Moneyball The Current State Of The Sports Media Landscape

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INDUSTRY | COMMENTFEBRUARY 4, 2013

Moneyball: The Current State Of The SportsMedia Landscape

Comprehensive Proprietary Analysis On TheChanging Sports Programming Landscape

Fears That Increased Sports Rights Fees Will Create Headwinds ForMedia Industry Earnings Are Probably Overstated — Aftercomprehensively mapping out the impact of more than 125 individual rightsdeals between sports leagues/events/teams and cable channel operators, wethink press reports can be misleading.

• Rather than comparing the last year of the old deal to the first year of thenew deal, the press tends to focus on the total magnitude of the newcontract, which can inflate investor fears.

Proprietary Findings Show Margins Can Continue To Expand — Ourproprietary model finds that channel operators should be able to expandmargins despite the headline to investors of rapidly rising rights costs.

• Retransmission consent and affiliate fees should help support revenuegrowth ahead of operating expense growth (not "headline average cost", butactual costs after escalators are factored in) with a key driver being thevalue of sports.

Pay TV Distributors Have Handed More Leverage To Media OperatorsThan One Might Realize — Time Warner Cable directly supported thelaunch of one "single team" RSN and indirectly supported another (both inLA) and has sought industry high-end affiliate fees. Comcast is the secondlargest RSN operator in the U.S. and DirecTV owns 3 major RSNs. All theseRSNs carry market rate affiliate fees and are generally on "basic".

• We think it's going to be tougher for the distributors to "push back" onaffiliate fee increases than some have suggested.

News Corp. Has Enormous Opportunity With A Potential NationalSports Channel As RSN Margin Pressure Increases — News Corp. has thepotential for greatest structural transformation with launch of new nationalsports network as massive margin potential exists. But, if NWSA fails tosuccessfully launch a new platform, exploiting much of the National cablerights it has secured and with RSN rights cost increases, margin growth couldslow materially in the impacted segments.

Time Warner Margin Expansion Could Lead The Pack — While TWXhas invested heavily in sports, it has yet to see the likely affiliate fee increasesassociated with the investment. We expect Turner to bid aggressively forThursday night NFL games if they become available though.

Disney's ESPN Margins Difficult To Model — A multitude of rights deals,and lack of full visibility on exact timing of affiliate fee ramp, makepredicting margins a challenge. While we expect a ramp in rights costs inFY2014/15, we expect affiliate fees to catch up over time, allowing for solidlonger-term margin expansion.

Priced as of prior trading day's market close, EST (unless otherwise noted).All values in USD unless otherwise noted.

RBC Capital Markets, LLC

David Bank (Analyst)(212) 858-7333; [email protected]

Nicholas Caplan (Associate)(212) 428-6412; [email protected]

Kristina Warmus (Associate)(212) 428-6622; [email protected]

• CBS Corp. (NYSE: CBS $42.41; Top Pick,Average Risk)

• News Corporation (NASDAQ: NWSA$28.16; Outperform, Average Risk)

• Time Warner Inc. (NYSE: TWX $50.88,Outperform, Average Risk)

• The Walt Disney Co. (NYSE: DIS $54.59,Outperform, Average Risk)

For Required Conflicts Disclosures, see Page 87.

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Table of Contents

Key Investment Themes ..........................................................................................................................................................................3

Recent Events And Trends......................................................................................................................................................................6 Major League Update — Sports Programming Rights Are Becoming More Expensive For A Reason ..............................................6

NFL Remains One Of The Better Places To Reach A Large Audience ......................................................................................6 MLB Ratings Declines Are More Than Offset By Its Value As A Source Of Bulk Content ......................................................8 NBA Ratings On Upswing, Rights Fee Renewal In 2016 ...........................................................................................................9

Fox Sports 1 (And Fox Sports 2…And 3?) — The Worst Kept Secret In Sports Media ...................................................................10

Deep Dive Into The Cost Of Sports Rights ..........................................................................................................................................12 Fees Expanding, But Headlines Misleading: Sports Rights Expense Growth Appears Manageable.................................................13 Achievability Of Margin Expansion In Light Of Rights Fee Growth By Company ..........................................................................21

CBS ...........................................................................................................................................................................................21 Disney........................................................................................................................................................................................28 News Corporation......................................................................................................................................................................34 Time Warner..............................................................................................................................................................................42

An Update on the Economics of the Sports Media Business ..............................................................................................................48 Sports Economics and TV Economics: Inextricably Linked as Sports Is the Most Watched, Most Valuable, and Most Expensive Content on TV ..................................................................................................................................................................48 Sports Programming Is Home to a Large Portion of Total Network TV Advertising........................................................................50 College Conferences Gaining Power .................................................................................................................................................54

College Sports Programming Is Seeing Rising Costs and Increasing Competition...................................................................54 Dedicated Conference Networks Are Making More Content Available, but Fragmenting The Market ...................................57

Regional Sports Networks Are an Important Player in Local Distribution .....................................................................................62 RSN Recent Developments .......................................................................................................................................................62

Time Warner Cable’s Deal for Los Angeles Dodgers TV Rights Confirms the Company’s Commitment to RSN Business ...........65 Summary of Recent Transactions and Existing Team/RSN Relationships................................................................................69

League Economics..................................................................................................................................................................................72 Key Financial Drivers Are Similar Across Sports, but Relative Impact of Components Varies ...............................................73 Highlights of League-Owned Networks ....................................................................................................................................75

Appendix: Description Of Our Sports Rights Deals Database And Analytical Methodology ........................................................80

Moneyball: The Current State Of The Sports Media LandscapeFebruary 4, 2013

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Key Investment Themes Since we published our piece Moneyball: The Economics Of Sports Media, OTT and Other Hot Buttons in October 2010, a number of changes have occurred across the Sports Media landscape.

Rights Costs Appear To Be Exploding—National TV rights costs have seemingly exploded for the Big 3 pro sports leagues, highlighted by total NFL TV rights fees per year, going from $3.0bn to $5.0bn per year (excluding DirecTV) for the current and future rights deals, respectively. Additionally, on the local level, Regional Sports Networks (RSNs), particularly in a few major markets, have seen their own sports costs skyrocket. Additionally, the carriage rights costs for college content have reached levels that few might have expected even two and a half years ago, highlighted by the new Bowl Championship Series rights acquired by ESPN. Further, major college conference regular season content (particularly football) is now “prime time”, becoming increasingly competitive with professional sports for audience, advertising and rights fees.

But Rights Costs Headlines Are Misleading—That said, the figures surrounding rights increases aren’t always as simple as they look. Headlines reflect increases in annual fees after new deals, but the basis of comparison isn’t always correct. Typically, headlines reflect an “average” annual cost on a new deal versus a prior deal (since only total amounts over the life of a multi-year deal are made public, as opposed to price in any given year). This can suggest (for recent Big 3 sports deals) rights increases in the 50%-100%+ range. However, when adjusting for escalators over the life of the contract, fees might only by up 5% in a normal year (but possibly high singles to 20s, or even higher, in the first year of a new contract, depending on the deal) on total rights increases of 50%+ over the life of a contract.

New Channel Proliferation—New sports channels on the national level have been created to capture the increasing importance of sports viewership and the value that is being attributed to that viewership. Most prominently, industry sources indicate to us Fox is in the process of launching Fox Sports 1 (a re-branded Speed Channel) and potentially Fox Sports 2 (a re-branded Fuel TV channel), while NBC is attempting to make its NBC Sports Channel a major player in the landscape. Further, the impact of college sports on the TV ecosystem has dramatically changed as we have seen the proliferation of new college sports channels (e.g. Big Ten Network, Longhorn Network, etc.), which, while not having full basic penetration, are typically generating affiliate fees as high as the $1/subscriber range, putting them in the upper echelon of programming compensation (within their “home” markets).

Rights Fees Increase, But So Do Associated Revenues—Affiliate fees and retransmission consent fees have escalated dramatically to help compensate for these staggering rights fees increases. In 2010, there was still skepticism that the major networks could generate $1/subscriber in retransmission consent fees that many industry operators targeted in longer-term plans and the concept of seeking reverse compensation seemed almost like an academic exercise. Currently, the path to $1/subscriber is well on its way and on a very clear day, one can see $2 as a possibility, while reverse compensation is starting to flow in. Further, the seemingly exorbitant affiliate fees for major national sports platforms (such as ESPN), Regional Sports Networks, and even general market stations carrying sports have seen or are expected to see healthy increases.

Football Is An Enormous Factor In Ratings Dynamics—Sports, particularly football, have become a major driver of ratings changes in primetime (Sunday Night Football is arguably the single largest factor in the turn of fortune for NBC), while the addition of another five Thursday night games (aired on the NFL Network; up from eight games in the prior season) has been a force in the decline of ratings for general market networks this season. On both the advertising front (where Sunday Night Football is now the highest priced “regular season” spot in primetime) as well as the ratings front (NF- related programming comprised 29 of the top 30 rated shows on television during the Fall 2012 season), sports continue to dominate.

The NFL Could Shake Up The Industry Further By Moving The Thursday Night Package From NFL Network To A 3rd Party Distributor—The NFL Network has achieved virtually full digital basic penetration on the pay TV ecosystem with roughly $1/subscriber of affiliate fee on the basis of its Thursday night package (13 games in the 2012/2013 season, up from eight games in the prior year). We believe NFL is still considering selling at least some portion of the package (probably around eight games) and retaining the balance for the NFL Network. While the NFL Network would probably have to offer a lower distribution fee for its channel (given less programming delivery), we believe it could possibly reduce affiliate fees by ~50% and still be net ahead by doing so, given our sense of the current market for NFL rights. Fox, Turner and ESPN would all be likely bidders for such a package.

Despite Soft Ratings, Baseball Remains One Of The Most Cost-Effective Programming Tools For Sports Networks—Despite recently waning ratings, baseball rights are a very valuable tool for launching and sustaining any sports network (both local and national). An RSN, such as SNY, can arguably be sustained on the strength of baseball alone since it allows for live, premium programming most nights per year for roughly half the year. Similarly, the potential launch of a new national channel, such as a rebranded Fox Speed Channel, couldn’t pick a better anchor sport (with rights for an estimated 40 games going to Fox in the latest rights deal). In other words, baseball might not be the most popular sport and it may not command the highest ratings, but it offers bulk. That bulk, in turn can drive both affiliate fees and cumulative viewership.

Too Much Sports Content On TV?—While sports continue to drive overall ratings leadership, year-over-year ratings for a number of sports categories were flat to down in 2012. A debate rages over whether or not the proliferation of college sports across conference


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channels and broader national distribution, as well as the addition of more NFL games, has diluted the viewership of existing franchises. Quite frankly we aren’t convinced in either direction yet, but many industry experts tell us we need to let the ecosystem “digest” the influx of programming before it finds a new equilibrium.

With The Number Of Channels Expanding, Will Affiliate Fee Growth For Any Given Channel Have To Slow?—Is the industry setting up a massive arms race, on a national, as well as local, level? Increasingly, the incumbents are being challenged, fragmenting the market, driving up rights fees, and pressuring affiliate fee costs across distributors without really driving a meaningful increase in actual sports content. Over time, it might very well be the case that affiliate fee growth has to slow. For today, however the popularity (and DVR-proof characteristics) of sports gives us relative comfort that the channels will probably retain leverage over the distributors. We think the torrid pace of affiliate fee growth could slow “a step” in some cases, but over the next few years, it should still grow high singles to low double digits.

Recent LA RSN Created By Time Warner Cable May Be The Biggest Aid The RSNs Have In Driving Affiliate Fees Higher—Time Warner Cable and Comcast represent ~34% of the total pay TV subscriber base in the US today. Given their ownership of RSNs, and in some cases, affiliate fees on the high end of the market, we think it will be increasingly difficult for them to push back on 3rd party RSNs as they demand increased carriage fees and the continued inclusion on the basic tier. How can these distributors complain about unfair pricing when they are in turn asking for the same kind of pricing on the same kind of content? Further, there tend to be most favored nations clauses that prevent a network from being able to accept a lower sub fee on one system versus another. As a result, increased negotiating leverage with Comcast or Time Warner Cable could be exploited exponentially as the outcome of those rate negotiations become “the market.”

We Think The Operators Can Maintain Margin Over The Long Term—Our basic view is that, after absorbing the ramp up in fees across the ecosystem that have been contractually agreed to, margin expansion (and mid single to low double digit EBITDA growth) is still quite achievable for the cable and broadcast network businesses in our coverage universe. That said, the RSNs will likely come under the most pressure.

Expect “Noise” To Increase Around RSN Demands For Basic Carriage—In response to both the increase in overall RSN affiliate fees and the potential for an increase in the sheer number of RSNs (and associated affiliate fees) without increased content, DirecTV now has a $3/month RSN surcharge broken out on the bills of new customers who sign up for basic packages with an RSN. In essence, we believe DirecTV is trying to get the customer to focus more on the magnitude to which RSNs drive overall end user bills, so that customers will complain and create a more grassroots push for à la carte pricing of RSNs and sports in general. We think such a strategy is unlikely to make a real difference any time soon, but over time, it could begin to change the tone of the debate over sports carriage in the basic tier. Additionally, the fact that DirecTV owns three major RSNs (ROOT SPORTS Pittsburgh, ROOT SPORTS Rocky Mountain, and ROOT SPORTS Northwest) that are carried on basic puts them on questionable footing to make such demands in the eyes of public opinion (similar to Time Warner Cable’s Lakers channel).

More RSNs And More Carriage Fees, Without More Content, Is A Bigger Problem Than Absolute Affiliate Fee Increases—Inertia will likely support the market forces of existing players. But, more players are entering the market without adding more content (simply taking some content from the incumbents). A market could absorb one or even two major RSNs (with the proper content and franchises), but can it sustain more without raising the ire of basic cable subscribers (and potentially regulators)? For the past five years, the New York City market has had four RSNs (YES Network, SNY, MSG and MSG Plus), which cost New York-area distributors more than a combined $10 per subscriber a month. But, this is the vast exception, not the rule. With costs continuing to escalate, we must ask ourselves whether the RSNs risk damaging the ecosystem by essentially forcing consumers to push for a grassroots movement of RSNs from basic to a sports tier, since the channels have taken that option away from the distributors (they are simply required to carry the channels on basic).

News Corp.’s Reliance On Sports As A Driver Has The Most Binary Outcome Potential, But We Think The Upside Is More Likely. We believe that, without the launch of a national sports network, News Corp. could begin to see some headwinds to margin expansion. In our pro forma analysis, without the benefit of Fox Sports 1, blended Cable Networks margin expansion could slow to roughly 28bps/year between FY2014 and FY2017. However, margins could improve further with the launch of a national sports network, as costs are likely already “built in” while revenues could be mostly incremental (roughly 400bps a year to affiliate fee growth over three years). Additionally, we think News Corp. should be able to benefit from some degree of stability at its RSNs because a large proportion of the rights deals that we were able to identify are locked up for a significant period of time. We would estimate that approximately 70% of primary RSN sports rights deals are locked up through at least 2017.

Time Warner’s Limited Exposure To Rising Rights Costs, As Affiliate Fees Are Likely To Ramp, Leaves The Door Open For Very Strong Margin Expansion. We believe Time Warner’s ability to expand margins in the mid- to long-term will depend more on the programming slate as a whole rather than on sports content. That said, limited exposure to sports rights and the relatively low anticipated growth in costs for rights that the company does hold leave the door open for margin expansion in light of strong expected affiliate fee growth. However, margins will depend highly on ad dollars and programming expense for non-sports content. In this report, we present a scenario under which Time Warner could have a Media Networks OIBDA (ex-restructuring and other


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adjustments) margin of 41.6% in 2017E (up from 36.5% in 2012E). Note that the biggest assumption underlying this analysis is that the company will not need, or choose, to increase or cut other costs substantially.

CBS Sports Rights Growth Estimates Allow For Middle Of The Pack Margin Expansion, But Retransmission And Reverse Compensation To Pay For A Growing Portion Of Rights Fees And Could Provide Upside. We believe CBS should be able to continue to expand margins (at Entertainment and Cable Networks segments combined) over the next several years despite the growing cost of sports rights. However, compared to competitors, we think that its ability to do so could be somewhat “middle of the pack.” Our pro forma sports rights analysis demonstrates how the company could achieve a blended margin of 28.7% for the Cable Networks and Entertainment segments in 2017E (up from 24.9% in 2012E).

Disney’s Sports Rights Costs Inflation (And The Complexity Of Modeling Them) Could Leave Media Networks Estimates Somewhat Vulnerable But Affiliate Fee Cycle Ramp, And Monetization Of New Content, Should Lead To Longer Term Margin Expansion. We believe Disney should be able to expand margins over the longer term despite the growing costs of sports rights, but we think there could be some risk to FY2014 estimates (specifically in the Media Networks segment) due to the impact of the new MLB and NFL contracts. That said, margin expansion could pick up pace as these costs (and those from the new NCAA College Football playoff deal) cycle through.


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Recent Events And Trends

Major League Update — Sports Programming Rights Are Becoming More Expensive For A Reason We believe that an understanding of the Sports TV ecosystem, as well as the potential future changes and trends, is becoming increasingly important. In 2011, the total hours of live sports content available on ‘national broadcast and cable television’ increased by roughly 5% to approximately 42,500 hours according to Nielsen. In 2012, this metric increased 45% to 60,000 hours, boosted by the Olympics. It would not surprise us to find that coverage of live sports adjusted for the Olympics also increased, considering the apparent ramp in college sports programming. However, it is important to note that this increase in content may not be good for all industry participants, because consumers have a limited amount of time available to consume sports content. Thus, we think there could be some downward pressure on ratings of existing franchises. Furthermore, we wonder if the competitive effect of more sports programming could also have an effect on general entertainment programming—we would argue that it did in 2012 as the National Football League (NFL) Network added five NFL games to its Thursday lineup.

The effect of additional programming also reaches beyond ratings and advertising dollars, because increased sports content (and incremental rights costs) could put upward pressure on affiliate fees (and/or downward pressure on margins) at many of the major media conglomerates.

NFL Remains One Of The Better Places To Reach A Large Audience Sports content again occupied much of the top-10 list of most watched programs in 2012. At the top of that list was Super Bowl XLVI, which was watched by 111.3 million viewers. The only non-sports program that made the list was the 2012 Grammy Awards, which squeaked in at number 10.

Exhibit 1: Top-10 Programs, 2012, Total Day, P2+

Rank Telecast Network Date Aired1 Super Bowl XLVI NBC 02/05/20122 Super Bowl Pre-Kick NBC 02/05/20123 Super Bowl Post NBC 02/05/20124 Super Bowl Kick-Off NBC 02/05/20125 FOX NFC Championship FOX 01/22/20126 AFC Championship on CBS CBS 01/22/20127 FOX NFC Playoff-SUN FOX 01/15/20128 AFC Wildcard Playoff CBS 01/08/20129 Summer Olympics Opening Ceremony NBC 07/27/201210 GRAMMY Awards CBS 02/12/2012

Note: Live + Same Day Source: Nielsen, RBC Capital Markets

Sports programming is also important beyond the largest events. Regular season games can also be a big viewership driver, most notably in the NFL. We believe that Sunday Night Football (SNF) was a primary reason NBC ratings turned in fall 2012 (along with The Voice).

Exhibit 2: Top-10 Regularly Scheduled Primetime Programs, 2012, Total Day

Rank Telecast NetworkPersons 2+

Rating Total Viewers (000)1 NBC Sunday Night Football NBC 7.3 21,2272 American Idol-Wednesday FOX 6.2 18,0063 American Idol-Thursday FOX 5.7 16,4504 Sunday Night NFL Pre-Kick NBC 5.4 15,7255 Dancing with the Stars ABC 5.3 15,4586 Dancing w/ Stars Results ABC 4.8 13,9227 NCIS CBS 4.7 13,6298 The Voice NBC 4.6 13,2559 NFL Regular Season ESPN 4.6 13,24510 Vegas CBS 4.0 11,680

Note: Live + Same Day Source: Nielsen, RBC Capital Markets


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NFL content outperforms almost all of its direct comparables. Compared to other sports content, a regular season SNF broadcast has even drawn more viewers than a Major League Baseball (MLB) World Series game that it was going up against. And compared to general market programming, NFL games draw more viewers on average than their non-sports broadcast primetime counterpart. The gap between the NFL and non-sports programming has grown to a roughly 150% premium in 2012 from a roughly 50% premium in 2002.

Exhibit 3: NFL Games Shown On Broadcast Television Outdraw Non-NFL Competition, And The Gap Is Growing

NFL On BroadcastBroadcast Primetime NFL Advantage

2002 Avg. Viewers 15.8 million 10.3 million 52%2003 Avg. Viewers 15.5 million 9.9 million 56%2004 Avg. Viewers 15.4 million 9.8 million 57%2005 Avg. Viewers 15.6 million 9.7 million 61%2006 Avg. Viewers 16.3 million 9.8 million 66%2007 Avg. Viewers 16.6 million 8.7 million 91%2008 Avg. Viewers 16.6 million 8.8 million 89%2009 Avg. Viewers 18.4 million 8.5 million 116%2010 Avg. Viewers 20.0 million 8.2 million 144%2011 Avg. Viewers 19.8 million 8.1 million 144%2012 Avg. Viewers 19.3 million 7.6 million 154% Source: nflcommunications.com, RBC Capital Markets

Supported by high ratings, football programming is also able to bring in substantial advertising revenues, with SNF charging more per spot than any other primetime broadcast show. The most costly alternatives Modern Family, at roughly $331,000 per spot, and American Idol, at $341,000, were significantly cheaper than SNF, at $545,000 per 30-second spot.

Exhibit 4: SNF Is The Most Expensive Advertising Spot In Primetime

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2010-11 2011-12 2012-13

Season

Cos

t Per

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Spo

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Sunday Night Football American Idol Modern FamilyNew Girl American Idol (results show)

Source: adage.com, RBC Capital Markets

The NFL’s strong ad rates are not limited to broadcast. Per spot prices for Monday Night Football averaged an estimated $340,000 in the 2012 regular season, according to Adweek, which is roughly in line with the second-most expensive show on broadcast, American Idol.

Also notable is that ad pricing (and the cost of rights) has held up despite ratings declines in the last couple years. The average total audience for Monday Night Football declined by roughly 10% in 2011 and by another 3% in 2012. Although some of this decline may be due to the quality of the match-ups, it is possible that viewership could also be affected by the increase in other football content on TV (including college football and the expansion of the NFL Network’s schedule to 13 from eight Thursday night games). Meanwhile, ESPN renewed its contract for Monday Night Football for an estimated $15.1bn, or approximately $1.9bn per year, up more than 70% compared to the previous contract.


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Exhibit 5: Monday Night Football Viewership And Rating, 2006-2012

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2006 2007 2008 2009 2010 2011 2012

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Rating Audience Source: sportsbusinessdaily.com, RBC Capital Markets

MLB Ratings Declines Are More Than Offset By Its Value As A Source Of Bulk Content Viewership for MLB content has declined significantly in recent years. The audience for Fox’s Saturday telecast has declined by 33% to 2.5mm viewers on average in 2012 from a 2004 high of approximately 3.7mm viewers. ESPN’s baseball programming has experienced similar declines, with viewership down by 35% percent since 2007 to roughly 1.2mm viewers on average. And TBS baseball programming did not receive a reprieve either, with viewership on the Time Warner network down 28% since 2008 to roughly 450,000 viewers.

Yet, despite these significant declines in ratings, the costs of this content have increased. Combined, the three national MLB rights agreements with Disney, News Corp., and Time Warner should see roughly $11.7bn of costs over eight years for MLB compared to approximately $5.0bn total for the prior, seven-year agreements. This is equivalent to a more than 100% increase in average combined annual rights fees to $1.5bn for the new deal from $710mm for the prior deal.

Exhibit 6: Audience For MLB Telecasts Has Declined Significantly In Recent Years

Regular Season: FOX MLB Saturday

0

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Regular Season: ESPN MLB

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1,0001,2001,4001,6001,8002,000

2007 2008 2009 2010 2011 2012

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Viewers ('000) Source: forbes.com, sportsbusinessdaily.com, RBC Capital Markets


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Despite ratings declines, we believe that an increase in rights costs is justified. The key factor is that baseball provides a massive quantity of content. While an NFL team plays only 16 games during the regular season and a team in the National Basketball Association (NBA) plays 82, an MLB team plays 162—making MLB one of the better ways to ‘fill’ a sports channel with content. To put it another way, ESPN’s rights deal with the NFL grants it the airing of 17 Monday Night Football games per season, while its contract with the MLB gives it an estimated 100 games per season.

Exhibit 7: Baseball Provides Bulk Content At A Far Cheaper Price Per Game Payments Over Life Of

Current Deal Games Over Life Of DealPrice Per

Game SeasonsGames Per

SeasonESPN Baseball Rights $5,328 mm 808 $7 mm 8 101 ESPN Football Rights $15,062 mm 136 $111 mm 8 17

The cost of a single game is 94% lower for baseball.

Notes: Reports of total games available for telecast from MLB vary somewhat. Source: espn.com, RBC Capital Markets estimates

The bulk provided by MLB content makes it very valuable. With the expansion of sports channels and sports programming (by sports only channels and some general entertainment channels), overall, there is increasing demand for bulk, and baseball meets the need. A regional sports network (RSN), for example, can be sustained primarily by the rights to a baseball team’s telecasts (for example, SportsNet New York, which carries the New York Mets). Additionally, bulk would be required by a national sports channel. As we look toward the potential launch of a Fox Sports national network, we can see how valuable baseball content could be (we believe that News Corp.’s contract for baseball TV rights grants it the ability to move approximately 40 games to a potential national network). While baseball may not be the highest-rated sport on average, its content provides ways to justify affiliate fees and to build viewership.

NBA Ratings On Upswing, Rights Fee Renewal In 2016 Ratings for the NBA regular season have been growing since the 2006-2007 season on broadcast, and based on our conversations with industry sources, we believe cable telecasts (on ESPN and TNT) are showing a similar trend. We also see the same general trend for the NBA Finals, although these ratings could be more volatile because match-up and duration of the series could have a meaningful effect on ratings.

Exhibit 8: NBA Ratings Have Grown Materially Since The 2006-2007 Season

NBA Regular Season Ratings On Broadcast TV

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NBA Finals Ratings On Broadcast TV

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Note: Household rating Source: sportsmediawatch.com, RBC Capital Markets

The NBA is a league of ‘stars’, whose individual brands can, in many ways, rival those of their teams and the league as a whole. However, the self promotion of one of these stars also serves to promote their team and the league as a whole—and we believe this star power may have helped to drive popularity and ratings growth in recent years. Looking forward, we think ratings growth could continue in a self-reinforcing cycle (ratings drive popularity, popularity drives ratings), and note that recent and future ratings and popularity growth could push rights fees higher when the current national TV contracts are renewed for the 2016-2017 season (negotiations may start next year).


