Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Does TV Advertising make money at Fox and ViacomCBS?

Television advertising has no effect on product sales. TV ads had no effect on the sales of 288 consumer brands studied by three marketing professors, Kellogg Insight claims.

In addition, 80% of the brands studied received a negative return on investment (ROI) from TV commercials, Kellogg Insight alleges. Therefore, most companies lose money on their TV commercials.

The measurable effect or elasticity from TV advertising was 0.01% TV Advertising Effectiveness and Profitability: Generalizable Results from 288 Brands found. They based the paper on a study of 288 brands including Diet Coke and Brawny. The researchers studied product sales at 12,000 US stores and Nielsen data about 60,000 American households in the years 2010-2014.

The paper was written by Guenter Hitsch and Bradley Shapiro of the University of Chicago and Anna E. Tuchman of Northwestern University’s Kellogg School of Management.

TV ads have zero effect on sales

Interestingly, the professors could find no evidence TV ads have a positive effect on sales, Kellogg Insight claims.

 “These effects are essentially zero,” Tuchman says of TV ads’ effect on the sales of two-thirds of the brands she studied. Hence, Tuchman and her colleagues conclude that TV advertising is a waste of money.

Tuchman speculates that companies buy TV advertising because some advertising and marketing professionals jobs depend on television. She thinks advertising professionals have no incentive to show if ads work. Hence, they spend money on commercials to justify jobs, not sell products.

Can TV networks make money?

If this research is valid, it calls many business models into question. In particular, TV networks such as CBS and CNBC. Determining the profitability of TV ads is hard because most networks are part of larger organizations.

MSNBC and CNBC, for example, are part of Comcast Corporation (NASDAQ: CMCSA). Similarly, the Walt Disney Corporation (NYSE: DIS) owns ESPN and ABC.

Moreover, they recently folded America’s last true independent TV network CBS intoViacomCBS (NASDAQ: VIAC). ViacomCBS is a holding company that owns several cable networks, Paramount Pictures, Paramount+, and CBS.

Is Network TV Dead?

Tellingly, ViacomCBS executives are exploring a possible merger with Comcast’s NBCUniversal, which owns NBC, USA, MSNBC, and CNBC, CNBC speculates. The thinking behind a merger is to combine ViacomCBS’s Paramount+ and NBCUniversal’s Peacock streaming services to compete with behemoths such as Disney+ and Netflix (NFLX).

A combined ViacomCBS/NBCUniversal would own two of America’s historic big three broadcast TV networks CBS and NBC. However, Tuchman’s data shows both networks could be irrelevant and money losing in today’s market.

I think television ratings bolster Tuchman and company’s assertion. In 2020, America’s most watched TV network was CBS with an average of 7.14 million viewers, All Top Everything estimates.

The population of the United States was 333.097 million people in mid 2021, Worldometers estimates. Hence, I estimate a little over 2% of the nation’s population watched America’s most popular network. To elaborate, 2% of 333.097 million is 6.66 million.

Broadcast Networks reach under 2% of the population

In contrast, Fox Broadcasting, the number four network had 4.62 million average viewers in 2020. NBC, the number two network, had 6.33 million average viewers in 2020. The number five network and top cable channel, the Fox News Channel, had an average of 2.5 million viewers in 2020.

I think no rational marketer will pay for advertising that only reaches 2% or less of the population. Hence, data the data shows broadcast television is dead. Notably, the top cable channel’s viewership is less than 1% of America’s national population.

On the other hand, aging newspaper tycoon Rupert P. Murdoch and his family bet that TV networks still make money. To explain, Murdoch sold his entertainment company 20th Century or 21st Century Fox to Disney (DIS) but kept his Fox broadcast network and the infamous Fox News Channel through Fox Corporation (NASDAQ: FOXA).

Tellingly former Disney CEO Bob Iger wanted nothing to do with Fox News or Fox Broadcasting Instead, Iger only wanted 20th Century Fox and its historic movie and TV library.

Does Fox Corporation Make Money?

Hence we can view Fox Corporation (FOXA) as an experiment in the effectiveness and profitability of television advertising.

Strangely, Mr. Market has some faith in Fox Corporation. Fox Corp’s stock price rose from $25.72 on 27 July 2020 to $36.56 on 26 July 2021 to $33.94 on 29 July 2021. Conversely, Fox Corp’s revenues, income, and profit fell between March 2020 and March 2021 which verifies Tuchman’s thesis.

