Laura Martin, CFA • [email protected] • (917) 373-3066 December 1, 2013 Dan Medina • [email protected] • (212) 705-0295 Entertainment & Internet NeedhamNeedham InsightsInsights Providing in-depth analysis of significant industry issues Martin’s Meditations

Valuing Consumers’ TV Choices

In the past, we have quantified the economic consequences of breaking apart the TV bundle on the companies that compete within the U.S. TV ecosystem. In this report, we examine the economic consequences to consumers of deconstructing the TV bundle.

We quantify the following sources of consumer value destruction from TV unbundling: • $80-113 billion in consumer value at risk from loss of channel choice; • $45 billion of TV advertising revenue at risk; • 1.4 million jobs at risk; • $20 billion of taxes paid at risk; and • $117 billion of market capitalization at risk.

Our research also suggests the following: • We estimate that it costs an average of $280 million annually to run an entertainment cable channel. By implication, this requires an average of 165,000 viewers over an entire year to break even, assuming an ad-driven revenue model. By implication, about 56 channels would survive and 124 channels would disappear, based on 2012 viewing levels. Our calculations conclude that $80-113 billion of U.S. consumer value would be destroyed by this shrinking channel choice. • For every $1.00 paid by consumers to fund content creation, advertisers pay $1.24, implying that TV programming is twice as good (or plentiful) as it would be without advertising revenue. Unbundling makes many channels sub-scale, requiring higher consumer payments to offset falling advertising revenue. • Based on average wage and TV viewing data, consumers are paying about 3% of what their TV viewing time is actually worth to them. The average TV household watches about 4,400 hours of TV annually and pays about $720 per year, or $0.16 per hour of TV viewed. Based on an average household income of $51,017 annually, this represents about 1/36 the value of these hours to consumers. • 90% of total U.S. households pay to receive up to 180 TV channels. Paying homes rise as the bundle size grows because (we believe) a household subscribes only after there are 16-20 channels they want to watch. We base this conclusion on the facts that average channels viewed have remained constant at 18 for the past several years, while channel choices and multichannel penetration levels have risen. • Because the U.S. has the largest TV ecosystem funded predominantly by public capital markets, rather than the government, the direct value destruction to consumers is compounded by millions of jobs lost and billions of lost debt and equity investment value. In addition, tax rates on consumers would have to rise to offset falling taxes paid by companies within a shrinking TV ecosystem.  Because consumers lose so much value through unbundling, we expect no policy change in the U.S. All content companies benefit from TV bundling, as well as from new digital platforms that are driving record free cash flows from content creation globally. Our top choice is CBS (CBS, Buy) because, untethered by Hulu, it is doing the most innovative experiments aimed at driving higher content ROIs.  As a Wall Street analyst, I am tasked with attributing monetary values to companies and ecosystems, and tracking how these change over time. However, often the most valuable aspects of life are difficult to quantify. Therefore, let’s begin with the non-quantifiable value to U.S. consumers of having 180 TV channels to choose from, 24 hours every day.

Intangible Consumer Value

America is a country built on diversity that puts a premium on individual choice. Nielsen (NLSN, Hold) reported that in 2012, multi-channel households could receive up to 180 channels, which generates consumer value in the following ways: • Household Value. TV fees are paid by households, which have an average of 2.5 people each (Nielsen). Each member of the household has 180 channels to choose from, which creates a high probability that each person can find 3-5 programs they would like to watch at any moment that they have leisure time. Each can select a program closest to their value curve at any moment of the day or night. • Money Follows Quality Fast. The average household reports that they watch 18 channels each month, and these often change seasonally. Consumer value is maximized by lowering friction to try a new show. For example, during 2012, the A&E network had no shows in the top 10. However, by 3Q13, Duck Dynasty on A&E had 14 million viewers, a higher average than any other cable series in 2012. Virtually every one of the 104 million multi-channel households (260 million people) could try Duck Dynasty by turning a channel when they got home from work. Trial is easy, and economics (i.e., ad revenue) tied to a new hit show can rise simultaneously with viewing. This makes the potential payback for taking risks on new shows fast and encourages content innovation. If consumers must pay for channels in advance, this creates enormous barriers to trial and slows advertising revenue moving to new hit shows, which advantages incumbents and slows innovation. • Best in Class or Die. An advantage of having 180 channels for consumers to choose among is that this keeps every content creator on their game. Unless programs are engaging and differentiated, they get no viewers. This drives constant improvements in programming choices and content executives. • Social Value. As technology isolates people, TV plotlines and dialog become more valuable to fuel social interactions and conversation both in person around the water cooler and in social media on Twitter and Facebook. TV shows provide conversation topics that can bring Americans closer together through shared experiences across generations and economic gaps. • Export Value. American policies around the world are often controversial, but when we export our TV content to the rest of the world, it becomes a long-form commercial. American TV exports our culture to other countries in a non-threatening way, drives tourism, encourages commerce and creates a positive global perception. U.S. public policy should subsidize this industry, not downsize it. • Niche Channels. The launch of 180 cable channels over the past 40 years has driven higher TV viewing by creating more passion (i.e., niche) channels. Channels such as the Military Channel (2012 Nielsen rank #63) or Golf Channel (#90) may have small audiences, but these are passionate followers. The current TV ecosystem can afford to fund passion channels because, although audiences are too small to sell alone, when packaged together across networks into demographic reach, they can generate enough advertising revenue to survive. Most passion channels would probably not survive in an a la carte world because their cost per month to consumers would be enormous, especially because their reach would be too small to generate any advertising revenue. • International. Within the current bundle of 180 channels are many international news, language, and entertainment channels, including the BBC, Al Jazeera, Korean, Indian and Chinese channels. These channels represent a global perspective and encourage Americans to be less isolated in our beliefs and think of ourselves as world citizens. We expect that most households would not subscribe for these channels in an a la carte world, making America a less global place. • Valuing Creative Contributors. The TV ecosystem employs many of the most creative people in the U.S. If the number of TV channels fall, creative folks become victims through layoffs. Certain geographies, Los Angeles and New York, are especially hard hit. In addition, we estimate that for every TV employee that shows up in an SEC filing, 3-5 freelancers work on a project by project basis.

A Flawed Premise?

The core idea of unbundling the U.S. TV Ecosystem is predicated (round numbers) on the following logic:

1. The average U.S. household paid approximately $720 in 2012, representing an average of $4 per channel per year, assuming they receive all 180 channels available. (PWC) 2. However, the average U.S. household says it watches only 18 channels each month. (Nielsen) 3. A legislated public policy that allows consumers to pay $4 each for only the 18 channels they actually want implies total payments of $72 per year, and therefore creates value for consumers because each household theoretically saves $648 per year (i.e., $4 per channel x 162 channels not watched) and loses nothing.

The notion of creating value through unbundling may be a laudable goal from a public policy point of view, but the world this premise describes can never exist.

Why? In the U.S., consumer payments for content are heavily subsidized by advertisers. In fact, advertisers pay $1.24 ($56 billion in 2012) to content creators for every $1.00 ($45 billion in 2012) paid by consumers, as follows:

• In 2012, total consumer payments to U.S. TV providers were $75 billion, of which content received approximately $45 billion and distribution (cable/satellite/telco) kept $30 billion. (PWC) • In 2012, total TV advertising was $76 billion (Nielsen), of which national TV advertising revenue was $56 billion plus $20 billion (Pew) of local TV revenue (mostly stations).

Television advertising revenue is based on reach and typically requires a minimum of about 30 million households in the digital age before it can be measured by Nielsen, a precursor to generating advertising revenue. Since HBO (arguably the best content on television) has only 30 million subscribers, it seems safe to assume that cable channels would lose much of their advertising revenue in an unbundled world. In addition, as TV channel audiences declined in an a la carte world (as the number of subscribers fell), they would lose pricing power on their ad units faster than audience deterioration would imply because there are more substitutes from premium online video alternatives. That is, the more a cable channel’s audience size looks like an Internet video’s audience size, the more commoditized its advertising units become, thereby losing pricing power faster than audience delivery.

