Market Mad House

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


Is CBS (CBS) the Future of Television?

I ask is CBS (CBS) the future of television because the network is two separate companies.

First, CBS is an old-fashioned broadcast network with a historic brand that is declining fast. Second CBS is a digital video streaming service CBS All Access with 2.5 million viewers.

Significantly, CBS (NYSE: CBS) is small potatoes in today’s television landscape. For instance, CBS’s most-watched show The Big Bang Theory had 12.418 million viewers during the 2018-2019 season, TV Series Finale calculates. Meanwhile, Netflix (NASDAQ: NFLX) had 60.55 million American subscribers in 4th Quarter 2018, Statista estimates.

Is CBS the future of Television and News?

Comparatively, the CBS All Access streaming service had 2.5 million subscribers in August 2018, TVTechnology estimates. In addition, CBS hopes to expand All Access’s subscriber base to four million in 2019 and eight million in 2020.

In addition, CBS offers a streaming news service called CBSN. Interestingly, CBSN will feature access to local news broadcasts from CBS affiliates, TV Technology reveals.

CBSN, in particular, could be the future of video news because it supposedly offers 24/7 original reporting. However, CBSN could have serious problems if CBS’s broadcast news is any sign of its quality.

In fact, CBS rarely engages in serious reporting. Disturbingly, CBS’s journalists accommodate colorful politicians like President Donald J. Trump (R-New York) and U.S. Senator Bernie Sanders (I-Vermont).

However, it is unclear whether CBS journalists support Trump and Sanders or see them as rating winners. I have to wonder how a news network with such poor quality journalism and questionable ethics can survive. In some ways, CBS is worse than Fox News, which at least has the courage to reveal its political leanings.

How Streaming Video is Killing Broadcast Television

It is easy to see why CBS is devoting so many resources to streaming video. Broadcast television is dying fast while streaming video is growing like a weed.

For instance, Statista projects Amazon’s (NASDAQ: AMZN) Prime streaming video to grow from 30.8 million U.S. subscribers in 2017 to 46.3 million in 2020. Additionally, Statista estimates Netflix’s subscriber base grew from 44.36 million in 1st Quarter 2014 to 60.55 million in 4th Quarter 2018.

Meanwhile, the year-to-year viewership of all the scripted CBS shows renewed for the 2017 to 2018 season fell, TV Series Finale calculates. Notably, the viewership of six shows fell by over 10% and the year-to-year ratings for one series Bull fell by 35.85% or one-third.

Hence, CBS’s viewership is disappearing fast. Notably, only CBS series the documentary shows 60 Minutes and 48 Hours displayed year-to-year ratings growth. However, 60 Minutes ratings increased by 1.88% and 48 Hours ratings by 0.30%.

Streaming Video could make CBS a Cash-Rich company

From a value investor’s standpoint streaming video has some huge advantages over the broadcast networks.

First, digital requires no massive infrastructure of stations, studios, etc. antennas, etc. Instead, all a company needs to start a streaming video service is content and cloud space.

Second, streaming video subscribers pay a monthly subscription for the service. The subscription is low but it is a monthly stream of steady cash. For example, CBS makes $14.975 million from All Access each month because it charges a $5.99 monthly subscription. Moreover, CBS could make $179.70 million a year from All Access.

Hence, CBS could quickly become a cash-rich company because of streaming video. Thus it is easy to see why Comcast is so eager to launch an NBC Universal streaming service and Disney (NYSE: DIS) bought 21st Century Fox to get a 60% ownership stake in Hulu.

Is Streaming Video a Value Investment

Subscription fees are an example of what Warren Buffett calls “float.” In detail, Buffett’s float is a constant stream of cash a company can save or tap for other means.

Notably, Buffett used a wide variety of float to build Berkshire Hathaway (NYSE: BRK.B). Specifically, float-producing businesses Berkshire Hathaway (NYSE: BRK.A) owns include newspapers, utilities, and insurance companies (Uncle Warren regards premiums as float).

In today’s world streaming video services like CBS All Access and Hulu are value investments. Streaming video is a value investment because of float.

