% of those potential cancellers saying they would act if the blackout lasted into the start of the NFL season. So we don't think it's a coincidence that the dispute was settled right before NFL started on CBS. ■ Program fee shift potential. While this is more a theoretical exercise than a statement of what's likely to happen, if affiliate and retransmission fees were allocated according to loyalty as tallied here, Discovery's fees could more than triple while Disney's could fall over 50%.

SEE PAGES 24-25 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION Effective May 10, 2005, Lazard Frères & Co. LLC ("LF&Co.") transferred its capital markets business (which includes equity research, syndicate, sales and trading) to a new privately-held company, Lazard Capital Markets LLC, which is neither owned nor controlled by LF&Co. LF&Co., which is part of publicly-traded Lazard Ltd, has retained, among other things, its investment banking business (including its mergers and acquisitions and financial restructuring practices). SURVEY SAYS THE POWER OF CONTENT IS GROWING

For the third time, we have used Clear Voice Research LLC for an online survey of over 2,000 consumers to gauge loyalty to TV networks, and the leverage that network owners have to extract more fees from cable and satellite TV distributors.

In all three surveys, we presented consumers with a list of 53 basic cable and broadcast networks, and asked, “If this network were dropped by your pay-TV service, would you cancel or switch providers?” On top of that, in this survey for the first time, we also queried consumers about loyalty to 35 leading regional sports networks (RSNs) and the three leading premium networks, HBO, Showtime and Starz.

Survey respondents were broadly similar to U.S. averages in income, age, sex, race and geographic dispersion (Exhibit 22). This survey was carried out from August 24- 29, while the second one was conducted from December 18-31, 2012 and the first one was done from May 15-22, 2012.

Average cancel intent across all networks of 19% was a tad lower in this survey than the 20% average in December, but on par with the 19% in May. We are in the early stages of repeating this survey, and believe the variance could be tied to seasonality. People were less interested in TV in late August as they start back to school or wind up their summer vacations, and the new fall shows had not yet started, nor had the NFL and college football.

The encouraging point for content owners is that many Americans say they would cancel or switch TV service providers if a network were dropped. We believe it’s hard for a cable or satellite TV service provider to absorb a potential loss of 19% of their subs, given substantial fixed costs. This, we believe, leaves them little ability to stop the current trend of high single-digit growth in content costs. Pain for cable and satellite TV in this instance is a gain for content, supportive of our positive stance on CBS, Viacom, Discovery, Disney, 21st Century Fox and Time Warner, all of which are covered by Lazard Capital Markets with BUY ratings.

TV NETWORK LOYALTY INDEX

In Exhibit 1, we show the cancel or switch responses for this survey, compared to the other two. We find it notable that the relative ranking of networks was little changed. The results do suggest seasonality, and that Americans like TV more in December, as the Super Bowl approaches and the NFL moves towards playoffs, than at other times of the year.

Entertainment 2

Exhibit 1. TV Network Loyalty Index

% of respondents that would cancel or switch if network dropped (Aug 2013 vs Dec 2012 vs May 2012) 44% CBS TV station NBC TV station 43% ABC TV station 42% FOX TV station 37% ESPN 33% RSNs Average 33% Discovery Channel 28% History Channel 27% TNT 27% A&E Network 26% AMC 26% Food Network 24% USA 23% TBS 22% 21% 21% National Geographic Channel Channel 21% FX 21% Comedy Central 20% 19% HGTV 19% Lifetime 19% Fox Soccer Channel 18% Animal Planet 18% Disney Channel 18% CNN 17% HBO 17% Aug 2013 17% TruTV Dec 2012 TLC 17% Nickelodeon 17% May 2012 ABC Family 17% Travel Channel 16% Cartoon Network/Adult Swim 16% CW TV station 16% TV Land 15% Investigation Discovery 15% Hallmark Channel 15% Science Channel 15% 15% 14% MSNBC E! Entertainment TV 13% Showtime 13% Aug. 2013 Avg, 19% MTV 13% 12% Nick Jr. 12% Spike Biography 12% OWN 12% VH1 12% 11% CNBC 11% BET Military Channel 11% The HUB 10% Oxygen 10% WeTv 10% Sprout 10% CMT "Get Country" 9% Starz 9%

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 3 In Exhibit 2, we highlight the change in loyalty by network. The network with the largest gain was Fox Soccer Channel (rebranded to FXX on September 2, after the completion of our survey), up 8% to 18%. That could be correlated to the start of the English Premier League on August 17, shortly before our survey was conducted. Otherwise, we observed modest loyalty declines (average of 1%) at nearly every network, to levels observed in May 2012. The largest declines, of 300 bps to 400 bps, were at the broadcast networks.