In an unbundled world, how much more would consumers have to pay to content makers to retain 180 channels as advertising disappeared? In 2012, total payments to content companies to fund TV channels were $45 billion of subscriber fees plus $56 billion of ad revenue, or $101 billion in 2012. Worst case, to maintain all 180 channels, consumers would have to pay the $75 billion they pay today plus $56 billion (to make up for the lost advertising revenue), or $131 billion, or $1,260 per year, a 75% increase above today’s $720 per year actual payment.

Since the objective of a la carte is to allow consumers to pay less, not more, our next step is to calculate how many channels would survive, but first…

Can Too Many Choices Destroy Consumer Value?

Before we move off the topic of flawed premises, let’s ask the question of whether more choices always add value to consumers. A public policy of a la carte assumes that it adds more value to consumers when they can choose among 180 channels to subscribe for versus deciding among today’s 4-6 bundle options. Is that a valid assumption? Maybe not.

Valuing Consumers’ TV Choices 1 In 2004, Barry Schwartz wrote a book entitled the Paradox of Choice: Why More Is Less, in which he concluded that having too many options to choose from often leaves consumers bewildered and less satisfied after making a decision. One of his key insights is that too many choices often produce paralysis. Consumers simply don’t decide at all. They chose nothing, because they fear making the wrong choice. In addition, too many choices often produce poor decisions because people try to simplify the choice to the point where they make bad choices. And, if they actually reach a decision, too many choices often make them second-guess whether they made the right decision after all, thereby lowering satisfaction of any decision made.

Professor Sheena Iyengar of Columbia Business School has spent her academic career studying the value created by choice. In her 2010 book entitled The Art of Choosing, she includes in Chapter 6 of her now famous experiment where she alternated offering tastings of a large assortment of jams (24 of the 28 total flavors made by Wilkin & Sons), followed by a small selection of only six jams, and found that when consumers went to the jam aisle to purchase jam after the tasting, “people who had sampled the large assortment were puzzled. They kept examining different jars, and if they were with other people, they discussed the relative merits of the flavors. This went on for up to ten minutes, at which point many of them left empty-handed. By contrast, those who had seen only six jams seemed to know exactly which one was right for them. They strode down the aisle, grabbed a jar in a quick minute and continued with the rest of their shopping. In all, 30% of people who had sampled the small assortment decided to buy jam, but only 3% (1/10th) bought a jar after sampling the large assortment.”

Her book also includes the results of a study where she analyzed nearly 800,000 people’s savings decisions and found that the more choices of 401(k) funds people had, the less likely they were to participate in their retirement savings program.

Bottom line, the notion that consumers will perceive they are better off (i.e., higher value) when their choices go from 4-6 bundle options to 180 a la carte channels may be flawed, according to some of the academic literature. Too many choices can overwhelm consumers and lead to lower satisfaction levels or, worse, induce them to buy nothing at all. We note that many of the best marketers use small, medium, large, or tall, vente, grande, or bronze, silver, gold. Three choices is a recurring theme in marketing because it allows consumers to default to the middle choice.

How Did We Get Here?

Beginning in the 1950s, broadcast TV channels were free to consumers and paid for by advertising revenue. However, the advertising-only revenue model supported only a few broadcasters, including ABC, CBS and NBC. PBS (funded by taxes) began in 1969 and Fox launched in 1986.

How did subscriber payments for cable TV channels in the U.S. come about? As the cable industry laid coaxial cables in the 1970-1990s, they noticed that the number of households that signed up to pay for TV was correlated to the number of new channels someone could watch if they paid. However, there was zero advertising revenue until a cable channel reached at least 25 million homes in the analog world (30 million homes in the digital world), because a program must have a minimum rating of 0.1 for Nielsen to measure it. Without a Nielsen rating, there is no advertising revenue.

Therefore, in a visionary move to fund a pipeline of new channels, the cable companies began paying content owners a fixed monthly fee that funded investment in new content until the channel could generate advertising revenue. Content owners used all the subscription money to fund programming on the first channel, and then when they began to get advertising revenue, they used that ad revenue to fund content on a second cable channel. Rinse and repeat.

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HBO In 1975, under the leadership of Gerald Levin at Time Warner, HBO became the first television network to continuously deliver its signal via satellite when it broadcast the boxing match between Muhammad Ali and Joe Frazier (Wikipedia). HBO was founded on the idea that consumers would pay to receive the extra TV channel. This business model survives intact today, and HBO has no advertising revenue.

Today, HBO has approximately 30 million households that pay about $14 per month (HBO keeps 50%, or $7 per month) representing approximately $5.0 billion per year paid by consumers to receive arguably the best content on television. We estimate that HBO’s revenue is $2.5 billion annually (half of the consumer payment). However, the dark side of this business model is that 70% of cable households don’t get the benefit of HBO’s awesome programming because they can’t afford it or won’t pay for it.

TBS In 1977, Ted Turner took his local Atlanta TV station WTBS and bounced its signal off a satellite, which was picked up by cable distributors across the U.S. for free as they laid cable wires in the ground. Turner monetized this by selling advertising time based on the entire U.S. viewership and didn’t charge the cable companies to carry the TBS signal.

Today, we estimate that TBS generates about $1.1 billion of revenue from subscription fees plus $2 billion from advertising. We estimate that TBS charges cable/telco/satellite companies about $1.10 per month, which they mark up by 25% and charge consumers approximately $1.40, which is about 90% below HBO’s monthly charge to consumers. We estimate that TBS’s total revenue is $3.1 billion annually (24% higher than HBO’s) of which less than half is paid for by consumers. Advertisers subsidize TBS’s expensive programming, including sports and original series, and 104 million households (about 260 million people) have the option to watch TBS at any time of the day. Consumer value is maximized by the subsidy from advertisers.

State of Play: Consumer Choices Today

We should begin with a benchmark. To calculate the incremental value of allowing consumers to buy TV channels one at a time, we should start with where we are today.

Today’s channel mix in the U.S. gives us a strong indication of relative business model value: • Four channels (broadcasters ABC, CBS, NBC and Fox) have been funded by one revenue stream (i.e., advertising) for the past 25-50 years (until the past 3 years). • Four pay TV channels (HBO, Showtime, Cinemax, STARZ) fund themselves through consumer payments only. • 172 cable channels are funded by two revenue streams: subscription plus advertising revenue. Today, most entertainment cable channels generate about 60% of their revenue from advertising and 40% from subscription payments. For sports channels, these numbers are inverted, with approximately 40% of revenue typically coming from advertising and 60% (or more) from subscription payments.

These datapoints suggest that two revenue streams maximize consumer choice. In addition, the bundle appears to fund a robust TV environment with many valuable niche channels such as the Military Channel, Golf Channel, Oprah Winfrey Network, etc. Even though these niche channels are only valuable to small groups of people, their fans may put a higher value on them than the “mass” channels they view each month.

What Problem Is a la Carte Trying to Solve?

What is magic about unbundling to the channel level? A channel is simply a bundle of hit shows followed by other shows. Why not unbundle to the program level? In fact, consumers have this option today and are selecting it to the tune of billions of dollars. For example, iTunes reported $12.9 billion of revenue from the global sale of a la carte music, films, TV series and books in 2012.

Valuing Consumers’ TV Choices 3 Hulu garnered $700 million of U.S. revenue in 2012, based on a la carte programs primarily aired on ABC, Fox, and NBC. Netflix reported 30 million paid U.S. subscribers and $700 million of U.S. streaming revenue in 3Q13. YouTube reached $4 billion of advertising revenue from 4 billion viewers globally per day of short- form (less than 5 minutes) videos in 2012.

