John Nallen talks about TV taking ad dollars from digital, RSNs, importance of programming rights at Deutsche Bank conference

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John Nallen, Chief Financial Officer for 21st Century Fox, spoke with Deutsche Bank analyst Bryan Kraft at Deutsche Bank’s 24th Annual Media, Internet & Telecom Conference today. During the 45-minute discussion, John talked about how advertising dollars are flowing from digital to television, the strength of regional sports networks (RSNs) and the importance of having rights to shows, among other topics.

On the strength of the ad market: “Reflecting more on the ad market overall – I know there’s been a lot of discussion around this at this conference, and I think I’d probably echo what others have said: The market is very encouraging on a national basis. We’ve seen now great momentum over the last three quarters, so it was driven a year ago by fantasy sports and a couple of categories. Right now, it’s across the board. So it’s an auto, it’s telco, it’s mobile devices – this is national. And pricing is up 20-plus percent above upfront and the strength keeps coming.”

On the flow of ad dollars from digital to TV: “So what we’ve seen in conversations with the agencies and advertisers is that it’s not like their total budgets have increased. What they’ve done is rebalance spending from other places they were in, most notably digital, back to long-form, premium entertainment and sports, and that’s what we do. So we’ve enjoyed that.”

On RSNs going from strength to strength: “[The RSNs] continue to go from strength to strength. I look at it from a couple of different ways. First, from the team standpoint: We run 20-plus RSNs, we’ve got 44 teams, we reach 85 million households. From a team right rights standpoint, we don’t have any significant renewals coming up over the next three years. So our cost base is secure under contracts that go as long as 30 years for the Yankees and one that we’re in negotiations now that’s up in one year with the Clippers. But it’s a base that is, from a cost standpoint, pretty secure.”

On the importance of RSNs to local markets: “On the affiliate side, we just completed significant renewal and you didn’t hear a peep about the RSNs being negotiated off of a platform. It was down on a traditional basis with traditional volume and rates, and it was really no drama about the RSNs being up. Because in every case, the MVPDs recognize that the RSNs are so important to their local market product. You take New York – and I know we’re in discussion with MVPD in that market – the YES Network, when the Yankees are playing, is the No. 1 cable network in the market; it’s the No. 3 television network on that night in the market. So for an MVPD to offer its consumers a package that doesn’t have what is the most important television in the market would be pretty surprising. From a growth standpoint though, what you should look at is the RSNs are an enormous store of value for us. They are a very significant profit generator for the company.”

On the dispute between YES and Comcast: “I’d say that’s a negotiation between the two parties. So again I come back to the point that the YES Network – any of these networks, whether it’s in Detroit or in Florida here or in New York, these networks are pretty important to the consumers in that market and I think we will see a day where we will settle that and YES Network will be back on.”

On high expectations for STAR: “The beauty of it, at least the way we’re looking at it, is we are providing a bit of a canopy to Star to allow it to grow, so I don’t have to and go through quarter-by-quarter metrics and how its performance is going. Because that will just get in the way of its growth. The ad market is growing by 20 percent a year, cable and satellite households will grow by over 45 percent over the next three or four years, and Star will enjoy that ride along the way as the leader in the market. What we’ve done is launched the sports business, where in 2015 we took almost entirely the profits we generated on the entertainment side, which was near $300 million, and invested it into the sports business, to launch the sports business. And what you’re now seeing, as I said earlier, is that the peak investment is gone, the entertainment trajectory continues and now sports is continuing to grow. So we have a high degree of confidence around the two milestones we set for Star of $500 million in EBITDA in 2018 and $1 billion shortly thereafter… Star is really – when I look at the growth engines of the company overall, one of the top three is where we’re going with Star.”

On the Hotstar opportunity: “It’s an over-the-top product that’s entirely ad-supported. At Star, going back on the entertainment side, we produce and own all of our programming, except for movies that are on our movie channel. Everything else is owned and produced. We have all the IP for Star. So we put 40,000 hours of programing onto this over-the-top product called Hotstar. We also now broadcast sports, because we have a digital rights, across Hotstar. We had, I think in the first week, 40 million downloads of the Hotstar app, and we continue to get very significant engagement. It’s the kind of product that over time could be a subscription product. But that’s not what we’re doing right now. And most of the focus right now is on active engagement, principally on the Star entertainment product.”

On the success of “Deadpool” and implications for 21CF’s future: “We still have two very big movies ahead of us in the year with “X-Men” and “Independence Day,” and we’ve got great confidence in those films. But I’m not about to declare victory and re-guide the company based on that kind of activity. But you’re right – “Deadpool” unto itself has been a great jolt coupled with really slight change even since then on the strength of the advertising market. So I’d say there are more positives than negatives as we look at the rest of the year and we look into 2017. Remember, going into 2017, we’ve got basically three big events for our company that will help drive growth: We’ve got the Super Bowl, we’ve got the political tailwind that I described and we have the tailwind of a number of these big films coming into 2017. So we will have released two of them at the end of 2016 and spent all the money on marketing “Ice Age 5” in 2016, and we enjoy the benefits of that into fiscal 2017. So fiscal 2017 has three big pieces of momentum behind it that we’re looking forward to, as well as, we’re hopeful, a continued buoyancy behind the advertising market.”

On the strength of TV: “We had 36 series – 16 new, 20 returning – between the fall and what will end this summer before the upfronts. That was a very big slate for us. Roughly 70-75 percent of that is pointed toward FOX. This was part of the initiative we did when we put Gary [Newman] and Dana [Walden] in charge of both the television production business, which they had, and the network. So on the production side, like I said, 70-75 percent of the output is for our networks. On the broadcast side, if you take idle for the moment, 80 percent of what we’re showing is our product as well. So [20th Century Fox TV] is clearly one of the leaders in television production. They have 15 pilot orders already looking into next season. Not all of the announcements have been made about renewals of those 36 series that I mentioned, but there is a very substantial number that will be renewed yet again. So as a home for content and for long-form content, which is what we do – we do long-form, engaging, premium content; we’re not a short-form content house – TCFTV will continue to grow.”

On the importance of having rights to shows: “This whole shift to non-linear requires you to have the rights to that programming… So having full rights to that IP and being able to provide those rights to any platform is vitally important to your strategy now. You can’t disconnect the linear broadcast anymore from the opportunity for people to consume that in a non-linear basis. And if you don’t have those rights – if we have a show on linear but somebody else has the rights for non-linear, we’re just a showroom for their product. And that’s not the business that we’re in.”

To hear more of John’s discussion, listen to the recorded webcast.