Exhibit 2. TV Network Loyalty Index Change from December 2012 to August 2013

Change % of respondents that would cancel or switch if network dropped (from Dec 2012 to Aug 2013)

Fox Soccer Channel 8% CW TV station 1% OWN 0% A&E Network 0% The HUB 0% Fox News Channel 0% Food Network 0% Animal Planet 0% CMT "Get Country" -1% Travel Channel -1% Military Channel -1% National Geographic Channel -1% AMC -1% Lifetime -1% Comedy Central -1% Investigation Discovery -1% Science Channel -1% Avg. -1% HGTV -1% E! Entertainment TV -1% ESPN -1% Syfy -1% TruTV -1% Biography -1% WeTv -1% CNN -1% Cartoon Network/Adult Swim -1% History Channel -2% Discovery Channel -2% MSNBC -2% TV Land -2% Oxygen -2% Sprout -2% The Weather Channel -2% TNT -2% Disney Channel -2% MTV -2% VH1 -2% CNBC -2% Bravo -2% FX -2% ABC Family -3% ABC TV station -3% Nick Jr. -3% TLC -3% Hallmark Channel -3% USA -3% Nickelodeon -3% Spike -3% BET -3% TBS -3% NBC TV station -3% FOX TV station -4% CBS TV station -4% -6% -4% -2% 0% 2% 4% 6% 8% 10%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 4 TV NETWORK LOYALTY INDEX - RSNS

In Exhibit 3, we show the willingness to cancel or switch responses for 35 leading regional sports networks (RSNs) and the average rate, which was 33%.

Exhibit 3. TV Network Loyalty Index – Regional Sports Networks (RSNs)

% cancel or switch if network dropped

Comcast SportsNet Chicago 47% SportsNet Bay Area 42% New England Sports Network 42% FOX Sports Southwest 41% SportsTime Ohio 40% FOX Sports Detroit 40% Comcast SportsNet Houston 39% Comcast SportsNet Philadelphia 39% Prime Ticket 39% FOX Sports Wisconsin 37% FOX Sports Ohio 37% FOX Sports Arizona 36% Sun Sports 36% Comcast SportsNet New England 35% Comcast SportsNet Northwest 35% YES Network 34% FOX Sports Midwest 34% FOX Sports West 33% Avg. 33% SportsNet New York 32% SportSouth 32% FOX Sports Tennessee 32% Mid-Atlantic Sports Network 31% MSG -- Madison Square Garden Network 30% Root Sports Pittsburgh 30% Altitude Sports & Entertainment 30% FOX Sports South 30% Comcast SportsNet California 30% Comcast SportsNet Washington 28% Root Sports Northwest 26% FOX Sports Florida 26% Root Sports Rocky Mountain 25% FOX Sports North 22% Time Warner Cable SportsNet/Deportes 20% Comcast/Charter Sports Southeast 19% FOX Sports Carolinas 19%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 5 RSNs presented a conceptual challenge, because only 2%-8% of total respondents subscribe to any one RSN. But most of the country has one or more RSNs on the basic tier in their local cable and satellite TV services. So we view the average loyalty across the group, 33%, as a proxy for RSN leverage loyalty. This is on par with ESPN, which makes sense, given the sports focus.

The RSN with the highest loyalty was Comcast SportsNet Chicago (which carries Bears, Bulls, White Sox and Blackhawks games), at 47%, a considerable 5% above second-place, Comcast SportsNet Bay Area. The RSN with the lowest loyalty was Fox Sports Carolinas, which the Bobcats and Hurricanes. 21st Century Fox owns 17 of the RSNs covered in the survey, and Comcast/NBCU owns 10. A breakdown of RSN loyalty by company is shown in Exhibits 18 and 19.