What choices do consumers have today to watch TV content? 1. Each household typically has 4-6 bundle options of up to 180 channels offered by 2 satellite competitors plus 1 cable competitor plus 1 telco competitor. 2. Disconnect the TV bundle. According to Moffett research, 115,000 households cut the cord in 3Q13, exacerbated by the Time Warner Cable’s 30-day blackout of CBS programming in 3 million households in NYC, LA and Dallas. This suggests that people do consider having zero TV channels a viable option. As cord cutting occurs, both distributors and content creators lose distribution fees and ad revenue streams immediately. 3. Netflix, Hulu, Amazon TV streaming options. 4. Pay per show or TV series from Apple, Amazon, cable operators, telcos, etc. We have a datapoint around what it costs consumers to buy shows on an a la carte basis. Typically it’s the highest consumer fee, at $2.99 per episode for standard definition and $3.99 for high definition, implying that a single season of 22 episodes for 1 TV series costs $88—the equivalent of 45 days of the TV bundle with 180 channels. 5. DVD sets of old series sold in retail stores, Amazon, Apple and several online sites. 6. Premium and user-generated videos distributed by YouTube, AOL, Yahoo and many other online sites.

Consumers always prefer to pay less for more. Reviewing this list of choices suggests that the value of consumer choice is maximized today. Consumers have no obligation to pay $720 per year for TV content. They can disconnect the bundle and receive much of the same content in other ways. The fact that households put a high value on their choices is supported by disconnects in 3Q13 and the rapid growth of iTunes, Netflix, Hulu Plus, and YouTube.

18 Is Magic

One important aspect of TV ecosystem economics is that the take-up rate of subscribing to the bundle rises as the price of the bundle rises, because the number of channels rises.

Why is this? Our hypothesis is because there is a certain number of channels that a household must think are worth viewing before they pay $720 per year. Since 18 have been the average channels watched for each of the past 3 years, 18 (plus or minus 2) may be a magic number. That is, only when a household can find 18 channels that they actually want to watch do they subscribe for the bundle. Therefore, as the number of channel choices rises, the likelihood that an incremental household finds 18 channels they are willing to pay for rises. In 2012, channels receivable reached 180 channels and multichannel homes as a penetration of total households reached 90%, according to Nielsen. Figure 1 demonstrates that rising adoption has been correlated to larger bundle sizes (and higher prices) for the past 40 years.

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Penetration Is Tied to Channel Choices Figure 1

Source: Nielsen.

Consumer value rises as channel choice rises. We believe that a household waits to subscribe to the bundle until they have 18 channels they care about, so the larger the bundle, the greater the penetration of total homes.

The inverse would be true, intuitively, as well. Losing channels destroys consumer value as channel choices fall. If smaller channels went out of business in an a la carte world, this would “cost” households value if these niche channels were one of their 18 favorites. In fact, EVERY household we surveyed would lose 3-5 “passion channels” because those channels would no longer be available in an unbundled world. Even households that did not lose one of their 18 favorite channels would lose the option value of discovering a new favorite channel.

Valuing Consumers’ Time

Can we calculate how much consumer value is created from TV viewing each year? Yes. At the most basic level, consumer choice is worth the opportunity cost of whatever a consumer can spend time on and/or their willingness to pay for any good or service. In the next section, we calculate the economic value of consumer time.

At the simplest level, a household should value its time based on what it earns. On September 17, 2013, The New York Times reported that the latest U.S. census report found that median household income in the U.S., adjusted for inflation, was $51,017 in 2012. If the average household in the U.S. earns $51,017 per year and there are 8,760 hours every year, that implies that the value of each hour is $5.82, using the average earnings power of a household as a proxy.

For 2Q13, Nielsen reported that approximately 285 million Americans watched an average of 146 hours of television each month, or nearly five hours per person per day. According to Nielsen, there were approximately 115 million TV households with an average of 2.5 persons per TV household. Taking 2.5 people per household times 146 hours per month implies 365 hours per household per month of total TV viewing, or approximately 4,400 hours per year.

Valuing Consumers’ TV Choices 5 Since TV viewing is approximately 4,400 hours per year per household, this implies that the VALUE to consumers of 180 TV channel choices is $25,625 per household per year, using average household earnings power as a proxy for the value of consumer time.

Calculation of Consumer Value per Hour, Based on Earnings Power Figure 2

Consumer Value per Hour $ 51,017 Average Income/Household in 2012 8760 Total Hours/Year $ 5.824 Value/Hour per HH, Based on Earnings Power 4,400 Avg Hours/TV Viewing/HH/Year $ 25,625 Theoretical Value of TV Viewing/HH/Year Source: US Census Bureau, Needham & Co, LLC research

Another way to analyze the value to consumers of television programming is to calculate how much each household actually spends to purchase multichannel TV each year. This is the minimum that TV viewing time is worth since each individual household is making an independent decision to spend this much money for TV channel choices every month. If it wasn’t worth the money, some portion of the 90% of U.S. households that currently pay wouldn’t spend the money.

PriceWaterhouseCoopers (PWC) estimates that TV subscription payments in the U.S. totaled $75 billion in 2012. Nielsen reports that there were 104 million multichannel households in 2012. By implication, each multichannel household paid an average of $720 per year, or $60 per month, to a cable/satellite/telco provider for TV channels in 2012.

If the average multichannel household paid $720 per year and watched 4,400 hours per year, by implication this implies that consumers valued (i.e., paid) $0.16 for each hour of TV viewing.

Calculation of Consumer Value per Hour of TV Viewing, Figure 3 Based on Price Paid for TV

TV Viewing Value/Year $ 720 Price Paid/HH/Year for TV ($60/month x 12) 4,400 Avg Hours/TV Viewing/HH/Year $ 0.164 Price Paid per Hour of TV Viewing Source: Nielsen, Needham & Co, LLC research

The risks of changing anything in the TV ecosystem becomes clear if we turn the formula around and calculate the “TV Efficiency Ratio.” This ratio demonstrates that the theoretical value consumers get from their thousands of hours of watching TV each year is 36x higher than the actual price they pay for TV.

This datapoint is supported by the fact that 90% of households actually pay for multi-channel video, despite the high price (and complaints) about the cost of the bundle. There have only been a small handful of consumer products that have achieved these high penetration levels in a country as diverse as America. Our calculation of the TV Efficiency Ratio is included in Figure 4 below.

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Calculation of Theoretical Value vs. Purchase Price Paid for TV Figure 4

TV Efficiency Ratio $ 25,625 Theoretical Value of TV Viewing/HH/Year $ 720 Price Paid/HH/Year for Multichannel Video 36 TV Efficiency Ratio (theoretical value vs amt paid) Source: Needham & Co, LLC research

By implication, making changes to the TV ecosystem should proceed with caution because anything that lowers hours of TV viewing destroys consumer value 36x faster, owing to the TV Efficiency Ratio. We recognize that not all hours of time are created equally, and that TV viewing time (i.e., leisure time) might be valued below the $5.82 average theoretical value of an hour, but the multiplier would still end up being large.

Value Is Added to Consumers for Each New Channel Choice

Can we quantify how much value consumers get from each new TV channel added (or lost)? Yes. Over the past 3 years, the number of channels that U.S. consumers can chose among has risen by 30 to 180. Below, we calculate that the extra hours of TV viewing per new channel added was 218 hours.

Calculation of Consumer Viewing Growth per New Channel Figure 5

Comparison of Viewing Growth per New Channel 2010 2012 Change Household Viewing Hours/TV HH/Week 58.25 59.38 1.13 Translate This into Viewing Minutes/TV HH/Week 3,505 3,578 73 Weeks/Year 52 Extra Viewing Minutes/TV HH/Year 3,796

Multi-Channel Video Homes (mm) 104 104 0 Avg Cable Channels/Multi-Channel Home 150 180 30 Extra Viewing Minutes/TV HH/Extra Channel/year 127

Multi-Channel Video Homes (mm) 104 Total US Economy Extra Viewing Minutes per year for each extra channel (mm) 13,109 Total US Economy Extra Viewing Hours per year for each new TV channel (mm) 218 Sources: Nielsen, Needham & Co, LLC research.

