Why CBS Will Never Be Great Again

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.


Originally published