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Fox Sports 1 (And Fox Sports 2…And 3?) — The Worst Kept Secret In Sports Media ESPN has long dominated the 24-hour a day national TV sports ecosystem, with its only direct competition coming from second-tier players (e.g., Fox’s Speed and NBC Sports Network) who have held second- and third-tier rights (such as those for the NHL or UFC). The most notable competition has come in the form of 1) general market channels, which have increased marquee sports programming (e.g., Time Warner’s TNT and TBS distribute NBA, MLB, and NCAA Basketball Tournament games), and 2) RSNs (News Corp. is the largest RSN operator, but Comcast and DirecTV are also notable participants in the space). In this environment, the establishment of a de novo, direct competitor to ESPN would have seemed virtually laughable in October 2010 when we published our first sports programming deep dive, Moneyball: The Economics Of Sports Media, OTT And Other Media Hot Buttons.

However, in our opinion, the likelihood of a direct competitor entering the 24-hour sports ecosystem has grown considerably, in large part due to News Corp.’s recent TV rights agreement with MLB (signed October 2012). This contract, scheduled to run from the 2014 season through 2021-2022 season, increases the average annual rights cost to News Corp from roughly $200mm to $500mm. And, importantly, we believe that this deal grants News Corp. consent to televise as many as 40 games on a possible national cable TV channel—with some sources suggesting that it may have the right to broadcast some early round playoff games in 2014—and to rebroadcast a significant number of hours of highlights (allowing the channel to provide sports news coverage, as is seen on SportsCenter). There is a variety of other sports content that News Corp. already holds rights to in some capacity that could find a home on Fox Sports 1 including: college football (including Big Ten and Pac-12), NASCAR, and UFC, as well as European and World Cup soccer (although the flexibility built into current contracts is unknown, we believe that it has likely already been factored into at least several existing deals).1

Of course, content alone does not hold significant value without distribution, and thus, we would look for News Corp. to convert an existing second-tier sports network. Likely candidates include Speed (which hosts primarily second-tier racing content), Fox Soccer Channel Plus (News Corp. recently lost the rights to televise English Premier League games starting with the 2013-2014 season), and Fuel TV (home to ‘adrenaline and thrill-seeking sports’). Speed, for example, has good distribution (roughly 80 million subscribers), but it is likely an undermonetized distribution outlet compared to what it could be as a national sports network.

If News Corp. does in fact launch Fox Sports 1, we think a rebranding of the entire line up could be possible, which would give more consistency across the brand (and also make some channels more attractive). For example, take a channel with mostly European soccer that occasionally hosts college football and basketball games. If a customer does not watch soccer, then the customer may choose to pass on purchasing (or insisting on having) the channel if it is branded Fox Soccer, but might request the channel if it is called Fox Sports 2 (because of the realization that it may carry a broader spectrum of sports and potentially a game that the customer wishes to watch).

Exhibit 9: What Could A Fox Sports National TV Network Look Like? Potential Primary Regularly Scheduled Programming Fox Sports 1 (Formerly Speed) Fox Sports 2 (Formerly Fox Soccer) Fox Sports 3 (Formerly Fuel)

· College Basketball · UEFA Champions League · Extreme Sports· College Football · Scottish Premier League · Australian Rules Football· MLB · UEFA Europa League · Mixed Martial Arts (UFC)· NASCAR · Rugby

Notes: We would expect, during certain periods, sports to be shown across networks. For example, if there are multiple important college football games going on at the same time, one may find a home on Fox Sports 1, while the others could find a place on the remaining Fox Sports national networks. Source: fangsbites.com, Bleacher Report, FoxSports.com, and RBC Capital Markets

We do not believe that the likely initial slate of sports events will make Fox Sports 1 ‘another ESPN’ overnight. However, for the venture to be a success, the channel does not need to reach such heights, especially on a going-forward basis, considering that many of the sports rights have already been acquired (making the costs essentially sunk). Thus, if News Corp. is able to take Speed (at roughly 81.4mm subscribers, $0.22/month subscriber fees, and $90mm in advertising revenue) and convert it to a modestly successful Fox Sports 1 (at roughly 90mm subscribers, $1.00/month subscriber fees, and $460mm in advertising revenue), then the company could add approximately $1.2bn to the top line. We believe that a moderate increase in distribution to 90mm subscribers (ESPN is closer to 100mm) and affiliate fees in the $1.00–1.50 range (RSNs often receive higher fees, and ESPN receives an estimated $5.00/subscriber/month for just the primary network) could be reasonable in the not too distant future.

1 sportsbusinessdaily.com


11

Exhibit 10: Potential Revenue Benefit From Converting Speed To A National Sports Network

SPEEDPost Channel

Launch

Total Subs 81.4mm 90.0mmA rebranded, reprogrammed network would likely increase coverage closer to ESPN's 98mm

Per Sub Fees $0.22 $1.00Total Affiliate Revenue/Year $215mm $1,080mm

Advertising Revenue $92mm $463mmIt wouldn't be uncommon on a sports platform of this type to see advertising versus affiliate fee revenue splits in the 30%/70% range.

Note: Based on 2012 estimates from RBC Capital Markets and SNL Kagan Source: SNL Kagan, RBC Capital Markets estimates

If Fox Sports 1 is able to reach the subscriber and affiliate fee estimates outlined in Exhibit 10, it could increase affiliate revenues by approximately $865mm, compared to FY2013 estimated global affiliate fees of $6.7bn at News Corp. If this benefit were to ramp in equally over three years, then it could add approximately 400bp to affiliate fee growth in FY2014. We would remind investors that if rights costs are effectively sunk, then these should be high-margin incremental revenues.

While the scenario laid out above would not put Fox Sports 1 on the same level as ESPN, the new network could still be a success. From there, the network would have the opportunity to attempt to move further up the ladder by acquiring additional and/or more desirable sports rights—potentially through the acquisition of NBA rights (the outstanding deals expire at the end of the 2015-2016 season) or NFL rights (the NFL could possibly sell a portion of the 13 game package that it hosted on its NFL Network during the 2012 regular season). Furthermore, we would remind those who think ESPN’s incumbency is insurmountable that Fox has succeeded as the insurgent in two other significant cases: broadcast (with the launch of FOX in the mid-80s) and cable news (with the launch of Fox News Channel in the mid-90s).


12

Deep Dive Into The Cost Of Sports Rights While identified sports rights costs are expected to grow in line to faster than operating expenses on the whole in the relevant segments for CBS, Disney, News Corp., and Time Warner, we think that each of these companies should be able to grow revenues in these segments quickly enough to more than offset this expense growth in the long run. Most important in our analysis is that we believe, over time, margins should expand at each of these companies in the segments most affected by sports rights, although 1) margins in any given year could compress depending on the schedule of rights renewals (rights fees often see a big step-up in the first year of a new contract), and 2) even if margins expand in the long run, higher expense growth could result in downward estimate revisions or a ‘miss’ in some cases. Furthermore, while we believe that each company could expand margins in the long run, this depends on the performance of the entire TV channel businesses, including the ability of the company to control other costs. Growth in retransmission consent and reverse compensation payments as well as in cable network and Regional Sports Network (RSN) affiliate fees is expected to help (at least partially) offset the growth in sports rights expense.

The results of our analysis are summarized in Exhibit 11. For example, indentified sports rights costs at CBS are expected to grow at a CAGR of 5.4% from 2012 to 2017, which may seem low in light of recent headlines, but in our reports, we detail how headlines can be misleading. Under the pro forma scenario we present, Cable Networks + Entertainment blended margins could still expand roughly 377bp over the same period.

Exhibit 11: Summary Of Sports Rights Costs Analysis CBS DIS

With expense growth of… CAGR ('12-'17) With expense growth of… CAGR (F12-F17)Identified Sports Rights Costs 5.4% Identified Sports Rights Costs 8.9%Total Expenses ex-Restructuring (Entertainment & Cable Networks segments combined) 3.4% Total Media Networks Operating Expenses 5.1%

And revenue growth of… CAGR ('12-'17) And revenue growth of… CAGR (F12-F17)Retrans/Reverse Comp (in Entertainment segment only) 35.4% Cable Networks Ad Revenue (Domestic) 6.1%Network Advertising Revenue 1.2% Cable Networks Affiliate Revenue (Domestic) 8.7%Cable Networks Revenue 4.8% Total Broadcasting Revenue 2.2%

Blended OIBDA Margin (Entertainment + Cable Networks) could still expand from… Media Networks EBITDA Margin could still expand from…2012E 24.9% FY2012 32.1%

To… To…2014 (as modeled) 27.2% FY2014 (as modeled) 33.1%2017 (pro forma*) 28.7% FY2017 (pro forma*) 34.9%

Average annual margin expansion from 2012E to 2017 (pro forma*) 75bps Average annual margin expansion from FY2012 to FY2017 (pro forma*) 56bps

Average annual margin expansion from 2014 (as modeled) to 2017 (pro forma*) 50bps Average annual margin expansion from FY2014 (as modeled) to FY2017 (pro forma*) 60bpscompared to… compared to…Average annual margin expansion 2009 to 2012E 294bps Average annual margin expansion FY2009 to FY2012 167bps

NWSA TWXWith expense growth of… CAGR (F12-F17) With expense growth of… CAGR ('12-'17)Identified Sports Rights Costs 11.6% Identified Sports Rights Costs 5.1%

Total Operating Expenses (Cable Networks & Television segments combined)* 3.9% Total Media Networks Operating Expenses (ex-restructuring and other one time items) 5.2%

And revenue growth of… CAGR (F12-F17) And revenue growth of… CAGR ('12-'17)Cable Networks Ad Revenue 5.2% Media Networks Subscription (Affiliate) Revenue 8.5%Cable Networks Affiliate Revenue 11.1% Media Networks Advertising Revenue 5.6%Television Retrans/Reverse Comp 24.6% Media Networks Content Revenue 0.9%

Blended EBITDA Margin (Cable Networks + Television) could still expand from…Media Networks OIBDA Margin (ex-retructuring and other one time items) could still expand from…

FY2012 30.7% 2012E 36.5%

To… To…FY2014 (as modeled) 34.0% 2014 (as modeled) 37.4%FY2017 (pro forma*) 34.8% 2017 (pro forma*) 41.6%

Average annual margin expansion from FY2012 to FY2017 (pro forma*) 83bps Average annual margin expansion from 2012E to 2017 (pro forma*) 103bps

Average annual margin expansion from FY2014 (as modeled) to FY2017 (pro forma*) 28bps Average annual margin expansion from 2014 (as modeled)E to 2017 (pro forma*) 140bpscompared to… compared to…Average annual margin expansion FY2009 to FY2012 352bps Average annual margin expansion 2009 to 2012E 59bps

*does not factor in the impact of launching a national sports channel

For total margin expansion of 377bps between 2012 and 2017 (pro forma*). Which is equivalent to...

For total margin expansion of 279bps between 2012 and FY2017 (pro forma*). Which is equivalent to...

For total margin expansion of 415bps between 2012 and FY2017 (pro forma*). Which is equivalent to...

For total margin expansion of 515bps between 2012 and 2017 (pro forma*). Which is equivalent to...

Note that these margins are not necessarily comparable across years or companies. More details are provided in each company's section. However, highlights include: (1) CBS - gets hit by a new NFL contract in 2014, (2) DIS - will see effects of new NFL and MLB contracts in FY2014,(3) NWSA - will broadcast the Super Bowl in FY2014 and will see the effects of a new MLB contract, (4) TWX - will also see the effect of a new MLB contract in 2014.

*Pro forma reflects numbers not as modeled but presented for hypothetical purposes (i.e., if growth is X margins would be Y). Source: RBC Capital Markets estimates


13

Fees Expanding, But Headlines Misleading: Sports Rights Expense Growth Appears Manageable

We have developed a proprietary model to asses the effect of rising sports rights costs on cable channel operators. However, before we dive deeply into company level details, we want to highlight five key industry points.

1. Rights costs for sports may appear to be exploding, but the headlines can be misleading (quoting the increase in average annual costs over the average cost of the previous deal, rather than the year-over-year increase in the first year of the new contract over the last year of the prior contract and the annual escalator, can make rights appear to be growing more quickly than they actually are).

2. Regional rights costs could grow faster than average sports rights costs, which could make it more difficult for some RSN operators to expand margins, but they must be analyzed on a case-by-case basis.

3. The NFL is the biggest driver of sports costs for media companies on the whole, but there are increasingly others (such as national MLB and NBA rights, college sports, and regional sports) that matter.

4. Growth in NFL rights fees demonstrates how ‘headline’ commentary can overstate the effect in any given year.

5. There are several rights deals that have been renewed on new terms recently and a few that potentially will be in the near future that are worth highlighting. (Notable recently renewed contracts include ones for the NFL and NCAA College Football playoff telecast rights.)

Rights Costs May Appear To Be Exploding Nationally, But Headlines Can Be Misleading. Annual step-up quoted in the press is typically an average over the deal’s term, but because annual escalators typically result in the payment being less in the first year and more in the last year of a deal, we believe that such ‘headlines’ can be misleading and can imply faster expense growth. Numerous deals have made headlines recently highlighting the growing cost of sports rights, such as ESPN’s recent renewal of NFL rights for an average of $1.9bn/year over eight years, which would be an increase of approximately $800mm (71%) over the average annual fee for the prior deal. For the NFL as a whole, the average annual rate under new rights deals is 59% higher than the average annual rate under old deals. Large step-ups have been seen in a number of other cases; a sample of which is presented in Exhibit 12. However, note that using the average annual increase between two periods overstates the actual annual effect of these deals. We should really be considering the expected annual payment in each year based on an annual escalator (to understand this better, please see the NFL example on page 17; the actual affect of applying these assumptions is presented on the following page).

Exhibit 12: Total Average Annual Sports Rights To Be Paid Over The Duration Of Agreements Are Exploding, But This Is The Wrong Metric To Consider

$155

$240

$29

$300

$27

$175

$0

$50

$100

$150

$200

$250

$300

$350

Old ACCDeal

2011 to2022

NewACCDeal

2012 to2026

Old LADodgers

Deal 2002 to2013

NewLADodgers

Deal 2014 to

2038

Old LALakersDeal

2005 to2011

NewLALakersDeal

2012 to2031

(in m

illio

ns) 55%

556%

929%

$708

$1,466

$3,738

$5,953

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Old MLBDeal

2007 to2013

NewMLBDeal

2014 to2021

Old NFLDeal

Term Varies

New NFLDeal

Term Varies

(in m

illio

ns)

1

0

107%

59%

Note: Sources used to build our sports rights database are listed in the Appendix. Source: RBC Capital Markets estimates

After Mapping Out Actual Expected Annual Payments Based On Escalator Assumptions, Sports Rights Cost Increases Appear Somewhat Less Dramatic. After modeling out all the individual rights deals that we could find sufficient pricing information on, we are able to estimate the actual growth in payments in each year. Here, we see that total indentified rights costs actually increase to $13.1bn in 2015 from $9.2bn in 2011 (42% or a 9.2% CAGR—less than the 10.5% that the methodology in the previously chart would have given). Looking forward, excluding the effect of the Olympics, rights are expected to increase at a 7.6% CAGR between 2012 and 2017.


14

Exhibit 13: Estimated Identified Rights Costs By Year Based On Annual Escalator Assumptions

$7,285mm$8,604mm

$9,435mm

$11,188mm$10,586mm

$8,211mm$9,195mm

$13,055mm$12,790mm

$14,969mm$14,437mm

$0mm

$2,000mm

$4,000mm

$6,000mm

$8,000mm

$10,000mm

$12,000mm

$14,000mm

$16,000mm

$18,000mm

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

NHL National

MLS Regional

Other

Olympics

NHL Regional

NFL

NBA Regional

NBA National

MLB Regional

MLB National

Mixed Regional

College Sports

Industry sports rights ex-Olympics are estimated to grow at a 7.6% CAGR between 2012 and 2017.

Note: Sources used to build our sports rights database are listed in the Appendix. Source: RBC Capital Markets estimates

Margins Can Still Expand As Sports-Related Revenues Will Likely Grow Faster Than Expenses Over Time. In Exhibit 14, we demonstrate that if sports rights costs grow at a 7.6% rate between 2012 and 2017, then we think the industry as a whole should be able to increase sports-related revenues at a similar rate under fairly reasonable circumstances (maintaining or decreasing sports-rights costs as a fraction of sports-related revenue). In other words, if sports-rights costs were to grow at 7.6% between 2012 and 2017, and national TV sports ad spend (ex-Olympics) were to grow at 8.0%, then sports channel affiliate fees would need grow at 7.3% in order to maintain costs as a constant percent of rights—we believe that sports channels as a whole should be able to grow affiliate fees above this rate, potentially driving total industry margin expansion.

We should, however, note that the analysis below only accounts for deals that we are able to identify (and have been included in our sports rights database).2

Exhibit 14: Based On Deals We Have Identified: Sports-Related Revenue Could Grow As Fast Or Faster Than Sports-Rights Costs

($ mm) 2012E 2017E '12-'17 CAGRNational TV Sports Ad Spend (ex-Olympics) 11,772 17,297 8.0%Sports Channel Affiliate Fees 15,291 21,748 7.3%Total 27,063 39,045 7.6%

Identified Sports Rights Costs (ex-Olympics) 10,007 14,437 7.6%

For sports rights to remain a constant proportion of sports related revenues, associated ad and affiliate fees must grow at the same rate.

Despite lower ratings, sports remains one of the few places on TV advertisers can reach a large audience simultaneously, and thus we think sports related ad revenue could grow at a 8.0% CAGR between 2012 and 2017.

If National TV Sports Ad Spend (ex-Olympics) grows at 8.0% then for sports rights costs to remain a constant fraction of sports related revenue, sports channel affiliate fees would have to grow at 7.3% from 2012 to 2017. We think this is achievable.

Our proprietary analysis shows that we predict Identified Sports Rights Costs (ex-Olympics) will grow at a 7.6% CAGR between 2012 and 2017.

Based on our rights cost and ad growth assumptions, sports channel industry affiliate fee growth of greater than 7.3% would drive aggregate margin expansion (ex-Olympics).

Note: Sources used to build our sports rights database are listed in the Appendix. Source: Nielsen, SNL Kagan, RBC Capital Markets estimates

Of course, we would like to stress that in any particular year, a network may see increased volatility in expenses from a particular event (which could have a temporarily negative effect on financial performance if it causes a temporary bump in the growth rate of expenses). We would, for example, expect a ramp in costs at ESPN in the first year of the NCAA College Football Playoff. And we would also like to stress that there could be winners and losers. Company-by-company expenses are evaluated in the following section. 2 Rights deals are only included in our database if we can find or reasonably estimate the total dollar amount and duration during at least one contract term. Deals are not included if we only know the dollar payment in a single year, because such information does not help us accurately estimate the growth rate of sports-rights expense.


15

We think that the national TV ad spend assumption of an 8.0% CAGR between 2012 and 2017 is reasonable, given that national TV ad spend grew at an approximately 8% CAGR over the last four years. We believe that ad spend on sports could grow at least in line with cost per thousand impressions (CPM) growth, as we expect sports viewership to be flat to up, in aggregate.

Exhibit 15: National TV Sports Ad Spend On Network TV And Cable According To Nielsen

$9.8bn

$8.2bn

$10.3bn$10.9bn

$13.3bn

$0.0bn

$2.0bn

$4.0bn

$6.0bn

$8.0bn

$10.0bn

$12.0bn

$14.0bn

4Q07-3Q08 4Q08-3Q09 4Q09-3Q10 4Q10-3Q11 4Q11-3Q12

Ad

Spe

nd

-16% 26%

6%

22%Summer Olympics

Roughly 8% CAGR between 4Q07-3Q08 and 4Q11-3Q12 which could help drive margins expansion at

dedicated sports channels.

Source: Nielsen, RBC Capital Markets

Additionally, we believe that sports channel affiliate fee growth of 7.3% is achievable (and probably beatable), as the historical growth rate for total industry affiliate fees for sports channels appears to be leveling out in the 9% range.

Exhibit 16: Total Affiliate Fees And Operating Expenses For All Sports Channels (RSNs And National Channels), SNL Kagan Estimates

31%

21%19%

15% 16%14%

12%10% 9% 9%

12%9% 9% 9%

32%

8%

19%

16% 16%

10% 9%6% 7%

11% 11%9% 8% 8%

$0mm

$5,000mm

$10,000mm

$15,000mm

$20,000mm

$25,000mm

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Tota

l Spo

rts C

hann

el A

ffilia

te R

even

ue

And

Ope

ratin

g E

xpen

se

0%

5%

10%

15%

20%

25%

30%

35%

YoY

Gro

wth

Total Sports Channel Industry Affiliate Revenue ($mm) Total Sports Channel Industry Operating Expense ($mm)Total Sports Channel Industry Affiliate Revenue Growth Total Sports Channel Industry Operating Expense Growth

Source: SNL Kagan estimates, RBC Capital Markets

We Believe Regional Rights Costs Could Grow Faster Than Average Sports-Rights Costs. This Could Make It More Difficult For Some RSN Operators To Expand Margins, But They Must Be Analyzed On A Case-By-Case Basis. Based on rights deals, which we have identified, RSN rights costs are expected to grow at a CAGR of 12.0% between 2012 and 2017 compared to rights-costs growth across all categories of 7.6% over the same period (ex-Olympics). This leads us to believe that either increased competition for or a higher recognized valuation of local sports rights is driving some of these rights fees higher.


16

Exhibit 17: Growth In Cost Of Regional Rights Outpaces Average Growth, Based Only On Deals We Have Identified

$0mm

$2,000mm

$4,000mm

$6,000mm

$8,000mm

$10,000mm

$12,000mm

$14,000mm

$16,000mm

$18,000mm

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All

Iden

tifie

d R

ight

s C

ost

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

Iden

tifie

d R

SN

Rig

hts

Cos

t

All Identified Rights Cost (ex-Olympics) Identified RSN Rights Cost

Identified RSN rights costs are estimated to grow 76.1% between 2012 and 2017 (a 12.0% CAGR) vs. sports rights cost growth across all catagories (ex-Olympics) of 44.3% (a 7.6% CAGR).


It is possible the growth rate is higher on the RSN deals that we have identified than for the RSN industry as a whole, because not all deals are public or publicized, and those that are made public are likely for larger-market teams, which could be experiencing higher cost inflation (i.e., we know about the recent LA Lakers deal that saw a big step-up, but limited information is available on the Milwaukee Bucks’ last rights contract, perhaps the percent step-up in fees was not as large).

SNL Kagan’s forward estimates indicate that the RSN industry should be able to grow affiliate revenue at a faster rate than operating expenses (suggesting that margin expansion should be possible), but we would caution investors to keep a close eye on the rate of growth in RSN fees. Additionally, because RSN rights expense can vary greatly among channels, investors should evaluate RSN operators on a case-by-case basis.

Exhibit 18: Total Affiliate Fees And Operating Expenses For RSNs, SNL Kagan Estimates

22%

16%

21%

17%

13%12%

9% 9% 8%10%

12%

9% 9% 9%13% 12%

22%

14%

11% 10%

7% 7%8%

10%11%

8% 8% 8%

$0mm

$1,000mm

$2,000mm

$3,000mm

$4,000mm

$5,000mm

$6,000mm

$7,000mm

$8,000mm

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

RS

N A

ffilia

te R

even

ue A

nd O

pera

ting

Expe

nse

0%

5%

10%

15%

20%

25%

YoY

Gro

wth

Total RSN Industry Affiliate Revenue ($mm) Total RSN Industry Operating Expense ($mm)Total RSN Industry Affiliate Revenue Growth Total RSN Industry Operating Expense Growth

Source: SNL Kagan estimates, RBC Capital Markets

NFL Accounts For The Biggest Portion Of Total Sports-Rights Costs. In 2012, we believe, NFL rights accounted for more sports rights expense than any other sports category that we identified. We estimate that rights fees paid to the NFL accounted for 36% of total sports rights expense.


17

Exhibit 19: Sports Rights Expense By Category

2012E Total Rights Expense

$1,181mm9%

$764mm6%

$922mm7%

$1,394mm11%

$163mm1%

$4,346mm36%

$1,951mm16%

$1,741mm14%

NFL RSN Deals College Sports OlympicsMLB National NBA National Other NHL National

Note: For a list of contracts indentified and sources used to build our sports rights database, please see the Appendix. Note: We assume that total sports-rights costs are 50% of total RSN programming expense costs as estimated by SNL Kagan, based on a comparison of RBC estimated rights fees and SNL Kagan estimated programming expense for a number of sample RSNs. Additionally, there may be some overlap between college sports and RSN rights expense. For the case of our analysis, we assume that these two categories are separate (with national college rights deals being classified as College Sports, even if they could have an RSN component). Source: RBC Capital Markets estimates

Growth In NFL Rights Fees Demonstrates How ‘Headline’ Growth Can Overstate Effect In Any Given Year. Yes, the costs of sports rights are increasing. For example, annual rights fees for the NFL are estimated to grow on average over 50% from the current deal to newly signed deals at CBS, FOX, NBC, and ESPN.

Exhibit 20: Summary of Current and Future NFL Rights Deals

Current NFL Deal

Deal Starts* Deal Ends* Years Total Rights FeesAverage Annual Rights

FeesCBS 2006 2013 8 $4,980mm $623mmESPN 2006 2013 8 $8,800mm $1,100mmFOX 2006 2013 8 $5,700mm $713mmNBC 2006 2013 8 $4,824mm $603mm

Next NFL Deal

Deal Starts* Deal Ends* Years Total Rights FeesAverage Annual Rights

FeesCBS 2014 2022 9 $9,090mm $1,010mm

growth over prior deal 82.5% 62.2%ESPN 2014 2021 8 $15,062mm $1,883mm

growth over prior deal 71.2% 71.2%FOX 2014 2022 9 $9,990mm $1,110mm

growth over prior deal 75.3% 55.8%NBC 2014 2022 9 $8,550mm $950mm

growth over prior deal 77.2% 57.5% Source: sportsillustrated.cnn.com, wsj.com, sportsbusinessdaily.com, adweek.com, RBC Capital Markets

However, although the deal-over-deal average cost increase is quite large, we believe the annual effect is less dramatic. While there are a number of unknowns that make it difficult to know the fee growth in any year, if we assume annual escalators in a reasonable range, then we see that the step up in the first year for the networks and ESPN could range between 7% and 22%.