Next we combine the prior two sections. Between 2010 and 2012, TV viewing rose 3,796 minutes per household and there were 30 new channels launched. Assuming that the extra viewing was largely attributable to the new channel choices implies that each new channel generated 218 million hours of extra TV viewing (i.e., value). This implies that the value to consumers of each new channel is between $35 million (218 million hours x $0.16) and $1.3 billion (218 million hours x $5.82 per hour). We posit that the consumer value destruction for each channel that disappears is the exact same value, between $4 billion and $131 billion of consumer value destruction per channel lost.

Valuing Consumers’ TV Choices 7 How Many Channels Would Be Lost?

In 2012, Nielsen reported that each of the 104 million multi-channel homes could receive up to 180 channels. What are the economic costs to consumers of unbundling? As calculated earlier in this report, to maintain all 180 channels, consumers would have to pay $1,260 per year, a 75% increase above today’s $720 per year actual payment. Since holding the number of channels constant at 180 costs consumers more in an unbundled world, it is far more likely that channels would not survive. How many channels would disappear?

Below, we include our estimate of the average cost to run an entertainment cable network in 2012, for the 4 companies we cover that break out their cable channels as an operating segment. We calculate that it costs an average of about $280 million to program a U.S. entertainment cable channel each year. We hasten to note that there is a wide range of programming costs, ranging from $1.1 billion annually for TBS to $50 million per year for TV Guide Channel, because the costs to run a channel depend on many variables, including genre, total original programming hours, scripted vs unscripted mix, etc.

Calculation of Average Cost to Run a Channel Figure 6

US Cable Channel Corp Overhead Required Total Expenses, US Avg Cost/US Cable Expenses, 2012 Allocation/US Channels ROIC, at 15% 2012 Cable Channel/Year ($mm) ($mm) ($mm) ($mm) Channels ($mm) DISCA $1,126 $206 $200 $1,532 6 $255 SNI $1,121 $126 $187 $1,434 6 $239 TWX $2,030 $339 $355 $2,724 8 $341 VIAB $4,636 $305 $741 $5,682 20 $284 Average $280 Source: Needham & Co, LLC estimates. DISCA domestic channels include Discovery Channel, TLC, Animal Planet, Science, Investigation Discovery, and Military Channel. SNI domestic channels include Food Network, Home and Garden TV, Travel Channel, DIY Network, Cooking.Channel,Great American Country. TWX domestic channels include TBS, TNT, Cartoon Network, truTV, Turner Classic Movies, Boomerang, CNN and HLN VIAB channels include MTV, MTVU, MTV2, VH1, VH1 Classic, CMT, Logo, BET, CENTRIC, Nickelodeon, Nick Jr, TeenNick, Nicktoons, 'Nick at Nite, Comedy Central, TV Land, SPIKE, Palladia, Colors, and Tr3s.

To generate revenue of $280 million per channel per year would require revenue from consumers, advertisers, or both. Consumer Payments Only According to our surveys, consumers say they are willing to pay $30 per month to watch “only the channels they want.” Since the average channels per household viewed has been stable at 18 per month for the past 3 years, let’s assume that consumers are willing to pay $30 per month to watch the 18 channels ($1.70 per channel) they care about. By implication, for a cable channel that costs $280 million per year to survive, it would have to have at least 14 million households paying $1.70 per month, assuming no advertising revenue (which is a valid assumption at only 14 million households of reach).

Each household would pay $30 per month for the 18 channels they care most about, thereby saving $30 per month compared to the $60 per month the home is paying today. This creates quantifiable consumer value of $30 per month x 12 months per year, or $360 per household per year x 104 million households = $37 billion across the U.S. economy.

This value is offset in part by value destruction from the loss of free-trial optionality on the 162 channels they didn’t pay for. Although the average household says they watch 18 channels per month, they swap these channels based on programming quality by months, quarters and years. Having 180 channels available makes it easy for consumers to turn the channel and sample the new hit show everyone is talking about, which adds value in a social medium like television.

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In this unbundled world, total revenue to the TV ecosystem would be 104 million homes x $30 per month x 12 months, or $37 billion, down from $131 billion in 2012, or 28% of what it was in 2102, implying that (best case) 28% of channels would survive (i.e., 50) and 130 (180 x 72%) channels would disappear. Worst case, if distributors (who collect all the money) kept the first $30 billion (as they did in 2012), that would leave only $7 billion for content, implying only 7% of channels would survive and 173 channels would disappear.

Calculation of Consumer Value Destroyed per Channel Lost Figure 7

Consumer Value Destroyed- Consumer Payments Only Best Case Worst Case Channels That Disappear 130 173 Extra Viewing Hours/Channel/Year (mm) 218 218 TV Viewing Hours Lost (mm) 28,340 37,714 Consumer Value at $0.16/hour ($mm) $ 4,534 $ 6,034 Consumer Value at $5.82/hour ($mm)$ 164,939 $ 219,495 Average Consumer Value Lost ($mm)$ 84,737 $ 112,765 Source: Needham & Company, LLC research.

We calculate that the quantifiable benefit of $37 billion saved is well below the consumer value destroyed of $85-113 billion tied to having fewer channels to choose from. In this case, it seems clear to us that the value of lost channels more than offsets the quantifiable savings of monthly payments, especially because every home would lose some of the 18 channels that are most important to them.

How many channels would survive with 100% of their current revenue intact? None. Why? Because one of the best aspects of the bundle is that each person in the household can psychologically assign their own value to each channel. To some households, the Military Channel (#62) or Golf Channel (#70) might be the primary reason they pay $60 per month, even though these niche channels are not highly rated. Passion can be a more powerful value driver than mass appeal when a household calculates its price/value ratio.

Let’s use some numbers. According to Nielsen, Fox News was the 6th highest ranked cable channel in 2012, with 1.2 million average viewers. In a bundled world, someone could perceive that Fox News is worth half of their $60 monthly cable payment. In an unbundled world, Fox News would have to pick a single price point, say $10 per month. Some people would have been willing to pay $20 per month for Fox News (and Fox would lose that revenue upside) and others won’t subscribe at $10 per month because it’s only worth $5 per month to them (so Fox would lose that revenue). Because sampling is more prevalent with 180 channel choices, any eyeballs Fox News loses as subscribers decline lowers their advertising revenue as well as subscription fees. Advertising Payments Only How many channels would survive in an “advertising-only” revenue world? In this scenario, some channels would decide to offer free reception in order to garner ad revenue. They would forgo subscription fees in order to maximize reach and ad revenue. We note that before the two revenue stream model created by cable channels, there were only a handful of broadcasters that were successful with an advertising-only revenue model.

Based on average CPMs, sell-out ratios and annual ad loads, we calculate that 165,000 minimum viewers would be required to generate enough advertising revenue to cover $280 million of the costs of an average entertainment channel. Perusing the Nielsen ratings for 2012, only 56 networks achieved this level of viewership throughout 2012. Presumably, other channels would die out, in an advertising-only world.

Valuing Consumers’ TV Choices 9 Channels under the top 56 that would be lost in an advertising only world (unless supported by subscription revenue) include many “passion channels,” such as Military Channel (#62), Style (#65), Golf (#70), DIY (#73), SoapNet (#77), TV Guide Network (#78), Financial Business News (#88), MLB Network (#90), Great American Country (# 92), etc. So would the Chinese and Indian language channels, and other channels targeted to minority groups in the U.S. These channels are all too small to survive on their own, but living inside a content group allows their audience to be aggregated with other channels to generate advertising revenue to invest in content as they try to find a larger audience.

