State of the Media Industry and More Media Wall St. Updates - 6/8/12

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News flow was concentrated on larger, macroeconomic concerns this week, with the media industry taking a backseat to what was going on in Europe.

Pandora

Investors were listening, though, when Pandora Media (P) reported May audience metrics and they came in screaming like an old Guns N' Roses song. The streaming media firm reported an 87% y/y increase in listener hours and a 52% jump in active listeners (53M). This means that Pandora's share of U.S. radio listening has grown to 5.80% from a little over 3% a year ago. JPMorgan analyst Doug Anmuth was encouraged by this strong growth in usage and continues to believe "the company will improve mobile monetization as the regional sales force expands." Partnerships that will put P's streams in new cars have risen to 19, with a recent addition from Mazda. Anmuth remains positive on the stock with an Overweight rating.

Nomura's State of the Media Industry

After last week's media conference, Nomura's Michael Nathanson published his 5 big-picture takeaways about the state of the media industry.

· TV Anywhere: The Disney-Comcast deal created a firmer model for TV Anywhere and branded authenticated apps. Owners of content see over the top (OTT) products as strategic revenue streams.

· Original content rules: Content producers, which include cable and Netflix, are continuing to move resources into developing more original (and exclusive) media. Many execs attributed the cable ratings declines of recent months to a dearth of fresh content.

· Increasing the value of brands: Networks are concentrating on building value into their brands to increase affiliate fees and expand their global footprints.

· International is here, now: All presenters spoke about their focus on global products. Revenues are growing in a big way from non-US geographies.

· Sports, all day and all night: Owners of sports rights are extracting ever higher affiliate fees.

Nathanson emphasized that the advertising environment is pretty stable, but lacks a certain optimism going into the summer.

OTT

Speaking of over the top media (OTT), Janney's Tony Wible was banging the table this week about the need for a next generation ratings system. As media consumption changes, the analyst believes investors need to look at a "broader set of metrics" to better evaluate the impact of new technology. He's complying and Janney's now publishing data culled from 2 million TIVO (TIVO) users to get a better grasp on time-shifting trends, DVR ratings, OTT usage, and advertising inventory. After running the numbers, the media analyst said, "The data shows that while OTT actually helps TV ratings its early benefits are peaking, which combined with slowing sub growth may be to blame for the current ratings weakness - especially as the early benefits are actually reversing for some networks." In other words, OTT could be assisting viewers with new content discovery across networks.

Increasing Network TV Inventory Supply

Wible also notes that cable networks are coping with ratings weakness by selling more ad spots and ad time, increasing ad spots 1.5% to 3.5% over the past year. Drilling down further, it appears Discovery Networks (DISCA) is mainly responsible for this leap as Disney (DIS) has actually been decreasing its number of spots.

E3 Gaming Report

E3, the must-attend gaming conference, got underway this week and Goldman Sachs was out with an early note about its expectations of the event. Analyst Brian Karimzad believes console manufacturers like Sony (SNE) and Microsoft (MSFT) may announce price decreases in an all-out effort to expand the installed base (67M unites currently). "We expect 4Q concentration to increase this year (a pattern he's noted has been happening since 2008). CoD: Black Ops 2 (ATVI), Halo 4 (MSFT), and Medal of Honor (EA) are among the largest on deck this year," he wrote.

In fact, the analyst published an update to his Electronic Arts (EA) model early on Thursday and while he left his price target and estimates unchanged, he did introduce a 2015 EPS estimate of $1.31. The game designer has a full slate of follow-on titles for its franchise games and doesn't seem to have much risk in its near-term pipeline. What's more up in the air are subscription levels to its Star Wars game, expected to drop to almost 700k by year end from 1.3M in May. He's sticking with his Neutral rating and a $17 target for the next 12 months.

LinkedIn Password Theft Impact

While it's unclear what the future impact on the stock will be, you may want to consider changing your LinkedIn (LNKD) password. Word got out this week that user passwords had been stolen, as the company came clean with a mea culpa. A Russian hacker posted that he stole over 6 million encrypted passwords and posted them online to prove it. The stock was down 5% during the trading week.

Dish Hopper

Dish Network (DISH) revealed this week that Hoak Media has blocked access to 14 channels in markets like Florida and Colorado. The issue stems from the satellite provider's controversial Hopper Whole-Home DVR. The new technology allows viewers to skip all commercials in most shows if they watch the programming the day after it first airs. This tech has become a flashpoint in the industry and attracted multiple lawsuits from Fox, CBS, and NBC.

Charter

Bernstein Research's Craig Moffett likes the cable sector. More specifically, with the lowest penetration of any MSO, he believes Charter (CHTR) has significant upside. According to the analyst, CHTR has around 36% video penetration and around 33% in broadband compared to Cablevision's 58% and 54%. He thinks the firm can grow its FCF at a 26% CAGR over the next 4 years. All in, Moffett thinks the stock could top $100 by the end of 2015.

Netflix

Netflix (NFLX) appeared to change the channel on many of its distribution technology partners this week. Unveiled on Tuesday, the media firm said it would use its own network infrastructure, or content distribution network (CDN), to stream videos out to customers.

But industry analysts like Aaron Schwartz at Jeffries & Co don't think it's such a big deal. "This is not Netflix's first effort at bringing CDN capabilities in-house, so there will be questions on credibility," Jefferies & Co analyst Aaron Schwartz said. Open Connect, Netflix's internal network, handles only 5 percent of the company's traffic.

Google

On the topic of upgrades, Google (GOOG) announced a series of enhancements yesterday to Google Maps and Google Earth. The changes, which included 3D maps, offline maps and better integration into other Google services, should help differentiate the search engine's offerings, according to Perry Gold at Barclays. Combined with Google's announcement earlier in the week that it integrate Zagat and Google + into its app on Android, and it appears the firm is getting more serious about monetizing local search by winning a larger share of the $33.8B local ad market in 2014. Barclays is Overweight on GOOG with a $750.

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