18

Exhibit 21: Mechanics Of Sports Rights Fees - Annual Growth May Be Less Than You Think (But Still Material) ($ in mm) Season

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

CBS NFL (ex-Super Bowl) 467 490 515 540 567 596 626 657 751 788 828 869 913 958 1,006 1,057 1,109

YoY Growth (ex-Super Bowl) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 14.3% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Super Bowl 149 - - 173 - - 200 - - 232 - - 268 - - 310 -

Total 616 490 515 713 567 596 826 657 751 1,020 828 869 1,181 958 1,006 1,367 1,109

YoY Growth -20.4% 5.0% 38.6% -20.4% 5.0% 38.6% -20.4% 14.3% 35.8% -18.8% 5.0% 35.8% -18.8% 5.0% 35.8% -18.8%

NBC NFL (ex-Super Bowl) 468 491 516 542 569 597 627 659 705 741 778 817 857 900 945 993 1,042


Super Bowl - - 165 - - 190 - - 221 - - 255 - - 295 - -

Total 468 491 681 542 569 788 627 659 926 741 778 1,072 857 900 1,241 993 1,042

YoY Growth 5.0% 38.5% -20.4% 5.0% 38.5% -20.4% 5.0% 40.6% -20.0% 5.0% 37.8% -20.0% 5.0% 37.8% -20.0% 5.0%

FOX NFL (ex-Super Bowl) 540 566 595 625 656 689 723 759 829 870 914 960 1,008 1,058 1,111 1,166 1,225


Super Bowl - 157 - - 181 - - 210 - - 243 - - 281 - - 326

Total 540 723 595 625 837 689 723 969 829 870 1,157 960 1,008 1,339 1,111 1,166 1,550

YoY Growth 34.0% -17.8% 5.0% 34.0% -17.8% 5.0% 34.0% -14.5% 5.0% 32.9% -17.1% 5.0% 32.9% -17.1% 5.0% 32.9%

ESPN NFL (ex-Super Bowl) 922 968 1,016 1,067 1,120 1,176 1,235 1,297 1,577 1,656 1,739 1,826 1,917 2,013 2,114 2,219

YoY Growth (ex-Super Bowl) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 21.6% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Super Bowl - - - - - - - - - - - - - - - -

Total 922 968 1,016 1,067 1,120 1,176 1,235 1,297 1,577 1,656 1,739 1,826 1,917 2,013 2,114 2,219

YoY Growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 21.6% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Season when new deals kick in

Notice that the YoY step up in the first year of a new deal should be significantly less than the increase in average rights fee (if we assume there is an annual escalator).

FOX

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

NFL (ex-Super Bowl) Super Bowl YoY Growth (ex-Super Bowl)

ESPN

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


CBS

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


NBC

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%


Source: sportsillustrated.cnn.com, wsj.com, sportsbusinessdaily.com, adweek.com, industry sources, RBC Capital Markets

ESPN Deal For NCAA Football Playoffs Is One Of The Bigger Changes On The Horizon. While the mechanics of fee payments mean that the annual effect is often less than the headlines suggest, it does not necessarily mean that there are no cases where a new deal could have a significant year-over-year effect. The first year of the new NFL contracts could still bring a visible acceleration in expenses at some networks in its first year.

Beyond the NFL deal, the most notable new deal is ESPN’s for the NCAA Football playoffs, which we believe could result in a meaningful single-year jump in fees and will address it in more detail when we analyze Disney in detail (ESPN is estimated to be paying more than $7bn for rights to the NCAA Football playoffs and affiliated bowl games over 12 years). The MLB renewal could also cause some notable cost inflation (average rights fees in aggregate from Disney, News Corp., and Time Warner are estimated to hit $1.5bn/year over 8 years). Beyond deal size, wins and losses could have significant company-specific implications; the most notable recent cases are News Corp.’s losses of regional rights for the LA Dodgers and LA Lakers.


19

Exhibit 22: Notable Recently Renewed Deals

Old Deal New Deal

Event TV PartnersDeal

Starts*Deal

Ends* YearsTotal Rights

FeesAvg. Annual Rights Fees TV Partners

Deal Starts*

Deal Ends* Years

Total Rights Fees

Avg. Annual Rights Fees

ACC DIS 2011 2022 12 $1,860 $155 DIS 2012 2026 15 $3,600 $240

BCS Series/NCAA Football Playoffs (ex. non-semifinal Rose Bowl) DIS 2010 2013 4 $495 $124 DIS 2014 2025 12 $6,720 $560 Rose Bowl (new deal doesn’t include years Rose Bowl is a playoff semi-final)* DIS 2006 2013 8 $300 $38 DIS 2014 2025 12 $640 $53

Big 12 DIS 2008 2015 8 $480 $60 DIS 2012 2024 13 $1,430 $110 NWSA 2008 2011 4 $78 $20 NWSA 2012 2024 13 $1,170 $90

Total $2,600 $200

English Premier League NWSA 2010 2012 3 $80 $27 NBC 2013 2015 3 $250 $83

LA Angels of Anaheim NWSA 2006 2011 6 $270 $45 NWSA 2012 2031 20 $3,000 $150

LA Dodgers NWSA 2002 2013 12 $350 $29 TWC 2014 2038 25 $7,500 $300

LA Lakers NWSA 2005 2011 7 $187 $27 TWC 2012 2031 20 $3,500 $175

MLB DIS 2007 2013 7 $2,492 $356 DIS 2014 2021 8 $5,328 $666 NWSA 2007 2013 7 $1,426 $204 NWSA 2014 2021 8 $4,000 $500 TWX 2007 2013 7 $1,040 $149 TWX 2014 2021 8 $2,400 $300 Total $4,958 $708 Total $11,728 $1,466

NASCAR DIS 2007 2014 8 $2,160 $270 DIS New Deal Not Yet SignedNWSA 2007 2014 8 $1,760 $220 NWSA 2015 2022 8 $2,400 $300 TWX 2007 2014 8 $668 $84 TWX New Deal Not Yet SignedTotal $4,588 $574

NFL DIS 2006 2013 8 $8,800 $1,100 DIS 2014 2021 8 $15,062 $1,883 CBS 2006 2013 8 $4,980 $623 CBS 2014 2022 9 $9,090 $1,010 NWSA 2006 2013 8 $5,700 $713 NWSA 2014 2022 9 $9,990 $1,110 NBC 2006 2013 8 $4,824 $603 NBC 2014 2022 9 $8,550 $950 DTV 2006 2010 5 $3,500 $700 DTV 2011 2014 4 $4,000 $1,000

Pac-12 (formerly Pac-10) ESPN (Basketball) 2006 2011 6 $53 $9 DIS, NWSA 2012 2023 12 $3,000 $250 ESPN (Football) 2007 2011 5 $125 $25 NWSA 2007 2011 5 $97 $19

PGA Tour NBC, CBS 2007 2012 6 $2,950 $492 NBC, CBS 2013 2021 9 $6,417 $713

USTA U.S. Open CBS 2006 2011 6 $145 $24 CBS 2006 2011 6 $145 $24 DIS 2009 2014 6 $140 $23 DIS New Deal Not Yet Signed

Wimbledon NBC 2008 2011 4 $48 $12 ESPN (All Rounds) 2012 2023 12 $480 $40 ESPN (Early Rounds) 2008 2013 6 $60 $10

Comments: No identified credible sources have cited the split in revenues between ESPN and FOX under the new deal.

Comments: We believe Fox can shift some portion of its baseball content onto a new nationally distributed sports network.


Comments: The ACC renegotiated its rights contract with ESPN in 2012, just two years (roughly) after it had signed a 12 year deal with the network.

Comments: ESPN also holds rights to the Rose Bowl, but because its current deal is different in duration than the remaining bowls, it is excluded from the analysis above, except when it is the host site of a national semi-final under the new deal. The old deal included 4 games, the Sugar Bowl, Orange Bowl, Fiesta Bowl, and the National Championship. New deal includes two semi-final games and the national championship game as well as four other games (deal does not cover Rose, Sugar, and Orange Bowls in seasons where they are not hosting a semi-final game, but ESPN owns rights to those games under a separate contract). All-in costs of the new contract including the Rose Bowl in all years (i.e. 7 games/year over 12 years) would be close to $7.4bn total or an average of ~$610mm/year over the life of the deal. *The prior Rose Bowl deal averaged ~$40mm/year over 8 years, and provided a game per year, while the new deal is the average amount over its life but pro rated for the fact that the game every third year is a semi-final and included in the playoff deal above.

Comments: The prior Big 12/ESPN deal was renegotiated before its completion.

Comments: Under the prior deal FOX had sublicensed some games to ESPN. This is one of the few major national rights losses expected to hit in the next few years.

Comments: ESPN was able to win the right to later round from NBC and folded its existing rights deal into this new deal.

Comments: Impact of loss of rights for News Corp. is addressed in more detail in the section titled RSN Recent Developments .

Comments: Impact of loss of rights for News Corp. is addressed in more detail in the section titled RSN Recent Developments .

Comments: ESPN sublicenses some of its content to the Tennis Channel.

*Year refers to start date of the season or event; college sports deals assume a year starting in 3Q. For example, if the ACC deal says it starts in 2011, then we assume that the new deal covers the basketball season starting in 2011 and ending in 2012. All college events are based on the college season even if the event is confined to one year. For example, if an NCAA Men’s Basketball tournament deal starts in 2013, then we would present it as starting in 2012 to imply the 2012-2013 college season. Note: Includes data from our sports rights database, for a list used to build our sports rights database, please see the Appendix. Source: RBC Capital Markets estimates


20

Exhibit 23: Notable Deals That Have Not Been Renewed Since 2011 Or Earlier Current Deal


Starts*Deal


FeesAvg. Annual Rights Fees

BIG EAST DIS 2007 2013 7 $200 $29 CBS 2007 2012 6 $54 $9

BIG TEN DIS 2007 2016 10 $1,000 $100 Big Ten Network 2007 2031 25 $2,800 $112 CBS 2011 2016 6 $72 $12 NWSA 2011 2016 6 $145 $24

Longhorn Network DIS 2011 2030 20 $300 $15

NBA DIS 2008 2015 8 $3,880 $485 TWX 2008 2015 8 $3,560 $445

NCAA Men's Basketball CBS, TWX 2010 2023 14 $10,800 $771

NHL NBC 2011 2020 10 $2,012 $201

SEC CBS 2009 2023 15 $825 $55 DIS 2009 2023 15 $2,250 $150

*Year refers to start date of the season or event; college sports deals assume a year starting in 3Q. For example, if the ACC deal says it starts in 2011, then that includes the basketball season starting in 2011 and ending in 2012. All college events are based on the college season even if the event is confined to one year. For example, if an NCAA Men’s Basketball tournament deal starts in 2013, then we would present it as starting in 2012 to imply the 2012-2013 college season. Note: Includes data from our sports rights database, for a list used to build our sports rights database, please see the Appendix. Source: RBC Capital Markets estimates


21

Achievability Of Margin Expansion In Light Of Rights Fee Growth By Company In the following section, we utilize our proprietary sports rights model to determine the expense effect of sports rights and the ability of cable channel operators to maintain or expand margins in light of these costs.

Our analysis utilizes the following process:

1. Identify all relevant rights deals (we have identified more than 125 unique deals among sports leagues and/or teams and CBS, Disney, News Corp., or Time Warner). If rights deals do not cover the period from 2008 through 2017, then we assume a rate for the prior or potential future contract.3

2. Assume a constant escalator (the escalator used is informed by metrics reported in the media or our conversations with industry sources)—if no color is available, then we typically assume a mid-single digit escalator. Such escalator assumptions typically imply a bump in rights costs in the first year of a new contract, which supports our general understanding of sports rights payment schedules.

3. Sum the rights costs for each channel operator.

4. Assume some growth in all other costs and determine what revenue would have to grow at in order to reach a certain pro forma margin (not that this margin should be viewed as a ‘pro forma’ hypothetical and not as an ‘estimate’).

More details on our assumptions and process can be found in the Appendix.

CBS: Middle Of The Pack Margin Expansion But Retrans And Reverse Comp. To Pay For A Growing Portion Of Rights Fees And Could Provide Upside We believe CBS should be able to continue to expand margins over the next several years despite the growing cost of sports rights. However, compared to competitors, we think that its ability to do so could be somewhat ‘middle of the pack’. Below, we present a scenario under which CBS could have a blended margin of 28.7% for the Cable Networks and Entertainment segments in 2017E (up from 24.9% in 2012E). Note that one of the bigger assumptions underlying this analysis is that the company will not need, or choose, to increase or cut other costs substantially.

For the years 2012–2014, we present estimated financials ‘as modeled’. For 2015–2017, we solve for the rate at which revenue must grow for the 2017 blended margin (Entertainment and Cable Networks segments) to achieve margin expansion of 50bp per year from 2014 to 2017 (and then check to insure the implied revenue growth rate is reasonable). Thus, we think CBS could achieve a blended margin of 28.7% in 2017 based on estimated growth in sports-rights costs and a 2012–2017 CAGR in other costs of 2.9%. In fact, we think CBS could be able to expand margins even further under a variety of scenarios—if, for example, sports rights allow the company to drive retransmission and reverse comp payments (recognized in the Entertainment segment) higher than $750mm by 2017—such an assumption implies retrans payments of roughly $1.20/subscriber, but we think these fees could approach the over $2/subscriber range longer term.

3 This assumption is necessary to eliminate bias in our data set caused by lack of information. For example, because some future rights deals have not yet been signed, but almost certainly should be renewed at some point, total rights fees would incorrectly appear to decline as existing contracts end unless we assume they are renewed.


22

Exhibit 24: CBS Should Be Able To Grow Revenues Fast Enough To Offset Increase In Sports-Rights Costs

Modeled Years Assumptions To Get To MarginCBS 2012E 2013E 2014E 2015E 2016E 2017E CAGR ('12-'17) Growth ('12-'17)Identified Sports Rights Costs 1,332 1,592 1,506 1,582 1,888 1,732 5.4% $400mm

YoY growth 19.5% -5.4% 5.0% 19.4% -8.3%Other Expenses 5,816 5,935 6,056 6,268 6,487 6,714 2.9% $898mm

YoY growth 2.1% 2.0% 3.5% 3.5% 3.5%Total Expenses ex-Restructuring (Entertainment & Cable Networks segm 7,147 7,527 7,561 7,849 8,375 8,446 3.4% $1,299mm

YoY growth 5.3% 0.5% 3.8% 6.7% 0.9%CAGR ('12-'17) Growth ('12-'17)

Retrans/Reverse Comp (in Entertainment segment only) 165 312 433 537 657 750 35.4% $585mmYoY growth 89.1% 38.7% 24.0% 22.4% 14.1%

Network Advertising Revenue 4,012 4,153 4,025 4,105 4,401 4,269 1.2% $256mmYoY growth 3.5% -3.1% 2.0% 7.2% -3.0%

International Sales of TV Content 1,100 1,210 1,319 1,438 1,567 1,708 9.2% $608mmYoY growth 10.0% 9.0% 9.0% 9.0% 9.0%

All Other Entertainment Revenue 2,478 2,653 2,655 2,729 2,805 2,884 3.1% $406mmYoY growth 7.0% 0.1% 2.8% 2.8% 2.8%

Cable Networks Revenue 1,759 1,863 1,948 2,037 2,130 2,227 4.8% $468mmYoY growth 5.9% 4.6% 4.6% 4.6% 4.6%

Entertainment + Cable Networks Revenue 9,515 10,191 10,380 10,846 11,561 11,838 4.5% $2,323mmYoY growth 7.1% 1.9% 4.5% 6.6% 2.4%

Entertainment + Cable Networks OIBDA ex-Restructuring 2,367 2,664 2,818 2,997 3,186 3,392 7.5% $1,025mmYoY growth 12.5% 5.8% 6.3% 6.3% 6.5%

Blended OIBDA Margin (Entertainment + Cable Networks) 24.9% 26.1% 27.2% 27.6% 27.6% 28.7%($ in mm)

Pro forma expense and revenue assumptions in these years made to get to a blended Cable Networks and Entertainment margin of 28.7%.Superbowl in 2013 and 2016.

New NFL contract hits in 2014.

In order to reach a combined Entertainment and Cable Networks margin of 28.7%, we believe all other Entertainment revenue could grow at a 3.1% CAGR.

We make assumptions for growth in sports rights costs, other expense, retrans/reverse comp, network advertising, international sales of TV content, and cable network revenue.

Total Expense and Revenue presented in these years are "as modeled".

Based on our assumptions CBS could still achieve margin expansion of 0.5% between 2014 and 2017.

Source: RBC Capital Markets estimates

While we expect a portion of sports rights to be ‘paid for’ through advertising, we also think that sports content could give CBS additional leverage in retransmission fee and reverse compensation negotiations. We estimate that these fees (as recognized in the Entertainment segment—note that half of retransmission consent is recognized in the Television segment) could rise to 43% in 2017 from 12% of sports-rights costs in 2012. (Also note that we could see a rise in affiliate fees at CBS Sports Network, depending on the allocation of sports programming, which depends somewhat on the flexibility written into the existing rights, as well as retrans, reverse comp, and contracts).

Exhibit 25: Retransmission Consent And Reverse Compensation Should Compensate For A Growing Portion Of Sports Rights

12%

20%

29%

34% 35%

43%

$mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

$1,400mm

$1,600mm

$1,800mm

$2,000mm

2012E 2013E 2014E 2015E 2016E 2017E0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Retrans/Reverse Comp (in Entertainment segment only) Identified Sports Rights CostsRetrans/Reverse Comp. As Percent Of Sports Rights

Retransmission consent fees and reverse compensation is expected to pay for an increasing fraction of sports rights costs

Note: For a list of contracts indentified, details on the derivation and assumptions embedded in these estimates, and sources used to build our sports rights database, please see the Appendix. Source: RBC Capital Markets estimates


23

We estimate that roughly 37% of programming expense in 2013 at CBS will be from indentified sports rights fees. These costs would be approximately 21% of total expense for the Entertainment and Cable Networks segments combined. Thus, we note that while sports rights are very important, they are not, by any means, the only contributor to expense or margin changes.

Exhibit 26: 2013E Identified Sports-Rights Costs As A Percentage Of Other Expenses (for CBS Entertainment and Cable Networks segments)

As A Portion Of Programming Expense

$1,592mm37%

$2,683mm63%

Identified Sports Rights Costs

All Other Programming Expense

As A Portion Of All Operating Expense

$1,592mm21%

$5,935mm79%


All Other Entertainment And Cable NetworksOperating Expenses

Note: Programming expense excludes networks that are not consolidated. Source: SNL Kagan, RBC Capital Markets estimates

Exhibit 27 presents the estimated sports-rights fees applied in our analysis. When a contract expires before 2017, and a new deal has not yet been signed, we assume for our analysis that it is renewed with the same TV partner. Additional details regarding the assumptions made are presented in the Appendix.


24

Exhibit 27: Estimated Annual Sports-Rights Costs For CBS – Assumes Deals Renewed If Current Deal Ends Before 2017

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

$1,400mm

$1,600mm

$1,800mm

$2,000mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

USTA U.S. OpenSuper BowlSECPGA TourNFLNCAA Men's Basketball TournamentMountain WestConference USABIG TENBIG EAST

League/Event

New NFL Contract

Began to "share" NCAA Tournament with Time Warner


While the majority of major sports rights are under contract through 2017 (the last year of our analysis), several are not. Below, we chart only the signed deals for reference. In cases where a deal ends before 2017, we show the rights expense rolling off in Exhibit 28, but in our analysis above, we assume that these deals are renewed. The chart below also does not include historical deals if we were unable to find sufficient financial information (while in the analysis above, we make a best guess of the rights fees recognized in the historical years of our analysis, if financial information was not available).


25

Exhibit 28: Estimated Annual Sports-Rights Costs For CBS – Only Includes Signed And Identified Deals

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

$1,400mm

$1,600mm

$1,800mm

$2,000mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

USTA U.S. OpenSuper BowlSECPGA TourNFLNCAA Men's Basketball TournamentMountain WestConference USABIG TENBIG EAST

League/Event

Note: This analysis only includes announced deals (i.e. it does not assume contracts are extended). It also does not include old deals if sufficient financial information was not available.

New NFL Contract

Began to "share" NCAA Tournament with Time Warner


As a resource for understanding and interpreting quarterly results, we also present the results of our analysis broken down by quarter through 2014. Here, we can see that in most quarters, we would expect the year-over-year increase in costs to be quite manageable. However, we highlight that there are many unknowns that effect quarterly estimates. For example, if the annual escalator for a new deal is actually less than we have estimated, then the first-year step up could be meaningfully higher than we predicted (but this would later be offset by lower annual growth).


26

Exhibit 29: Quarterly Breakdown Of Estimated Sports Rights Expense

Growth

$25 $3 $2 $1

$192

$3 $10 $21

($454)

$3 $6 $16 $21 $4 $6 $19

$217

$4 $13 $26 $4 $25 $66

($180)($600)

($400)

($200)

$0

$200

$400

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

($ in

mm

)

3% 5% 1% 0%

26%

5% 5% 5% 5% 3% 3% 4% 5% 2% 4%

43%

5% 5% 5% 5% 10% 12%

-48% -25%-60%-40%-20%

0%20%40%60%

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

(%)

$64.8

$220.6

$449.8

$941.7

$68.0

$231.1

$71.4

$237.5

$508.6

$75.0

$243.4

$504.8

$726.0

$78.8

$256.1

$545.8

$82.7

$280.8

$596.5

$488.1

$749.2

$531.0$486.2$470.5

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

$1,000.0

CY1

Q09

CY2

Q09

CY3

Q09

CY4

Q09

CY1

Q10

CY2

Q10

CY3

Q10

CY4

Q10

CY1

Q11

CY2

Q11

CY3

Q11

CY4

Q11

CY1

Q12

CY2

Q12

CY3

Q12

CY4

Q12

CY1

Q13

CY2

Q13

CY3

Q13

CY4

Q13

CY1

Q14

CY2

Q14

CY3

Q14

CY4

Q14

($ in

mm

)

BIG EAST BIG TENConference USA Mountain WestNCAA Men's Basketball Tournament NFLPGA Tour SECSuper Bowl USTA U.S. Open

CBS was able to realize a significant cost reduction by sharing the NCAA contract with TWX.

First season under new NFL rights contract



27

As a sanity check, we chart sports rights expense versus programming and talent commitments as reported in CBS’s 2011 10-K. Our results appear to make sense, as we would expect to see commitments exceed sports rights fees in the near term (as commitments could include shorter-term programming and talent contracts, perhaps those with hosts or a production company). On the other hand, we think expected rights fees could exceed obligations as reported in the 10-K over the longer term as these agreements may have some form or ‘out’ or ‘option’, which means they might not be included in this reported item, while others will have rolled off (while we assume they are renewed).

Exhibit 30: Estimated Sports Rights Fees Compared To Total Programming And Talent Commitments As Reported

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

2012E 2013E 2014E 2015E 2016E

Identified Sports Rights Expense Programming and talent commitments (2011 10K)

In total CBS reports having $16,913mm in Total Programming And Talent Commitments of which $12,900mm is due to Sports Programming Rights.

We estimate that much of the 1-year commitments that exceed sports programming rights costs are likely areas where the network could make some "sacrifices" longer term if necessary to pay for rights.

Note: Commitments for 2013-2016 only provided for 2 year pairs. Thus we assume 2013 commitment = 2013+2014 commitment/2; For a list of contracts indentified, details on the derivation and assumptions embedded in these estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates


28

Disney: FY2014E Media Networks Estimates Could Be Vulnerable But Rights Fees Leave Room For Longer-Term Margin Expansion We believe Disney should be able to expand margins at Media Networks over the longer term despite the growing costs of sports rights, but we think there could be some risk to FY2014 due to the effect of the new MLB and NFL contracts. With that said, below, we present a scenario under which Disney could have a Media Networks EBITDA margin of 34.9% in 2017E (up from 32.1% in FY2012). Note that the biggest assumption underlying this analysis is that the company will not need, or choose, to increase or cut other costs substantially.

For FY2012-FY2014E, we present estimated financials ‘as modeled’. For FY2015E-FY2017E, we solve for the rate at which revenue must grow for 2017 Media Networks EBITDA margin to achieve margin expansion of 60bp per year from 2014 to 2017 (and then check to insure the implied revenue growth rate is reasonable). Thus, we think Disney could achieve a Media Networks EBITDA margin of 34.9% in 2017 based on estimated growth in sports-rights costs and a 2012-2017 CAGR in other expenses of 3.9%. In fact, we think Disney could expand margins even further under a variety of scenarios. If, for example, the company were able to reduce the growth of other costs or drive higher growth in affiliate fees in the segment (perhaps the NCAA Division I College Football Playoffs could help Disney demand higher affiliate fees for ESPN). Of course, we would remind investors that the reverse could also occur, and other scenarios could result in a worse than presented 2017 margin.

Exhibit 31: Disney Should Be Able To Grow Revenues Fast Enough To Offset Increase In Sports-Rights Costs

Modeled Years Assumptions To Get To MarginDIS FY2012 FY2013E FY2014E FY2015E FY2016E FY2017E CAGR ('12-'17) Growth ('12-'17)Identified Sports Rights Costs 3,082 3,303 3,688 4,299 4,484 4,718 8.9% $1,636mm

YoY growth 7.2% 11.6% 16.6% 4.3% 5.2%Other Expenses 10,121 10,638 10,894 11,275 11,749 12,242 3.9% $2,121mm

YoY growth 5.1% 2.4% 3.5% 4.2% 4.2%Total Media Networks Operating Expenses 13,203 13,941 14,582 15,574 16,233 16,960 5.1% $3,757mm


Cable Networks Ad Revenue (Domestic) 3,785 3,874 4,146 4,436 4,746 5,078 6.1% $1,293mmYoY growth 2.4% 7.0% 7.0% 7.0% 7.0%

Cable Networks Affiliate Revenue (Domestic) 8,630 9,438 10,240 11,110 12,055 13,079 8.7% $4,449mmYoY growth 9.4% 8.5% 8.5% 8.5% 8.5%

Cable Networks All Other Revenue 1,206 1,266 1,329 1,369 1,394 1,401 3.0% $195mmYoY growth 5.0% 5.0% 3.0% 1.8% 0.5%

Total Broadcasting Revenue 5,815 5,979 6,070 6,203 6,340 6,479 2.2% $664mmYoY growth 2.8% 1.5% 2.2% 2.2% 2.2%

Total Media Networks Revenue 19,436 20,557 21,784 23,118 24,535 26,037 6.0% $6,601mmYoY growth 5.8% 6.0% 6.1% 6.1% 6.1%

Total Media Networks EBITDA 6,233 6,616 7,202 7,545 8,301 9,077 7.8% $2,844mmYoY growth 6.1% 8.9% 4.8% 10.0% 9.3%

Media Networks EBITDA Margin 32.1% 32.2% 33.1% 32.6% 33.8% 34.9%($ in mm)

Between FY2014 and FY2015 Disney will see the NFL, MLB and NCAA BCS enter new contracts.

Pro forma expense and revenue assumptions in these years made to get to a Media Networks EBITDA margin of 34.9%.

In order to reach a Media Networks margin of 34.9% in 2017 we believe Cable Networks all other revenue could grow at a 3.0% CAGR.

We make assumptions for growth in sports rights costs, other expense, ad revenue, affiliate revenue, and broadcasting.


Based on our assumptions DIS could still achieve margin expansion of 0.6% between 2014 and 2017 in its Media Networks segment.

The low implied growth in other expenses in a "modeled" year suggests some vulnurability to FY2014 estimates.


While we expect a portion of sports rights to be ‘paid for’ through advertising, we also think that sports content could give Disney additional leverage in affiliate fee negotiations. We estimate that identified sports rights expenses could increase to 36.1% in FY2017 from 35.7% of affiliate fees in FY2012, in large part due to the introduction of the NCAA Football Playoff.