Calculation of Consumer Value Lost Figure 8

Consumer Value Destroyed- Advertising Revenue Only Channels That Disappear 124 Extra Viewing Hours/Channel/Year (mm) 218 TV Viewing Hours Lost (mm) 27,032 Consumer Value at $0.16/hour ($mm) $ 4,325 Consumer Value at $5.82/hour ($mm)$ 157,326 Total Consumer Value Lost ($mm)$ 80,826 Source: Needham & Company, LLC research.

In the advertising only revenue model, consumers must continue to pay $30 billion for distribution, but no payments for content, because we are assuming in this section that advertising pays all content costs. Therefore, the quantifiable payments saved by households are $45 billion per year. However, the value destroyed because 124 channels no longer exist is $80 billion. By implication, this business model destroys more value than it creates for consumers.

Since all content businesses have a high level of fixed costs, the negative hit to profitability is often 2-3x worse than any revenue decline. That is, if revenue falls by 20%, cash flow will typically fall by more than 40%.

TV Pricing Discounts

We believe that the TV bundle costs less than the posted rate of $60 per month, or $720 per year. When distributors sell a bundle of voice, video and data, they discount each component of that bundle, so the video price ends up being lower than posted a la carte rates. In fact, in a triple-play bundle, the implied price for video falls dramatically. For example, at Time Warner Cable (TWC, Buy) triple-play bundles start at $115 per month for new subscribers, including the price for high-speed modem of $40 + a $5 per month modem rental fee plus $50 per month for digital cable with 70 channels + 20/month for VOIP telephone. By implication, when the TV channels are purchased as part of a double or triple-play bundle, the pricing attributable to the TV channels is lower by 15-25%. In 3Q13, total double play bundles at TWC were 5.044 million and triple play were 4.053 million out of a total of 11.4 million subscribers.

Higher Distribution Costs in an Unbundled World

One important point that needs to be made is that unbundling hurts content creators most. It is the content creators who bundle their channels together to maximize subscriber payments and advertising revenue. The cable/satellite/telcos would be happy to unbundle and lower their price to consumers because they are the ones who have to listen to customers complain each year when subscription fees rise.

Importantly, even in an unbundled world, households would still be required to pay for the full $30 billion of cable/telco/satellite expense because these are fixed cost businesses and there is no savings in delivering 180 channels in hundreds of combinations to 104 million homes compared with delivering 180 channels to every home in the U.S. In fact, we think it could be argued that fees paid to cable/satellite/telco would have to

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increase once they have higher customer service costs and churn linked to maintaining 180 different “bundles” (channels), rather than the 4-6 bundles they have today. There are distribution economies of scale in today’s TV ecosystem.

Our analysis concludes that there is no worldview where consumer value is created by unbundling the 180 channels available to 90% of households today. What about the broader implications?

The Broader Implications of Unbundling

We note that $150 billion of 2012 TV ecosystem revenue was funded by U.S. consumers and advertisers. PBS received about $450 million from tax payments via Congress. The networks of wires and the satellites and the fiber investments were all privately funded by capital markets and financial institutions over the past 40 years. The vast majority of the 180 channels available to consumers today have been privately funded.

The irony isn’t lost on us that in the U.K. BBC programming is funded through taxes on consumers, giving each household no choice, even if they watch zero TV. At least in the U.S. every household decides on the exact price/value relationship for them and either subscribes or doesn’t subscribe. This feels like a better consumer value proposition to us.

The figure below estimates that there are 1.4 million jobs at risk through unbundling. We use the multiplier of 3x visible employees from public companies both to account for the hundreds of small private companies, but also because creative businesses like TV and film always use outside creatives on a project by project basis. The employees that manage each project are the only ones accounted for in the list below. The thousands of contractors are invisible, but would become unemployed upon unbundling.

Another important point is the nature of these employees. The folks employed in the TV ecosystem range from techs that install boxes in households to the head of prime-time programming at a cable or broadcast network. Essentially, the TV ecosystem employs a range of skillsets consistent with that of America, providing jobs to all education levels and socioeconomic ranks.

Impact on Employment & Taxes Figure 9

Total Employees 2012 Taxes Paid ($mm) CMCSA 129,000 (2,841) TWC 50,250 (1,177) CHTR 17,800 (257) CVC 16,433 (24) CBS 20,930 (892) DIS 156,000 (2,984) FOXA 25,600 (1,690) DISCA 4,500 (561) SNI 2,100 (88) TWX 34,000 (1,526) VIAB 9,880 (1,070) Visible Total 466,493 (13,111) Multiplier 3.0 1.53 Total 1,399,479 (20,060) Source: Company documents, Needham & Co, LLC estimates.

The loss of taxes paid is another issue we think it’s important to raise. In 2012, the TV ecosystem booked approximately $20 billion in taxes, by our estimate. In all of our calculations, revenue would decline in an unbundled world. Taxes would have to be raised elsewhere to offset the lost tax revenue from the TV ecosystem, with all the grumbling that entails. In today’s world, these taxes are associated with 4,400 hours of leisure activity (watching TV)—hardly something a consumer feels justified complaining about.

Valuing Consumers’ TV Choices 11 Shareholder Value Destruction

Another source of consumer value destruction is falling net worth in savings portfolios. Since 90% of households subscribe to cable/telco/satellite TV today, it’s safe to assume that many of these household have money at risk in debt or equity markets. The average valuation multiple in the TV ecosystem is 2.6x revenue. Therefore, anything that lowers TV ecosystem revenue lowers shareholder value 2.6x faster.

For example, if the TV ecosystem is unbundled and $45 billion of advertising revenue (and/or consumer payments) disappears, that implies a negative valuation impact of $117 billion ($45 billion x 2.6), representing about 17% of the total industry’s market capitalization. Assuming that the 90% of consumers who currently subscribe for cable are also shareholders and that the shareholder destruction in value occurred evenly over the 104 million multichannel homes implies that an average household would lose $1.1 million of stock market wealth as the TV ecosystem became unbundled.

Market Capitalization, Enterprise Value, and Figure 10 Valuation of TV Companies

Market Cap Enterprise Value Price/Sales ($mm) ($mm) CMCSA $129,520 $164,890 2.0 TWC $37,470 $57,990 1.6 CHTR $14,020 $27,690 1.7 CVC $4,230 $13,060 0.6 CBS $35,180 $42,420 2.3 DIS $126,360 $136,250 2.8 FOXA $30,570 $36,290 5.8 DISCA $76,210 $86,370 2.6 SNI $10,900 $11,790 4.4 TWX $60,610 $78,080 2.1 VIAB $35,510 $45,120 2.6 Visible Total $560,580 $699,950 2.6 Multiplier 1.2 1.2 Total $672,696 $839,940 Note: We use a multiplier of 1.2x to account for the public TV station companies plus vendors not explicitly included in the list above. Source: Yahoo Finance.

Stock Picks—Content Wins

New Revenue Streams All of the content companies we follow benefit from bundling and the growth of new digital distribution platforms globally. The content companies that are benefiting the most are those that create serialized 1-hour dramas. Serialized dramas are 1-hour episodes that must be viewed in a certain order. In the days before Netflix (NFLX, Buy), it was very hard to sell serialized dramas in syndication, and therefore very few got made. The series 24 was able to cover its costs because boxed sets sales of entire seasons were a large revenue stream. The rise of the subscription video on demand (SVOD) services has created a new market for serialized dramas. The rise of binge viewing has made these dramas much more valuable.

Programming prices have been rising at 8-10%, while prices to consumers are rising at 3-5%. This reality has elicited cries of distress from distributors, who are the primary recipients of consumer complaints. We think complaining about rising programming costs misses a key point. The programmers spend every penny they get from distributors on new series and new original content. None of it falls to the bottom line. Since

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content and distribution are complimentary networks, more spending on original content should fuel higher distribution fees and penetrations. For FY14, nearly every programmer will spend 100% of their distribution fee increases plus take margin compression of 100-200 basis points to invest in more original content.

