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CBS Corporation (CBS), Gannett Co., Inc. (GCI): This Content War Is About Costs

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CBS Corporation (NYSE:CBS)

CBS Corporation (NYSE:CBS) and Time Warner Cable are fighting over carriage costs. Such fights are likely to get more common, showing just how valuable video content is becoming. Two other station owners are bulking up for a fight, too.

Carriage costs

CBS Corporation (NYSE:CBS) is asking Time Warner Cable to pay higher fees for the right to rebroadcast CBS Corporation (NYSE:CBS)-owned stations in key markets like New York City, Dallas, and Los Angeles. Although television stations have been losing viewers to cable for years, they still attract a lot of eyeballs. And having the local television stations on cable is an important selling point for the cable companies.

That both companies are willing to take this fight down to the wire, and then some, is a statement about the battles that are yet to come over the value of content. For example, CBS Corporation (NYSE:CBS) is the highest rated broadcaster, beating NBC and ABC. According to Bloomberg, the company’s retransmission fees jumped over 60% in the first quarter. The company is clearly using its clout to extract more money for its content.

CBS Corporation (NYSE:CBS)’ revenue has been stuck at around $14 billion for about eight years. Over the last three years, however, the company’s profit margin has improved from around 8% to over 20%, leading to an earnings advance from just over $0.30 a share to nearly $2.40. After hitting a low during the 2007 to 2009 recession of less than $5 a share, the stock recently traded hands at over $50.

With a price to earnings ratio of around 20, the company’s solid performance is reflected in its price. Although it may not get everything it wants from Time Warner Cable, it looks like CBS Corporation (NYSE:CBS) is well positioned. For example, Time Warner Cable would be loath to lose CBS’ football broadcasts, let alone the other content it shows. Sports remains a key differentiation between cable and Netflix.

The two sides will eventually come to terms. Look for the outcome to help boost CBS’ results over the next few years. The stock isn’t cheap, but growth investors should still consider taking a look at the key content owner and distributor. That said, a return to top-line growth should be a major concern.

Bulking up for battle

Gannett Co., Inc. (NYSE:GCI) recently inked a $1.5 billion deal to buy Belo, nearly doubling its station count. Although part of the benefit was to reduce the company’s exposure to its newspaper business, the more important aspect was to gain more clout in its video business.

This gives Gannett Co., Inc. (NYSE:GCI) more bargaining power when purchasing content and it will allow the company to demand more money from cable companies that rebroadcast its stations. A double benefit. Tribune Company, only recently out of bankruptcy court, announced a similar deal, spending $2.7 billion to buy 19 television stations from a private equity firm. Also a near doubling in size.

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