29

Exhibit 32: Sports-Rights Costs Should Account For A Decreasing Portion Of Affiliate Fees

35.7%

35.0%

36.0%

38.7%

37.2%

36.1%

$mm

$2,000mm

$4,000mm

$6,000mm

$8,000mm

$10,000mm

$12,000mm

$14,000mm

FY2012E FY2013E FY2014E FY2015E FY2016E FY2017E33.0%

34.0%

35.0%

36.0%

37.0%

38.0%

39.0%

Identified Sports Rights CostsCable Networks Affiliate RevenueSports Rights As A Percent Of Total Cable Networks Affiliate Revenue

Sports rights costs could increase somewhat as a fraction of Cable Networks affiliate fees, most notably as Disney sees a step up in costs from the NCAA College Football playoffs.

Step up from first year of the NCAA Division I College Football Playoffs and most of first season of new NFL contract.

Note: For a list of contracts indentified, details on the derivation and assumptions embedded in sports rights estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates

We estimate that roughly 32% of programming expense in 2013 at Disney will be from indentified sports-rights fees. These costs would be approximately 24% of total expense for the Media Networks segment. Thus, we note that while sports rights are very important, they are not, by any means, the only contributor to expense or margin changes.

Exhibit 33: FY2013E Identified Sports-Rights Costs As A Percentage Of Other Expenses (Media Networks segment)


$6,830mm67%

$1,467mm14%

$1,900mm19%


Unidentified Sports Rights Costs

All Other Operating Expenses (Cable Networks &Television segments combined)


$2,689mm45%$1,900mm

31%

$1,467mm24%



All Other Programming Expense

Note: Programming expense excludes networks that are not consolidated; operating expense is before depreciation and amortization. Source: SNL Kagan, RBC Capital Markets estimates

Exhibit 34 presents the estimated sports-rights fees applied in our analysis. When a contract expires before 2017 and a new deal has not yet been signed, we assume for our analysis that it is renewed with the same TV partner. More details regarding the assumptions that we made are presented in the Appendix.


30

Exhibit 34: Estimated Annual Sports-Rights Costs For Disney – Assumes Deals Renewed If Current Deal Ends Before 2017

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

$3,500mm

$4,000mm

$4,500mm

$5,000mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

World CupWimbledonUSTA U.S. OpenSuper BowlSugar BowlSECRose BowlPAC-12PAC-10Orange BowlNHLNFLNBANASCARMLSMLBLonghorn NetworkIZOD IndyCar SeriesConference USANew Bowl Championship SeriesBowl Championship SeriesBIG12BIG TENBIG EASTACC

League/Event

First year of the NCAA College Football Playoff

New MLB ContractNew NFL Contract

Fiscal Year


While the majority of major sports rights are under contract through 2017 (the last year of our analysis), several are not. In Exhibit 35 we chart only the signed deals for reference. In cases where a deal ends before 2017, we show the rights rolling off in Exhibit 35, but in our analysis above, we assume that these deals are renewed. The chart below also does not include historical deals, if we were unable to find sufficient financial information (while in the analysis above, we make a best guess of the rights fees recognized in the historical years of our analysis, if financial information was not available).


31

Exhibit 35: Estimated Annual Sports-Rights Costs For Disney – Only Includes Signed And Identified Deals

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

$3,500mm

$4,000mm

$4,500mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

World CupWimbledonUSTA U.S. OpenSuper BowlSugar BowlSECRose BowlPAC-12PAC-10Orange BowlNHLNFLNBANASCARMLSMLBLonghorn NetworkIZOD IndyCar SeriesConference USANew Bowl Championship SeriesBowl Championship SeriesBIG12BIG TENBIG EASTACC


First year of the NCAA College Football Playoff

New MLB Contract

New NFL Contract

When NBA and NASCAR deals would expire if not renewed

Fiscal Year


As a resource for understanding and interpreting quarterly results, we also present in Exhibit 36 the results of our analysis broken down by quarter through calendar 2014. Here, we can see that in most quarters, we would expect the year-over-year increase in costs to be quite manageable although we see some volatility, for example, as the new NFL deal (and part of the new NCAA BCS deal) begins to hit in the back half of calendar 2014. However, we highlight that there are many unknowns that effect quarterly estimates. For example, if the annual escalator for a new deal is actually less than we have estimated, then the first-year step up could be meaningfully higher than we predict (but this would later be offset by lower annual growth).


32


Growth

$16 $21$77 $111

$36 $37 $48 $50$135

($7)

$26$103

$38 $20$74

$130$47 $14 $30 $64

$112$181

$308

$28

($50)$0

$50$100$150$200$250$300$350

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

($ in

mm

)

4% 6%

15%11% 8% 9% 8%

5%

29%

-2%

4%9% 6% 5%

11%10%7%

3% 4% 5%

25%24%21%

4%

-5%0%5%

10%15%20%25%30%35%

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

(%)

$434.8$393.0

$578.7

$1,115.0

$470.8$429.9

$626.7

$1,165.3

$606.0

$422.5

$652.4

$1,268.1

$644.5

$442.8

$726.6

$1,398.5

$691.0

$456.7

$757.1

$1,462.3

$718.9

$569.1

$937.6

$1,769.9

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

CY1

Q09

CY2

Q09

CY3

Q09

CY4

Q09

CY1

Q10

CY2

Q10

CY3

Q10

CY4

Q10

CY1

Q11

CY2

Q11

CY3

Q11

CY4

Q11

CY1

Q12

CY2

Q12

CY3

Q12

CY4

Q12

CY1

Q13

CY2

Q13

CY3

Q13

CY4

Q13

CY1

Q14

CY2

Q14

CY3

Q14

CY4

Q14

($ in

mm

)

ACC BIG EAST BIG TEN BIG12Bowl Championship Series Conference USA IZOD IndyCar Series Longhorn NetworkMLB MLS NASCAR NBANew Bowl Championship Series NFL NHL Orange BowlPAC-10 PAC-12 Rose Bowl SECSugar Bowl Super Bowl USTA U.S. Open Wimbledon

The NFL rights renewal and the first potential New Year's Day games affiliated with the new NCAA College Football Playoff could drive higher than normal growth in expenses in the back half of calandar 2014.



33

As a sanity check, we chart sports rights expense versus sports programming commitments as reported in Disney’s FY2012 10-K. Our results appear to make sense, as we would expect to see the company’s reported sports commitments to exceed sports rights fees that we have identified in the near term (as we may be missing some of the smaller deals). On the other hand, we think our identified rights fees could exceed company identified commitments as reported in the 10-K over the longer term as these agreements may have some form or ‘out’ or ‘option’, which means that they might not be included in this reported item, while others will have rolled off (while we assume they are renewed).

Exhibit 37: Estimated Sports-Rights Fees Compared To Sports Programming Commitments As Reported

$0mm

$1,000mm

$2,000mm

$3,000mm

$4,000mm

$5,000mm

$6,000mm

FY2013E FY2014E FY2015E FY2016E FY2017EIdentified Sports Rights Expense Sports Programming Commitments (FY2012 10K)

In total DIS reports having $40,664mm in sports programming commitments (FY2012 10K) of which $20,533mm is due to more than 5 years after the end of F4Q12.

Note: Commitments for FY2013-FY2016 only provided for 2 year pairs. Thus, we assume 2013 commitment = 2013 + 2014 commitment/2. For a list of contracts indentified, details on the derivation and assumptions embedded in these estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates


34

News Corporation: Some Headwinds To Margin Expansion From Growing RSN Rights Fees, But Fox Sports 1 Provides An Opportunity For Significant Upside We believe that, without the launch of a national sports network, News Corp. could begin to see some headwinds to margin expansion. In our pro forma analysis, blended Cable Networks would only expand by roughly 80bp between FY2014 and FY2017 (an average of approximately 28bp/year). We think blended margin should expand significantly faster in FY2012 through FY2014 (from 30.7% to 34.0%), but this is dependant on our assumption that 1) there are no major, unidentified, RSN, rights renewals in the period, and 2) News Corp. is able to control other costs. FY2013 and FY2014 also benefit from the ramp in retransmission and reverse compensation payments.

Exhibit 38: Without The Launch Of A National Network, We Believe News Corp. Could See Some Headwinds To Margin Expansion

Modeled Years Assumptions To Get To MarginFY2012 FY2013E FY2014E FY2015E FY2016E FY2017E CAGR ('12-'17) Growth ('12-'17)

Identified Sports Rights Costs 1,643 1,900 2,242 2,287 2,476 2,848 11.6% $1,206mmYoY growth 15.6% 18.0% 2.0% 8.3% 15.0%

Assumed Unidentified RSN Costs 1,358 1,467 1,584 1,774 1,987 2,226 10.4% $868mmYoY growth 8.0% 8.0% 12.0% 12.0% 12.0%

Other Expenses 6,614 6,830 7,070 7,367 7,677 7,999 3.9% $1,385mmYoY growth 3.3% 3.5% 4.2% 4.2% 4.2%

Total Operating Expenses (Cable Networks & Television segments combi 9,615 10,196 10,897 11,429 12,140 13,073 6.3% $3,458mmYoY growth 6.0% 6.9% 4.9% 6.2% 7.7%

CAGR ('12-'17) Growth ('12-'17)Cable Networks Ad Revenue 2,603 2,726 2,881 3,030 3,188 3,354 5.2% $750mm

YoY growth 4.7% 5.7% 5.2% 5.2% 5.2%Cable Networks Affiliate Revenue 5,805 6,724 7,478 8,226 9,007 9,818 11.1% $4,013mm

YoY growth 15.8% 11.2% 10.0% 9.5% 9.0%Cable Networks All Other Revenue 723 844 908 976 1,049 1,127 9.3% $404mm

YoY growth 16.7% 7.5% 7.5% 7.5% 7.5%Television Retrans/Reverse Comp 204 406 529 556 583 613 24.6% $409mm

YoY growth 99.0% 30.3% 5.0% 5.0% 5.0%Television Revenue (ex-retrans/reverse comp) 4,530 4,488 4,706 4,800 4,896 5,141 2.6% $611mm

YoY growth -0.9% 4.9% 2.0% 2.0% 5.0%Cable Networks + Television Revenue 13,866 15,189 16,502 17,588 18,724 20,053 7.7% $6,187mm

YoY growth 9.5% 8.6% 6.6% 6.5% 7.1%Cable Networks + Television EBITDA 4,251 4,992 5,605 6,159 6,584 6,980 10.4% $2,729mm

YoY growth 17.4% 12.3% 9.9% 6.9% 6.0%Blended EBITDA Margin (Cable Networks + Television) 30.7% 32.9% 34.0% 35.0% 35.2% 34.8%

Based on our assumptions NWSA could still achieve margin expansion of 0.8% between FY2014 and FY2017 for the Cable Networks and Television segments combined.

We assume there are an additional roughly $1.5bn in unidentified RSN rights costs in FY2013, because this is the amount by which company identified sports programming rights obligations exceeds our indentified sports rights expense in FY2013 (see chart at the end of this section) .

We assume these RSN costs grow at 8%, which is somewhat less than the rate for all identified RSNs in our sports rights database, in FY2013 and FY2014 because we don't believe there are any significant deals to be renewed in these years that we have identified.

This scenario does not include a benefit from the launch of a national sports network.


Pro forma expense and revenue assumptions in these years made to get to a blended EBITDA (Cable Networks + Television) margin of 34.8%.

Super Bowl in FY2014 and FY2017.

New MLB and NFL rights contracts.


With that said, we believe that many of the rights needed to launch a national sports network (i.e., Fox Sports 1) have already been paid for (or more specifically, the costs have already been built into our sports rights database). This would mean that the additional revenues recognized from such a venture would come at a very high incremental margin. (In Exhibit 39, we demonstrate how this benefit could add approximately 400bp to affiliate fee growth in FY2014 if it were to ramp evenly over three years). If we layer in the additional affiliate fees that could be generated from News Corp. launching a national sports network, then we see that it would be possible to expand margins significantly. Our pro forma analysis maps out how blended EBITDA margin (Cable Networks + Television) could expand to 38.2% in FY2017E from 34.0% in FY2014E.


35

Exhibit 39: The Launch Of A National Network Could Drive Meaningful Margin Expansion, And We Believe Much Of Rights Costs Are Likely Sunk

Modeled Years Assumptions To Get To MarginFY2012 FY2013E FY2014E FY2015E FY2016E FY2017E CAGR ('12-'17) Growth ('12-'17)

Identified Sports Rights Costs 1,643 1,900 2,242 2,287 2,476 2,848 11.6% $1,206mmYoY growth 15.6% 18.0% 2.0% 8.3% 15.0%

Assumed Unidentified RSN Costs 1,358 1,467 1,584 1,774 1,987 2,226 10.4% $868mmYoY growth 8.0% 8.0% 12.0% 12.0% 12.0%

Other Expenses 6,614 6,830 7,070 7,367 7,677 7,999 3.9% $1,385mmYoY growth 3.3% 3.5% 4.2% 4.2% 4.2%

Total Operating Expenses (Cable Networks & Television segments combi 9,615 10,196 10,897 11,429 12,140 13,073 6.3% $3,458mmYoY growth 6.0% 6.9% 4.9% 6.2% 7.7%

CAGR ('12-'17) Growth ('12-'17)Cable Networks Ad Revenue 2,603 2,726 2,881 3,030 3,188 3,354 5.2% $750mm

YoY growth 4.7% 5.7% 5.2% 5.2% 5.2%Cable Networks Affiliate Revenue 5,805 6,724 7,478 8,525 9,676 10,934 13.5% $5,129mm

YoY growth 15.8% 11.2% 14.0% 13.5% 13.0%Cable Networks All Other Revenue 723 844 908 976 1,049 1,127 9.3% $404mm

YoY growth 16.7% 7.5% 7.5% 7.5% 7.5%Television Retrans/Reverse Comp 204 406 529 556 583 613 24.6% $409mm

YoY growth 99.0% 30.3% 5.0% 5.0% 5.0%Television Revenue (ex-retrans/reverse comp) 4,530 4,488 4,706 4,800 4,896 5,141 2.6% $611mm

YoY growth -0.9% 4.9% 2.0% 2.0% 5.0%Cable Networks + Television Revenue 13,866 15,189 16,502 17,887 19,393 21,169 8.8% $7,303mm

YoY growth 9.5% 8.6% 8.4% 8.4% 9.2%Cable Networks + Television EBITDA 4,251 4,992 5,605 6,458 7,252 8,095 13.7% $3,844mm

YoY growth 17.4% 12.3% 15.2% 12.3% 11.6%Blended EBITDA Margin (Cable Networks + Television) 30.7% 32.9% 34.0% 36.1% 37.4% 38.2%

We assume all revenue line items grow at the same rate as in the prior scenario, except we assume that a launch of a national sports network adds roughly 400bps of incremental affiliate fee growth in FY2015E-FY2017E (at minimal cost).

Realistically, we believe that such a network could launch before FY2015, however, because the impact is not yet in our "modeled" estimates, for this calculation we show it in our first pro forma year, FY2015.


Based on our assumptions NWSA could achieve margin expansion of 4.3% between FY2014 and FY2017 for the Cable Networks and Television segments combined if we assume a national sports network is launched in 2015.


While we expect a portion of sports rights to be ‘paid for’ through advertising, we also think that sports content could give News Corp. additional leverage in affiliate fee negotiations. With that said, without the benefit from the launch of a national sports network, we believe that sports rights expense (indentified and unidentified) could increase to 48.6% in FY2017E from 47.8% of affiliate fees in FY2014E, but after considering the effect of the Super Bowl in 2017, underlying sports rights expenses as a fraction of affiliate fees plus retrans/reverse comp. is decreasing (this analysis does not consider the potential upside from the launch of a national sports network).

Exhibit 40: Identified Sports-Rights Costs Should Account For A Decreasing Portion Of Affiliate Fees: Based On A Case Where News Corp. Does Not Launch A National Sports Network

49.9%

47.2%47.8%

46.3% 46.5%

48.6%

$mm

$2,000mm

$4,000mm

$6,000mm

$8,000mm

$10,000mm

$12,000mm

FY2012 FY2013E FY2014E FY2015E FY2016E FY2017E40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

Identified And Unidentified Sports Rights CostsCable Networks Affiliate Revenue + Television Retrans/Reverse CompSports Rights As A Percent Of Total Affiliate Revenue

Sports rights costs are could increase as a fraction of total Cable Networks affiliate revenue plus Television retrans/reverse comp revenue after adjusting for the Super Bowl between FY2014 and FY2016, if we don’t model in a benefit from the launch of a national sports network.

Super Bowl

Note: For a list of contracts indentified, details on the derivation and assumptions embedded in sports rights estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates

We estimate that roughly 56% of programming expense in FY2013E at News Corp. will be from sports rights fees (identified and unidentified). These costs (together) would be approximately 33% of total operating expenses for the Cable Networks and Television segments combined. Thus, we note that while sports rights are very important, they are not, by any means, the only contributor to expense or margin changes.


36

Exhibit 41: 2013E Identified Sports-Rights Costs As A Percentage Of Other Expenses (Media Networks segment)


$6,830mm67%

$1,467mm14%

$1,900mm19%



All Other Operating Expenses (Cable Networks &Television segments combined)


$2,689mm45%$1,900mm

31%

$1,467mm24%

Identified Sports Rights CostsUnidentified RSN Rights CostsAll Other Programming Expense

Note: Programming expense excludes networks that are not consolidated; operating expense is before depreciation and amortization. Source: SNL Kagan, RBC Capital Markets estimates

Exhibit 42 presents the estimated sports rights fees applied in our analysis. When a contract expires before 2017, and a new deal has not yet been signed, we assume for our analysis that it is renewed with the same TV partner. More details regarding the assumptions that we made are presented in the Appendix.


37

Exhibit 42: Estimated Annual Sports-Rights Costs For News Corp. – Assumes Deals Renewed If Current Deal Ends Before 2017

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

World CupUniversity of Florida-Sun SportsUFCSuper BowlPAC-12PAC-10NHL RSNNFLNBA RSNNASCARMLS RSNMLSMLB RSNMLBEPLConference USABowl Championship SeriesBIG12BIG TEN

New MLB Contract

Fiscal Year

New NFL Contract


While the majority of major sports rights are under contract through 2017 (the last year of our analysis), several are not. In Exhibit 43, we chart only the signed deals for reference. In cases where a deal ends before 2017, we show the rights rolling off in the chart below, but in our analysis above, we assume these deals are renewed. Exhibit 43 also does not include historical deals if we were unable to find sufficient financial information (while in the analysis above, we make a best guess of the rights fees recognized in the historical years of our analysis, if financial information was not available).


38

Exhibit 43: Estimated Annual Sports-Rights Costs For News Corp. – Only Includes Signed And Identified Deals

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

World CupUniversity of Florida-Sun SportsUFCSuper BowlPAC-12PAC-10NHL RSNNFLNBA RSNNASCARMLSMLB RSNMLBEPLConference USABowl Championship SeriesBIG12BIG TEN

Fiscal Year


New MLB Contract

New NFL Contract


As a resource for understanding and interpreting quarterly results, we also present in Exhibit 44 the results of our analysis broken down by quarter through calendar year 2014. Here, we can see that in most quarters, we would expect the year-over-year increase in costs to be quite manageable, although new NFL and MLB rights contracts could drive higher growth in rights costs in calendar 2014. However, we highlight that there are many unknowns that effect quarterly estimates. For example, if the annual escalator for a new deal is actually less than we have estimated, then the first-year step up could be meaningfully higher than we predict (but this would later be offset by lower annual growth).


39


Growth

$15 $18 $25 $13

($4)

$5 $31$107

$17 $23 $55 $67 $102$107$20 $28 $36 $27

$67 $94 $82

($124) ($151)

$213

($200)

($100)$0

$100$200$300

CY1

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CY1

Q14($

in m

m)

6% 5% 5% 5%

-1%

1% 6%

38%

6% 6% 10%24% 24% 17% 8% 8% 7% 4%

18% 17% 11%

-32% -39%

83%

-60%-40%-20%

0%20%40%60%80%

100%

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

(%)

$401.3

$540.8

$280.8

$406.4

$571.8

$388.0

$283.6

$428.9

$626.4

$236.8

$350.7

$530.6

$733.3

$256.8

$378.9

$566.3

$760.1

$469.6

$660.4

$841.8

$446.1

$267.1$271.1

$267.7

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000C

Y1Q

09

CY2

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CY3

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CY4

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CY1

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CY4

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Q14

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CY3

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CY4

Q14

($ in

mm

)

BIG TEN BIG12 Bowl Championship SeriesConference USA EPL MLBMLB RSN MLS MLS RSNNASCAR NBA RSN NFLNHL RSN PAC-10 PAC-12Super Bowl University of Florida-Sun Sports UFCGrand Total

First season under new NFL rights contractFirst season under new MLB rights contract



40

As a sanity check, we chart sports rights expense versus sports programming rights commitments as reported in News Corp.’s FY2012 10-K. Our results appear to make sense, as we would expect to see the company’s reported sports commitments to exceed sports rights fees that we have identified in the near term (as we may be missing some of the smaller deals—this would be particularly true in the case of News Corp., which has a number of small regional deals for which financials are likely not public or publicized). On the other hand, we think our identified rights fees could exceed company identified commitments as reported in the 10-K over the longer term, as these agreements may have some form or ‘out’ or ‘option’, which means they might not be included in this reported item, while others will have rolled off (while we assume they are renewed).

Exhibit 45: Estimated Sports Rights Fees Compared To Sports Programming Rights As Reported

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

$3,500mm

$4,000mm

$4,500mm

$5,000mm

FY2013E FY2014E FY2015E FY2016E FY2017EIdentified Sports Rights Expense Sports programming rights (FY2012 10K)

In total News Corp. reports having $36,309mm in sports programming rights of which $19,922mm is due after 5 years from the end of FY2012.

Note: Commitments for 2013-2016 only provided for 2 year pairs. Thus we assume 2013 commitment = 2013+2014 commitment/2. For a list of contracts indentified, details on the derivation and assumptions embedded in these estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates

Additionally, we think News Corp. should be able to benefit from some degree of stability at its RSNs because a large proportion of the rights deals that we were able to identify are locked up for a significant period of time. We would estimate that approximately 70% of primary RSN sports rights deals are locked up through at least 2017. A list the duration of RSN deals for News Corp. is provided in Exhibit 46, which supports this conjecture.


41

Exhibit 46: Many Of News Corp.’s Important RSN Rights Deals Are Locked Up For A Significant Period Of Time Network Franchise DurationFox Sports Arizona Arizona Diamondbacks 8 years 2007Fox Sports Arizona Phoenix Suns - 2011-12FOX Sports Carolinas Carolina Hurricanes multi-year 2013-14Fox Sports Detroit Detroit Tigers, Detroit Pistons, Detroit Redwings 10 years 2008/09Fox Sports Florida Miami Heat 11 years 2004-05Fox Sports Florida Tampa Bay Rays 8 year extension 2008Fox Sports Indiana Indiana Pacers long-term 2006-07Fox Sports Kansas City/Midwest Kansas City Royals end ~2020 -Fox Sports Midwest St. Louis Cardinals 10 years 2008Fox Sports New Orleans New Orleans Hornets 10 years 2012-13Fox Sports Net North Minnesota Timberwolves 7 to 10 years 2008-09Fox Sports North Minnesota Twins - 2011Fox Sports Ohio Cincinnati Reds ends after 2016 -Fox Sports Ohio Cleveland Cavaliers - 2006-07Fox Sports Ohio Columbus Blue Jackets multi-year 2011Fox Sports Prime Ticket L.A. Clippers 7 years 2009Fox Sports San Diego San Diego Padres 20 years 2012Fox Sports South/Sport South Atlanta Braves 20-25 years ~2008Fox Sports Southwest Dallas Mavericks expires after 2016-17 season -Fox Sports Southwest Texas Rangers 20 years 2015FOX Sports Tennessee/SportSouth Nashville Predators 4 years 2010-11Fox Sports West Los Angeles Angels of Anaheim 17-20 years 2013Fox Sports West Los Angeles Kings 12 years 2012Fox Sports Wisconsin Milwaukee Brewers expires 2013 2009SportSouth Charlotte Bobcats 10 years 2010-11SportsTime Ohio Cleveland Indians 10-15 years 2013YES Network (49% owned) Brooklyn Nets (previously New Jersey Nets) 10 year extension 2022-23YES Network (49% owned) New York Yankees 30 years 2013

First Season/Year Signed*

*First season given unless unavailable; in which case, we provide the year the deal was signed. Source: forbes.com, nba.com, newsobserver.com, crainsdetroit.com, sportsbusinessdaily.com, insideindianabusiness.com, kansascity.com, espn1420.com, nola.com, bizjournals.com, 1500espn.com, startribune.com, cincinnati.com, ohio.com, sportspromedia.com, latimes.com, utsandiego.com, ajc.com, dallasnews.com, jsonlines.com, thewrap.com, nbcsports.com, RBC Capital Markets estimates


42

Time Warner: Little Exposure To Rising Rights Costs, Leaves The Door Open For Margin Expansion We believe Time Warner’s ability to expand margins in the mid to long term will depend more on the programming slate as a whole than on sports content. Limited exposure to sports rights and the relatively low anticipated growth rate of the rights that it holds leaves the door open for margin expansion in light of strong expected affiliate fee growth. However, margins will depend on ad dollars and programming expense for non-sports content. In Exhibit 47, we present a scenario under which Time Warner could have a Media Networks OIBDA (ex-restructuring and other adjustments) margin of 41.6% in 2017E (up from 36.5% in 2012E). Note that the biggest assumption underlying this analysis is that the company will not need, or choose, to increase or cut other costs substantially.

For the years 2012E-2014E, we present estimated financials ‘as modeled’. For 2015E-2017E, we solve for the rate at which revenue must grow for 2017 Media Networks OIBDA margin to achieve margin expansion of 140bp per year from 2014 to 2017 (and then check to insure the implied revenue growth rate is reasonable). Thus, we think Time Warner could achieve a Media Networks EBITDA margin of 41.6% in 2017 based on estimated growth in sports-rights costs, and a 2012-2017 CAGR in other expenses of 5.2%. In fact, we think Time Warner could expand margins even further under a variety of scenarios: if, for example, the company was able to reduce the growth of other costs in the segment. Of course, we would remind investors that the reverse could also occur, and other scenarios could result in a worse than presented 2017 margin.