The TV ecosystem has a problem that only content companies can solve. Young adults (ages 18-34) aren’t watching as much television. Unless the content participants create programming this group wants to watch, there will be no TV ecosystem to save in 10 years. There are 180 channels that have the potential to crack the code to create 18 channels that 21-year olds think are worth paying a monthly subscription fee for. Until that happens, distributors should sit tight and keep their fingers crossed that one of the content conglomerates solves this important problem. We include our coverage list with valuation details in Figure 11.

Comparative Content Company Valuation Figure 11

$ and shares in millions, except where noted & per share data 11/29/13 Market Cap Break-even EV EV/ '14 EV/ '14 Target Current Target/ Ticker Rating ($B) DCF ($B) Sales EBITDA 2014 P/E Price Price Current Online Content 1 AOL, Inc. AOL BUY $3.6 2% $4 1.7 8.8 18.4 $46 $44.58 3% 2 Bankrate, Inc. RATE BUY $1.9 11% $2 4.0 14.0 25.5 $25 $18.74 33% 3 Demand Media, Inc. DMD HOLD $0.5 1% $1 1.3 6.1 17.2 NA $5.51 4 Facebook FB BUY $118.3 13% $109 10.6 19.7 45.1 $65 $47.01 38% 5Netflix NFLX BUY $23.0 15% $24 4.6 42.9 92.5 $425 $365.80 16% 6 Pandora Media P BUY $6.0 24% $6 6.4 89.2 90.5 $33 $28.40 16% 7 TripAdvisor, Inc. TRIP BUY $12.4 11% $12 10.3 22.5 37.9 $90 $88.32 2% 8Yahoo! YHOO HOLD$37.8 11% $23 4.9 13.8 22.2 NA $36.98 Offline Content 9 CBS CBS BUY $32.8 6% $41 2.7 10.6 15.7 $70 $58.56 20% 10 Discovery Communications DISCA HOLD $30.5 7% $36 5.8 12.8 21.8 NA $87.27 11 Disney DIS HOLD $124.2 9% $133 2.9 10.6 18.1 NA $70.54 12 Madison Square Garden MSG BUY $4.4 12% $5 3.2 13.1 30.7 $70 $56.36 24% 13 21st Century Fox FOXA BUY $67.4 6% $74 2.4 10.3 19.6 $36 $33.49 7% 14 Scripps Networks Interactive SNI BUY $10.7 7% $11 4.2 9.5 17.8 $88 $74.59 18% 15 Time Warner Inc TWX HOLD $59.8 6% $80 2.6 9.7 15.3 NA $65.71 16 Viacom VIAB HOLD $35.1 6% $46 3.2 10.0 14.6 NM $80.17 Content-Adjacent Value Drivers 17 Nielsen Company BV NLSN HOLD $16.4 8% $23 3.7 12.5 27.5 NA $43.16 18 Synacor SYNC HOLD $0.1 10% $0.1 0.7 9.6 102.5 NA $2.80 19 Time Warner Cable TWC BUY $39.8 4% $63 2.8 7.4 18.0 $135 $138.22 -2%

Income Statement Balance Sheet FCF Data

Revenue EBITDA EPS Debt FCF/ FCF Dividend/ Conflicts 2014E 2014E 2014E Net Debt Rating WACC FCF Share Yield Share Div. Yield Disclosure 1 AOL, Inc. $2,450 $471 $2.42 ($168) BBB- 10% $381 $4.76 11% $0.00 - B 2 Bankrate, Inc. $527 $150 $0.73 $105 B 10% $50 $0.49 3% $0.00 - B 3 Demand Media, Inc. $420 $98 $0.32 ($57) B 10% $63 $0.69 12% $0.00 - B 4 Facebook $10,254 $5,543 $1.04 ($9,328) BBB 10% $4,693 $1.86 4% $0.00 - B,G 5 Netflix $5,117 $549 $3.96 ($635) BBB 10% $350 $5.58 2% $0.00 - B,G 6 Pandora Media $894 $65 $0.31 ($442) BBB- 10% $79 $0.38 1% $0.00 - B 7 TripAdvisor, Inc. $1,179 $538 $2.33 ($300) BBB- 10% $438 $3.13 4% $0.00 - B, G 8 Yahoo! $4,637 $1,633 $1.66 ($3,215) A- 10% $756 $0.74 2% $0.00 - B, G 9 CBS $15,246 $3,899 $3.72 $7,619 BBB- 10% $2,782 $4.97 8% $0.48 0.8% B 10 Discovery Communications $6,238 $2,822 $4.00 $6,119 BBB 10% $1,820 $5.20 6% $0.00 - B, G 11 Disney $48,136 $12,626 $3.89 $10,357 A 10% $5,112 $2.90 4% $0.75 1.1% B 12 Madison Square Garden $1,467 $356 $1.83 ($128) BBB- 10% ($71) ($0.92) -2% $0.00 - B, G 13 21st Century Fox $31,250 $7,139 $1.50 $12,092 BBB+ 10% $1,982 $0.86 3% $0.17 0.5% B, G 14 Scripps Networks Interactive $2,704 $1,207 $4.19 $878 BBB+ 10% $691 $4.83 6% $0.60 0.8% B 15 Time Warner Inc $31,191 $8,266 $4.29 $17,596 BBB 9% $3,116 $3.42 5% $1.15 1.8% B 16 Viacom $14,101 $4,560 $5.48 $9,492 BBB+ 10% $2,421 $5.53 7% $1.10 1.4% B, G 17 Nielsen Company BV $6,330 $1,854 $2.40 $6,145 BBB- 10% $855 $2.25 5% $0.80 1.9% B 18 Synacor $119 $8 $0.03 ($35) B 10% ($0) ($0.02) -1% $0.00 - B,G 19 Time Warner Cable $23,217 $8,548 $7.68 $23,906 BBB 10% $2,902 $10.07 7% $2.60 1.9% B Sources: Needham research, Company documents, FirstCall, Yahoo Finance.

Valuing Consumers’ TV Choices 13 Top Stock Pick: CBS (CBS, Buy, $70 Price Target) All the content companies listed above benefit from bundled economics. Owing to both the breadth and depth of value destruction for consumers, we forsee only a remote chance that the TV ecosystem will be unbundled in the U.S.

Our top stock pick among the content companies we cover is CBS because it is unterthered by Hulu ownership and, therefore, it is the most innovative at creating new cash flow strems by windowing digital distribution to maximize the ROI of its content. For example:

• Under the Dome. We estimate that CBS covered nearly 100% of its $2.5-3 million per hour cost of Under the Dome through an exclusive 1-year license deal with Amazon (starting 4 days after airing) in the U.S. plus international presales. CBS kept 100% of the ad revenue upside and ratings were so strong for Under the Dome that CBS reported ratings gains up 6% year over year in 3Q13 despite CBS being dark in 3 million homes for 30 days of the quarter during the TWC negotiation. • The Good Wife came available in the syndication window this year with 88 episodes (4 years) available. Normally, this 1-hour serialized drama would have garnered about $700,000 per episode, by our estimate. However, since CBS sold seasons 1-3 to Amazon exclusively for 6 months followed by selling the non-exclusive rights to both Amazon and Hulu Plus for seasons 1-4 after season 4 ended plus the Hallmark Channel plus a broadcaster for certain weekend airings, we estimate that CBS generated $1.5 million per episode instead. • Twitter. CBS did a deal with “Twitter Amplify” for sponsored tweets, whereby sponsors buy tweets of CBS shows, paid for by Visa, Target, etc. • Programming Marathons. CBS hosted catch-up marathons just before the new season began in September 2013. That is, CBS released the prior year full-season of 7 non-procedural shows which could be streamed via app or on CBS.com and/or cable VOD during the 4 weeks immediately before the new fall season. We note that The Good Wife previewed to ratings up 13% after this marathon, but that could have been driven by SVOD availability. In addtion, CBS experimented with mid-season catch-up marathons on CBS.com over the 2012 holidays to drive in-season catch-up of some shows (e.g., The Good Wife) after 4-5 episodes had been aired. • EST. CBS does Electronic Sell Through (EST) through iTunes, Sony Entertainment Network, Samsung Smart Hub, Amazon Instant Video, Vudu, and Xbox. EST sales usually start the day after airing. The pricing is $2.99 for a standard definition episode and $3.99 per HD episode. EST is more monetization per viewer than any other revenue source. In fact, consumers that buy the entire season of just one show pay as much as if they’d paid for an entire season of Showtime. • CBS Audience Network. CBS offers ad supported promo/clips (not full episodes) streaming through up to 200 partner websites, including Yahoo, Comcast, Microsoft, AT&T, Roku, TV Guide, Metacafe, Veoh, etc. These sites are allowed to put up clips (1-3 minutes only) of CBS shows as promotions. Because CBS is primarily advertising driven, its goal is to try to get content in front of audience, no matter where the viewing may occur.