TV NETWORK LOYALTY INDEX – PREMIUM NETWORKS

In Exhibit 4, we show the cancel or switch responses for the top three premium networks, as well as the percent of respondents who subscribe, and the adjusted loyalty, which we define as cancel intent percent multiplied by subscriber percent.

HBO led the pack in usage and loyalty—38% of respondents subscribe to HBO, 45% said they would cancel or switch if it were dropped, for an adjusted loyalty of 17%. Showtime’s sub base was 32% and loyalty was 40%, while Starz’s sub base was 30% and loyalty was 9%. This suggests most premium network subscribers sign up for all three networks.

Exhibit 4. Premium Network Loyalty

45%

HBO 38%

17% % of subs who would cancel or 40% switch % of respondents Showtime 32% who subscribe 13% Adj. share (subs % 30% x loyalty %)

Starz 30%

9%

0% 20% 40% 60%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 6 NETWORK LOYALTY SHARE BY COMPANY

We use the TV Network Loyalty Index as a gauge of the relative loyalty value of a company’s TV network portfolio. To do this, we sum up all of the cancel or switch responses for a company’s networks covered in the survey, and calculate their loyalty shares as a percentage of the total cancel or switch responses, what we call “Network Loyalty Share.” In our most recent iteration, as shown in Exhibit 5 below, we include the value of RSNs and premium networks. Among the media conglomerates, Comcast/NBCU leads in loyalty, followed by 21st Century Fox, Discovery, Viacom, Time Warner and Disney.

Consistent with our previous findings, this analysis favors operators with multiple networks, as they compile a series of niche audiences who could cancel if their network were dropped.

Exhibit 5. TV Network Loyalty Share by Company with RSNs and Premium Networks

Comcast/NBCU 17.1%

21st Century Fox 12.3%

Discovery 12.1%

Viacom 11.6%

Time Warner 11.2%

Disney 10.6%

A&E 8.1%

CBS 7.0%

Scripps Networks 5.7%

AMC Networks 3.4%

Starz 0.9%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% % of loyalty-share (Aug 2013)

Source: Lazard Capital Markets, Clear Voice Research LLC.

PROGRAM FEE SHARE-SHIFT POTENTIAL

As long as the program fee pie is growing at a high single-digit pace, we expect all TV network companies to benefit.

But we see potential for some to gain more than others, or for some companies to pursue large program fee share gains at the expense of others.

Entertainment 7 To gauge share-shift potential—who could win, and who could lose, in a time of substantial share shift of program fees—we compare company share of affiliate and retransmission fees to TV Network Loyalty Share.

To do this, we start with total pie of industry program fees. We then isolate the approximate 8% share of the industry program fees related to networks not covered in our survey. We then weight the remaining 92% of program fees available according to each company’s TV Network Loyalty Share.

The results of this exercise (shown below in Exhibit 6) show that if affiliate and retransmission fees were allocated according to loyalty, A&E, half-owned by Disney, could see its fees quadruple, while Discovery and Scripps could triple and AMC could double. Comcast/NBCU would see a 67% step up.

CBS, in this new format, would see a 37% rise in fees, versus the over tripling we saw in earlier iterations. The difference here is that we are now including Showtime, where before we weren’t.

Disney’s fees would potentially be lower if fees were allocated according to loyalty share, with the survey suggesting a 55% drop. People love ESPN, but the survey suggests that Disney is more than fairly compensated for that.

We’d note, however, that we see no plausible scenario for a 50%+ decline in fees at Disney in an investable time horizon, as the company has locked up 7 of its 10 largest distributors to 10 year deals. We doubt any commercially viable pay TV provider would want to risk losing a third of its subs by dropping ESPN.

