CBS Doubles Down on Content, but Can It Ever Catch Up With Disney?


CBS' series Under the Dome. Source: CBS.

Among major television networks, CBS (NYSE: CBS  ) has a strong reputation, delivering an impressive performance this year that saw it lead in average viewers and dominate the top 10 shows for key demographic groups. Yet even as CBS delivers on its core business, rival Disney (NYSE: DIS  ) is much more popular among stock investors, despite ABC's laggard status in broadcast television. With CBS having taken steps to boost its content-production business by divesting itself of noncore businesses, shareholders want to know whether the network's stock can catch up to Disney in the eyes of investors.

CBS: The way it was last quarter 
CBS reported its second-quarter results Thursday afternoon, and investors had to deal with mixed messages on the company's performance. Overall revenue fell more than 5% for the quarter, which helped send net income from continuing operations down by almost 4%. Adjusted earnings per share actually climbed from the year-ago level, though, as a big reduction in share count outweighed the downward pressure on overall income.


CBS logo. Source: Wikimedia Commons.

Looking closer at CBS' operations, three of its four business segments saw declines in sales, with its core entertainment division leading the way down. Local-broadcasting revenue also fell, and cable-network sales, which include the key premium service Showtime, inched downward very slightly. CBS' Simon & Schuster publishing unit was the sole bright spot, with a revenue gain of almost 12%, but publishing makes up such a tiny part of the overall business that it was unable to overcome downward pressure from the video-content side of company.

CBS gets more than half of its revenue from advertising, and ad sales fell 7% for the quarter. Revenues from content licensing and distribution fell even more sharply, overcoming gains in affiliate and subscription fees.

How CBS is moving forward
For its part, CBS seemed to dismiss the mixed results. The company noted that the loss of the key NCAA Final Four basketball semifinal game to Turner Broadcasting System in early April this year had a material impact on revenue, but Executive Chairman Sumner Redstone instead emphasized content production as "the cornerstone of our continued success," and CEO Les Moonves touted the company's status as the most-watched network of the summer.

One area where CBS hopes to challenge Disney is with the new Thursday Night Football series, with games during the first half of the fall season moving from the proprietary and little-watched NFL Network to CBS this year thanks to the network's $275 million one-year deal with the National Football League. That will provide an answer to Disney's Monday Night Football programming, and the novelty of having football available on network television on Thursday night could add to CBS' already-strong reputation for Sunday football programming.


CBS will show Thursday Night Football for the first half of the 2014 season. Image source: NFL.

But football isn't the only weapon in CBS' arsenal. The network has worked hard to develop its own stable of programming, with CBS this fall owning four of its five new series for the season and therefore retaining all the potential future licensing potential if they succeed.

Why CBS might never catch up to Disney
With CBS having completed its divestiture of its CBS Outdoor Americas billboard business, the company will focus even more on video content production and distribution. What Disney has that CBS lacks, though, is a broader slate of offerings designed to maximize revenue from that content. CBS can collect licensing revenue from hit shows and characters, but it doesn't have Disney's theme parks to take advantage of popular concepts to draw vacationers. CBS has a film division, but it hasn't made the aggressive moves that Disney has to acquire content-rich studios like Marvel and Lucasfilm and the cross-platform merchandising and licensing opportunities that come with them.

Those competitive disadvantages have forced CBS to resort to more shareholder-friendly actions to keep its valuation high. For this quarter, CBS said it would authorize a $6 billion stock repurchase program, adding to the accretive impact of falling share counts on earnings per share. At the same time, CBS also boosted its dividend by 25%, pushing its payout yield above 1%.

Based on the fact that CBS stock had jumped 4% by midday Friday, shareholders seem confident that the network's moves will put the company back on a solid growth trajectory. But despite its television success, CBS has a long way to go before it can match Disney's multimedia success and earn the reputation that it thinks it deserves.

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