CBS’s valuation information is included in Figure 11 above.

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Appendix 1: Selected Private Online Video Companies We recommend investors pay special attention to the following private online video companies. Aereo’s innovative remote (cloud-based) antenna/DVR technology makes watching television simple and user-friendly. Using Aereo’s technology, consumers can pause, rewind and fast-forward any program that they are watching live, or save a program for future viewing. Aereo works on “smart” devices from tablets to phones to laptop computers. Aereo is supported on iPad, iPhone, iPod Touch, Chrome, Internet Explorer 9, Firefox, Safari, Opera, AppleTV and Roku devices. Android support is expected later in 2013.

Big Frame works with the biggest YouTube influencers to create and market video content. Big Frame is a leading media company in the YouTube entertainment space, building sustainable media brands around YouTube’s most influential channels, and connecting advertisers with their highly engaged audiences. YouTube’s best channels partner with Big Frame to build professional careers by growing their audiences and unlocking lucrative partnerships with advertisers. The biggest advertisers in the most competitive industries work with Big Frame to reach active, engaged and demographically focused audiences. Its satisfied advertisers include Chevrolet, The Home Depot, Sony, Virgin, Levis, Fox and many more.

BrightLine is the leading innovator and global provider of rich media solutions on TV, for the entertainment and advertising industries. BrightLine’s universal design framework is fueled by data-driven experiences proven to increase consumer engagement, brand recall, purchase intent, and sales. With over 500 executed programs in over 90 million households, BrightLine transforms passive 30-second commercials into dynamic, superior, video rich viewer-driven brand interactions. BrightLine’s proprietary iQ™ software suite aggregates consumer behavior trends and historical results to inform the design implementation of integrated, programmatic advertising experiences. BrightLine’s platform-agnostic solutions launch across all connected and legacy television platforms, including cable/telco/satellite companies, gaming consoles, connected televisions, smartphones, and tablets.

With more than 70 million monthly unique viewers, BrightRoll is the world’s largest and most trusted video ad network and the leading provider of digital video advertising services. The BrightRoll Network has access to billions of video impressions per month enabling advertisers to execute smart digital video campaigns across a massive pool of web and mobile video inventory. BrightRoll’s proprietary buying technology, combined with its full site disclosure, detailed performance reports and flexible targeting, provide brands and agencies with the reach, frequency and scalability needed to achieve their campaign goals. BrightRoll is headquartered in San Francisco, CA.

Valuing Consumers’ TV Choices 15 Established in 2007, DECA is a leading digital media and entertainment company. DECA creates high-quality video and operates a network of premium video channels. Its purpose is to make women feel connected and inspired. DECA owns DECA Studios, Kin Community and a portfolio of brands, including Kin Community Originals, Momversation.com and The Lizzie Bennet Diaries. Headquartered in

Santa Monica, CA, DECA is funded by Mayfield Fund, General Catalyst Partners, Rustic Canyon Partners and Atomico.

Defy Media is focused on content creation and delivery to the key 12-34-year-old demographic and is the #1 ranked male-targeted network with Alloy Digital’s top ranking properties and video networks. Defy Media’s proprietary media and ad network offers advertisers unmatched access to consumers across key categories, including entertainment, women and men’s lifestyle, comedy and gaming. Over 50 million monthly unique users connect with its owned and operated properties, including SMOSH, the award-winning comedy brand and #2 most subscribed YouTube channel, and Break.com, the #1 video humor site on the web. Defy is also home to the #1 digital entertainment news provider Clevver Media and Made Man, a top men’s lifestyle destination, as well as recognized content brands AWEme, Screen Junkies, The Gloss and The Escapist.

Delivery Agent is the market leader in turning TV viewers into revenue-generating customers for the world’s largest brands and media companies. Its proprietary technology allows viewers to engage with and transact directly from advertisements and television shows through web, mobile and advanced television applications. Delivery Agent has enabled over 700,000 hours of programming and advertisements resulting in over 200 million engagements and 10 million transactions. It is deployed and maintains long-term partnerships with NBC, FOX, CBS, HBO, Showtime, Pepsi, Visa, Comcast, Cablevision, AT&T, Verizon, Samsung and LG, among others.

Ebuzzing is the global expert in video advertising. It creates engaging, high impact video experiences, distributing video ads to audiences through placements within social media and premium media. To date, Ebuzzing has distributed thousands of campaigns for the world’s leading brands, including Heineken, Acer, LG, Samsung, Evian and Adidas. Founded by Bertand Quesada and Pierre Chappaz in 2007, Ebuzzing now has more than 200 employees with offices in New York, Miami, London and across France, Italy, Germany, Spain, Luxembourg, Morocco and Dubai. Its R&D department employs 50 people, demonstrating the company’s commitment to innovation. Ebuzzing’s 2012 revenue was $52 million, up 78% from the previous year.

FreeWheel gives enterprise-level media companies the infrastructure they need to create scaled, profitable content businesses in the new media landscape. Founded and led by a team of executives from the world’s leading technology companies, FreeWheel’s solutions have armed its customers with the technology and services they need to manage advertising and operations across a multiplicity of devices. The company was founded in 2007 and is privately held, with offices in Silicon Valley, New York, London, and Beijing. FreeWheel is funded by Steamboat Ventures, Turner Broadcasting System, DIRECTV, Battery Ventures, and Foundation Capital.

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Fullscreen is a next-generation media company building a global network of YouTube channels with content creators and brands. The Fullscreen network generates over 1 billion monthly video views and reaches over 90 million subscribers, making Fullscreen a Top 5 YouTube Partner. Fullscreen was founded in January 2011 by CEO George Strompolos, the co-creator and co-founder of the YouTube Partner Program. Fullscreen is headquartered in Culver City, CA.

Machinima is the next generation of video entertainment for gamers, providing comprehensive gaming-focused programming to the hard-to-reach 18-to-34-year-old male demographic. Its growing global reach blankets over 190 million unique gamers. This network is constantly tuned-in and engaged, viewing an excess of 2.1 billion videos in May 2013. Machinima’s properties are found across the largest global distribution platforms, including YouTube, Facebook, Twitter, iOS, Android, and the Xbox 360. In addition to producing expansive and high-quality editorial content, Machinima boasts a suite of applications, tools and technologies that motivate and engage its audience. It builds communities around and in between game launches and DLC releases, distributing “official” videos and producing custom content, creating the world’s most powerful and enthusiastic gamer network.

Maker Studios is a next-generation, talent first media company home to many of online video’s top digital stars and content, including KassemG, The Game Station, Nice Peter’s “Epic Rap Battles of History,” the Shaytards, Andrea’s Choice, The Yogscast, Snoop Lion, The Gregory Brothers, Mike Tompkins and celebrity actress/comedian LisaNova, among many others. Maker is the only network to offer partners development, production, promotion, distribution, sales, and marketing services. Maker Studios is headquartered in Los Angeles, CA.

