Media Spotlight Swings Away From Content

Also a negative for programmers, says Shapiro, is decreasing competition between DBS operators and cable systems. Recently, points out Shapiro, cable operators such as Charter Communications (CHTR - Cramer's Take - Stockpickr) and DBS operators EchoStar Communications (DISH - Cramer's Take - Stockpickr) and Hughes Electronics (GMH - Cramer's Take - Stockpickr) have indicated their aversion to cutting prices to attract new subscribers. "The natural extension of this change," writes Shapiro, "is that the operators will change their focus from the battle for market share to the battle to reduce their costs, with programming at the top of the list."

To illustrate that scenario, Shapiro estimates that if distributors could cut programming price increases from 9% annually to 5% annually through 2006, current stock values could be boosted from 10% to 40% for most operators.

In a report issued last week, Merrill Lynch analyst Jessica Reif Cohen also makes the distribution case, though she rejects making a blanket statement to that effect. Instead, says Cohen, certain programming networks will have a tougher time than others in forcing cable and satellite distributors to pay price increases; key determinants of value for the distribution side will be ratings performance and local advertising sales opportunities for operators.

Dwarfs?

Among content providers, says Cohen, the biggest risk is faced by Disney, whose monthly subscriber fees for cable operators are said to be the highest by far of any cable channel, and whose fees are believed to rise about 20% annually.

As the company's contracts with individual operators come up for renewal, writes Cohen, "we believe it will be much more difficult for ESPN to pass these huge increases through to the cable operator, especially the larger, consolidated system operators." Also likely to face difficulties will be News Corp.'s (NWS - Cramer's Take - Stockpickr) Fox Sports properties. (Merrill or an affiliate has received investment banking fees from both News Corp. and Disney.)

Ultimately, says Cohen, cable network affiliate fees could shift to a "pay-for-performance" model, varying based on audience size.