Time Warner Cable may be cursing the recent surge, called "Lin-sanity," that's made the Carmelo Anthony and Amar'e Stoudemire-less Knicks a must see national phenomenon. In a matter of days, Lin turned a missable Knicks season into a must see sports drama.
In early January, after months of heated talks on pricing that even made it publicly to television ads, Madison Square Garden and Time Warner Cable ended negotiations that would bring MSG and MSG+ to 12 million-plus Time Warner subscribers for years to come. With more and more fans interested in seeing whether Lin will turn into a bona fide star or peter out, Time Warner may need to relent to a higher priced agreement.
"It makes it harder for Time Warner Cable to get the price it wants for carriage of MSG," says Evercore Partners analyst Bryan Kraft of the impact of Lin-sanity on the contract dispute. The biggest fear may be that Jeremy Lin is broadening interest in the Knicks and not only to Time Warner Cable's 2 million-plus New York area subscribers.
With a broader interest outside of New York basketball die hards, Time Warner may be cornered. "There were a certain number of Time Warner subscribers who watch MSG. Now with the popularity of Jeremy Lin, that number of customers is increasing," adds Kraft. Still, he says that five games of NBA play by 23-year old Jeremy Lin isn't a backbreaker for the company.But the impact may already be felt. Initially, one might have given Time Warner the edge in the contract war because of its size relative to the long-suffering Knick and Ranger broadcasting rights that MSG offers. However, the Lin-fueled Knicks may make it easy for MSG to forget its Time Warner viewers. "their ratings are higher in absolute terms even without Time Warner Cable," says Maxim Group analyst John Tinker. "Heaven forbid if Linsanity keeps going," he adds. The pricing ball may be back in MSG's court. "MSG wants an escalation over the $4.3 per sub rate charged last year. We think a deal gets done at $5 to $5.40 based on how much ad inventory goes to TWC and if TWC carries the FUSE network," says Albert Fried analyst Richard Tullo. MSG will also benefit from increased TV ratings, which will boost its MSG Media division sales. Meanwhile a change in the NBA's merchandising rights may benefit Madison Square Garden shares. "We think eventually corporate Jersey sponsorship must happen in the NBA, so Linsanity potentially helps the KNICK court high profile sponsors just as Wayne Rooney helps Manchester United earn $125 million annually in the EPL," says Tullo. MSG shares are up nearly 10% in the last five trading days near record highs of $33.18 a share. Time Warner Cable shares have risen moderately in that time span, rising under 1% in Monday trading to $75.98. Madison Square Garden gets roughly 62% of its $373 million in annual revenue comes from Knicks and Rangers led broadcasting rights, ticketing and in-arena food, beverage and memorabilia sales. Rising ticket prices and an increase in distribution prices paid by cable companies like Time Warner bode well for profit margins in the near future, said Pyykkonen of Wedge Partners. He estimates that memorabilia sales represent 10% of the company's sports revenue. Since Feb. 4, Lin's jersey is the NBA's top seller making the Knicks the top selling team for merchandise, according to Bloomberg reports. If a MSG and Time Warner Cable holdout were to continue and Jeremy Lin were to pique the sustained interest of a national audience, Verizon's (VZ) FiOS cable network and Cablevision could benefit from a subscriber exodus, potentially boosting shares. Cablevision shares have struggled after the resignation of its Chief Operating Officer and the spinoffs of Madison Square Garden and AMC Networks (AMCX) in 2010. Already, the Knicks have the second highest average ticket price of $88, only eclipsed by the $113 that the L.A. Lakers charge fans to watch Kobe Bryant play, according to Forbes. The Lin-fueled Knicks surge made national headlines when the Harvard grad who hails from Palo, Alto Calif., put up 38 points and 7 assists against the Kobe-led Lakers on Feb. 10. Overall, the Knicks are the NBA's most valuable franchise, worth $655 million, according to Forbes calculations. Prior to MSG's Lin fueled run, the company reported better than expected cash flow but lower than expected sales driven by the company's non-sports entertainment division, which benefited from strong Radio City Christmas Spectacular sales, according to Bank of America Merrill Lynch analysts. The sports segment reported a less than expected $24.2 million loss on expenses tied to the NBA lockout. Expenses may continue to stay in-line for the simple reason that Lin makes a $762,200.00 salary - low for the NBA -- just as the Knicks eat $10 million from waving Chauncey Billups. The teams winning steak may mean they won't fire coach Mike D'Antoni, potentially saving millions. A key for the company's shares is an eventual Time Warner Cable deal, which will help boost waning MSG Media sales. Miller Tabak analysts cut their sales expectations for the unit from $168 million to $125.8 million for the third quarter, reflecting an expectation an over 15% drop in revenue from 2011 on the programming dispute. Time Warner Cable beat earnings estimates of $1.21 a share, according to Zacks when it reported earnings per share of $1.39 on Jan. 26. TheStreet Ratings' price target is $88.22 for Time Warner Cable. Analysts polled by Bloomberg give MSG and Time Warner Cable $34 and $86.81 a share price targets. For more on MSG shares see, top rated media stocks. To learn more about Time Warner Cable shares, see the highest dividend yielding media stocks. -- Written by Antoine Gara in New York
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