Al Jazeera’s apparent $500 million deal to acquire Current TV’s 40 million U.S. cable homes, as reported in the New York Times, essentially values U.S. cable network distribution at $10.25 per cable home. Is this transaction a good deal? And perhaps more interestingly, what does it mean for how traditional media like cable versus digital media like streaming video networks get valued? And finally, how might this impact local digital and traditional media?
Of course, there are specifics to any deal that need to be factored in. However, for our purposes here, let’s consider several questions in somewhat broad brush strokes. First, are there any comparable transactions to provide some context? Second, what are the most significant deal terms that factor into valuation? Third, what larger implications might this transactions have in the media space?
Let’s start with some background. Al Jazeera is based in Doha, Qatar and receives financial backing from the government of Qatar and is available globally via cable, satellite and the web. Al Jazeera English is one of Al Jazeera’s twenty network services. In the U.S., Al Jazeera’s distribution strategy largely has been limited to the web as a streaming video service. Washington, DC based MHz Networks distributes Al Jazerra English programming via its affiliates network as well as part of its MHz Worldview channel. According to the Wall Street Journal, Al Jazeer reports that about 40% of its global online viewing comes from the U.S. Comscore reports that November 2012 traffic for Al Jazeera English was 971,000 monthly unique visitors, up 18% year over year. According to the same Wall Street Journal article, Al Jazeera plans to launch new channel, Al Jazerra America combining both new material and that of the existing Al Jazeera English service, that will be available only via cable and satellite. Why? To avoid distribution channel conflicts between digital distribution via the web and traditional distribution channels.
Now some context. Is Al Jazeera English deal to acquire Current TV with an estimated transaction value of $10.25 per subscribing cable home a good deal? Clearly, with its 42,000 prime time viewers (versus say 700,000 for CNN) as estimated by Nielsen, the value is not coming from Current TV’s accumulated audience.�As argued by SeekingAlpha, “Cable networks continue to command premium valuations in the public markets. The competitive forces and technological threats that have flattened growth and valuations for old media assets have, to date, not negatively impacted cable networks.” One reason is that dual revenue stream cable networks enjoy – subscriber and advertising fees. As low as Current TV’s prime time viewership has been, cable operators still pay about $0.12 per month per subscriber, regardless of whether anyone in those cable homes actually watches the network. This leads some operators such as Time Warner Cable to conclude, time to drop these low rated networks.
NBC paid about $10 per subscriber in 2007 for the Oxygen Network and about $22 per subscriber for Bravo in 2002. By these comps, and given Current TV’s distribution deals, the strike price of $10.25 per subscriber is in the ballpark, even with Time Warner Cable’s decision to drop the network.
Al Jazzera’s decision to drive Al Jazeera America’s distribution exclusively over cable and not streamed via the web is interesting. Risk factors include the percentage of current U.S. viewers to Al Jazeera English that (a) subscribe to cable systems with Current TV that are keeping Al Jazeera; (b) within this segment, how many are willing to convert from streaming to linear cable service; and (c) is Time Warner’s decision to drop Al Jazeera an anomaly or the bow wave of a trend? It seems a curious decision potentially to disenfranchise nearly 1 million monthly unique viewers in favor of some fraction of the addressable cable universe. One assumes that this likely is a reflection as much of distribution channel management power accruing to those in the cable industry as it is core to Al Jazeera’s business strategy. From the consumer’s perspective, the broader television/online video industry has been focused on cross-platform video delivery to address technology and consumer imperatives. The market power of the cable industry to test this trend in the case of Al Jazeera seems a curious artifact at this point in time.
Finally, what does this mean for local media? Local cable systems and the network programming they deliver ride on two intertwined revenue streams that create synergistic and enduring value even in face of massive industry change. Linear television served up by broadcast, cable and satellite sources still account for about 30 of 35 hours of weekly video consumption across all screens. Audiences, and subscribers, are planted in front of these linear screens. And the advertisers, whether national or local, know this. Cable and television account for a significant portion of local ad spend will remain a key part of the local ad pie.