Exhibit 6. Program Fee Potential Based on TV Network Loyalty Share Potential Fees, Program Fees, % of loyalty-share based on loyalty- Company 2013E % Share (Aug 2013) share + / - % A&E $739 1.8% 8.1% $3,108 320.4% Discovery $1,289 3.1% 12.1% $4,656 261.2% Scripps Networks $697 1.7% 5.7% $2,199 215.7% AMC Networks $604 1.4% 3.4% $1,321 118.8% Comcast/NBCU $3,956 9.4% 17.1% $6,613 67.2% CBS $1,987 4.7% 7.0% $2,713 36.6% Viacom $3,625 8.6% 11.6% $4,472 23.3% 21st Century Fox $7,079 16.8% 12.3% $4,746 -33.0% Time Warner $8,272 19.7% 11.2% $4,329 -47.7% Disney $9,040 21.5% 10.6% $4,096 -54.7% Starz $1,298 3.1% 0.9% $332 -74.5% Other $3,442 8.2% $3,442 0.0% Industry Total $42,028 100.0% 100.0% $42,028

Source: Lazard Capital Markets, Clear Voice Research LLC, SNL Kagan, Nielsen

Entertainment 8 COMPARISON TO TV AUDIENCES

Exhibit 7. TV Network Loyalty Share Versus Audience Share (24-hr TV HH)

Network loyalty-share in excess of audience-share

Fox Soccer Channel 1.8% National Geographic Channel 1.6% Discovery Channel 1.5% The Weather Channel 1.3% AMC 1.3% ESPN 1.3% Travel Channel 1.1% Food Network 1.1% Animal Planet 1.1% History Channel 1.0% Syfy 1.0% A&E Network 1.0% The Hub 0.9% Comedy Central 0.9% Military Channel 0.8% CNN 0.7% CNBC 0.7% Lifetime 0.7% Bravo 0.7% VH1 0.6% TLC 0.6% FX 0.6% Oxygen 0.5% TBS 0.5% Investigation Discovery 0.5% E! Entertainment TV 0.5% MSNBC 0.5% truTV 0.5% Hallmark Channel 0.5% HGTV 0.4% TV Land 0.3% ABC Family 0.3% TNT 0.2% Spike 0.2% Nick Jr. 0.1% BET 0.1% MTV 0.1% FOX News Channel -0.2% CW TV station -0.4% USA -0.6% Cartoon Network/Adult Swim -0.7% Disney Channel -1.6% Nickelodeon -2.1% NBC TV station -2.6% ABC TV station -3.2% CBS TV station -4.2% FOX TV station -10.1% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0%

Source: LCM Research, Clear Voice Research LLC, Nielsen data as reported by SNL Kagan.

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. This makes sense, as cable networks target avid fans in niche audiences, while

Entertainment 9 broadcast networks reach broader audiences, including some who may not have an avid interest in the programming (Exhibit 7).

CABLE NETWORK SECTOR DETAIL

GENERAL ENTERTAINMENT

General entertainment cable networks aspire, over time, to approach the audience and loyalty shares seen in broadcast. Today, their loyalty shares appear to be close to half of broadcast, averaging 24% (Exhibit 8).

Exhibit 8. General Entertainment: TV Network Loyalty Index

% cancel or switch if network dropped

27% TNT

26% AMC

23% Aug Avg. 24% USA Dec Avg. 26% May Avg. 25% 22% TBS

21% FX

0% 5% 10% 15% 20% 25% 30% 35%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

KIDS NETWORKS

Disney Channel and Nickelodeon inspire the most loyalty among kids’ networks, with 18% and 17%, respectively, of respondents in August saying they would cancel or switch if the network was dropped, vs. 20% in December 2012 (Exhibit 9).

Entertainment 10 Exhibit 9. Kids Networks: TV Network Loyalty Index

% cancel or switch if network dropped

18% Disney Channel

17% Nickelodeon

16% Cartoon Network/Adult Swim

12% Nick Jr. Aug Avg. 15% Dec Avg. 16% May Avg. 16% 10% The HUB

0% 5% 10% 15% 20% 25%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

FEMALE-FOCUSED NETWORKS

Among female-focused networks, A&E’s Lifetime was at the top with 19% loyalty, followed by Discovery’s TLC network with 17% and Comcast/NBCU’s Bravo with 15%. While loyalty at the three networks has declined since December 2012, Discovery’s OWN increased from 9% in May 2012 to 12% now (Exhibit 10).

