Tune In TV's Comeback

Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com.

The most addictive visual entertainment around these days is not on YouTube, wireless phones, Google Video or in theaters. It is good old-fashioned television, updated and reinvigorated for the late 2000s like no other mass medium on earth.

Hello, artful, compelling and free Lost, 24, Prison Break and The Daily Show. Goodbye, reality-show geeks, video-cam amateurs and overpriced movies. Contrary to dire predictions of its imminent demise, scripted television is not dead yet, or even sleepy, as it enters a new season this week.

Emerging from a do-or-die battle against the exodus of its audience to ad-skipping digital video recorders, iTunes and DVDs, episodic and comedic TV is in fact staging a dramatic comeback to reassert itself as a great moneymaker.

And it's providing a nice pile of loot for corporate parents at broadcasters CBS ( CBS), Walt Disney ( DIS) and News Corp. ( NWS), and cable operators Viacom ( VIA), Time Warner ( TWX) and Comcast ( CMCSA).

In tandem, the shares of most are rebounding after years in the wilderness.The good news for investors is that media stocks still have a long way to go to restore lost credibility and value, so there is still time to sock them away while ratings and earnings results are less attractive than they will be in a year or two.

See It Now

What's changed? A few years ago, inexpensive, easy-to-operate digital recorders such as those from TiVo revolutionized viewing habits. But now television executives have rediscovered their sense of creativity and generated a new round of shows that beg to be watched fresh, not off a hard drive or DVD. The secret has been to create dramas replete with enough real mystery, quirky story lines, edgy acting and buzz that they function more like sporting events than predictable sitcoms. Much as you don't want to time-shift a live NFL playoff game, you wouldn't want to miss an episode of Lost. The idea isn't to create just "must-see TV" but "must see right now TV."

The economics of broadcast television have practically demanded that this happen, because networks make money in a brutally elemental way: Multiply the number of viewers by the price charged to advertisers to reach them, and multiply that by the number of commercials sold per day. Broadcasters sell out almost 100% of their inventory, so the amount that a network earns is a function of ad pricing, ratings and production expenses.

Network execs used to live and die on their ability to deliver a large number of viewers. Now they have the added, urgent task of ensuring viewers also won't skip advertisers' messages.

The problem in recent years is that ratings and ad prices have both fallen. Even in the second quarter of this year, ratings sank 6% among adults 18 to 49 in every time period, from prime time to weekends. The largest part of the dip came from a 9% slide in male viewers. Female viewers were down 4% at all networks except Fox, the television arm of News Corp.

Channel Stuffed

Although this erosion sounds bad, it's not quite as lousy as expected. The most troublesome kink to overcome is a loss of ad pricing power, as supply and demand have misaligned.

Look at the numbers: As the average number of TV channels per household in the U.S. has risen from 19 in 1985 to 96 in 2005, the amount of available ad inventory has jumped exponentially. Yet at the same time, the potential number of advertisers has plunged amid a wave of mergers among consumer products and services companies.

Procter & Gamble ( PG) swallowed Gillette, SBC merged with AT&T ( T) and AT&T Wireless, Verizon Communications ( VZ) bought MCI, and Sprint Nextel ( S) bought Nextel in just the past two years.

Analysts at Sanford Bernstein Research point out that the merger boom has left networks with fewer customers, reduced market-share battles, cut ad-buying costs and boosted broadband Internet penetration. That's why ad spending growth has slacked off. The 20 largest advertisers only increased their spending by 2.5% a year in the past five years.

What's more, media research firm Magna Global reports that the penetration of digital video recorders -- including both TiVos and the generic ones embedded in Comcast cable boxes -- reached 10.4% of all U.S. households at the end of 2005, double the previous year.

By the end of this year, the researchers say, penetration will grow another 50% to nearly 16% of U.S. households. According to their report, the most-recorded broadcast shows last season were Scrubs, Amazing Race, Apprentice and Survivor. Three were reality shows. For the most part, hot dramas such as CSI at CBS and Lost at ABC are witnessed live.

Bernstein analysts point out that one factor that has prevented sharp price erosion in both ad cost per thousand viewers and DVD sales is that the networks essentially operate as a four-player cartel.

About half of the networks' annual inventory is sold in a one-month period during the summer, called the upfronts, when they make their customers commit money to the new season on the basis of previews, pilots and salesmanship. Long-term ad pricing has thus grown at nearly 5% a year -- a whopping 2.5 percentage points higher than inflation -- which has offset rating declines of 3.7%, according to Bernstein.

Entertainment conglomerates are capturing and retaining viewers via new means, such as episodic downloads at $1.99 a pop at iTunes; multi-DVD season sets at $50 to $75; and soon, on-demand viewing over broadband lines distributed by telephone carriers.

Emotional Fiction

Behind the resurgence is the dawn of the affordable big-screen TV, replete with multiple speakers and powerful amps. I cannot remember the last time my family went to see a movie in the theater.

With my 11-year-old daughter and 14-year-old son always on the run between school, soccer games and baseball practice, we enjoy huddling together in the den during a homework break or after dinner to watch a show like Lost in 42-inch, high-definition, high-fidelity splendor.

When I admit this to friends, I discover we're not alone. It turns out that few find any real entertainment value in the Internet, as it's an isolating, personal experience. As odd as it sounds, episodic TV with improved storytelling and production values today brings families together to share emotional fiction, amplifying the value to advertisers.

Shares of the major broadcasters have only just started to feel the love. Since 1998, the S&P 500 Index is up 33%, vs. a gain of 29% in CBS/Viacom, an 11% decline in News Corp. and a 3% decline in Disney, owner of ABC.

Since the start of 2006, however, the S&P 500 is up just 3%, vs. a 25% gain in Viacom, a 24% gain for Disney, a 21% gain for News Corp. and an 18% gain for CBS, which separated from Viacom this year.

TV 'Watch' List
These TV-related stocks are must-see viewing
Company Market Cap 5-Yr. High 9/1/06 Close
News Corp. $19.5 B $42.20 $20.06
CBS $22.5 B $29.20 $28.86
Walt Disney $62 B $34.80 $29.89
Comcast $73 B $45.80 $35.26
Viacom $2.1 B $90.00 $36.96

In anticipation of a ratings improvement, more contributions from DVD sales and a streamlining of the rest of their far-flung businesses, I think the best values today are News Corp., which can go to $26 over the next year from its current perch at $20; CBS, which can go to $35 from $29; Viacom, which can go to $45 from $37; and Disney, which can go to $34 from $29. All of their dividends are negligible except for CBS, which yields 2.2%.

At the time of publication, Markman did not hold positions in any stocks mentioned in this column, although positions may change at any time.

Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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