To explain, Fox Corp reported quarterly revenues of $3.44 billion on 31 March 2020. Those quarterly revenues fell to $3.215 billion on 31 March 2021. In addition, the quarterly gross profit fell from $1.379 billion to $1.333 billion in the same period. Finally, the quarterly operating income fell from $858 million on 31 March 2020 to $815 million on 31 March 2021.

In contrast, ViacomCBS’s quarterly revenues grew from $6.669 billion on 31 March 2020 to $7.412 billion on 31 March 2021. Similarly, ViacomCBS’s quarterly gross profits grew from $2.503 billion on 31 March 2020 to $2.95 billion on 31 March 2021. In addition, ViacomCBS’s quarterly operating income grew from $902 million on 31 March 2020 to $1.528 billion on 31 March 2021.

I think ViacomCBS Inc. (VIAC) shows streaming video is a growth business. Notably, ViacomCBS’s quarterly revenues grew by 11.14% in the quarter ending on 31 March 2021 and 13.49% in the quarter ending on 31 December 2020, Stockrow estimates. In contrast, Fox Corporation’s revenues shrank by -6.54% in the quarter ending on 31 March 2021. Interestingly, Fox’s quarterly revenues grew by 8.18% in the quarter on 31 December 2020.

How Much Cash Does Television Generate?

There is some financial data to support Murdoch’s faith in television. Interestingly, the Fox Corporation (FOX.B) reported a quarterly operating cash flow of $1.629 billion and a quarterly ending cash flow of $1.2643 billion on 31 March 2021.

Importantly, that cash did not come from debt. Fox reported a quarterly financing cash flow of -$366 million on 31 March 2021. However, Fox reported a quarterly financing cash flow of $1.132 billion on 30 June 2020.

Consequently, Fox had $5.765 billion in cash and short-term investments and a Total Debt of $7.95 billion on 31 March 2021.

I consider Fox Corporation a financially healthy company that makes money. However, I think Fox Corporation is a company with a questionable future because of the shrinking viewership.

How Much Cash can Television Generate?

In contrast, ViacomCBS (VIAC.B) had a quarterly operating cash flow of $1.723 billion on 31 March 2021 ViacomCBS had a quarterly ending cash flow of $5.632 billion on 31 March 2021.

However, ViacomCBS reported a $723 million quarterly financing cash flow on 31 March 2021. I imagine the financing comes from borrowing to finance television production for streaming which is smart. As result, ViacomCBS had $5.499 billion in cash and short-term investments and a total debt of $17.787 billion on 31 March 2021.

I conclude television is a cash-rich business because of these numbers. However, ViacomCBS’s cash flow is growing. The quarterly operating cash flow rose from $356 million on 31 March 2020 to $1.723 billion on 31 March 2021. Comparatively, Fox’s quarterly operating cash flow grew just slightly from $1.601 billion on 31 March 2020 to $1.629 billion on 31 March 2021.

Similarly, Fox’s quarterly ending cash flow rose from $1.205 billion on 31 March 2020 to $1.263 billion on 31 March 2021. Impressively, ViacomCBS’s quarterly ending cash flow grew from $731 million on 31 March 2020 to $5.632 billion on 31 March 2021.

Thus, even smaller streaming services such as Paramount+ can generate enormous amounts of cash. Notably, Paramount+ had 36 million global subscribers in May 2021, ViacomCBS claims. In contrast, Statista estimates that Netflix (NASDAQ: NFLX) had 207.64 million paid subscribers worldwide in the First Quarter of 2021.

What Future does Television have?

I think the financial numbers show streaming is the future of television. Hence, I consider ViacomCBS (VIAC) an interesting growth and value stock.

First, Mr. Market undervalued VIAC at $41.69 on 29 July 2021. ViacomCBS’s share value grew from $24.83 on 27 July 2020. Notably, ViacomCBS shares hit a high of $100.34 on 22 May 2021 before falling.

Second, ViacomCBS Inc. (VIAC) paid a 24₵ quarterly dividend on 14 Jun 2021. Overall, ViacomCBS offered a last-twelve months (LTM) dividend of 96₵ and a dividend yield of 2.32% on 29 July 2021.

I conclude television advertising is a poor business with no future that investors need to avoid. Conversely, I think streaming television is a cash-generating growth business, investors need to investigate.