Why CBS Will Never Be Great Again

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CBS"NCIS" is CBS' top rated drama. From left: Mark Harmon, guest star Colin Hanks, and Pauley Perrette.
The market was loving CBS (CBS) on Tuesday, but don't be surprised if the love affair doesn't last. Shares of the broadcasting giant soared nearly 5 percent after it resolved a month-long dispute with Time Warner Cable (TWC) that had kept its channels off the air for the cable provider's 11.7 million customers.

But there will be a price to pay for being unavailable to so many cable subscribers for so much of this summer, and we're not just talking about the immediate hit in the current quarter.

Customers are getting tired of the games that content providers pay, and CBS is feeding the resentment as it tries to get subscribers to pay more for CBS, The CW, and lesser watched channels including Smithsonian Channel and TVGN.

We don't know the terms of new carriage deal, but we know who's actually going to be paying the price: The average Time Warner Cable video customer's bill is up 8.5 percent over the past year.
Is it any wonder why the pay TV industry is starting to lose customers?

Audiences Are Thinning Out

Industry analysts at UBS predict that cable and satellite television providers will lose 250,000 net subscribers this year. It will be the first year that the pay TV industry suffers an annual decline.

CBS can argue that it's better off than its sibling Viacom (VIA), which takes in a more significant level of its television revenue from cable subscription fees. CBS has its namesake broadcast channel and more than two dozen local stations. A lot of people cutting the cord to save money will simply invest in HD antennas that they can use to access over-the-air channels including CBS.

Well, it's not that easy. Local broadcast advertising was actually one of the few CBS businesses to see its profits decline in its latest quarter. The company blamed the decline on the loss of election-year political ad spending, but could it be that folks just aren't as passionate about watching television as they used to be?

We live in the great era of Netflix (NFLX), and while CBS is seeing some healthy increases as it licenses its content for digital distribution, the leveling of the playing field is giving consumers a broader array of available content to choose from. Time people once spent consuming network shows is now spent viewing YouTube clips and web shows.

There's also Netflix, and while CBS and the leading video streaming service did extend and expand their licensing deal this summer, the leveling of the playing field means that it will have to compete harder for viewers in the future.

Oh, there's also the impact that Netflix will eventually have on CBS' Showtime premium movie channel.

'Dexter' Has a Killer Finale in the Works

Showtime may not generate quite as much buzz as HBO gets, but it's a juggernaut when it comes to premium cable. Viewers and critics are flocking to shows such as "Dexter," "Homeland," and "Nurse Jackie" -- the kind of gritty television that broadcast networks aren't airing.

Well, Showtime is going to lose one of its biggest magnets when the "Dexter" series finale airs on Sept. 22.

Sure, Showtime has plenty of other shows. The early success of "Ray Donovan" is encouraging. However, it won't be a shock if some "Dexter" fans cancel their Showtime subscriptions after the last episode. Why keep paying when Netflix has a much broader selection of shows and movies at just $7.99 a month?

Slow Burnout

Investors should be wary of investments where recent market gains have outpaced the fundamentals. Shares of CBS have soared nearly 50 percent over the past year, hitting fresh highs just last month.
Is CBS growing that quickly? Of course not. Analysts see revenue climbing just 5.6 percent this year, slowing to a mere 2.5 percent come 2014.

The market is apparently bidding up shares of CBS on the premise that it will strike it rich in digital distribution, making more than enough to offset the inevitable decline in revenue that it generates from advertising and pay TV carriage licensing fees as cable viewers cut the cord.

Unfortunately, the math doesn't add up. CBS is growing too slowly even in this somewhat favorable climate to be fetching 17 times this year's projected earnings. When Viacom and CBS split into two companies four years ago, CBS was supposed to be the slower-growing media behemoth.

Wall Street's bidding up CBS as if it's a growth stock, and it's not.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our newsletter services free for 30 days.

7 Business Battles That Caught Consumers in the Crossfire
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Why CBS Will Never Be Great Again

In September 2011, Netflix (NFLX) and Starz announced that they'd failed to renew the licensing agreement that gave Netflix the rights to stream Starz's movies and original series. Starz reportedly wanted Netflix to implement a tiered subscription system that would have required subscribers to pay a premium to access Starz's content; Netflix, having already faced a backlash for one price hike, refused.

Consumer Impact: The result was that at the end of February, series like "Party Down" and "Spartacus: Blood and Sand," not to mention more than a thousand movies, were removed from Netflix streaming. And because Starz controlled the rights to Disney movies, that also meant a lot of disappointed children as "Tangled" and the rest of the catalog vanished from the watch instantly catalog.

The good news for Netflix subscribers is that the company didn't take the defeat lying down: Earlier this month, it went directly to Disney to get the streaming rights to Disney's theatrical releases, regaining some of the content it lost when things went south with Starz.

The NFL was able to resolve its dispute with the Players Association prior to the 2011 season, but it just couldn't move the ball when it came to the labor dispute with its referees this year. As a result, the preseason and the first three weeks of the 2012 regular season were refereed by replacement officials who lacked pro football experience.

