Pivotal Research Group Senior Research Analyst Brian Wieser said the newly announced CBS programmed sports radio network should be viewed favorably, “as it illustrates growth initiative potentially enabling CBS radio to grow faster than their forecasts, otherwise assumed as generally flat in years ahead.”
From the report:
“Radio currently represents ~10% of CBS’s total revenue. With this announcement, we see potential for incremental growth, but wait for execution to change estimates.
The network will run 24-hours, seven-days-a-week on eight CBS stations (in Houston, Philadelphia, Detroit, Tampa, Baltimore, Charlotte, Riverside and Las Vegas). Scores of Cumulus (CMLS, N/R) stations and other CBS stations will also run network programming. Cumulus will be responsible for syndication and ad sales using its existing sales teams.
CBS management believes the market for sports network radio advertising to be worth $150 million of revenue, part of what we estimate will be a $1.3 billion network radio sector this year. Far and away the dominant player in this business is Disney’s (DIS, N/R) ESPN. Other key sellers of advertising in context of sports content on radio include Dial Global (WWON, N/R), which currently owns the former Westwood One network among its properties.
This effort should be only minimally cannibalistic. Sales teams in any given city will likely continue capturing the ad revenues they were already generating as long as they can fulfill marketer goals with inventory on other stations or programming sold by the CBS radio sales team. The revenue from inventory contributed to a national pool will then capture money from an essentially different market, leading to potential incremental growth for CBS.
One limitation to the effort will be the separation of sales responsibilities between CBS and Cumulus. Sports marketing is uniquely holistic, with marketer/agency rhetoric matching reality. Media owners selling ads associated with sports are generally better able to sell across media platforms than they can with other content. We believe that this bundling has contributed significantly to ESPN’s success with radio to date. A second limitation will relate to content rights that CBS may have or secure in the future, as other entities such as Dial Global or SiriusXM (SIRI, BUY) may otherwise secure radio rights for themselves.
To this end, maximizing the opportunity for this initiative may ultimately require establishing an integrated sales force covering TV and radio properties or ensuring that sales teams responsible for selling TV properties are appropriately – and perhaps disproportionately – incentivized to bundle the sales of TV inventory with radio. Such bundles can and do work with sports marketing, in contrast to other cross-media sales efforts, where bundles may often only be sold with significant discounts. Concurrently, when CBS negotiates for content rights for its TV networks, the company will need to secure concurrent rights for radio as well.
Radio continues to be challenged for growth by (often inaccurate) perceptions about radio among marketers, agency account directors and media planners as an old or declining medium. Sentiment about radio as an old, declining medium has been reinforced by the traditional radio industry’s failure to embrace newer players (including Sirius, Pandora (P, N/R) and Spotify) as part of what we would call a “competitive fraternity” of legacy station groups. Large sellers of radio inventory must pursue initiatives such as these to capture share of the existing market or otherwise capture budgets that would have gone to other media.
VALUATION. We value CBS with a DCF, incorporating a 10.6% near-term discount rate, a 13.6% long-term discount rate and long-term cash flow growth of 4.5%. Our target equates to a 13x 2013 P/E multiple vs. 11x currently.
RISKS include a partial dependence on public policies which favor broadcast station licensees, the hit-driven nature of producing television programming, and the prevalence of misguided perceptions around the “death” of TV advertising.”
