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 That expensive and potentially risky decision is starting to
pay dividends as the network's international sales rise and more
viewers watch television online.
CBS figured correctly that owning a show, such as the reboot of
the 1980s hit "MacGyver," would allow it to take a greater share
of sales to international and domestic buyers.
More recently, that approach has allowed it to maximize the
value of deals with streaming services like Netflix Inc <NFLX.O>
while driving more subscribers to its own TV app.
That new-found power is helping CBS, just as it and rival
networks are getting squeezed by young viewers who "cut the
cord" on their expensive cable packages, contributing to a dip
in the advertising dollars that are TV companies' traditional
mainstay.
Global hits that CBS owns, like "Hawaii Five-O" and "NCIS,"
helped swell CBS's international content licensing revenue to
$1.5 billion in 2015, up from $500 million 10 years earlier.
That represented 11 percent of total revenue, compared with
about 3.5 percent a decade ago.
Last year, such dramas got an average of 36 percent of revenue
internationally, according to previously unpublished data shown
to Reuters by CBS. Ten years ago, comparable shows on average
got 16 percent of their revenue from international distributors.
In total, CBS owns all of part of 26 shows from its lineup of 31
for the 2017-2018 season. That is a significant bump up from 10
years ago, when it owned just 16 shows out of 26.
For a graphic on ownership of CBS shows, click on http://tmsnrt.rs/2sdXRnR
CBS now routinely turns a profit on new shows through
international sales even before they air in the United States, a
rare feat only a few years ago.
"Before, you were flying blind and could sink $3 million into a
pilot and cross your fingers, hoping someone would buy it,"
Joseph Ianniello, chief operating officer of CBS, told Reuters
in an interview. "Now you go into it with a lot more certainty."
CBS is not alone in focusing on owning its content, but it has
been more aggressive than rivals, with ownership of greater than
80 percent of its shows, compared with over 70 percent for
rivals such as Comcast Corp's <CMCSA.O> NBCUniversal and Walt
Disney Co's <DIS.N> ABC, said John Janedis, an analyst at
Jefferies.
POST-CABLE ERA
U.S. TV networks are likely to see ad revenue drop between 1
percent and 2 percent this year, excluding ad sales related to
last year's Rio Olympics, according to Pivotal Research Group.
CBS's ownership of shows has insulated it somewhat from that
drop.
In the United States, CBS expects that between its Showtime
streaming service and All Access - both of which bypass cable TV
altogether by allowing people to watch on smartphones and
tablets - to hit 8 million subscribers and $800 million in
combined revenue by 2020. That compares with about 3 million
subscribers now. CBS does not disclose how much revenue the two
services generate now.
That, along with its burgeoning international revenue, means CBS
is less dependent on ad sales, which now provide less than half
of CBS's total revenue, compared with almost 70 percent five
years ago, according to company filings.
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The strategy does have risks. CBS's desire to own content means that
it sometimes passes on potential hit shows it does not have a stake
in, such as the revival of the popular "American Idol," which was
picked up by ABC.
Equally, the strategy only works as long as CBS creates content that
people want to buy, according to Salvatore Muoio, whose firm invests
in several media companies but not CBS. "But if you own the rights
to a show, it can make up for a few duds because you have other
revenue streams," he said.
CBS also has to shoulder more of the cost of making shows. Its
production costs rose 37 percent between 2011 and 2016. They now
represent 34 percent of CBS's operating expenses, up from 23 percent
in 2011, according to company filings.
"They have the capacity to produce more content, which they can put
exclusively on their own streaming services that will help drive
subscribers, but they have to be smart about how they invest," said
Tim Nollen, an analyst at Macquarie Bank. "The cost of content only
goes up."
CBS has so far managed to offset those rising costs with higher
revenue. And the money it gets from selling its own content is
making up a bigger part of its total revenue.
The network got $845 million in content licensing and distribution
revenue in the first quarter of this year, representing 25 percent
of its total sales. That is up from $729 million, or 20 percent of
its revenue, for the same quarter last year.
INTERNATIONAL APPEAL
Revival shows like "MacGyver" and "Hawaii Five-0" do particularly
well internationally as they are already known by viewers across the
globe, Ianniello said.
"Star Trek," CBS's reworking of the classic space drama, which will
be shown on All Access later this year, should help that even
further. The show has already been snapped up by Netflix for
overseas streaming, making the show profitable before it even airs
on CBS in the United States.
On Wednesday, CBS announced a deal with Fox Networks Group Asia,
owned by Twenty-First Century Fox Inc <FOXA.O>, to bring its
Showtime shows to Hong Kong, Taiwan and Southeast Asia. It did not
disclose the value of the deal.
Some overseas buyers are so keen to get CBS's shows on their roster
they are willing to buy them without even seeing them.
Earlier this month, French premium cable channel Canal+ signed an
exclusive multi-year deal for licensing rights to Showtime series
across France, Switzerland, Monaco and parts of Africa.
"These kinds of deals are becoming a lot more common," said Patrick
Grove, chairman and co-founder of iflix, a streaming video service
focused on emerging markets, which recently signed a similar
multi-year licensing deal with NBCUniversal. "There are so many more
distributors today that you are competing against... it's not just
Netflix."
(Reporting By Jessica Toonkel; Editing by Anna Driver and Bill
Rigby)
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