Exhibit 47: Time Warner Should Be Able To Grow Revenues Fast Enough To Offset Increase In Sports-Rights Costs

Modeled Years Assumptions To Get To MarginTWX 2012E 2013E 2014E 2015E 2016E 2017E CAGR ('12-'17) Growth ('12-'17)Identified Sports Rights Costs 1,015 1,048 1,160 1,200 1,246 1,304 5.1% $289mm

YoY growth 3.2% 10.7% 3.5% 3.8% 4.6%Other Expenses 8,048 8,516 8,950 9,407 9,887 10,391 5.2% $2,343mm

YoY growth 5.8% 5.1% 5.1% 5.1% 5.1%Total Media Networks Operating Expenses (ex-restructuring and other one time items) 9,063 9,564 10,110 10,607 11,133 11,695 5.2% $2,632mm


Media Networks Subscription (Affiliate) Revenue 8,668 9,188 9,877 10,865 11,952 13,027 8.5% $4,359mmYoY growth 6.0% 7.5% 10.0% 10.0% 9.0%

Media Networks Advertising Revenue 4,326 4,607 4,907 5,152 5,410 5,680 5.6% $1,354mmYoY growth 6.5% 6.5% 5.0% 5.0% 5.0%

Media Networks Content Revenue 1,088 1,154 1,188 1,156 1,101 1,140 0.9% $52mmYoY growth 6.0% 3.0% -2.8% -4.7% 3.6%

Media Networks Other Revenue 179 179 179 179 179 179 0.0% $mmYoY growth 0.0% 0.0% 0.0% 0.0% 0.0%

Media Networks Total Revenue 14,262 15,128 16,151 17,352 18,641 20,027 7.0% $5,765mmYoY growth 6.1% 6.8% 7.4% 7.4% 7.4%

Media Networks OIBDA (ex-retructuring and other one time items) 5,199 5,564 6,041 6,745 7,508 8,332 9.9% $3,133mmYoY growth 7.0% 8.6% 11.6% 11.3% 11.0%

Media Networks OIBDA Margin (ex-retructuring and other one time items) 36.5% 36.8% 37.4% 38.9% 40.3% 41.6%($ in mm)

Pro forma expense and revenue assumptions in these years made to get to a Media Networks margin of 41.6%.

In order to reach a Media Networks margin of 41.6% in 2017 we believe Media Networks Content Revenue could grow at a 0.9% CAGR.

We make assumptions for growth in sports rights costs and other expense as well as for subscription, advertising, and other revenue.


Based on our assumptions TWX could still achieve margin expansion of 1.4% between 2014 and 2017 in its Media Networks segment.

New MLB Contract


While we expect a portion of sports rights to be ‘paid for’ through advertising, we also think that sports content could give Time Warner additional leverage in affiliate fee negotiations. We estimate that identified sports rights expenses could decrease to 10.0% in 2017 from 11.7% of affiliate fees in 2012.


43

Exhibit 48: Sports-Rights Costs Should Account For A Decreasing Portion Of Affiliate Fees

11.7%

11.4%

11.7%

11.0%

10.4%

10.0%

$mm

$2,000mm

$4,000mm

$6,000mm

$8,000mm

$10,000mm

$12,000mm

2012E 2013E 2014E 2015E 2016E 2017E9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

Identified Sports Rights Costs Media Networks Subscription (Affiliate) RevenueSports Rights As A Percent Of Total Affiliate Revenue

Sports rights costs are expected to decline as a fraction of total affiliate revenue over time.

Note: For a list of contracts indentified, details on the derivation and assumptions embedded in sports rights estimates, and sources used to build our sports rights database, please see the Appendix. Source: RBC Capital Markets estimates

We estimate that roughly 21% of programming expense in 2013E at Time Warner will be from indentified sports rights fees. These costs would be approximately 11% of total expense for the Media Networks segment. Thus, we note that while sports rights are very important, they are not, by any means, the only contributor to expense or margin changes.

Exhibit 49: 2013E Identified Sports-Rights Costs As A Percentage Of Other Expenses (Media Networks segment)


$1,048mm21%

$3,910mm79%

Identified Sports Rights CostsAll Other Programming Expense


$1,048mm11%

$8,516mm89%


All Other Media Networks Operating Expense (ex-resturcturing and other 1x items)

Note: Programming expense excludes networks that are not consolidated. Source: SNL Kagan, RBC Capital Markets estimates

Exhibit 50 presents the estimated sports-rights fees applied in our analysis. When a contract expires before 2017, and a new deal has not yet been signed, we assume for our analysis that it is renewed with the same TV partner. Additional details regarding the assumptions made are presented in the Appendix.


44

Exhibit 50: Estimated Annual Sports-Rights Costs For Time Warner – Assumes Deals Renewed If Current Deal Ends Before 2017

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

$1,400mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

NCAA Men's Basketball TournamentNBANASCARMLB

League/Event

Began to "share" NCAA Tournament with CBS

New MLB Contract


While the majority of major sports rights are under contract through 2017 (the last year of our analysis), several are not. In Exhibit 51, we chart only the signed deals for reference. In cases where a deal ends before 2017, we show the rights rolling off in the chart. In our analysis above, we assume these deals are renewed. Exhibit 51 also does not include historical deals, if we were unable to find sufficient financial information (while in the analysis above, we make a best guess of the rights fees recognized in the historical years of our analysis, if financial information was not available).


45

Exhibit 51: Estimated Annual Sports-Rights Costs For Time Warner – Only Includes Signed And Identified Deals

$0mm

$200mm

$400mm

$600mm

$800mm

$1,000mm

$1,200mm

$1,400mm

Sum of2008

Sum of2009

Sum of2010

Sum of2011

Sum of2012

Sum of2013

Sum of2014

Sum of2015

Sum of2016

Sum of2017

NCAA Men's Basketball TournamentNBANASCARMLB

League/Event

Began to "share" NCAA Tournament with CBS

New MLB Contract

Expiration of NBA rights contract



As a resource for understanding and interpreting quarterly results, we also present in Exhibit 52 the results of our analysis broken down by quarter through 2014. Here, we can see that in most quarters, we would expect the year-over-year increase in costs to be quite manageable, although we anticipate acceleration in the growth of sports-rights costs in 2014 from the renewal of the MLB contract. However, we highlight that there are many unknowns that effect quarterly estimates. For example, if the annual escalator for a new deal is actually less than we have estimated, then the first-year step up could be meaningfully higher than we predict (but this would later be offset by lower annual growth).


46


Growth

$6 $9 $3 $4 $5 $8 $4 $5

$321

$8 $4 $5 $15 $8 $4 $5 $15 $8 $4 $5 $42 $39 $15$16

$0$100$200$300$400

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

($ in

mm

)

4% 4% 4% 3% 3% 3% 4% 3%

189%

3% 4% 3% 3% 3% 4% 3% 3% 3% 4% 3% 16% 37%9%3%

0%50%

100%150%200%

CY1

Q09

CY1

Q10

CY1

Q11

CY1

Q12

CY1

Q13

CY1

Q14

(%)

$165.1

$227.2

$90.5

$141.6$170.2

$234.8

$94.1

$146.2

$491.5

$242.8

$97.9

$150.9

$506.3

$251.0

$101.8

$155.8

$521.7

$259.5

$105.8

$160.8

$537.5

$301.0

$145.3$176.1

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

CY1

Q09

CY2

Q09

CY3

Q09

CY4

Q09

CY1

Q10

CY2

Q10

CY3

Q10

CY4

Q10

CY1

Q11

CY2

Q11

CY3

Q11

CY4

Q11

CY1

Q12

CY2

Q12

CY3

Q12

CY4

Q12

CY1

Q13

CY2

Q13

CY3

Q13

CY4

Q13

CY1

Q14

CY2

Q14

CY3

Q14

CY4

Q14

($ in

mm

)

MLB NASCAR NBA NCAA Men's Basketball Tournament

TWX sports rights expenses increased significantly after it agreed to share the NCAA Men's Basketball Tournament

First season under new MLB rights contract



47

As a sanity check, we chart sports rights expense versus network programming obligations as reported in Time Warners’s 2011 10-K. Our results appear to make sense, as we would expect to see commitments exceed sports rights fees in the near term (as commitments could include shorter-term programming and talent contracts, perhaps those with hosts or a production company).

Exhibit 53: Estimated Sports Rights Fees Compared To Network Programming Obligations As Reported

$0mm

$500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

2012E 2013E 2014E 2015E 2016EIdentified Sports Rights Expense Networking programming obligations (2011 10K)

We estimate that much of the 1-year commitments that exceed sports programming rights costs are likely areas where the network could make some "sacrifices" longer term if necessary to pay for rights.

TWX reports having $16,210mm in networking programming obligations with $10,000mm due to NCAA over 13 years, but according to Time Warner's 2011 10-K this amount doesn't include "amounts recoupable from the other party to the agreement with the NCAA".

Note: Commitments for 2013-2016 only provided for 2 year pairs. Thus we assume 2013 commitment = 2013+2014 commitment/2; For a list of contracts indentified, details on the derivation and assumptions embedded in these estimates, and sources used to build our sports rights database, please see the Appendix. Source: Company reports, RBC Capital Markets estimates


48

An Update on the Economics of the Sports Media Business

Sports Economics and TV Economics: Inextricably Linked as Sports Is the Most Watched, Most Valuable, and Most Expensive Content on TV Sports programming occupies a significant place on the TV lineup; Nielsen has reported that there were a total of approximately 42,500 and 60,000 hours of live sports on “national broadcast and cable TV” in 2011 and 2012, respectively—with the latter year receiving an Olympics bump.4 Additionally, sports can account for a significant portion of a media company’s costs, revenues, and profits.

The large impact sports can have on financials is apparent from the cost of sports channels. Four sports-focused channels (if you count ESPN 3D as an independent channel) crack the top 10 list for highest affiliate fees on national cable channels (this analysis excludes Regional Sports Networks). While these channels may appear expensive, sports channels look even more costly when considered on a per viewer basis, as nine of the top ten most expensive channels on a per viewer basis are sports channels. Thus, we can see why investors should care how much more the cost of sports could increase (both for a cable channel operator, multichannel video programming distributor (MVPD), or the end consumer).

Exhibit 54: Evaluating the Cost of Sports Networks Top 10 National Cable Network Affiliate Fee Top 10 Most Expensive Networks Per P2+ Viewer1 Top 10 RSN Affiliate Fee

NetworkMonthly Affiliate Fee

(USD) NetworkMonthly Cost Per

Viewer (USD) NetworkMonthly Affiliate Fee

(USD)ESPN 5.01 ESPN 500 Comcast SportsNet Washington 4.02ESPN 3D 2.71 NFL Network 424 FOX Sports North 3.683net 1.29 MLB Network 307 New England Sports Network 3.62TNT 1.18 FOX Soccer 265 Root Sports Pittsburgh 3.26Disney Channel 0.99 Current 259 Comcast SportsNet Philadelphia 3.18NFL Network 0.95 FUEL TV 257 Comcast SportsNet Bay Area 3.05FOX News 0.89 NBA TV 247 YES Network 2.99ESPN2 0.66 Golf Channel 251 FOX Sports Southwest 2.88USA 0.62 ESPN2 229 FOX Sports Detroit 2.86CNN en Español 0.58 NBC Sports Network 238 Root Sports Northwest 2.852012E per subscriber 2012E, based on Live+7/SD blended data 2012E, per subscriber; does not include TWC's SportsNet

and Deportes

While sports networks reprsented 4 of the top 10 highest cost cable networks per subscriber (on an affiliate fee basis), on a

cost per viewer basis, sports networks represented 9 of the top 10 most expensive. Further, the top 10 RSNs command affiliate

fees of $2.85+.

1Cable network affiliate revenue divided by average number of viewers, excludes Spanish language channels Source: SNL Kagan, Nielsen, RBC Capital Markets

In addition, sports programming represents a significant amount of total revenues for both the cable TV businesses and the overall businesses at both Disney (stemming from ESPN and its related channels) as well as News Corp. (stemming primarily from the various Fox Sports Networks). We estimate that roughly 28% and 13% of Disney and News Corp.’s EBITDA is generated by dedicated sports channels, respectively. This is equivalent to approximately 57% and 23% of cable networks segment EBITDA for Disney and News Corp. being derived from such channels. Additionally, we would note that this does not include EBITDA generated from sports programming on general entertainment/broadcast channels.

It is harder to breakout this value creation for CBS and Time Warner because the majority of sports content is mixed with non-sports content on a single channel (e.g., on the CBS broadcast network or TNT). However, we believe the value contribution of sports is significant in these cases as well.

4 nielsen.com


49

Exhibit 55: ESPN Contribution to Total Disney and Cable Networks Segment Revenue and EBITDA

Revenue as % of Total DIS

ESPN, 22%

All Other DIS, 78%

EBITDA as % of Total DIS

ESPN, 28%

All Other DIS, 72%

Revenue as % of DIS Cable Nets

ESPN, 69%

All Other Cable Nets,

31%

EBITDA as % of DIS Cable Nets

ESPN, 57%


43%

Note: Based on 2012E; ESPN includes ESPN, ESPN 3D, ESPN Classic, ESPN Deportes, ESPN2, ESPNews, and ESPNU but does not include international channels Source: Company reports, SNL Kagan, RBC Capital Markets estimates


50

Exhibit 56: Sports Channel’s Contribution to Total News Corp. and Cable Networks Segment Revenue and EBITDA

Revenue as % of Total NWSA

All Other NWSA,

91%

FSN, 7%Basic Cable Sports

Nets, 2%

EBITDA as % of NWSA Cable Nets

FSN, 17%

Basic Cable Sports

Nets, 6%


77%

Revenue as % of NWSA Cable Nets


67%

FSN, 26%

Basic Cable Sports

Nets, 7%

EBITDA as % of Total NWSA

All Other NWSA,

87%

FSN, 9%

Basic Cable Sports

Nets, 3%

Note: Based on 2012E. Source: Company reports, SNL Kagan, RBC Capital Markets estimates

Sports Programming Is Home to a Large Portion of Total Network TV Advertising On the national level, sports accounts for an enormous fraction of national TV advertising—roughly 28% of an estimated nearly $40 billion for the Q4/10–Q3/11 period. On the local level, sports likely contribute less to the total amount of ad revenues generated; RSN operations are typically driven primarily by affiliate fees and these networks often receive only a relatively small amount of advertising money.


51

Exhibit 57: National TV Sports Ad Spend on Network TV and Cable According to Nielsen

$9.8bn

$8.2bn

$10.3bn$10.9bn

$13.3bn

$0.0bn

$2.0bn

$4.0bn

$6.0bn

$8.0bn

$10.0bn

$12.0bn

$14.0bn

4Q07-3Q08 4Q08-3Q09 4Q09-3Q10 4Q10-3Q11 4Q11-3Q12

Ad S

pend

-16% 26%

6%

22%Summer Olympics


We estimate the NFL generates roughly $3.3 billion of ad spend annually, which is roughly 30% of total national TV sports ad spend. However, ad revenues cannot be compared directly across leagues because the other major professional leagues have larger schedules that typically generate lower ratings per game. As a result, a large proportion of regular season games for other leagues are distributed through RSNs, where advertising makes up a small proportion of revenues. Thus, advertising share alone is not reflective of the relative value of each league. For the NFL, we estimate approximately 73% of ad spend occurs during the regular season.

Exhibit 58: Comparison of National TV Sports Ad Spend with Total NFL Ad Spend

ource: forbes.com

$0.0bn

$2.0bn

$4.0bn

$6.0bn

$8.0bn

$10.0bn

$12.0bn

National TV Sports Ad Spend (NetworkTV/Cable)

Total NFL Ad Spend

We estimate total NFL ad spend to be roughly 30% national TV sports ad spend.

Exhibit 59: Breakdown of NFL Ad Spend

NFL Post-Season Ad Spend (ex-

Super Bowl)$0.7bn20%

NFL Super Bowl Ad Spend$0.2bn

7%

NFL Regular Season Ad

Spend$2.4bn73%

Note: 2011E. Source: Kantar, Nielsen, wsj.com, forbes.com, RBC Capital Markets estimates

The majority of advertising revenue for the NFL is generated during the regular season, which is in contrast to the other major leagues. We believe this occurs because the NFL has a shorter regular season (16 games per team), which increases each game’s importance for fans and limits the supply of regular season advertising. Additionally, the postseason is short (as there are only four rounds of games and each round is single elimination). Comparatively, the other major sports leagues have longer regular seasons and post-seasons than the NFL. In the playoffs, for other leagues, teams typically play a best of seven series to determine who moves on to the next round or wins the championship.


52

Exhibit 60: Distribution of MLB and NBA Ad Spend Between Regular and Post Season

2011 season estimate 2010-11 season estimate

NBA

$0.4bn36%

$0.8bn64%

Post Season Ad Revenues Regular Season National Ad Revenues

MLB

$0.5bn70%

$0.2bn30%

Post Season Ad Revenues Regular Season National Ad Revenues

Source: Kantar, adweek.com, RBC Capital Markets estimates

The NCAA Men’s Basketball tournament provides one of the best examples of how a large number of regular season games combined with a significant number of important playoff games can result in a postseason heavy split in ad revenues. According to Nielsen data for the 2010-2011 season, NCAA Basketball generates nearly 80% of its advertising revenue from its postseason tournament.

Exhibit 61: Distribution of NCAA Basketball Ad Spend Between Regular and Post Season (2010-2011 Season)

$1,041 mm 78%

$296 mm 22%

NCAA BasketballTournament Ad SpendNCAA Basketball RegularSeason Ad Spend


However, one should not make the mistake of assuming that because the NFL generates most of its advertising revenue from regular season telecasts, its playoff games do not earn ad rates above those of other leagues. Logically, given the few number of playoff games, we would expect the opposite to be true. According to Kantar, the Super Bowl and NFL Conference Championship games command higher prices per 30-second spot than the championship games of any other major sports league in the United States.


53

Exhibit 62: Price per 30-Second Ad Spot, 2011

$3.1mm

$1.4mm $1.2mm

$0.8mm$0.4mm $0.4mm

$0.0mm

$0.5mm

$1.0mm

$1.5mm

$2.0mm

$2.5mm

$3.0mm

$3.5mm

Super Bowl NFL ConferenceChampionship

NCAA D1 Men'sBasketball

ChampionshipGame

BCSChampionship

Game

NBAChampionship

Series

MLB WorldSeries

Source: Kantar, RBC Capital Markets


54

College Conferences Gaining Power College conferences play an important role in the TV landscape. Considering the deals that we have been able to identify, the portion of total rights fees paid for college sports is expected to increase going forward. College sports deals account for 16% of rights costs that we were able to identify in 2011, compared to 18% in 2015E.

Exhibit 63: Total Estimated Sports Rights Payments by Category – College Sports Becoming a Large Piece of the Pie

2015

$1,305mm10%

$1,007mm8%

$1,642mm13%

$189mm1%

$2,320mm18%

$1,056mm8%

$5,535mm42%

NFL

Identified RSN Deals(Pro Sports)College Sports

Olympics

MLB National

NBA National

Other

NHL National

2007$628mm

9%

$997mm14%

$67mm1%

$794mm11%

$3,307mm45%

$389mm5%

$1,103mm15%

2011

$895mm10%

$1,289mm14%

$107mm1%

$4,122mm45%

$561mm6%

$1,487mm16%

$734mm8%

Note: Only includes deals for which we have identified pricing and duration during at least one renewal cycle. This is expected to abnormally reduce the total fraction of expenses for regional rights since RSN deals are often small and not publicized.

Source: RBC Capital Markets estimates, see the Appendix for a list of sources used to build our sports rights database

College Sports Programming Is Seeing Rising Costs and Increasing Competition Colleges and universities form conferences to organize sports competition and to negotiate media rights. There are currently 6 “power conferences” that receive an automatic bid into one of Division I College Football’s Bowl Championship Series games (in which there are five games, including the national championship). This list of major conferences includes the ACC, Big 12 (which has 10 teams), Big East, Big Ten (which has 12 teams and is expanding to 14), Pac-12 and SEC. However, with the introduction of a Division I College Football playoff, the Big East will be dropped from the list of conferences with automatic births. Historically, the major conferences have commanded the vast majority of rights fees paid for college sports.

Due to the large number of college football teams (even limiting this to those in the major conferences), there are a large number of college football games every week during the season (with the vast majority played on Saturday). While interest in any particular game may vary, we believe there will likely be a couple in each major conference in a given week that could garner national interest, while there will be many others that could draw substantial regional or local viewership. Further, there can be a large discrepancy in interest for the best compared to second, or third, best game of the week in a conference—depending, in part, on the quality of the match-up (involving good teams, or teams with a large, devoted fan base), and relevance of the outcome to a championship birth (in the future, playoff birth) or invitation to another bowl game. As a result, rights for college sports are typically sold on a tiered basis, where, on the simplest level, the holder of first tier rights gets first choice of game, the second tier holder gets second choice, etc. Third tier rights often also include sports other than football and basketball, sometimes referred to as “Olympic sports”. These third tier rights are frequently held by a local or regional broadcaster (such as an RSN).

Exhibit 64: College Sports Rights by Tier for Deals Currently in Effect

Conference Tier Holder DurationAverage Annual

Fee (mm)ACC 1st, 2nd and 3rd tier rights DIS 15 $240BIG12 1st tier rights DIS 13 $110 2nd tier rights NWSA 13 $90BIG EAST 1st tier rights DIS 6-7 $7 2nd tier and other rights DIS 15 $150BIG TEN 1st tier rights DIS 10 $100 2nd tier rights Big Ten Network 25 $112 Select basketball rights CBS 6 $12 Football championship game NWSA 6 $24PAC-12 Split unavailable NWSA and DIS 12 $250SEC 1st tier rights CBS 15 $55 2nd tier and other rights DIS 15 $150 Note: Big East deal with Disney is seven years for football and six years for basketball; Pac-12 average annual fee presented above is for News Corp. and Disney combined. Source: RBC Capital Markets estimates, see the Appendix for a list of sources used to build our sports rights database


55

While these deals individually are not massive, in total, the six conferences account for roughly $1.3 billion in average annual rights fees under their current deal.5 More impressive is the degree to which the annual fees have grown between the most recent, and current or future deals. Most notably, the costs of the “final” set of games in the NCAA Football season has grown from approximately $160 million/year for five games, to roughly $610 million/year for seven games (while the duration of the primary contract increased from 4 to 12 years).

Exhibit 65: Recently Renewed College Sports Rights TV Contracts Old Deal New Deal


Starts*Deal


FeesAvg. Annual Rights Fees TV Partners

Deal Starts*

Deal Ends* Years

Total Rights Fees

Avg. Annual Rights Fees

ACC DIS 2011 2022 12 $1,860 $155 DIS 2012 2026 15 $3,600 $240

BCS Series/NCAA Football Playoffs (ex. non-semifinal Rose Bowl) DIS 2010 2013 4 $495 $124 DIS 2014 2025 12 $6,720 $560 Rose Bowl (new deal doesn’t include years Rose Bowl is a playoff semi-final)* DIS 2006 2013 8 $300 $38 DIS 2014 2025 12 $640 $53

Big 12 DIS 2008 2015 8 $480 $60 DIS 2012 2024 13 $1,430 $110 NWSA 2008 2011 4 $78 $20 NWSA 2012 2024 13 $1,170 $90

Total $2,600 $200

Pac-12 (formerly Pac-10) ESPN (Basketball) 2006 2011 6 $53 $9 DIS, NWSA 2012 2023 12 $3,000 $250 ESPN (Football) 2007 2011 5 $125 $25 NWSA 2007 2011 5 $97 $19

Comments: The prior Big 12/ESPN deal was renegotiated before its completion.


Comments: The ACC renegotiated its rights contract with ESPN in 2012, just two years (roughly) after it had signed a 12 year deal with the network.

Comments: ESPN also holds rights to the Rose Bowl, but because its current deal is different in duration than the remaining bowls, it is excluded from the analysis above, except when it is the host site of a national semi-final under the new deal. The old deal included 4 games, the Sugar Bowl, Orange Bowl, Fiesta Bowl, and the National Championship. New deal includes two semi-final games and the national championship game as well as four other games (deal does not cover Rose, Sugar, and Orange Bowls in seasons where they are not hosting a semi-final game, but ESPN owns rights to those games under a separate contract). All-in costs of the new contract including the Rose Bowl in all years (i.e. 7 games/year over 12 years) would be close to $7.4bn total or an average of ~$610mm/year over the life of the deal. *The prior Rose Bowl deal averaged ~$40mm/year over 8 years, and provided a game per year, while the new deal is the average amount over its life but pro rated for the fact that the game every third year is a semi-final and included in the playoff deal above.

Source: RBC Capital Markets estimates, see the Appendix for a list of sources used to build our sports rights database

We believe that college sports are becoming an increasingly important part of cable and broadcast network programming; this is easiest to see in the case of college football. College football regular season telecasts on national networks grew from roughly 200 games/year to roughly 250 games/year between 2010 and 2012—this expansion was driven nearly entirely by the addition of regular season college football to Fox and FX. While at the same time, the average viewership for these telecasts declined 19%, reflecting more competition. In primetime, viewership declined significantly on ESPN Thursday nights, as college football faced off against an extended Thursday night NFL package on the NFL Network.

There has been some concern that the market for sports may be saturated. We believe that some of the ratings decline seen during the college football regular season, when new competition entered, does suggest that we are seeing at least some saturation. Generally, we can observe that total games telecast increased to 250 in 2012 from 203 in 2010 (up 23%), while average ratings on these telecasts declined roughly 19% over the same two-year period. Additionally, we see a similar effect after the NFL Network added additional Thursday night football games, which resulted in a 35% decline in viewership for ESPN’s primetime telecast of Thursday night college football. However, we think it is important to recognize that viewership does not tell the whole story, as sports content is also used to drive affiliate fees. Thus, even if additional content does not create additional viewership, it may produce additional revenues through affiliate fees.

5 Note that due to each contract being in a different year of its life, this is not actually what total fees will be in a given year, but it is sufficient to capture the aggregate scale of these rights.


56

Exhibit 66: There Were More College Football Games Available Across More Networks in 2012 than in 2010

Source: cbssports.com, abc.com, nbc.com, fox.com, espn.com, nbcsports.com, RBC Capital Markets

Exhibit 67: While the Number of Regular Season Collage Football Telecasts on National Networks Has Grown Roughly 23% Since 2010, Average Viewership for These Games Has Declined

0

50

100

150

200

250

300

2008 2009 2010 2011 2012

Gam

es

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Vie

wer

ship

('00

0)

Regular Season College Football Telecasts Regular Season College Football Average Viewership ('000)

Viewership down 19% from 2010 to 2012 while total games telecast increased 23%

Regular Season Average Viewership ('000)6,993 6,944 6,880

6,1686,105

5,578 5,522

3,1963,684

3,1302,617

2,837

2,5612,874 2,966 2,674 2,576

1,350 1,492 1,4161,0281,016613347353 326 411

5,097

6,274

4,975

4,381

1,179

1000

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011 2012

CBS ABC NBCFOX ESPN ESPN2FX NBC Sports Network Versus

Regular Season Telecasts

16 15 15 15 13

33 30 30 34 356 8 8 7 7

2369 71 75 78

68

63 54 56 5261

142020

23

22 25 19

0

50

100

150

200

250

2008 2009 2010 2011 2012

CBS ABC NBCFOX ESPN ESPN2FX NBC Sports Network Versus

Source: sportsbusinessdaily.com, collegesportsinfo.com, RBC Capital Markets


57

Exhibit 68: 2012 Primetime Viewership Declined Significantly on Thursday Nights as College Football Faced Off Against the NFL

Network Night Audience Audience Change Comments

ABC Saturday 6.5mm -3%Fox Saturday 3.6mm NA First regular season of full coverageESPN Saturday - FlatESPN Thursday 1.8mm -35% Competition from additional Thursday night NFL games

Source: SportsBusiness Daily, RBC Capital Markets estimates

Additionally, while we also believe that the importance of NCAA men’s basketball is likely growing, we believe that investors should focus on performance of the end of season tournament, which has a limited number of games (now broadcast on CBS and Time Warner networks), and generates the substantial majority of annual NCAA basketball ad spend. A similar approach of analyzing total telecasts and average viewership likely would not be as practical.