Consumer impact: Whether through tickets or cable subscriptions, NFL fans pay a lot for the product on the field. And most agreed that the product suffered significantly in the hands of the inexperienced replacement refs. Even President Obama publicly pushed for an end to the lockout as glaring mistakes by replacement officials began to pile up. The last straw came in a week 3 game between the Green Bay Packers and Seattle Seahawks, when, by blowing a last-second call, the officials gave the Seahawks an unearned victory in a nationally televised Monday Night Football game.

The resulting outcry prompted the NFL to hammer out a deal in time for week 4, but don't be surprised to hear fans griping at the end of the regular season if those early missteps wind up impacting playoff spots.

Football fans should count their lucky stars: At least they're getting a full season of games. Hockey fans are currently suffering through an NHL player lockout that has already seen games cancelled through Dec. 30, and which threatens to wipe out the entire 2012-2013 season.

Consumer impact: Hockey isn't as popular as football in the U.S., but the impact of a full-blown player lockout on the sport's loyal fans far eclipses a few poorly officiated football games. (And they are loyal, too: As NPR sports commentator Frank DeFord noted this week, hockey fans tend to be athletically monogamous -- they don't much flirt with other team sports.)

Small businesses are suffering as well: In hockey-crazy Minnesota, restaurants and bars near the Minnesota Wild's Xcel Energy Center have seen revenue plummet and have been forced to lay off workers. With no end to the lockout in sight, fans and fan-supported businesses alike will continue to be caught in the crossfire.

2012 also saw contract disputes between big cable providers and their TV networks. On New Year's Day, Time Warner Cable in New York began a blackout of MSG, the local sports network that carries the New York Knicks and New York Rangers, over a fee dispute. And later in the year, Dish Network subscribers stopped getting AMC after failing to agree on a new contract.

Consumer impact: The MSG/TWC spat came at the worst possible time for New York sports fans, as Harvard grad Jeremy Lin was taking the NBA by storm and reviving interest in the Knicks. Time Warner subscribers who wanted to watch Knicks or Rangers games had to watch at their local sports bars until the companies finally inked an agreement in mid-February.

The spat between Dish and AMC, meanwhile, stretched from June to October before a deal was struck. During that time, Dish subscribers missed out on the premiere of season 3 of "The Walking Dead," not to mention many episodes of "Breaking Bad." Customers also had to endure annoying PR efforts from both sides, with AMC encouraging viewers to call Dish with complaints and Dish CEO Charles Ergen petulantly insisting that no one actually watched AMC.

In September, Apple (AAPL) released iOS 6, its latest operating system for iPhones, iPads and iPod Touches. The most notable difference was that Google Maps was dropped as the default navigation app in favor of the new Apple Maps service.

Consumer impact: The new maps introduced turn-by-turn directions, but they also lacked both street view and transit directions, the latter especially crucial for urban iPhone owners. And there have been widespread complaints of significantly diminished accuracy, which led Apple CEO Tim Cook to apologize for the fiasco.

It's easy to see the map switch as an indirect result of the increasingly heated rivalry between Google and Apple. We think Google (GOOG) CEO Larry Page put it best in a recent interview with Fortune: "I think it would be nice if everybody would get along better and the users didn't suffer as a result of other people's activities," he said.

Fortunately, Google just released a third-party version of Google Maps in the app store, ending three months of suffering by iPhone owners.

In September, Facebook (FB) purchased popular photo-sharing service Instagram. Twitter, Facebook's biggest rival in the social space, responded by disabling a feature allowing Instagram users to import their Twitter contacts into the service. This month, Facebook and Instagram fired back by preventing Instagram photos from displaying within Tweets. Twitter founder Biz Stone responded with a snarky tweet directed at Instagram CEO Kevin Systrom.

Consumer Impact: The impact on users is fairly minimal, and if you don't use either service, you might not even understand what that last paragraph even means. In a nutshell, it makes it harder to share friends between the two popular services, and also makes it slightly more difficult for your friends to see the pictures you tweet using Instagram.

Compared with a lockout of an entire sports league or the disappearance of your favorite shows, that's a relatively small burden on consumers. But it's a good example of how even normal competition can make consumers' lives difficult. As The Economist points out, both services have a vested interest in keeping users on their respective sites as long as possible, and both moves certainly help in that regard. It's just unfortunate that this means making each service more closed off for users who would prefer to have a seamless social networking experience.

Twinkies-maker Hostess closed its doors last month after struggling for years to regain its footing. While various management missteps have been blamed for its demise, it certainly didn't help that it failed to avert a strike by a bakers union comprising 30% of its workforce.

Consumer Impact: It's unlikely that Hostess's most popular treats will disappear for good, as there are more than 100 potential bidders interested in buying its brands. Twinkie the Kid will likely ride again, and Ding-Dongs will probably ding-dong again. But it will take a while to sort out the bids, and unless one bidder swallows the whole tasty operation, expect it to take even longer to divvy up the brands and resume production. In the meantime, there's been a run on Hostess treats at stores across the country, so if you've got a Ho-Ho craving, it might be a while before you can satisfy it.

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