Pay TV distributors who believe that the decks are stacked against them in retransmission negotiations with major content producers should take a look at the 180-page media and entertainment report out today from International Strategy and Investment Group analyst Vijay Jayant. He urges investors to buy shares of AMC Networks, CBS, 21st Century Fox, Time Warner, and Viacom. He’s neutral on Discovery, Disney, and Scripps Networks. The big reason: These eight companies, he says, “control 90% of total TV viewership and 60% of total film production in the U.S., which means that, for the most part, they have the power to determine how content is packaged and priced to distributors and, therefore, consumers.” That muscle will be evident over the next few years as they squeeze cable and satellite companies to pay $60B in carriage fees for their channels in 2016, up from $45B this year. These payments “are drivers for the overall sector.” Factoring in “the consumer’s inherent psychological need for entertainment (even during tough times),” Jayant predicts healthy profits for his eight companies, with annual average returns on invested capital over the next three years ranging from 40.1% for AMC to 9.9% for Time Warner. Jayant recognizes that there’s “a real risk” that cable and satellite companies will merge, giving them more leverage to fight the price hikes. Online services also pose “evolving” threats. For example, pay TV customers might cut the cord with traditional video services as entertainment choices grow on the Internet from Netflix, Hulu, and Amazon Prime. And ad-supported sites including YouTube might siphon dollars from traditional TV. He remains an industry bull, though, because people devote about 15% of their waking hours to TV. As a result, “the importance of TV for advertisers wanting to broadly brand and to reach the public becomes obvious…despite the advent of competing forms of media and entertainment.”
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