Dedicated Conference Networks Are Making More Content Available, but Fragmenting The Market The idea that the producer of sports content (e.g., a team or league) might benefit from owning or holding a stake in a network that distributes its games is certainly not a new one. For example, the YES Network launched in 2002 and NBA TV launched in 1999 (under the moniker NBA.com TV). However, we would argue that it was not until the launch of the Big Ten Network in 2007 that it became clear college conferences could also benefit from such a venture.

Big Ten Network: The First National Single-Conference Network to Succeed

The Big Ten Conference announced in 2006 that it would launch its own national network the following year in partnership with News Corp. The conference would own 51% of its network, while its partner, News Corp., would own the remainder. The two partners were to share the burden of running the network with the Big Ten providing the content and News Corp. operating the network; and, each partner would assume a share of the costs. The conference, made up of universities from the Midwest, including University of Michigan and Ohio State, was to do something no college conference had done before. But, there remained many questions to be answered, such as:

1) Why launch a channel in the first place? Why not just accept the rights fees? We think the conference likely believed that the network could be worth more than the conference’s lower tier rights would be independently. Additionally, by programming the Big Ten Network with lower tier rights, the conference would still be able to receive content licensing fees on its highest value (e.g., 1st tier) content.

2) If launching a channel, why give up a 49% stake to a partner? First, TV channel operations likely don’t fall in the standard purview of a college conference—and as a result, it may be significantly more efficient to have an outside party operate the network. And second, News Corp. could potentially negotiate affiliate fees for the network in conjunction with those for its other networks, raising the profile of the new network and increasing the likelihood of achieving sufficient distribution.

3) Could the additional content dilute the value of rights sold to other partners? To some degree it’s possible, but because the higher tier rights holders get first choice of game (or in some cases are delegated specific games, like the Big Ten Men’s Basketball Tournament semifinals and final), we believe it is more likely the additional viewers could be incremental, compared to those of a directly comparable game. We think a lower tier game is more likely to attract fans of a participating school, whereas a higher tier game may be more likely to draw the casual viewer or neutral fan looking for the best game.

On a financial basis, the decision to launch the Big Ten Network appears to have made sense. Despite providing an outlet for additional Big Ten content, the conference was still able to increase the average annual rights fees received on its outstanding 1st tier rights deal, which was renewed in 2006, after the Big Ten Network had been announced. Further, the conference was able to generate material revenues from its network, which according to SNL Kagan estimates, produced roughly $85million in EBITDA off of a roughly 51 million subscriber base and per subscriber affiliate fees of $0.37.


58

Exhibit 69: Estimated Annual Revenues Generated by the Big Ten Before and After the Launch of the Big Ten Network Prior To Channel Launch Post Channel Launch

Rights Fees Paid Directly To ConferenceFrom ESPN/ABC ('97-'06) From ESPN/ABC ('07-'16)

Average Annual Fees On Outstanding 1st Tier Rights Contract1 $60mm $100mm

Conference Network FinancialsNot Applicable 51% Stake (Now 49%)

TV Network2

Total Subs - 51mmPer Sub Fees3 - $0.37/subEBITDA - $85mm

Average Annual Fees Paid To Big Ten From BTN For Rights ('07-'31) $112mm

1The Big Ten also has deals with CBS and News Corp. for the telecast of select college basketball games and the football championship game, respectively. 2Figures for 2012, as per RBC Capital Markets and SNL Kagan estimates. 3We believe per sub fees in "key markets" are closer to $1/sub while fees in "non-key markets" are probably closer to $0.20. Notes: Dates of sports contracts is based on college football and basketball season start date, thus -'06 implies through the '06-'07 season; Big Ten Network launched in 2007. Source: SNL Kagan, nytimes.com, chicagotribune.com, RBC Capital Markets estimates

The Big Ten Network may have an opportunity to realize an incremental “leg up” as the conference is scheduled to add the University of Maryland and Rutgers to its ranks in 2014. The addition of these teams expands the geographic coverage of the conference and could make the channel more desirable in the New Jersey and Washington D.C. areas—and possibly increase the network’s distribution or affiliate fee rate, and thus, total affiliate revenue. We would note, however, that as a network like the Big Ten Network expands beyond its core region, it may not be able to command as high affiliate fees per subscriber as it does in its core region. We believe that this type of geographic expansion could prove to be a secular trend for college conferences as they seek to maximize revenue.

ESPN and the University of Texas Go One Step Further, and Launch a Dedicated UT Sports Channel, Longhorn Network

While there may have been some questions as to whether or not a single conference could provide sufficient content to program a standalone network, ESPN and the University of Texas at Austin looked to go one step further by launching the Longhorn Network. The two parties struck a deal that would pay UT at least $300 million over 20 years, as well as a portion of profits, for what would mostly qualify as 3rd tier rights.

The centerpiece of the channel would be the carriage of at least one UT football game (in 2012 the network telecast three, one against a conference opponent). The channel would also host University of Texas basketball games and an assortment of lower profile sports. The rest of the schedule would be filled with other UT programming, such as behind the scenes football programming and, potentially, sports content from lower-profile sports programs, like University of San Antonio football. Additionally, there were originally intentions to host high school football games on the network, which can be a big draw in Texas, but these plans had to be scrapped after other programs in the Big 12 conference claimed it would give the university a recruiting advantage.

Since its launch, the network has faced challenges gaining full distribution. Notable MVPDs still not carrying the channel include Time Warner Cable, Dish Network, and DirecTV; together, these distributors account for approximately 60% of subscribers in the Dallas-Ft. Worth DMA (designated market area), and roughly 35% of subscribers in the Houston DMA. In total we estimate Longhorn Network likely reaches only 4 million subscribers in total, and receives monthly affiliate fees of approximately $0.40 per subscriber.


59

Exhibit 70: Estimated Longhorn Network Financials Post Channel Launch

Rights Fees Paid Directly To ConferenceFrom ESPN

Guaranteed Rights Fees1 $15mm

Conference Network FinancialsOwned by ESPN

TV Network2

Total Subs ~4mmPer Sub Fees ~$0.40/subEBITDA N/A

1University of Texas at Austin could also receive a portion of profits; 2Figures for 2012, as per RBC Capital Markets estimates. Source: espn.com, RBC Capital Markets estimates

Pac-12 Follows Big Ten’s Lead, but Launches Pac-12 Network without a Large Cap Media Partner

In August 2012, looking to emulate the success of the Big Ten Network (BTN), the Pacific-12 Conference launched the Pac-12 Network. However, unlike BTN, the Pac-12 Network would be wholly owned by its parent conference. Additionally, the Pac-12 Network would actually be a combination of one national network and six regional networks, which would allow MVPDs to carry a version of the network featuring more coverage of the teams most relevant to the local fan base.

By the time the new networks launched, the Pac-12 had already renewed its rights agreements with Disney and News Corp., which would grant the conference a certain degree of flexibility. On one hand, these deals would effectively insure a material annual revenue stream from the sale of what is, for the most part, 1st and 2nd tier sports rights, while on the other hand, the agreement afforded Pac-12 “favorable selection rights and digital rights” and left enough content available to program a network.6 The conference’s hand was also strengthened by the recent addition of the University of Utah and University of Colorado to the conference (requiring an update to its previous title, the Pac-10). As was the case for the Big Ten, we believe this expansion offered the conference an opportunity to increase relevance across a larger geographic area, and thus, provided the opportunity to possibly increase carriage and/or affiliate fees.

Thus far, the launch of the Pac-12 network appears to have been successful. We estimate that the group of networks probably reaches 60 million households (although the number of paid subscribers is probably significantly lower than this), and that the network can probably command an affiliate fee of an estimated ~$0.80/sub/month (although, remember that if the network chooses to push national distribution, it may offer out-of-market subscribers a lower rate). Further, the success of the network all happened in concert with the extension of the conference’s third-party TV rights agreements, which increased average rights fees to $250 million (vs. roughly $55 million for the prior contract).

Exhibit 71: Estimated Annual Revenues Generated by the Pac-12 Before and After the Launch of the Pac-12 Network Prior To Channel Launch Post Channel Launch

Rights Fees Paid Directly To ConferenceFrom Fox/ESPN ('07-'11)1 From Fox/ESPN ('12-'23)

Average Annual Fees On Outstanding 1st and 2nd Tier Rights Contract ~$55mm $250mm

Conference Network FinancialsNot Applicable 100% Stake

TV Network2

Household availability3 - 60mmPer Sub Fees - ~$0.80/subEBITDA - N/A

1Basketball rights run from 2006-2013, but for simplicity we assume the deal runs from 2007-2013. 2Figures for 2012, as per RBC Capital Markets estimates. 3Household availability indicates how many homes could have the network if they chose it; total subscribers should be lower than this estimate. Notes: Dates of sports contracts is based on college football and basketball season start date, thus -'06 implies through the '06-'07 season. Sources: cnn.com, usatoday.com, forbes.com, RBC Capital Markets estimates 6 cbssports.com


60

MountainWest Sports Network: First to Come and First to Go

The first dedicated, single-conference channel, MountainWest Sports Network, was launched in 2006. However, the network, jointly owned by CBS and Comcast, was not able to overcome some of the challenges it faced at both the network and conference level. While the channel featured a significant number of live sports events, including football, it was never able to receive wide national adoption, only reaching 13 million homes by the time it folded; however, the commissioner has said that the original intention was for the network to “get in 4.5 million homes” and indicated that it was originally intended to be a “super regional network.”7 The biggest games were to find a home on networks owned by CBS or NBC.

In the end, the main problem was that the conference lost a number of its members in the early 2000s: Brigham Young University (BYU) left in 2011 (becoming independent in football), University of Utah left for the Pac-12, and Texas Christian University (TCU) departed for the Big East but then later defected to the Big 12 before ever playing a game in the Big East. Boise State was also planning to go to the Big East, but following a raid of some of the Big East’s biggest sports schools, it decided to stay in the Mountain West following an agreement that allowed the team to potentially realize more revenue than the other conference members (if they appear on national TV more frequently, or participate in a BCS Bowl or playoff game)8. We believe that the defection of the bigger football teams was all or mostly about money, with teams in the conferences only receiving what we estimate to be a low single-million-digit payout from TV rights, compared to a greater than $20 million payout in the Big Ten.910

Will Other Conferences Launch Channels as Well?

We think it’s certainly possible that other major conferences will join the Big Ten and Pac-12 in launching their own network. The SEC has considered launching its own network since at least as early as 2007. And while the conference first passed, likely in part due to the fact that many of its teams had already signed relatively lucrative local rights deals for third tier content, news outlets have recently reported that the league could launch a dedicated channel by the middle of 2014.

Additionally, the SportsBusinss Daily recently reported that the ACC had hired an outside agency to assist in studying the possibility of launching such a network. Despite the fact that rights are tied up with ESPN until around 2027, the league could enter negotiations to free up some of these rights for its own dedicated network.

Exhibit 72: Status of Dedicated Networks for Notable Conferences Dedicated Network

Conference Name Launch Status

ACC - - Under consideration

Big Ten Big Ten Network 2007 Available

Big 12 - - None, complicated by university level rights deals*

Mountain West MountainWest Sports Network 2006 Folded

Pac 12 Pac-12 Network 2012 Available

SEC - 2014 (expected) In negotiationsUniversity of Texas has its own network, and University of Oklahoma has significant rights package with Fox Sports Source: dallasnews.com, cbssports.com, sportsbusinessdaily.com, RBC Capital Markets

7 gazette.com 8 espn.com 9 sportsbusinessdaily.com 10 gazette.com; espn.com


61

BCS Championship Also Undergoing Major Changes

In 2015 (following the 2014 season), the NCAA Division I Football national championship will be decided by a playoff for the first time. In the past, the national champion was decided by the winner of a single game, of which the participants were chosen based on a national ranking system. Additionally, there were four more Bowl Championship Series (BCS) Bowl Games for the winners of the six so called “power conferences,” and other teams that qualified (some of which could be from non-power conferences). Upon implementation of the new playoff system, there will be seven annual games affiliated with the championship: four major non-playoff bowls, two semi-final bowls, and one national championship game. Additionally, there will be five remaining “power conferences,” with the Big East now part of the “Group of Five,” which will have one team automatically qualify from its five conferences.

This deal has done more than just expand the bowl slate. It has also brought a significant step-up in rights fees. We estimate that the all-in fees for the telecast rights to all seven games associated with the new BCS playoff will likely cost ESPN an average of ~$610 million over 12 years. Previously, the network had two separate deals for BCS Bowl telecast rights: a four-year deal for the championship and three other bowl games at an average of roughly $120 million over four years, plus an additional $38 million/year over eight years for the Rose Bowl.


62

Regional Sports Networks Are an Important Player in Local Distribution Over the past several years, Regional Sports Networks (RSNs) have become increasingly powerful players in pay TV sports. The value creation associated with these networks has been so robust that the value of a certain RSN may exceed the value of the primary team that actually has games telecast on it.

In November 2012, News Corp. acquired a 49% stake in the YES Network (the RSN associated primarily with the New York Yankees baseball team). The transaction was valued at $3 billion, about $250 per subscriber and 11x estimated 2013 EBITDA. News Corp. has a call option to increase its stake in the network to 80%, and in the event that this option is exercised, the implied value of the network could be as much as $3.8 billion. An implied $3.8 billion value of the Yankees RSN network would be nearly double a recent valuation of the New York Yankees franchise (at ~$1.9 billion).

Exhibit 73: Enterprise Value of Yankees vs. YES Network

1.9

3.0

3.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Yankees YES Network (based on NWSA's acquisition of a

49% stake)

YES Network (based on NWSA's call right to raise

stake to 80%)

($ in

bn)

Source: Fortune, bloomberg.com, RBC Capital Markets

RSN Recent Developments For News Corp. It’s not Whether It Wins or Loses, but How It Plays the Game. When we published our initial deep dive on sports, Moneyball: The Economics Of Sports Media, OTT, And Other Media Hot Buttons in October 2010, the RSN business was undergoing a transformation. Realizing that a team’s local TV rights, placed in an RSN, could often be more valuable than the actual team (given typically high affiliate fees and frequent placement on a basic cable package), some franchises (particularly MLB franchises), began to form their own cable channels. In response to the realization that teams increasingly had the option of “going it alone,” local sports rights fees had been escalating.

Exhibit 74: Total Estimated RSN Programming Expenses Grew Roughly 3x Between 2000 and 2010

$1,003mm

$3,284mm

$0,000mm

$0,500mm

$1,000mm

$1,500mm

$2,000mm

$2,500mm

$3,000mm

$3,500mm

2000 2010

Tota

l RSN

Pro

gram

min

g C

osts

Source: SNL Kagan, RBC Capital Markets


63

Upon recognition of the value of local TV rights, leverage shifted to the sports teams (particularly high profile teams in large markets). With dominant incumbent RSNs in large markets—typically Fox or Comcast—teams often had only two options:

A. Launch a dedicated network on its own (here, the franchise would assume the risk of launching a network with just one team, or it must find another sports team to partner with); or

B. Renew the existing contract with the incumbent RSN.

The Time Warner Cable/L.A. Lakers deal of 2011, however, changed this simple two-pronged option. The deal was part of another major change in local sports rights.

Exhibit 75: Time Warner Cable’s Regional Sports Rights Agreement with the L.A. Lakers Is a Leg Up for Local Sports Rights

$mm

$50mm

$100mm

$150mm

$200mm

$250mm

Old Deal (with Fox Sports) New Deal (with Time Warner Cable)

Estia

mte

d A

vera

ge A

nnua

l L.A

. Lak

ers

RSN

Rig

hts

Fee

$30mm

$150mm to $200mm

Source: forbes.com, latimes.com, RBC Capital Markets

The Lakers and Time Warner Cable inked a landmark deal in February, 2011. The agreement would move the Lakers from Fox Sports West (owned by News Corp.) to Time Warner Cable SportsNet and Time Warner Cable Deportes (both launched in late 2012). The terms were estimated at $3-4 billion over a 20-year period.

The deal included all Lakers games not already dedicated to a national telecast on either ABC or TNT. While games will be aired in the Los Angeles and San Diego areas—where Time Warner Cable is the primary MSO—Lakers games will also be made available in other parts of Southern California (via other MSOs).

While the deal sounds great, we’d note that finding a third party to distribute the channel has been a bit challenging. After months of waiting, DirecTV agreed to distribute the channel to the 1.7 million customers it has in Southern California. The network was also picked up by several smaller rural cable providers, including Cox, Charter, Verizon FiOS, and AT&T U-Verse. However, of the 850,000 customers that DISH Network has in the area, none are yet able to watch the channel.

This said, with substantial third-party carriage and an industry high-end affiliate fee achieved, it seems like a smart choice for Time Warner Cable to have undertaken the launch of the new channels, especially given the IRR analysis laid out below:


64

Exhibit 76: Hypothetical Financial Analysis of Time Warner Cable’s Investment in the Los Angeles Lakers’ Regional TV Rights

Note: We chose to use Comcast SportsNet New England in the calculation for our third assumption because there is only one major team on the network, and that team is an NBA team, which we think could mean that the two networks may have comparable cost structures. Source: SNL Kagan, cbssports.com, forbes.com, sportsbusinessdaily.com, RBC Capital Markets estimates

While it appears the SportsNet and Deportes network launches were successful, we admit that trying to judge the appetite for a new RSN in Southern California was a bit of a gamble. News Corp. already had two RSNs in the market, and between Fox Sports West and Prime Ticket, News Corp. held rights to the NBA’s L.A. Lakers and Clippers, the MLB’s Los Angeles Angels of Anaheim (and L.A. Dodgers through the 2013-14 season), as well as to the NHL’s Anaheim Ducks and L.A. Kings.

Below we present a hypothetical financial analysis of the IRR possible on Time Warner Cable’s purchase of the L.A. Lakers’ TV rights. We assume that Time Warner Cable has done an internal analysis to show that such an investment meets its return of capital objectives, and our goal is not to replicate that analysis. Our intention is to simply show that it is not as hard as one might think, at first glance, to justify paying $3.5 billion for 20-year rights to L.A. Lakers’ telecasts. Additionally, it is not necessary to make exceedingly aggressive assumptions to get there.

We make the following simplifying assumptions:

1. Affiliate fees are based on press reports indicating that the network is asking for up to $3.95/subscriber/month for Time Warner Cable SportsNet and Time Warner Cable Deportes.

2. Subscriber target based on 2012 total subscriber estimate (SNL) for Fox Sports West, which operates in the L.A. region.

3. Other expenses is based on the difference between SNL Kagan’s 2012 estimate for Comcast SportsNet New England’s total expense, and our estimate of how much of that expense comes from the rights fees for the Boston Celtics.

We also recognize that our analysis does not account for any start up costs, or capture the fact that there is likely a terminal value for this channel (we think that typically a channel that has historically held one team’s rights should be in the best position to win those rights when renewed, and thus that the channel will likely continue after the final year of the first rights contract).

Our analysis determines that Time Warner Cable would realize a 22% IRR under this simplified scenario. Deal Assumptions Other Assumptions

Duration (years) 20 Affiliate Fees SubscribersFirst Season (begins in) 2012 Affiliate fee/subscriber target $3.95 Subscriber target (mm) 7.2Last Season (begins in) 2031 Period until target reached 3 years Period until target reached 10 yearsCost ($mm) $3,500 YoY growth after target reached 3% YoY growth after target reached 1%Assumed annual escalator 4.0%

Advertising Revenue Other ExpensesAd revenue - 1st year ($mm) 20 2012 Comcast Sportsnet New England Expenses ($mm) 79 (SNL)YoY growth 3% 2012 Comcast Sportsnet New England Est. Rights Cost ($mm) 21 (est. for Celtics rights)

Non-major rights deal expenses ($mm) 58YoY growth 3%

Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031Subscribers (mm) 0.7 1.4 2.2 2.9 3.6 4.3 5.0 5.8 6.5 7.2 7.3 7.3 7.4 7.5 7.6 7.6 7.7 7.8 7.9 8.0Affiliate fee per subscriber $1.32 $2.63 $3.95 $4.07 $4.19 $4.32 $4.45 $4.58 $4.72 $4.86 $5.00 $5.15 $5.31 $5.47 $5.63 $5.80 $5.97 $6.15 $6.34 $6.53Affiliate fee revenue ($mm) 11 46 102 141 181 224 269 317 367 420 437 454 473 492 511 532 553 576 599 623Advertising revenue ($mm) 20 21 21 22 23 23 24 25 25 26 27 28 29 29 30 31 32 33 34 35Total revenue ($mm) 31 66 124 162 204 247 293 341 392 446 464 482 501 521 542 563 586 609 633 658

Rights fee ($mm) 118 122 127 132 138 143 149 155 161 167 174 181 188 196 204 212 220 229 238 248Other expenses ($mm) 58 60 62 63 65 67 69 71 73 76 78 80 83 85 88 90 93 96 99 102Total expenses ($mm) 176 182 189 196 203 210 218 226 234 243 252 261 271 281 291 302 313 325 337 349

Profit ($mm) -144 -116 -65 -33 1 37 75 115 158 203 212 221 230 240 250 261 272 284 296 309

IRR (ex-launch costs) 22%


65

Time Warner Cable’s Deal for Los Angeles Dodgers TV Rights Confirms the Company’s Commitment to RSN Business Time Warner Cable and the L.A. Dodgers have reportedly agreed to a deal for the telecast rights of the L.A. Dodgers. According to some news reports:11

• The deal is believed to be worth $7-8bn over 25 years.

• A new RSN, SportsNet LA, will be launched to carry the games, and will be wholly owned by the Dodgers (or its owners/investors).

• Time Warner Cable will be the “main distributor” of SportsNet LA and has guaranteed a certain level of payments to the Dodgers, whether or not the new network is actually able to generate that much revenue through affiliate fee and ad sales (for reference, Time Warner Cable accounted for 34% of total multichannel video subscribers in the Los Angeles DMA as of 3Q12, according to SNL Kagan).

• The deal is still under review by the league, and it is possible the league could look to determine whether the team should be considered an “owner” of the channel for revenue sharing purposes (because Time Warner Cable has guaranteed payments, possibly eliminating the risk of ownership for the Dodgers). This is an important issue because rights fees are subject to revenue sharing, while revenue generated from the ownership of a RSN is not (there are additional complications to the determination of the amount of revenue subject to revenue sharing related to the Dodgers’ bankruptcy, but we will not address those issues here).

The new agreement will begin once the Dodgers’ current telecast rights deal with News Corp. is completed (which runs through the 2013 baseball season). Assuming the deal generates fees of $7.5bn over 25 years, the average annual rights fee would be increasing from an average of approximately $45 million per year under the old deal to $300 million under the new deal.

Exhibit 77: L.A. Dodgers RSN Rights Deal With Time Warner Cable Estimated To Be Worth $7-8bn Over 25 Years, Well Above The Prior Deal

$45mm

$300mm

$mm

$50mm

$100mm

$150mm

$200mm

$250mm

$300mm

$350mm

Old Deal (with Fox Sports + KCAL) New Deal (with Time Warner Cable)

Ave

rage

Ann

ual L

A D

odge

rs R

SN

Rig

hts

Fee

Source: latimes.com, RBC Capital Markets estimates

Such a deal would mean that the Dodgers could generate more revenue from local TV (on average over the life of the contract) than 27 other franchises take in from their entire operations (according to Forbes’s 2012 annual franchise valuation). The only franchises to generate more than $300 million in revenue according to this analysis were the New York Yankees and Boston Red Sox. However, it is worth noting that if the contract had a 6% annual step-up, the actual rights fee for the first season would only be $137mm.

11 latimes.com; reuters.com


66

For Incumbents, the Environment Is Increasingly Competitive but We Believe News Corp. Still Holds a Fairly Strong Position

The successful launch of SportsNet, following Time Warner Cable’s acquisition of the Lakers’ TV rights, as well as the loss of the Dodgers’ TV rights, presents some challenges for Fox Sports West and Prime Ticket, as these teams provided a significant amount of content for News Corp.’s L.A. based RSNs. However, we believe that the loss of the Lakers’ and Dodgers’ rights should not be perceived as a significant negative for News Corp. for four reasons:

1. We believe News Corp. will have enough programming to maintain its regional sports channels in the area, as it still has rights to the L.A. Clippers, L.A. Angels of Anaheim, L.A. Kings, and Anaheim Ducks.

2. News Corp. may be able to shift some relevant programming from other channels to fill some of the void left by the Dodgers. For example, it might be possible to show some San Diego Padres games on Fox Sports West/Prime Ticket.

3. We believe most existing affiliate agreements are likely in place for at least a couple of years, which would give time for any realignment if necessary. While we would expect the loss of certain content to trigger a contractual reduction in the affiliate fee rate, we also believe that the loss of revenues could be roughly offset by decreased content.

4. Across the U.S., we believe that News Corp. has no additional major regional rights deals, with this kind of profile, up for renewal in the next couple of years. This should insulate the company from further rights losses.

Additionally, if it became necessary to collapse Fox Sports West and Prime Ticket into a single channel, we believe that News Corp. would not see a meaningful incremental reduction in revenues and profitability. In other words, we believe the hypothetical combined channel would receive affiliate fees roughly equivalent to what the two separate channels would have received for the same content.

However, we do believe that because News Corp. was faced with the loss of the Lakers’ TV rights and the (then) potential loss of the Dodgers’ rights, News Corp. may have lost significant leverage in its negotiations with both the L.A. Angels and the L.A. Kings. The Angels appear to have used this leverage in their favor, signing a new 20-year deal that is estimated to be worth around $3 billion. The Angels opted out of their prior deal, which started in 2006 and would have paid approximately $500 million over 10 years. Additionally, the Kings inked a deal in June 2012 that would extend rights for L.A. Kings’ games until 2024, for a total of $250 million over the life of the contract, a significant step up from the prior deal.

Exhibit 78: Annual Rights Fees for the Los Angeles Kings and Los Angeles Angels of Anaheim

$mm

$5mm

$10mm

$15mm

$20mm

$25mm

Old Deal (maximum received in a year,

deal average and duration not available)

New Deal (average)

LA K

ings

RSN

Fee

$mm

$20mm

$40mm

$60mm

$80mm

$100mm

$120mm

$140mm

$160mm

Old Deal New Deal

Ave

rage

Ann

ual L

A A

ngle

s of

Ana

heim

RSN

Fee

Source: forbes.com, latimes.com, RBC Capital Markets

Of course, if Fox Sports West and Prime Ticket, even as a combined channel, are not viable franchises, then these events would be a negative for News Corp. If this were the case, revenues could decline significantly. Should Fox be worried about this? Yes…and no. We believe the New York market offers a good example of what could happen when a major market RSN loses rights. MSG Network lost the rights to the Yankees in 2002 and the Mets in 2006. While the lack of summer pro sports likely hurt MSG’s programming lineup and the rights losses probably had an impact on both revenue and earnings, the channel has remained a viable and successful RSN.

Additionally, we certainly believe that increasing rights fees, all else equal, is a negative for the RSN (and sports TV) business. However, given our analysis of the Time Warner Cable/Lakers deal above, and the analysis of the growth in sports rights costs for News Corp. in the prior section (which shows that News Corp. should be able to expand margins despite growing sports rights costs), we continue to believe that the major RSN operators can succeed even in an environment of rising rights costs.