Is CBS the future of television and streaming video?

I ask is CBS the future of television and streaming video because of CBS’s digital content.

To explain, CBS is pioneering a new video streamer that offers specific kinds of curated content. For instance, All Access showcases Star Trek and CBSN will specialize in the news.

Hence, CBS is concentrating on tailored high-profit content rather than trying to show as much content as possible. The benefit is CBS can make more money because it spends less on production.

Will CBS Succeed on Streaming Video?

The risk is CBS is staking everything on a few programs. However, at least one of those programs Star Trek has a proven audience.

The risk is that different programs work on streaming video and broadcast. To explain, streaming video fans prefer more sophisticated programs with complex plots and intense characters. On the other hand, broadcast television is simpler and shallower.

This explains why Netflix does not fill its platform with MASH and Law & Order reruns. Streaming video fans want programming that is deeper, richer, and more intense.

Will CBS Survive on Streaming Video?

Therefore, CBS will have to develop different programming for streaming video. For instance, a streaming video Star Trek needs to be darker and more complex; something closer to Deep Space Nine than Enterprise.

Hence, most of CBS’s broadcast shows; like NCIS, will not work on streaming video. To explain, shows like NCIS are simple, shallow, and appeal to a wide audience.

For example, the cop catches the bad guy; or solves the crime each week. A big problem is that traditional TV viewers crave closure and stability. Meanwhile, streaming video subscribers want an intense experience, complexity and continuous emotional satisfaction. Hence, the streaming fans want a soap opera rather than a four-act drama.

However, traditional TV genres like westerns, science fiction, cop shows, legal dramas, soap operas, and mysteries could work on streaming video. On the other hand, the showrunners will have to offer viewers a very different, darker, and more intense take on those classic tropes.

A good example of this is Dark Mirror which updates the classic Twilight Zone/Outer Limits “shock of the week” sci-fi for modern sensibilities. Correspondingly, CBS is creating a 21st Century Twilight Zone reboot for All Access.

However, CBS All Access will need to show something besides Star Trek to survive. An obvious solution is to package new original shows with Star Trek programs to build an audience.

Will Streaming Video take sports from CBS?

Other areas CBS could mine for streaming video subscribers are sports like pro wrestling, boxing, and Ultimate Fighting which have large audience.

In particular, the wrestling marks are already paying $9.99 for the WWE Network and high rates for pay-per-views. Interestingly, WWE (NYSE: WWE) claims its network has two million subscribers.

CBS needs to consider subscription sports because sports like the NFL will dump broadcast for streaming video in the next decade. The NFL, Major League Baseball, and NBA will go to streaming video because they will want float from subscriptions.

A smart move for CBS is to show NFL and other professional games on All Access and share the subscription fees with the league or the teams. An advantage to going digital is CBS could show American football all over the world. Notably, WWE is now offering its network in India and Europe.

CBS vs. Netflix

Currently, CBS (NYSE: CBS) is a far better stock than Netflix because it is cheaper and pays a dividend.

For example, CBS shares traded at $49.50 on 30 January 2019 but paid an 18¢ dividend on New Year’s Day 2019. Moreover, CBS shareholders enjoyed a dividend yield of 1.45%, an annualized payout of 72¢, and a 13.71% payout ratio on the same day.

Meanwhile, Netflix (NASDAQ: NFLX) pays no dividend and traded at $340.46 on 30 January 2019. Hence, Netflix is an overpriced stock while CBS is a valuable investment.

Interestingly, CBS and Netflix’s financial numbers are close. For instance, Netflix recorded revenues of $3.999 billion and a gross profit of $1.597 billion on 30 September 2018. Conversely, CBS reports revenues of $3.263 billion and a gross profit of $1.341 billion on the same day.

Thus, CBS is generating twice the revenue of Netflix with slightly lower profits. However, CBS is a better stock because it Mr. Market fairly prices it.

Under these circumstances, investors will be well-advised to stay far away from Netflix but investigate CBS. Surprisingly, I think CBS is in a good position to make money from streaming video if its management is serious about All Access. 

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