Entertainment 11 Exhibit 10. Female-Focused Networks: TV Network Loyalty Index

% cancel or switch if network dropped

19% Lifetime

17% TLC

15% Bravo

12% Aug Avg. 14% OWN Dec Avg. 15% May Avg. 13% 10% Oxygen

10% WeTV

0% 5% 10% 15% 20% 25%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

NEWS NETWORKS

Unsurprisingly, Fox News was the top news network in loyalty, at 21%, unchanged from December 2012 and above the May 2012 level. Surprising us, however, down-the-middle CNN inspired more loyalty than left-leaning MSNBC, as had been the case in all three survey periods. As a group, news networks’ average loyalty declined by 100 bps from the last survey to 18%, but is above the May 2012 loyalty level of 16% (Exhibit 11).

Entertainment 12 Exhibit 11. News Networks: TV Network Loyalty Index

% cancel or switch if network dropped

21% Fox News Channel

17% CNN

Aug Avg. 18% 14% Dec Avg. 19% MSNBC Dec Avg. 16%

0% 5% 10% 15% 20% 25%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

COMPANY LOYALTY DETAIL

THE WALT DISNEY COMPANY

Disney’s average loyalty index decreased to an average of 28% vs. 30% in December 2012 and 29% in May 2012, with all four channels covered in our survey weakening slightly. Disney’s ABC broadcast network was on par with other top broadcast networks in loyalty with 42%. ESPN, though, was not far behind, at 33%, inspiring the most loyalty of all cable networks. The Disney Channel and ABC Family are popular, too, with 18% and 17% loyalty, in-line with the average for cable networks of 17% (Exhibit 12).

Entertainment 13 Exhibit 12. Disney TV Network Loyalty Index

% cancel or switch if network dropped

42% ABC TV station

33% ESPN

18% Disney Channel Aug Avg. 28% Dec Avg. 30% May Avg. 29% 17% ABC Family

0% 10% 20% 30% 40% 50%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

Disney owns half of A&E, and this network group is driven by the surging History Channel, with 27% loyalty, followed by A&E at 26% (Exhibit 13). As a group, A&E’s average loyalty decreased to 21% from 22% in December 2012, but has increased from 19% in May 2012. The A&E Network has remained consistent at 26% after a huge 500 bps gain from May 2012 to December 2012.

Entertainment 14

Exhibit 13. A&E Network Loyalty Index

% cancel or switch if network dropped

27% History Channel

26% A&E Network

19% Aug Avg. 21% Lifetime Dec Avg. 22% May Avg. 19% 12% Biography

0% 5% 10% 15% 20% 25% 30% 35%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

DISCOVERY COMMUNICATIONS

The Discovery Channel drives its namesake company, with 28% loyalty, second only to ESPN among cable networks. Every network declined mostly from December 2012, except OWN, which increased, and The Hub, which remained consistent at 10% (Exhibit 14).

Entertainment 15

Exhibit 14. Discovery TV Network Loyalty Index

% cancel or switch if network dropped

28% Discovery Channel

18% Animal Planet

17% TLC

15% Investigation Discovery

15% Science Channel

12% OWN: Oprah Winfrey Network Aug Avg. 16% 11% Dec Avg. 17% Military Channel May Avg. 15%

10% The HUB

0% 5% 10% 15% 20% 25% 30% 35%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

21ST CENTURY FOX

21st Century Fox’s average loyalty remained unchanged at 24%, driven largely by an 800 bp loyalty gain at the Fox Soccer Channel (recently rebranded to FXX), potentially due to the English Premier League. The Fox broadcast network led 21st Century Fox’s network family with 37% loyalty, down 300 bps from December 2012. Fox inspired less loyalty than CBS, ABC and NBC, consistent with our last survey result (Exhibit 15).

Entertainment 16

Exhibit 15. 21st Century Fox TV Network Loyalty Index

% cancel or switch if network dropped

37% FOX TV station

21% FX Network

21% National Geographic Channel Aug Avg. 24% 21% Dec Avg. 24% Fox News Channel May Avg. 22%

18% Fox Soccer Channel

0% 10% 20% 30% 40% 50%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

TIME WARNER

Time Warner’s top networks for loyalty are TNT (29%) and TBS (25%). Time Warner’s average loyalty increased by 200 bps to 22%. Four of the five major Time Warner networks strengthened. The biggest gainers were TNT and CNN, each up 400 bps (Exhibit 16).