Following the loss of the Dodgers and Lakers, we believe that News Corp. does not have any more major rights contracts up for renewal in the next couple years. The two incumbent News Corp. networks were estimated to have a 2012 combined monthly affiliate fee of around $5.14/subscriber/month in 2012 (according to SNL Kagan). As a direct result of the new SportsNet network launch and the future launch of a Dodgers RSN, Southern California basic cable subscribers might have to absorb an additional approximately $8.00-9.00 per month of affiliate fees. Although, we would note that we believe Fox Sports affiliate fees will likely see some


67

contractual reduction tied to the loss of major sports content. This increased fee is associated with, essentially, no new sports content being provided to the customer. Given that RSNs are typically carried on basic cable, this fee is incurred by sports fans (who likely do not mind) as well as non-sports fans (who probably mind quite a bit).

Unless…The Times They Are A-Changin’?

It’s not just escalating rights costs that are a factor for RSN’s today, but also the danger of a marketplace being disturbed after enjoying a fair amount of equilibrium for nearly a decade. A market can probably absorb one or even two major RSNs (with the appropriate content and franchises), but it’s unclear whether or not a single market could sustain more without seriously upsetting both basic cable subscribers, who would be forced to pay for the networks, and, potentially, regulators.

It is true that for more than five years the New York City market has supported four RSNs (YES Network, SNY, MSG and MSG Plus). According to SNL Kagan, estimated cost to New York City-area distributors in 2012 totaled more than $10 per subscriber per month. But, given the sheer size of this market, it may be an exception to the rule. With costs continuing to escalate, we wonder if RSNs risk damaging the ecosystem by basically forcing consumers to push for the movement of RSNs from a basic tier to a sports tier. Presently, the channels have taken that option away from the distributors, requiring them to carry the channels on basic cable.

In response to the increase in RSN affiliate fees and the potential for an increase in the number of RSNs (and thus, in total affiliate fees) without increased content, DirecTV now has a $3/month RSN surcharge broken out on the bills of new customers who sign up for a basic package with one or multiple RSNs. We believe DirecTV is trying to focus the customer on the magnitude to which RSNs impact all subscribers’ bills—implying programming costs are passed through—in order to entice customers to complain. The response of DirecTV will likely be—“there’s not much we can do, it’s part of basic…and that’s the only way the RSNs will give it to us. If you have a problem, complain to your congressman and ask that Congress prohibit RSNs being bundled in a basic cable package.” We think such a strategy is unlikely to make a real difference any time soon, but over time it could begin to change the tone of the debate over sports carriage on a basic tier.

The following can be found in the FAQ section of the DirecTV website:

Exhibit 79: DirecTV Has Started Charging New Customers a “Regional Sports Fee”

Source: directv.com

Time Warner Cable and Comcast May Be the Biggest Aid the RSNs Have in Driving Affiliate Fees Higher

Time Warner Cable and Comcast represent approximately 32% of the total pay TV subscriber base in the U.S. today, according to SNL Kagan. Given their ownership of RSNs and, in some cases, their high affiliate fees compared to those of other RSNs, we think it will be increasingly difficult for these MSOs to push back on third-party RSNs as they demand increased carriage fees and continued inclusion on the basic tier. How can these large distributors complain about unfair pricing when they are essentially asking for the same kind of pricing on the same kind of content?

Further, there tends to be most favored nation clauses that prevent a network from being able to accept a lower subscriber fee from one system versus another. As a result, increased negotiating leverage with Comcast or Time Warner could be exploited more generally as the outcome of those rate negotiations become “the market”.


68

While It Fights Competitive Challenges in L.A., Fox Expands in New York City

In November 2012, News Corp. purchased approximately 49% of the YES Network from Goldman Sachs, the Yankees, and others for approximately $1.5 billion.12 This made News Corp. the largest single shareholder in what we believe to be the highest EBITDA generating individual RSN in the U.S. Press reports indicate that this transaction also extends the Yankees’ rights deal with the network through the 2042 season, and that the fees will ramp at a 5% rate from $85 million in the first year (financials reported in the press vary somewhat). The channel has a national subscriber base of roughly 15 million, the majority of which are located locally.

It is widely believed that the addition of the YES Network to News Corp.’s RSN portfolio made strategic sense. Strategic reasons for the investment could include that News Corp. has a local ad sales force in New York City as part of WNYW, it could realize various synergies across its national RSN footprint, and it could potentially use YES to leverage broader carriage of 51% owned Big Ten Network, particularly with the pending addition of Rutgers to the conference. At the end of the day, given recent rights fee growth for other marquee franchises, the valuation—which we estimate is at roughly 12x 2012E EBITDA—might end up looking like a real bargain, enabling YES to out-earn many of its competitors in the RSN business.

Exhibit 80: YES Network Contract with the Yankees Appears to Be a Good Deal Considering the Quality of the Franchise

$ mm

$50 mm

$100 mm

$150 mm

$200 mm

$250 mm

$300 mm

$350 mm

NY Yankees (over first 25 of 30

years)

LA Dodgers (reportedly worth $7-8bn over 25 years)

LA Angles of Anaheim(20 years)

Texas Rangers (20 years)

LA Lakers (20 years)

Source: latimes.com, sportsbusinessdaily.com, dallasnews.com, forbes.com, RBC Capital Markets estimates

12 latimes.com


69

Summary of Recent Transactions and Existing Team/RSN Relationships Regional rights deals in the headlines over the past several years indicate that the cost of regional sports rights is growing. With the L.A. Dodgers recently selling their TV rights in a deal reported to be worth as much as $7-8bn over 25 years (which may also include some national rights in addition to regional rights), we see no signs that the market is weakening. Additionally, we would point out that a number of recent deals have included ownership stakes.

Given the sheer volume of programming hours there are to fill each year, we believe it is difficult to launch an RSN with rights for only one team. This is even harder if the sport is not baseball (with each team playing 162 regular season games a year, baseball provides the most content), but one with fewer games per season (e.g., the NBA, NHL). Additionally, it’s unlikely that television production is a core skill set of sports teams (or is a business their owners necessarily wish to own and operate), which is why it does not surprise us to see any particular team take a minority equity stake in an RSN (as opposed to going at it alone).

Below we provide a list of recent deals and current RSN relationships for reference.

Exhibit 81: Estimated RSN Sports Rights Deal Terms Network Franchises Duration Signed/Announced First Season Rights Fees

Cablevision New York Islanders end 2030-31 1999 1999 $14mm in first year, $36mm in final yearComcast SportsNet Bay Area

Golden State Warriors 18 years 2010 2010 ~$50mm upfront, annual average payment of $25mm

Comcast SportsNet Bay Area

San Francisco Giants 25 years 2007 2008 Sources indicate Giants receive 30-33% of total channel revenue (and/or that they have an ownership stake in this range)

Comcast SportsNet Houston

Houston Astros, Houston Rockets 20 years 2010 2012-2013 (Rockets), 2013 (Astros)

Astros receive average of $80mm/year rights fee. Payment to Rockets not available. Combined, teams own an estimated 77% of the network.

Comcast SportsNet New England

Boston Celtics 20 year extension 2011 2017 Press reports indicate ~$40mm/yr, but it is unclear if this is for a particular year or average over the life of the deal. The Celtics also have a 20% equity stake in SportsNet New England).

Comcast SportsNet Northwest

Portland Trail Blazers 10 years - 2007-08 ~$12mm/year

Fox Sports Arizona Arizona Diamondbacks 8 years 2007 - $250mm over life of contractFox Sports Detroit Detroit Tigers, Detroit Pistons, Detroit

Redwings10 years 2008 2008/09 Combined $1bn over "at least" 10 years; ~$500mm allocated

to Tigers, Redwings and Pistons ~$250mm eachFox Sports Florida Miami Heat 11 years 2004 2004-05 ~$20-25mm per yearFox Sports Kansas City/Midwest

Kansas City Royals End ~2020 - - Less than $20mm/year through ~2020

Fox Sports Midwest St. Louis Cardinals 10 years - 2008 $14mm in 2011 season

Fox Sports New Orleans

New Orleans Hornets 10 years 2012 2012-13 ~$10mm annually

Fox Sports North Minnesota Twins - 2011 2011 Reported to be ~$29mm annuallyFox Sports Ohio Cincinnati Reds Ends after 2016 - - $30mm a year Fox Sports Prime Ticket

L.A. Clippers 7 years 2009 2009 -

Fox Sports San Diego

San Diego Padres 20 years 2012 2012 $1.2bn over the life of the contract (plus 20% stake in RSN)

Fox Sports Southwest

Texas Rangers 20 years 2010 2015 Press reports indicate ~$1.5bn-3.0bn over life of contract; we believe total fees on higher end of this range

Fox Sports West Los Angeles Angels of Anaheim 17-20 years 2011 2013 $2.5-3.0bn over the life of the contractFox Sports West Los Angeles Kings 12 years 2012 2012 $250mm over life of contractMASN Washington Nationals - 2005 2005 Rights fee resets every 5 years. $37mm in rights fees in 2013.

SportsNet LA (Dodgers/TWC partnership)

LA Dodgers 25 years 2013 2014 $7-8bn over life of contract

Root Sports Northwest

Seattle Mariners 10 years 2007 2011 $450mm over life of contract

Root Sports Pittsburgh

Pittsburgh Pirates 10 years - 2010 receive $18mm in 2012

SportSouth (owned by NWSA)

Charlotte Bobcats 10 years 2010 2010-11 ~$109mm over life of contract

SportsTime Ohio (owned by NWSA)

Cleveland Indians 10-15 years 2012 2013 North of $40mm/year

TWC SportsNet and TWC Deportes

L.A. Lakers 20 years 2011 2012-2013 $3-4bn over life of contract

TWC SportsNet and TWC Deportes

L.A. Galaxy 10 years 2011 2012 $55mm over life of contract

YES Network Brooklyn Nets (previously New Jersey Nets) 10 year extension 2011 2022-23 $20mm/year (unclear if new rate applies for all seasons after extension was signed, or after end of prior deals term)

YES Network New York Yankees 30 years 2012 2013 Starts at ~$85mm/yr and ramps at a ~5% annual growth rate

Note: Carriage rights terms for RSNs are frequently not made public. The contract terms presented above are based on financial terms (actual or estimated) provided in the press, and when those are not available, internal estimates. Source: forbes.com, sfgate.com, nytimes.com, netsdaily.com, chron.com, mlb.com, sportsbusinessdaily.com, crainsdetroit.com, broadcastingandcable.com, kansascity.com, nola.com, espn1420.com, 1500espn.com, sportspromedia.com, startribune.com, latimes.com, utsandiego.com, dallasnews.com, washingtonpost.com, triblive.com, bizjournals.com, thewrap.com, nbcsports.com, RBC Capital Markets estimates


70

Exhibit 82: Summary of Existing Regional Sports Networks Content Fox Regional Sports Networks

Network Teams Carried1Local Team Ownership2 Background/Comments3

Fox Sports Arizona Arizona Diamondbacks, Phoenix Coyotes, Phoenix Suns, Phoenix Mercury (WNBA) Launched in 1996Fox Sports Carolinas Carolina Hurricanes, SEC, ACC Launched in 2008; sister network Fox SportsSouthFox Sports Detroit Detroit Tigers, Detroit Pistons, Detroit Red Wings Launched in 1997Fox Sports Florida Miami Marlins, Florida Panthers, Tampa Bay Rays, Orlando Magic, Miami Heat Launched in 1987; sister network SunSportsFox Sports Indiana Indiana Pacers, Cincinnati Reds Sister network Fox Sports MidwestFox Sports Kansas City Kansas City Royals, Kansas State Sister network Fox Sports MidwestFox Sports Midwest St. Louis Cardinals, St. Louis Blues, Kansas City Royals, Cincinnati Reds Sister networks Fox Sports Indiana & Kansas CityFox Sports North Minnesota Twins, Milwaukee Brewers, Minnesota Timberwolves, Milwaukee Bucks,

Minnesota Wild (NHL), Minnesota Lynx (WNBA), University of Minnesota, University of Wisconsin

Fox Sports New Orleans New Orleans Hornets Launched in 2012;sister network Fox Sports SouthwestFox Sports Ohio Cleveland Cavaliers, Columbus Blue Jackets, Cincinnati Reds, Lake Erie Monsters (AHL) Launched in 1989; Cincinnati and Cleveland feeds

Fox Sports Oklahoma Oklahoma City Thunder, Oklahoma Sooners, Oklahoma State Cowboys Launched in 2008Fox Sports San Diego San Diego Padres, Los Angeles Clippers, Anaheim Ducks, some college 20% Launched in 2012Fox Sports South Atlanta Braves, Atlanta Hawks, SEC, ACC Launched in 1990; acquired later by FoxFox Sports Southwest Texas Rangers, Dallas Mavericks, San Antonio Spurs, Dallas Stars, FC Dallas (MLS), Sliver

Stars (WNBA), some Big 12 football* Launched in 1983; acquired later by Fox

Fox Sports Tennessee Nashville Predators, Memphis Grizzlies, SEC, C-USA Launched in 2008; sister network Fox Sports SouthFox Sports West Anaheim Ducks, Los Angeles Clippers, Los Angeles Angels of Anaheim, Los Angeles Kings,

Club Deportivo Chivas USA (MLS), (Los Angeles Dodgers through 2013 season)* Launched in 1985; sister network Prime Ticket.

Fox Sports Wisconsin Milwaukee Brewers and Milwaukee BucksPrime Ticket Los Angeles Clippers, and Club Deportivo Chivas USA (MLS), (Los Angeles Dodgers through

2013 season)Sister network Fox Sports West

SportSouth Atlanta Braves, Atlanta Hawks, Charlotte Bobcats, SEC, ACC, Southern and Big South conferences

Launched in 1999; later acquired by Fox

SportsTime Ohio Cleveland Indians 100% Launched in 2006; later acquired by FoxSun Sports Orlando Magic, Miami Heat, Tampa Bay Rays, Tampa Bay Lightning, Florida State University,

University of Florida and SECLaunched in 1988; later acquired by Fox

DirecTV Regional Sports Networks


Root Sports Northwest Seattle Mariners, Seattle Sounders FC (MLS), Portland Timbers (MLS), University of Washington, Washington State University, Oregon State, Gonzaga and Seattle University, Big Sky

Launched in 1988; acquired by DirecTV in 2008; rebranded ROOT Sports in 2011

Root Sports Pittsburgh Pittsburgh Pirates, Pittsburgh Penguins, some Big East basketball Launched in 1986; acquired by DirecTV in 2008; rebranded ROOT Sports in 2011

Root Sports Rocky Mountain Utah Jazz, Colorado Rockies, Pac-12, Mountain West, Big Sky Launched in 1988; acquired by DirecTV in 2008; rebranded ROOT Sports in 2011

Comcast Regional Sports Networks


Comcast Sportsnet Bay Area San Francisco Giants, Golden State Warriors, San Jose Earthquakes (MLS) 30% Launched in 1990; Giants and News Corp. also hold stakes

Comcast Sportsnet California Sacramento Kings, Oakland Athletics, San Jose Sharks, San Jose Earthquakes (MLS), some college games

Launched in 2004; sister channel CSN Bay Area

Comcast SportsNet Chicago Chicago Cubs, Chicago White Sox, Chicago Blackhawks and Chicago Bulls 80% Launched in 2004; Comcast owns 20%, Cubs, White Sox, Blackhawks, and Bulls own remainder

Comcast SportsNet Houston Houston Rockets, Houston Astros, C-USA, SEC, WACC 77% Launched in 2012; Comcast owns 22.7%, Astros 46.4%. and Rockets 30.9%

Comcast SportsNet Northwest Portland Trail Blazers, some college sports Launched in 2007Comcast SportsNets Mid-Atlantic (Baltimore/Washington)

Washington Wizards, Washington Capitals and DC United Launched in 1984; later acquired by Comcast

Comcast SportsNet New England Boston Celtics, Revolution (MLS) 20% Launched in 1981; later acquired by ComcastComcast SportsNet Philadelphia Philadelphia Phillies, Philadelphia 76ers, Philadelphia Flyers 100% Launched in 1997; Comcast also owns the Flyers.Comcast/Charter Sports Southeast (CSS) Regional college and high school games Launched in 1999; JV between Comcast and Charter

1Not necessarily exhaustive, a team may be aired on one of several sister networks but we may list it on all networks; doesn’t necessarily include all sports and/or complete seasons for college teams/conferences. 2Ownership may be indirect (i.e., same person may own team and all or a large stake in a fund or private business that owns all or part of the network). 3Launch may have been under different ownership or another moniker, change of ownership is identified in some, but not all, cases. *Some sources indicate that the Texas Rangers have a 10% stake in Fox Sports Southwest, and that the Los Angeles Angels of Anaheim have a 25% stake in Fox Sports West, but these claims have not been widely corroborated. Source: Industry sources, SNL Kagan, timewarnercable.com, rootsports.com, msg.com, locatetv.com, zap2it.com, foxsports.com and associated RSN websites, nba.com, nhl.com, mlb.com, sportingnews.com, wnba.com, comcastsportsnet.com and regional sites, comcast.com, forbes.com, sfgate.com, sportsbusinessdaily.com, chron.com, BCSN.com, baynews9.com, sportsillustrated.cnn.com, pac-12.com, nytimes.com, mvc-sports.com, multichannel.com, ncta.com, timewarner.com, broadcastingandcable.com, sltrib.com, reuters.com, nesn.com , RBC Capital Markets


71

Exhibit 83: Summary of Existing Regional Sports Networks Content (Continued) Independent/Other Regional Sports Networks

Network Teams Carried1

Local Team/Conference

Ownership2 Background/Comments3

4SD Some high school and collegiate (e.g. University of San Diego) Launched in 1997; owned by Cox CommunicationsAltitude Sports and Entertainment Colorado Avalanche, Denver Nuggets, Colorado Mammoth (lacrosse), Colorado Rapids

(MLS)100% Launched in 2004; owned by owner of the

Nuggets/Avalanche/Rapids as well as of St. Louis Rams and English Premier League team Arsenal

Buckeye Cable Sports Network (BCSN) Some high school and collegiate (e.g. Bowling Green State University hockey) Launched in 2004Big Ten Network Big Ten (Football, Basketball, and other sports) 49% Launched in 2007; News Corp. owns the remainderBright House Sports Network Some high school and collegiate (e.g. University of Central Florida) Launched in 2005; owned by Bright House NetworksCox Sports Television LSU, some other college games Launched in 2002; owned by Cox CommunicationsSportsNet LA Los Angeles Dodgers (starting with the 2014 season) 100% Time Warner Cable will be the “main distributor”Longhorn network University of Texas (at least 1 football game)

-Launched in 2011; partnership between University of Texas at Austin and ESPN

Mid-Atlantic Sports Network Baltimore Orioles, Washington Nationals, Big East, Big South 100% Launched in 2005; owned by Washington Nationals and Baltimore Orioles

MSG Network & MSG Plus New York Knicks, New York Ranges, New York Islanders, New Jersey Devils, Buffalo Sabers, New York Liberty, New York Red Bulls

100% Owned by Madison Square Garden Company, which also owns the New York Knicks, New York Rangers, and New York Liberty

New England Sports Network (NESN) Boston Red Sox and Boston Bruins (some college basketball, incl. ACC) 100% Launched in 1984; owned by Boston Red Sox and Boston Bruins

Pac-12 Network Pac-12 (Football, Basketball, and other sports) 100% Launched in 2012SportsNet New York New York Mets, Big East 65% Launched in 2006; partially owned by Time Warner Cable and

ComcastTime Warner Cable SportsNet/Deportes Los Angeles Lakers, LA Galaxy, Los Angeles Sparks,California Interscholastic Federation

(CIF)Launched in 2012; owned by Time Warner Cable

YES Network New York Yankees, Brooklyn Nets 25% Launched in 2002; News Corp. owns 49% with an option to take stake up to 80% in the future

1Not necessarily exhaustive, a team may be aired on one of several sister networks but we may list it on all networks; doesn’t necessarily include all sports and/or complete seasons for college teams/conferences. 2Ownership may be indirect (i.e., same person may own team and all or a large stake in a fund or private business that owns all or part of the network). 3Launch may have been under different ownership or another moniker, change of ownership is identified in some, but not all, cases. *Some sources indicate that the Texas Rangers have a 10% stake in Fox Sports Southwest, and that the Los Angeles Angels of Anaheim have a 25% stake in Fox Sports West, but these claims have not been widely corroborated. Source: Industry sources, SNL Kagan, timewarnercable.com, rootsports.com, msg.com, locatetv.com, zap2it.com, foxsports.com and associated RSN websites, nba.com, nhl.com, mlb.com, sportingnews.com, wnba.com, comcastsportsnet.com and regional sites, comcast.com, forbes.com, sfgate.com, sportsbusinessdaily.com, chron.com, BCSN.com, baynews9.com, sportsillustrated.cnn.com, pac-12.com, nytimes.com, mvc-sports.com, multichannel.com, ncta.com, timewarner.com, broadcastingandcable.com, sltrib.com, reuters.com, nesn.com , RBC Capital Markets


72

League Economics Sports leagues are able to create significant value, in large part through the monetization of TV rights, but also through a number of other sources. The aggregate value for the four major domestic sports leagues ranges from $8 billion for the NHL to $35 million for the NFL (calculated as the aggregate value of all teams; based on 2012 valuations).

Exhibit 84: Aggregate League Value, 2012

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

NHL NFL NBA MLB

($ in

mm

)

Exhibit 85: Aggregate League Revenue & EBITDA, 2012

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

NHL NFL NBA MLB

($ in

mm

)

Revenue EBITDA

Source: Fortune, RBC Capital Markets estimates Source: Fortune, RBC Capital Markets estimates

While at times sports teams may appear to be overvalued, since 2001 they have behaved much like beachfront real estate. Despite a perceived high valuation, investment returns have been strong, and values have avoided some of the dips we have seen in the S&P over the past decade (although we would note that the lack of a liquid market could affect this comparison somewhat).

Exhibit 86: Change in Value of Sports Leagues vs. S&P 500

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

NHL NFL NBA MLB S&P 500 (total return)

Source: Fortune, FactSet, RBC Capital Markets estimates


73

Exhibit 87: Sports League Historical P&L and Valuation

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012NHL Value 4,924 4,759 4,900 5,393 6,001 6,586 6,677 6,843 7,198 8,451

Y/Y growth 4.5% -3.4% 3.0% N/A 11.3% 9.7% 1.4% 2.5% 5.2% 17.4%Revenue 2,077 2,094 2,238 2,267 2,436 2,747 2,819 2,929 3,090 3,374

Y/Y growth 9.0% 0.8% 6.9% N/A 7.5% 12.8% 2.6% 3.9% 5.5% 9.2%Operating profit (8) (121) (95) 127 97 140 180 160 127 250

Y/Y growth -112.9% 1417.5% -21.4% N/A -23.7% 44.0% 28.3% -10.9% -20.7% 97.2%% Margin -0.4% -5.8% -4.3% 5.6% 4.0% 5.1% 6.4% 5.5% 4.1% 7.4%

TTM EV/EBITDA -615.5 x -39.2 x -51.4 x 42.3 x 61.7 x 47.0 x 37.2 x 42.8 x 56.7 x 33.8 xNFL Value 16,446 20,104 23,443 26,207 28,723 30,637 33,280 33,360 32,718 33,162 35,415

Y/Y growth 13.7% 22.2% 16.6% 11.8% 9.6% 6.7% 8.6% 0.2% -1.9% 1.4% 6.8%Revenue 4,284 4,944 5,330 6,029 6,160 6,539 7,090 7,573 8,016 8,345 8,823

Y/Y growth 8.8% 15.4% 7.8% 13.1% 2.2% 6.2% 8.4% 6.8% 5.8% 4.1% 5.7%Operating profit 685 1,046 850 1,038 985 568 789 1,032 1,066 979 1,316

Y/Y growth 65.1% 52.8% -18.7% 22.0% -5.1% -42.3% 38.9% 30.8% 3.3% -8.1% 34.3%% Margin 16.0% 21.2% 16.0% 17.2% 16.0% 8.7% 11.1% 13.6% 13.3% 11.7% 14.9%

TTM EV/EBITDA 24.0 x 19.2 x 27.6 x 25.3 x 29.2 x 53.9 x 42.2 x 32.3 x 30.7 x 33.9 x 26.9 xNBA Value 6,465 7,187 7,672 8,745 9,782 10,596 11,174 11,384 11,010 11,063 11,776

Y/Y growth 7.5% 11.2% 6.7% 14.0% 11.9% 8.3% 5.5% 1.9% -3.3% 0.5% 6.4%Revenue 2,496 2,664 2,721 2,932 3,185 3,367 3,576 3,765 3,786 3,805 3,960

Y/Y growth 8.1% 6.7% 2.1% 7.8% 8.6% 5.7% 6.2% 5.3% 0.6% 0.5% 4.1%Operating profit 149 247 178 234 277 207 293 318 233 182.6 174.7

Y/Y growth -10.2% 65.6% -28.0% 31.8% 18.3% -25.4% 41.4% 8.8% -26.8% -21.6% -4.3%% Margin 6.0% 9.3% 6.5% 8.0% 8.7% 6.1% 8.2% 8.5% 6.1% 4.8% 4.4%

TTM EV/EBITDA 43.4 x 29.1 x 43.1 x 37.3 x 35.3 x 51.2 x 38.2 x 35.8 x 47.3 x 60.6 x 67.4 xMLB Value 8,589 8,836 8,860 9,960 11,294 12,944 14,149 14,457 14,740 15,681 18,153

Y/Y growth 9.1% 2.9% 0.3% 12.4% 13.4% 14.6% 9.3% 2.2% 2.0% 6.4% 15.8%Revenue 3,583 3,652 3,878 4,269 4,733 5,111 5,489 5,818 5,898 6,137 6,359

Y/Y growth 12.8% 1.9% 6.2% 10.1% 10.9% 8.0% 7.4% 6.0% 1.4% 4.1% 3.6%Operating profit 76 (40) (56) 132 361 496 492 501 522 494 432

Y/Y growth -41.5% -152.0% 42.5% -335.2% 173.0% 37.1% -0.6% 1.8% 4.2% -5.4% -12.6%% Margin 2.1% -1.1% -1.5% 3.1% 7.6% 9.7% 9.0% 8.6% 8.9% 8.1% 6.8%

TTM EV/EBITDA 113.0 x -223.7 x -157.4 x 75.2 x 31.3 x 26.1 x 28.7 x 28.9 x 28.2 x 31.7 x 42.0 x

($ in mm)

Source: Fortune, RBC Capital Markets estimates

Key Financial Drivers Are Similar Across Sports, but Relative Impact of Components Varies Revenue for sports teams and leagues can be divided into two main sources, (1) local: revenues generated by a team in its jurisdiction (e.g., in its local broadcast region); and (2) national: revenues generated on a national level by the league as a whole. Local revenues can include ticket sales, concessions, stadium advertising/naming rights, local TV rights, and luxury tax revenue.

