Message To Ted: CNN Isn't A Winner With Time Warner Today

By Jonathan Berr | Updated April 10, 2014 AAA

Remember the hoopla over CNN's ratings jump over the spike in ratings in the wake of the disappearance of Malaysian Airlines Flight 370 in March 2014? Like the surge in viewership that occurred during the infamous Los Angeles police chase of football star and accused wife killer O.J. Simpson (he was acquitted during his 1995 trial)  in his white Ford Bronco, it didn't last.

In fact, the all-news channel posted dismal viewership numbers in the first quarter.   Primetime viewership slipped 16% to 498,000 and fell 3% amongst people aged 25-54, the demographic targeted by advertisers who purchase commercial time on news shows.   According to Deadline.com, the results were the third worst in the history of the New York-based Time Warner Inc. (NYSE:TWX) network.   MSNBC, which is owned by Comcast Corp. (Nasdaq:CMCSA), also saw viewership declines but attracted far more viewers than CNN, 683,000 in total viewers and 214,000 in the target demographic.   Not surprisingly, Twenty-First Century Fox Inc.(Nasdaq:FOXA) attracted the most viewers for the 49th straight quarter, attracting more total viewers, 1.8 million, than CNN and MSNBC combined.    Its viewership among the 25-54 viewers was 293,000.

Journalism

Let's set aside questions about the quality of CNN's journalism compared with Fox News and look at CNN as a business.   Time Warner CEO Jeff Bewkes would never launch CNN today.   Economically, it just isn't worth the hassle.  The network has little in common with other Time Warner cable channels such as TBS, TNT and Cartoon Network.  CNN isn't cheap to operate.  According to data from the Pew Journalism Project,  CNN's spending was $757 million in 2013 and increase of 23% from $615 million in 2010. Fox's spending rose at the same rate during that time period from $686 million to $848 million.  Fox has gotten more for its buck. The conservative network was forecast to earn $1.89 billion in revenue last year on profit of $1.04 billion. That far exceeds the $356 million in profit that CNN was expected to earn and the $203 million expected by MSNBC.  CNN's revenue during that same period was seen at $1.1 billion and MSNBC was seen at $475 million.

MSNBC can spread its costs among its sister channel CNBC and NBC News, which is an advantage that CNN doesn't enjoy.  NBC parent Comcast and 21st Century Fox,  also benefit from owning local television stations, a business which Time Warner isn't in either.  There have been rumors in the media for years about CNN joining forces with Walt Disney Co.'s (NYSE:DIS) ABC News, which seems unlikely since the network has a partnership with Yahoo Inc. (Nasdaq:YHOO).   Another potential partner may be CBS Corp. (NYSE:CBS), which lacks a cable news outlet.   A CNN/CBS partnership makes so much sense -- on paper anyway, that investors may wonder why it hasn't occurred yet.  Over the long-run, it still makes sense for Time Warner to either find a partner for CNN or perhaps find a buyer. CNN's always unpredictable founder Ted Turner might be interested but that certainly is a long shot.

Sell CNN

If Time Warner decided to jettison the all-news channel, the shares would probably rise. Many are hoping that better times will come to CNN.  Time Warner shares trade at a price-to-earnings ratio of about 16.7, which is in-line with Viacom Inc. (Nasdaq:VIAB).  The stock is trading at a 14% discount to its average 52-week price target of $74.56. For Time Warner's shareholders,  CNN offers too much of a distraction for management for too little return. Turner Networks, which includes all of Time Warner's cable channels, except HBO, earned about $10 billion in annual revenue in 2013 and reported adjusted operating income of about $3.6 billion.  

Meanwhile. challenges abound for CNN head Jeff Zucker. U.K. journalist Piers Morgan, who was hired to replace the legendary Larry King, never connected with U.S. audiences and was dumped earlier this year.   King, who helped open CNN, volunteered to come back in an interview with the Daily Beast.   Zucker, who didn't hire Morgan, should politely decline the suspender-wearing broadcaster's offer. CNN is testing a variety of replacements for Morgan such as "The Lede With Jack Tapper", which attracted an audience of 208,000  viewers aged 25-54 during a recent Monday when his show was rerun.  Michael Smerconish, who is also being considered, attracted 147,000 viewers, during a recent Friday. King was averaging 170,000 in the target audience toward the end of his run, which ironically was far better than Morgan, who since he is nearly three decades King's junior, was thought to be able to attract younger viewers.

Another weaknes for CNN is mornings.  BuzzFeed  recently declared the network's "New Day" show "a mess," as it is faced with internal discord amongst its anchors.  To make matters worse, the show failed to score in the ratings despite an exclusive interview with President Barack Obama and a chat with NBA basketball legend turned self-appointed North Korean emissary Dennis Rodman.  HLN's sister network beat or tied "New Day" in the target demographic on every day but one.

The Bottom Line

Time Warner has got to figure a way for CNN to earn a better return for shareholders without sacrificing its journalism, a challenge that won't be easy to accomplish.

Disclosure: Jonathan Berr writes freelance articles for CBS. He doesn't own shares of the listed stocks.

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