Entertainment 17 .

Exhibit 16. Time Warner TV Network Loyalty Index

% cancel or switch if network dropped

27% TNT

22% TBS

17% CNN/HLN Aug Avg. 20% Dec Avg. 22% 17% May Avg. 20% TruTV

16% Cartoon Network/Adult Swim

0% 5% 10% 15% 20% 25% 30% 35%

Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012) Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

VIACOM

Comedy Central remains Viacom’s top network in loyalty, at 20%, slightly outpacing Nickelodeon, at 17%, which has a larger audience (Exhibit 17). Viacom’s average loyalty decreased to 13% from 15% in both December 2012 and May 2012, in-line with the percentage declines at Disney and Time Warner, and with the declines spread evenly across all networks.

Entertainment 18

Exhibit 17. Viacom TV Network Loyalty Index

% cancel or switch if network dropped

20% Comedy Central

17% Nickelodeon

15% TV Land

13% MTV Aug Avg. 13% Dec Avg. 15% 12% May Avg. 15% Nick Jr.

12% Spike

12% VH1

11% BET

9% CMT "Get Country"

0% 5% 10% 15% 20% 25% Yes, I would cancel or switch (Aug 2013) Yes, I would cancel or switch (Dec 2012)

Yes, I would cancel or switch (May 2012)

Source: Lazard Capital Markets, Clear Voice Research LLC.

RSN LOYALTY DETAIL

Exhibits 18 and 19 show consumer loyalty to RSNs owned or controlled by Comcast/NBCU and 21st Century Fox. While Comcast/NBCU owns the top two RSNs in the nation, SportsNet Chicago and SportsNet Bay Area, the average loyalty index for both companies were about even at 35% for Comcast/NBCU and 33% for 21st Century Fox.

Entertainment 19

Exhibit 18. Comcast Regional Sports Network Loyalty Index

% cancel or switch if RSN dropped

Comcast SportsNet Chicago 47% Comcast SportsNet Bay Area 42% Comcast SportsNet Houston 39% Comcast SportsNet Philadelphia 39% Comcast SportsNet New England 35% Comcast SportsNet Northwest 35% SportsNet New York 32% Avg. 35% Comcast SportsNet California 30% Comcast SportsNet Washington 28% Comcast/Charter Sports Southeast 19% 0% 10% 20% 30% 40% 50%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Exhibit 19. 21st Century Fox Regional Sports Network Loyalty Index

% cancel or switch if RSN dropped

FOX Sports Southwest 41% SportsTime Ohio 40% FOX Sports Detroit 40% Prime Ticket 39% FOX Sports Wisconsin 37% FOX Sports Ohio 37% FOX Sports Arizona 36% Sun Sports 36% YES Network 34% FOX Sports Midwest 34% FOX Sports West 33% SportSouth 32% FOX Sports Tennessee 32% FOX Sports South 30% Avg. 33% FOX Sports Florida 26% FOX Sports North 22% FOX Sports Carolinas 19% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 20 TWC-CBS DISPUTE

In the survey, we asked Time Warner Cable subscribers about the CBS blackout. We were about to publish the results when the blackout was resolved on September 1, so we held off until this report. Of the 2,031 respondents, 368, or 18%, were TWC subscribers. Of these, 70% were aware that TWC and CBS had been in a dispute over program fees, and 59% believed that TWC and CBS bore equal responsibility. Opinions were evenly divided over whether or not the government should intervene to stop the blackout.

Exhibit 20. TV Network Loyalty Index – Regional Sports Networks (RSNs)

Are you aware of aware of dispute?

Yes, 70% No, 30%

Who is responsible? Should the government intervene?

TWC, No, 39% 23%

Both, 59%

Yes, 36% CBS, 18% Unsure, 25%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Among the TWC subscribers, 44% said the current blackout could prompt them to cancel their TWC subscription, or had already prompted them to cancel. This suggests that Time Warner Cable is probably accurate when it says the blackout noticeably increased churn. Among the TWC subscribers who say they would cancel their service in the future, 41% would have canceled if the blackout were not resolved by the start of the NFL season on September 5.