Mediamorph is a software-as-a-service (SaaS) company that provides media industry workflow, data and analytics solutions. Mediamorph helps media and entertainment companies to prosper in a rapidly changing environment. They do this through their industry leading cloud-based platform to collect rights, performance and social data on an industry-wide scale. They then provide tools on top of that data to automate operations, analyze the data and optimize business results. Some of the services they provide are Cross Platform Audience Measurement, Contracts and Rights Management, Accounting and Royalty Automation, and Social Data Dashboards. All major Hollywood studios, leading television networks and the largest video service operators use Mediamorph to better measure and understand their businesses and to operate more efficiently and effectively.

Ooyala is a leader in online video management, publishing, analytics and monetization. Its integrated suite of technologies and services give content owners the power to expand audiences, and deep insights that drive increased revenue from video. Ooyala serves hundreds of global media companies and consumer brands. Ooyala was founded in Mountain View, CA, in 2007 by Bismarck Lepe, Sean Knapp, and Belsasar Lepe. Ooyala’s corporate headquarters are supported by global offices and sales reps in New York City, Los Angeles, London, France, Spain, the Middle East, Japan, Australia, Brazil and Mexico.

Valuing Consumers’ TV Choices 17 Roku, located in Saratoga, CA, was founded in 2002 by Anthony Wood, the inventor of the digital video recorder. The market leader in streaming entertainment devices for TV with millions of units sold, Roku has always believed that anything you want to watch, listen to and enjoy should simply be there on your TV, whenever you want it. Roku streaming players are renowned for their simplicity, variety of entertainment choices, and exceptional value. “Roku” means “six” in Japanese, a reference to the six companies Wood has launched.

Shazam connects more than 350 million people, in more than 200 countries and 33 languages to music, TV shows and ads they love. Every month another 10 million people embrace Shazam, making it the world’s leading media engagement company.

Since its founding in 2002, Shazam has become one of the world’s most recognized mobile consumer brands and one of the Top Ten most downloaded apps on iTunes App Store. Shazam is also a companion app, bringing together people and entertainment in a variety of ways. Shows and advertisements that include the company’s on-air prompt connect viewers to exclusive information and special offers on their favorite products.

SundaySky, the creator of SmartVideo, helps customer-centric brands engage people with personalized, real-time video experiences at every step of the customer lifecycle. The SundaySky platform generates hundreds of thousands of SmartVideos daily, powering customer acquisition, support, growth and loyalty initiatives for leaders in e-commerce, telecommunications, insurance, banking and travel. AT&T, Office Depot, Allstate and other SundaySky customers have proven that SmartVideo viewers are more engaged, profitable and loyal, as program performance is measurable and optimized for incremental impact on key business metrics. SundaySky is headquartered in New York City with offices in Tel Aviv and London.

TubeMogul is the leader in programmatic brand marketing. The world’s largest brands and agencies centralize their video advertising on TubeMogul’s enterprise platform. Created specifically for brand marketers, TubeMogul’s platform enables the execution of scalable digital video campaigns, while providing the measurability and accountability marketers demand. Founded in 2006, TubeMogul is based in Emeryville, CA.

VEVO is the world’s leading all-premium music, video and entertainment platform, available in the U.S., Australia, Brazil, Canada, France, Ireland, Italy, New Zealand,

Spain and the U.K. through VEVO.com, the mobile web, mobile and tablet apps (iPhone, iPad, Android, Windows Phone, BlackBerry Playbook), Connected Television (Xbox, Roku) and user embeddable video players.

Visible Measures is the real-time video content marketing platform of choice. Global brands rely on Visible Measures to engage audiences with relevant content across channels and devices. Visible Measures predictably maximizes desired marketing results through its broadly embedded technology and the world’s most comprehensive data footprint.

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Vubiquity is the leading global provider of multiplatform video services, helping to bring the most innovative, advanced video services into consumers’ homes and onto their connected devices. Vubiquity aims to help its customers more easily and quickly meet consumers’ evolving demands and monetize opportunity, everywhere it exists and anywhere it emerges. Vubiquity offers the industry’s most complete portfolio of multiplatform video services, including TV Everywhere, VOD, linear television delivery, advanced advertising and data analytics. Vubiquity gets its customers to market faster, at a lower cost, with greater extensibility and flexibility than they could realize on their own.

WideOrbit is the leading provider of business management software for media companies. Its product lines include solutions for sales, traffic, media networks, radio automation and promotion optimization. And its client list includes the finest group of television stations, radio stations and media networks in the industry. WideOrbit is committed to client success and satisfaction, and it is consistently rated the most responsive and recommended provider of traffic systems in the industry, according to independent research by the Traffic Director’s Guild of America.

ANALYST CERTIFICATION I, Laura Martin, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company (ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

ANALYST CERTIFICATION I, Dan Medina, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company (ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

Closing Prices Company Symbol 11/29/13 Rating Disclosures 21st Century Fox FOXA $33.49 Buy B, G Amazon.com AMZN 393.62 Hold B, G AOL AOL 44.58 Buy B Apple AAPL 556.07 Buy A, B, G Bankrate RATE 18.74 Buy B CBS CBS 58.56 Buy B Demand Media DMD 5.51 Hold B Discovery Communications DISCA 87.27 Hold B, G Facebook FB 47.01 Buy B, G Madison Square Garden MSG 56.36 Buy B, G Netflix NFLX 365.80 Buy B, G Nielsen Holdings NLSN 43.16 Hold B Pandora Media P 28.40 Buy B Scripps Networks SNI 74.59 Buy B Synacor SYNC 2.80 Hold B, G Time Warner TWX 65.71 Hold B Time Warner Cable TWC 138.22 Buy B TripAdvisor TRIP 88.32 Buy B, G Viacom VIAB 80.17 Hold B, G Walt Disney DIS 70.54 Hold B Yahoo! YHOO 36.98 Hold B, G

Valuing Consumers’ TV Choices 19

% of companies under coverage % for which investment banking services with this rating have been provided for in the past 12 months Strong Buy 3 18 Buy 62 23 Hold 35 7 Underperform <1 0 Rating Suspended 0 0 Restricted 0 0 Under Review <1 0

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Photo credit: ©iStockphoto.com/HamiltonArchive. Should America Follow the Queen? On October 16, 2013, the U.K. Queen’s representative in Canada (the Governor General) announced that Canada should require TV channels to be unbundled in 2014 in order to “maximize consumer choice.” U.S. investors and press are wondering whether the U.S. should follow Canada’s lead. This report calculates the economic impact of unbundling the TV ecosystem on U.S. consumers. We have no opinion on what Canada should do, but in the U.S., we believe that our Founding Fathers had it right: Decisions made by Monarchs aren’t always in America’s best interest.

We calculate that consumer value is destroyed through falling channel choices, lay-offs, and shrinking net worth as the TV ecosystem is unbundled. Advertisers pay more for TV content than consumers in the U.S., which inverts with unbundling. The $0.16 pay per hour of TV viewing that consumers pay is a 97% discount to the average value of an hour of consumers’ time, based on their average earnings power.

In percentage terms, consumer value put at risk through TV unbundling includes: • About 65% of consumer value associated with channel choices ($80-113 billion); • About 60% of total TV advertising revenue ($45 billion); • About 40% of total TV ecosystem jobs (1.4 million total); • About 30% of taxes paid ($20 billion total); and • About 20% of TV ecosystem companies’ market capitalization ($117 billion).

In conclusion, American consumers derive enormous value through diverse channel choices, as evidenced by 4,400 hours of TV viewing per year, virtually all of it funded by public capital markets. Because consumers lose so much value through unbundling, we recommend no changes in the U.S.