How CBS can benefit from streaming video
The TV licensing business makes up 16% of the value of CBS shares. What happens if streaming takes off?
The licensing business helps television companies earn money when their shows run on other networks. Additionally, there is significant growth potential from streaming companies, including Netflix, Amazon (AMZN) and Blockbuster owner Dish Network (DISH), depending upon how this market develops. We estimate that the streaming-license business constitutes about 16% of CBS' value. This could increase, and CBS shares could grow further, if streaming picks up in the next few years.
The pay-TV market in North America amounted to a little over $70 billion in 2010. Digital TV Research expects this to decline slightly over the course of the next few years. Assuming that the pay-TV revenue between U.S. and Canada were split in proportion to the populations, we estimate that pay-TV revenue in the U.S. for 2011 was around $62 to $63 billion.
We also estimate that CBS' pay-TV related revenue (revenue earned from carriage fee, licensing and advertisements through pay-TV medium) stood at around $9.5 billion for 2011. This is about 15% of total U.S. pay-TV revenue.
Although this is not an accurate metric to calculate, it serves as a decent tool to understand how much CBS can gain from streaming.
Total streaming-related revenue stood at around $1 billion in 2011. Furthermore, the U.S. streaming market is expected to grow at a rate of 30% to 40% per year. Assuming that CBS' streaming-license revenue can stay at around 15% of the total U.S. streaming revenue, similar to what exists in the pay-TV market, CBS can earn an incremental $1 billion a year in revenue by the end of our forecast period.
This could push up our forecast for CBS's TV licensing revenue significantly above our current predictions, thus leading to an upside of about 5% to our price estimate. Therefore, even though the incremental revenue is significant, the potential upside is moderate when seen in context of the company as a whole.
Our price estimate for CBS stands at $33.52, implying close to a 10% premium to the market price.
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