Entertainment 21 When asked which pay TV service they would switch to, DirecTV (31%) and AT&T U-verse (26%) were the most commonly cited providers, followed by Verizon FiOS (16%) and Dish Network (15%).

Exhibit 21. TV Network Loyalty Index – Regional Sports Networks (RSNs)

Will you cancel/switch? Already cancelled, 10%

Will not cancel, 56% Will cancel if blackout continues, 34%

When will you cancel? Who will you switch to? Go Longer AT&T U- without than three verse, pay TV, 2 weeks weeks, 26% 8% 32% or less, 22% Other, 4%

Verizon FiOS, 16% Until the Until the NFL U.S. Open DirectTV, season starts Aug. Dish 31% starts 26, 5% Network, Sept. 5, 15% 41%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 22

RESPODNENT DEMOGRAPHICS

Exhibit 22. Respondent Demographics Survey Census Index Male 47.9% 49.1% 97.6% Gender Female 52.1% 50.9% 102.4% TOTAL 100% 100% 100%

18-24 12.8% 13.1% 97.9% 25-34 18.1% 17.5% 103.4% 35-44 17.5% 17.5% 99.9% Age Group 45-54 19.0% 19.2% 99.0% 55-64 16.8% 15.6% 108.0% 65+ 15.8% 17.2% 92.0% TOTAL 100% 100% 100%

Midwest 21.0% 21.7% 97.0% Northeast 18.7% 17.9% 104.5% Region South 35.5% 37.2% 95.5% West 24.8% 23.3% 106.4% TOTAL 100.0% 100.0% 100.0%

<$25K 21.5% 25.7% 83.7% $25-$39K 21.2% 15.8% 133.9% $40-$49K 10.9% 8.9% 122.5% $50-$74K 21.2% 17.7% 119.5% Income $75-$99K 13.1% 11.4% 114.6% $100-$124 5.2% 7.6% 68.5% $125-$149K 3.4% 4.5% 76.2% $150K+ 3.5% 8.4% 41.8% TOTAL 100.0% 100.0% 100.0%

White/Caucasian 82.9% 72.4% 114.5% African American 7.8% 12.6% 61.9% Asian 4.3% 4.8% 89.6% Native American 0.8% 0.2% 400.0% Race Pacific Islander 0.2% 0.9% 22.2% Other 2.7% 6.3% 42.9% 2 or more races N/A 2.8% N/A Prefer not to answer 1.3% N/A N/A Total 100.0% 100.0% 100.0%

Source: Lazard Capital Markets, Clear Voice Research LLC.

Entertainment 23 ANALYST CERTIFICATION

All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover of this report. No part of this research analyst' s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report.

IMPORTANT DISCLOSURES

This report constitutes a compendium report (covers six or more subject companies). As such, Lazard Capital Markets, LLC. chooses to provide specific disclosures for the companies mentioned by reference. To access current disclosures for all companies in this report, clients should refer to our Disclosure Site at https://lazardcapitalmarkets.bluematrix.com/sellside/Disclosures.action or write to Research Compliance at Lazard Capital Markets, LLC, 30 Rockefeller Plaza, New York, NY 10020 to request disclosure information.

DISTRIBUTION OF INVESTMENT RATINGS (AS OF 10-02-2013) OVERALL DISTRIBUTION BANKING CLIENT DISTRIBUTION* BUY NEUTRAL SELL BUY NEUTRAL SELL 53% 45% 2% 25% 7% 17%

*Indicates the percentage of each category in the Overall Distribution that were banking clients of Lazard Frères in the previous 12 months.

RATING GUIDELINE (return targets may be modified by risk or liquidity issues) BUY Expected to produce a positive total return of more than 10% in the next 12 months. NEUTRAL Fairly valued; expected to product a total return +/- 10% in the next 12 months. SELL Expected to product a negative total return of more than 10% in the next 12 months.

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Entertainment 24 varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. LCM does not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this report or its contents. By accepting this report you agree to be bound by the foregoing limitations. Lazard Capital Markets LLC 30 Rockefeller Plaza, New York, NY 10020 Member NYSE and FINRA Copyright 2013 Lazard Capital Markets LLC. All rights reserved

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