Luxury taxes are one method to level the playing field between “rich and poor” teams. A luxury tax is applied on any team whose payroll exceeds a certain soft cap (these revenues may then be distributed to less wealthy teams). National revenues are typically pooled and are generated through sources including national TV contracts (e.g., ESPN’s deal for Sunday Night Baseball, all major NFL TV rights agreements) and shared assets, such as a league’s TV network (e.g., NFL Network) or digital properties (e.g., mlb.com).

Exhibit 88: Key Drivers For Sports Franchises Local National

• Ticket sales • Share in national network broadcasting rights (ESPN, Broadcast Networks, Radio, etc.)• Concessions • Share in earnings of league-owned properties (Channels, Digital Streaming operations).• Stadium advertising• Stadium sponsorships (naming rights, etc.)• Local TV rights (RSN's, local broadcasters, etc.)• Luxury tax, etc.

Source: RBC Capital Markets

Although the primary revenue streams are similar across the major professional sports leagues, there are a number of factors that impact the relative importance of these items and the distribution of total league revenues between teams. For example, the number of games played can have a significant impact on revenues league-wide, whereas revenue pooling, salary cap, and luxury tax policies can


74

affect relative distribution between large and small market teams. Additionally, market size can have a meaningful impact on local revenues. Teams located in a larger market may be able to sell out a larger stadium, charge more for sponsorship deals, and earn more from local TV rights deals.

The NFL implements the greatest degree of equality between teams for the sale of TV rights. Like most leagues, the NFL pools revenues generated from its national TV deals. However, TV rights for NFL games are only sold on a national basis, taking away one of the primary sources of revenue through which a large market team could out-earn its smaller market peers. Thus, the Jacksonville Jaguars earn roughly as much as the NY Giants from the sale of TV rights, despite operating in a significantly smaller market. We believe that TV rights are sold nationally due to the small number of games per season (16 regular season games per team, compared to approximately 160 and 80 for the MLB and NBA, respectively).13

Despite redistribution of national revenues, more successful and larger market teams are able to generate more revenue than their small market counterparts through a variety of other sources. For example, we would expect sponsorship and licensing rights (e.g., naming a stadium) to be more valuable in a large market. All in all, roughly two-thirds of total NFL revenue in 2010 was pooled.

Additionally, in the NFL the playing field is further leveled through the implementation of a salary cap that limits total player payroll (although teams may be able to carry over savings from a prior year).14 Such a salary cap can create more parity in the NFL than is observed in other professional sports leagues, and decrease the likelihood that the teams that generate the most revenue also win the most games.

Relative to the NFL, the MLB and NBA seem to have a greater degree of separation between the “haves” and “have nots”. For example, while MLB national TV rights are pooled in their entirety, local rights are only partially pooled. Thus, in an environment where we estimate total national TV rights are only expected to generate $42 million/team in 2014, compared to $137mm generated by the sale of the L.A. Dodgers’ local TV rights, it is easy to see how team economics could begin to be skewed. Additionally, while these leagues apply a soft cap (i.e., luxury tax), which imposes a tax on teams whose payroll exceeds a certain limit, teams are still permitted to exceed it if they are willing to pay a fee to do so.

Exhibit 89: Snapshot of Key Characteristics of Leagues Number Of Regular

Season Total Revenue Split Local Revenue Split

League Games Home Games Local National Local TV

RightsVenue

RelatedAnnual National TV Revenues (2013E) TV Blackout Policy Commentary

16 8 30% 70% - 100%

$4.6bn -ESPN - $1.3bn

FOX - $759mm*CBS - $657mmNBC - $659mm

DirecTV - $1.0bnSuper Bowl -

$210mm*

Blacked out if occupancy is below 85-100% (depending on team). League provides disincentives against lower thresholds in this range.

Equal rev share for National TV, "hard" salary cap on player compensation, stadiums amongst the largest. Limited number of games (relative to other leagues). Revenue from ticket sales is partially pooled. In total, in 2010 roughly 2/3 of NFL revenue was pooled.

162 81 70% 30% 60% 40%

$749mm -FOX - $228mmTBS - $167mm

ESPN - $399mm

Exclusive rights to air a national game Sunday night after 5PM ET (ESPN) and Saturday between 4-7PM ET (FOX). Local broadcasters cannot show another game during these times, but some exceptions may be made.

More of a "have/have not environment" even though there still remains revenue pooling (national TV rights are pooled, while only 34% of "net local revenue" is). But most revenues come from local TV rights for large market teams. No salary caps but a luxury tax on high payroll teams. Equal share in league properties such as MLB Advanced Media (which manages digital properties, including MLB.tv, etc.). Most number of games which we believe strengthens the ability to create value for RSNs through the sale of local rights.

82 41 50% 50% 60% 40% $970 mm -ESPN/ABC and TNT

Games on NBA League Pass (MSO and broadband) are blacked out when shown on national television (ABC, ESPN, TNT or NBA TV) or televised locally (via broadcast or RSN).

Was previously more "have or have not" (as revenue sharing didn't includes any local revenue) but in 2012 put in place a plan for revenue pooling which included local revenue to level the playing field. Also has a "flexible" salary cap (spending over salary cap leads to a luxury tax). Smaller arenas than NFL and MLB, limiting non-TV local revenues versus those leagues.

82 41 90% 10% NA NA $176 mm

Exclusive rights for some national games.

Hard salary cap Had historically been a league characterized by a "haves and have nots" environment. New agreement gives oversight committee flexibility to adjust redistribution amount through "Industry Growth Fund". Around $200mm of revenue sharing per season, but could increase as total league revenue grows.

*Super Bowl broken out separately because it skews annual revenues-the game rotates between FOX, CBS, and NBC. Source: Industry sources, wsj.com, forbes.com, sports.yahoo.com, espn.com, nba.com, verizon.com, mlb.com, directv.com, yahoo.com, nhl.com, directv.com, Vanderbilt.edu (Theory of the Perfect Game: Competitive Balance in Monopoly Sports Leagues, Vrooman), msnbc.com, RBC Capital Markets research

13 fox11online.com 14 espn.com


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Highlights of League-Owned Networks Each of the four major professional sports leagues operates its own TV network, which provides an opportunity to generate an additional stream of revenue.

The NBA was the first major sports league to launch a network. It currently airs 96 live regular games per season (~3/week), and will air some playoff games as well. NBA TV does not have exclusive rights to any games, and thus, the games it broadcasts will be available in the competing teams’ markets on the local network holding the rights. In addition to broadcasting live games, NBA TV provides basketball news and highlights, as well as previously taped games.

NFL Network launched in 2003. During the 2012 season it offered 13 regular season games live on Thursday nights (up from eight live games in 2011). In 2012 it was also able to expand its distribution, announcing carriage deals with Cablevision, Time Warner Cable, and Bright House.15 Looking forward, we think it would be conceivable for the NFL to sell a portion of the 13-game package it aired in 2012, allowing it to monetize the games through expensive rights fees, while also maintaining some high-value, must-have live sports content to allow it to drive affiliate fees at the NFL Network. The league also offers NFL RedZone which switches to the most important moments of each game on Sunday afternoon (such as when a team is within 20 yards of the end zone).

The NHL Network premiered in 2007, six years after its Canadian counterpart launched. The network telecast more than 75 regular season games during the 2011-12 season, along with five playoff games.

The last network to launch was the MLB Network. It shows roughly 150 regular season games, and a small number of postseason games yearly. It will typically air one of two possible games in a given time slot, but these telecasts do remain subject to local blackout restrictions. The MLB allocated a one-third stake among Comcast, DIRECTV, Time Warner, and Cox Communications as a way to increase distribution.

Exhibit 90: League-Owned Channels

Service Launched Owners Subscribers* Live Games per Regular Season Live Coverage

77 regular season games and 5 playoff games during 2011-12 season. Additional content includes NCAA Hockey. Canadian equivalent launched in 2001.

Nov. 1999 96 No exclusive telecast rights for games; live games simultaneously shown by participating teams' local rights holder (such as an RSN). Local blackout restrictions.

44.1

59.2

NHLComcast

NBA (leased to Turner

Broadcasting)

13

Oct. 2007 (US) 77

81.9Nov. 2003

150

150 regular season games per year (some produced by MLB Network), but subject to local blackout. Carried some postseason games in 2012. Also carries preseason, minor leagues, and World Baseball Classic games, as well as other MLB related content.

Jan. 2009

MLBDirecTVComcast

Time WarnerCox

NFLBroadcast 13 live regular season games on Thursdays from September through December. Features also include NFL GameDay , NFL Films programming, and draft coverage.

84.5

*2013E Average Million Subscribers per SNL Kagan. Source: SNL Kagan, press reports, nfl.com, nhl.com, mlb.com, directv.com, sportsbusinessdaily.com, tvweek.com, tvbythenumbers.com, adweek.com, reuters.com, RBC Capital Markets research

League-owned channels for three of the four major professional leagues telecast exclusive games, although distribution ranges from decent (NHL Network) to strong (MLB Network, NFL Network). We believe that the channels serve two primary purposes: (1) to provide negotiating leverage for the league when determining TV rights fees; and (2) to stake out a place on cable in case the league later determines it makes financial sense to move a larger proportion of games to a league-owned channel. While we think it is possible leagues could eventually move a greater proportion of games to their owned network(s), we would expect such a transition to be slow (at the very least, because most rights are tied up in longer-term contracts).

However, it might not make sense for leagues to shift a large number of games to a league-owned network. For example, the NFL has a relatively small number of games per season (16 regular season games per team), which could make it very difficult to program an entire channel (games don’t actually occupy that many hours). To determine whether or not it makes sense for a league to shift games

15 multichannel.com


76

to its owned network, the league must consider a tradeoff between rights fees, and affiliate and ad fees (less the costs of operating the network).

For argument’s sake, we analyze this decision assuming a 45% or 60% margin. (Remember that the league does not have to pay rights costs, thus, this margin could be higher than that of a non-league owned sports network.) Additionally, we can’t predict how distributors and end customers might react to higher fees, and if it could affect distribution even in the context of additional content (but we assume subscribers remain flat in our analysis).

Maintaining or growing penetration could be difficult if a league shifts a significant portion of its games to its own station. The NFL Network faced initial challenges to achieving wide distribution, including efforts by MVPDs (multichannel video programming distributor) to offer the channel on a digital sports tier, even when the channel carried some NFL games exclusively. We believe MVPDs were concerned that, because of the short season and limited number of games per team, it would be difficult for the network to maintain the audience required to justify the requested affiliate fees. In the end, a variety of legal actions were taken to resolve these disputes, and now the network has strong distribution. However, these challenges do at least create some question as to the ability for a sports network to achieve and maintain wide distribution. The MLB took a different path and allocated a one-third stake among Comcast, DIRECTV, Time Warner, and Cox Communications as a way to increase distribution. We assume in our analysis that current penetration rates are reflective of longer-term penetration given that most of the channels have been available for a number of years.

The chart below demonstrates that the league-owned networks would need to raise affiliate fees by a significant amount in order to justify shifting all their content to these channels. The chart also shows what the requisite affiliate fee increases would have to be (assuming an affiliate fee/advertising revenue split of ~65/35% and margins in the 45-60% range, remember the league doesn’t have to pay rights fees) in order to achieve a break-even proposition for moving all national content from existing third-party distribution agreements to league-owned networks (pro forma based on 2013E financials).

In the case of the NFL, our analysis says it would need to receive an affiliate fee of somewhere in the $5.45-7.26/subscriber range. The NBA channel could require affiliate fees around $1.65-2.20/subscriber for “break-even”. For MLB, the issue is slightly more complicated as the MLB channel is 33% owned by its cable partners, so to reach break-even with existing rights, EBITDA would have to equal the existing rights grossed up accordingly. After making this adjustment, MLB would probably need to achieve an affiliate fee increase to the $1.40-1.86/subscriber level, which seems possible (and thus makes baseball the most likely candidate for the content shift from third party to league-owned channel), but not a no-brainer (ratings on the channel are low). Additionally, we doubt that the NHL Network could receive affiliate fees of $0.65-0.87 range per subscriber to achieve “break-even” given relatively low distribution.

There are also a variety of compounding reasons why a league may not want to make such a shift, even if our back-of-the-envelope “break-even” analysis suggests it should.

1. It’s high risk and there are no guarantees the channel could support the desired affiliate fees. On the other hand, contracted rights payments are much more certain.

2. There may be a “ramp-up” transitional period where they experience a loss of revenue. This may be undesirable for the team owners (and the players).

3. Channel operations are not the leagues’ core competency or skill set. And, the league may only have one sport, potentially for only a couple of days a week. It may not want to, or be able to, effectively program the rest of the schedule, which could impact the efficiency of a league-owned network and/or affiliate fees it receives.

4. If they attempt to go at it alone and fail, they could lose a significant amount of money, alienate their fan base (particularly if distribution is poor), and they may have a difficult time going back to the networks they tried to bypass. (While the networks would likely be happy to take the content, they would probably want to pay less and/or have a longer lock-up period.)

For these reasons, we think the actual expected return required to induce the leagues to shift all or a substantial portion of their games to a league-owned network is probably significantly higher than “break-even”. This means that the league would probably need to think it could receive affiliate fees meaningfully higher than those in our “break-even” analysis in order to attempt the shift.


77

Exhibit 91: Implications of Shifting National Programming to League-Owned Channels, Assuming a 60% Margin

ServiceAverage

Subscribers (mm)

Monthly Affiliate Fees

($/sub)

Total Affiliate Revenues

($mm)

Advertising Revenue

($mm)

2013E EBITDA ($mm)

National TV Rights valid

for 2013 ($mm)

Difference ($mm) Service

Average Subscribers

(mm)

Total Affiliate Revenues "To Break

Even" ($mm)

Advertising Revenue "To Break Even"

($mm)

National TV Rights + Share of Channel EBITDA ($mm)1

Affiliate Fee Need to

"Break Even" ($/sub)

Current Affiliate Fee

($/sub)

Difference ($/sub)

2013E1For MLB, EBITDA must be decreased or grossed up by 33% to calculate true break-even for network, since MLB only owns 67% of the channel. Same is done for NHL Network, of which roughly 16% is owned by outside parties.

108 176 (68)$0.2944.1 153 60

81.9 4,604

44.1

(4,266)$1.2981.9 338 1,268 335

84.5 87 875 -$1.17$0.23762 794

185 344

1,415

$5.452,883 5,354 4,942

267

$1.40(673)121 $0.2384.5 233

1,084 -$1.38$0.27$1.65

-$4.16

$0.65

$1.29

-$0.36$0.29

$0.2759.2 114 970 (856) 59.2 633 1,175 192 67

Assumes a margin of 60%. Remember the league owned channels (at least on a cash basis) could see a higher margin than other sports channels because they don’t have to pay a league for the content.

Source: SNL Kagan, RBC Capital Markets estimates

Exhibit 92: Implications of Shifting National Programming to League-Owned Channels, Assuming a 45% Margin

ServiceAverage

Subscribers (mm)

Monthly Affiliate Fees

($/sub)


($mm)

Advertising Revenue

($mm)

2013E EBITDA ($mm)

National TV Rights valid

for 2013 ($mm)


Average Subscribers

(mm)


Even" ($mm)


($mm)





($/sub)

Difference ($/sub)

2013E1For MLB, EBITDA must be decreased or grossed up by 33% to calculate true break-even for network, since MLB only owns 67% of the channel. Same is done for NHL Network, of which roughly 16% is owned by outside parties.

108 176 (68)$0.2944.1 153 60

81.9 4,604

44.1

(4,266)$1.2981.9 338 1,268 335

84.5 87 875 -$1.63$0.231,016 794

247 459

1,887

$7.263,844 7,139 4,942

267

$1.86(673)121 $0.2384.5 233

1,084 -$1.93$0.27$2.20

-$5.97

$0.87

$1.29

-$0.58$0.29

$0.2759.2 114 970 (856) 59.2 843 1,566 192 67



Additionally, when thinking about this decision leagues may want to consider the affiliate fees further out in the future (to more accurately assess what revenue they need to be able to achieve once the channel is fully launched). If we perform the same analysis based on 2017E affiliate fees and rights fees, the required “break-even” hurdle looks less desirable.


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Exhibit 93: Implications of Shifting National Programming to League-Owned Channels Pro Forma for 2017E, Assuming a 60% Margin

ServiceAverage

Subscribers (mm)

Monthly Affilate Fees,

2017E2

($/sub)


($mm)

Advertising Revenue

($mm)

Pro Forma EBITDA ($mm)1

National TV Rights, 2017E

($mm)


Assuming Full

Distribution (mm)


Even" ($mm)


($mm)





($/sub)

Difference ($/sub)

1Assumes same margin as in previous chart.2For MLB, EBITDA must be decreased or grossed up by 33% to calculate true break-even for network, since MLB only owns 67% of the channel. Same is done for NHL Network, of which roughly 16% is owned by outside parties.

$0.26 -$2.18

$1.68 -$5.73

-$0.47

$0.28 -$1.70

44.1

756 1,296

$2.44

$7.41

$0.83

84.5 2,472 1,331

438 236

81.9

1,529

$0.36

$1.98

7,283 3,921 6,723

339

59.2 1,404 107 135 1,161 (1,026)

103 149 214

887 535

44.1 $0.36

81.9 $1.68 1,647

(65)

59.2 $0.28 199

191

(5,653)

84.5 $0.26 264 142 154 1,426 (1,272)

6,188



Exhibit 94: Implications of Shifting National Programming to League-Owned Channels Pro Forma for 2017E, Assuming 45% Margin

ServiceAverage

Subscribers (mm)

Monthly Affilate Fees,

2017E2

($/sub)


($mm)

Advertising Revenue

($mm)

Pro Forma EBITDA ($mm)1

National TV Rights, 2017E

($mm)


Assuming Full

Distribution (mm)


Even" ($mm)


($mm)





($/sub)

Difference ($/sub)

1Assumes same margin as in previous chart.2For MLB, EBITDA must be decreased or grossed up by 33% to calculate true break-even for network, since MLB only owns 67% of the channel. Same is done for NHL Network, of which roughly 16% is owned by outside parties.

$0.26 -$2.99

$1.68 -$8.20

-$0.74

$0.28 -$2.36

44.1

1,008 1,296

$3.25

$9.88

$1.10

84.5 3,297 1,775

584 314

81.9

1,529

$0.36

$2.64

9,710 5,229 6,723

339

59.2 1,873 107 135 1,161 (1,026)

103 149 214

887 535

44.1 $0.36

81.9 $1.68 1,647

(65)

59.2 $0.28 199

191

(5,653)

84.5 $0.26 264 142 154 1,426 (1,272)

6,188


Source: RBC Capital Markets estimates, SNL Kagan

Additionally, it may be possible for a league to choose to adjust the number of games it shows on its owned network. For example, the NFL could sell the TV rights for some of the games it telecast on the NFL Network in 2012. While we think the NFL Network might see a reduced affiliate fee per subscriber if it reduces the number of games it shows, this league might still be willing to make such a tradeoff given that the network has already gained fairly wide distribution. The “break-even” point in affiliate fees, if we assume total subscribers remain constant, depends on the dollar amount received by the league. If the league were to receive $700 million a year for the rights to the eight games, such a sale would make sense if it gave up less than $0.71/subscriber/month in affiliate fees.


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Exhibit 95: The NFL Network Could Choose to Sell a Portion of the Games Telecast on the NFL Network in 2012 Impact of Shifting 8 Games Off The NFL Network

Potential Annual Rights Fee $500mm $600mm $700mm $800mm $900mm $1,000mmAverage Subscribers 82mm 82mm 82mm 82mm 82mm 82mmAnnual dollars per subscriber $6.11 $7.33 $8.55 $9.77 $10.99 $12.21Monthly dollars per subscriber $0.51 $0.61 $0.71 $0.81 $0.92 $1.022013E affiliate fee per subscriber $1.68 $1.68 $1.68 $1.68 $1.68 $1.68"Break even" sub. fee if sells 8 game $1.17 $1.06 $0.96 $0.86 $0.76 $0.66

If we assume that the NFL could receive $700mm from selling TV rights for the 8 games it telecast on the NFL Network last year, then such transaction would make sense if they could give up less than $0.71 in affiliate fees per subscriber.


In addition to providing a national channel, each of the leagues offers “out of market” packages through one or multiple MVPDs that distribute local networks feed across the country. These packages offer fans a way to watch games that are not subject to broadcast restrictions in their local area or being broadcast exclusively on a national channel (either because they are being broadcast on a local feed, or because a certain team has rights to the area’s local broadcast and has not sold the distribution rights). While many of the packages are available from numerous MVPDs, NFL Sunday Ticket is only available domestically to DirecTV subscribers. While these services don’t impact the calculation above, which focuses on national content rather than what would typically be only regional content, they are provided here for reference.

Exhibit 96: Access to Local Broadcasts Nationally

Availability Live Games Available Streaming Availability Comments

Blackout restrictions in teams' territories. Excludes games that are shown nationally.

Most major MVPDs

Up to 40 out-of-market regular

season games/week

Blackout restrictions in teams' territories and for games shown nationally.

Not Included (Streaming to mobile, iPad, computer,

and game consoles with additional subscription to NHL Gamecenter)

IncludedBroadband Only Also Available

(mobile, iPad, computer, and game consoles)

Most major MVPDs


season games/week

Blackout restrictions in teams' territories and during national broadcast (Sunday nights and Saturday afternoon/evening).

Exclusively on DirecTV

All out-of-market Sunday games

(regular season)Subject to same blackout restrictions as local broadcasts.

Not Included (Streaming available to mobile, iPad, computer, and game consoles with additional subscription to MLB.TV)

Requires an upgrade to NFL Sunday Ticket Max (available to computer, iPad,

PlayStation, and mobile)

Most of largest MVPDs

(not on Dish Network)


season games/week

Source: optimum.com, indemand.com, directv.com, sportsbusinessdaily.com, nhl.com, RBC Capital Markets


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Appendix: Description Of Our Sports Rights Deals Database And Analytical Methodology Our analysis utilizes the following process:

1. Identify all relevant rights deals (we have identified more than 125 deals between sports leagues/teams).

2. Assume a constant escalator throughout the deal (the escalator is informed by metrics reported in the media, or our conversations with industry sources). If no color is available, we typically assume a mid-single-digit escalator.

3. Sum the rights costs for each channel operator from the data set generated.

4. Assume some growth in all other costs, and determine what revenue would have to grow at in order to maintain a constant margin (from some base year) – to determine the total growth in operating expenses at each company.

Sports Rights Data Set Notes:

• This data set is an aggregation of estimated and assumed rights fees based on news reports and industry contacts.

• Contracts will only be included in this analysis if it is possible to find at least one deal’s size and duration for a specific league or team.

• If a contract can be found, in order to not create a bias in the data, due to availability of information, new and old contracts are assumed if deals cannot be found to cover the entire period of our analysis (2008-2017). Thus we divide our data into two groups:

o Exhibit 97: A decent amount of information was provided or available that allowed us to make a reasonable guess at the contracts’ financials.

o Exhibit 98: Limited or no information was available on the prevailing contract (all we may know is that a particular channel aired a team’s games before their most recent contract was announced). In these cases, we make a “best guess” for a prior contract that we think could provide a realistic set of payments for the other years in our data set (our data set covers payments from 2008-2017). These assumptions are not intended to provide an accurate estimate of what the prior deal or future deal could be. Rather, they are intended only to fill in any years between 2008 and 2017 for which we do not have any data with a reasonable guess at the annual payment in each of those years. In some cases, these best guesses will have one or more components that are actual, and not estimated. It also includes deals where there is a certain level of uncertainly; for example, the recent Time Warner Cable/Dodgers deal is included in this list because it has not yet been approved by the league and the deal structure is unknown.

• Sometimes deals are split between two parties. When information is not available to determine the correct allocation, we assume a 50/50 split.

• For allocation of RSN costs between quarters we assume that the team does not make the playoffs, even though an RSN might have the rights to show some playoff games.

• Because it is wholly owned by the Pac-12, the Pac-12 Network is not included in this analysis.

• Rights expenses are not adjusted for the impact of lockouts in any periods.

Sources used in building our database include:

adweek.com, anheuser-busch.com, azcentral.com, baltimoresun.com, big12sports.com, bizjournals.com, bloomberg.com, charlotte.news14.com, chicagotribune.com, chron.com, cnn.com, collegesportsinfo.com, coloradoan.com, comcast.com, crainsdetroit.com, dallasnews.com, drf.com, espn.com, espn1420.com, espnmediazone.com, forbes.com, goal.com, herald-dispatch.com, latimes.com, lfpress.com, mentalfloss.com, multichannel.com, nbcsports.com, newscorp.com, newsobserver.com, nielsen.com, nola.com, nytimes.com, orlandosentinel.com, sbnation.com, scpr.org, SNL Kagan, sportbusiness.com, sportsbusinessdaily.com, sportsillustrated.cnn.com, sportspromedia.com, thewrap.com, triblive.com, tvbythenumbers.zap2it.com, usatoday.com, utsandiego.com, variety.com, wsj.com, yahoo.com, industry sources, RBC Capital Markets estimates


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Exhibit 97: Summary Of Deals For Which Some Financial Estimates Were Available Network League/Event Deal Starts Deal Ends Rights Fee (mm) Avg. Annual Price (mm)Big Ten Network BIG TEN 2007 2031 $2,800 $112CBS BIG EAST 2007 2012 $54 $9CBS BIG TEN 2006 2010 $90 $18CBS BIG TEN 2011 2016 $72 $12CBS Conference USA 2004 2009 $46 $8CBS Conference USA 2010 2015 $44 $7CBS Mountain West 2006 2011 $65 $11CBS Mountain West 2012 2015 $18 $5CBS NCAA Men's Basketball Tournament 2002 2009 $4,371 $546CBS NCAA Men's Basketball Tournament 2010 2023 $5,400 $386CBS NFL 1998 2005 $4,000 $500CBS NFL 2006 2013 $4,458 $557CBS NFL 2014 2022 $8,280 $920CBS PGA Tour 2007 2012 $1,475 $246CBS PGA Tour 2013 2021 $3,208 $356CBS SEC 2009 2023 $825 $55CBS Super Bowl 2006 2013 $522 $174CBS Super Bowl 2014 2022 $810 $270CBS USTA U.S. Open 2006 2011 $145 $24CBS USTA U.S. Open 2012 2014 $81 $27Comcast EPL 2013 2015 $250 $83Comcast Kentucky Derby 2006 2010 $40 $8Comcast Kentucky Derby 2011 2015 $25 $5Comcast MLS 2012 2014 $30 $10Comcast NASCAR 2001 2006 $600 $100Comcast NBA Portland Trail Blazers 2007 2016 $120 $12Comcast NBA Golden State Warriors - CSN Bay Area 2010 2027 $500 $28Comcast NBA Boston Celtics 2018 2037 $800 $40Comcast NFL 2006 2013 $4,469 $559Comcast NFL 2014 2022 $7,779 $864Comcast NHL 2006 2010 $359 $72Comcast NHL 2011 2020 $2,012 $201Comcast PGA Tour 2007 2012 $1,475 $246Comcast PGA Tour 2013 2021 $3,208 $356Comcast Summer Olympics 2000 2000 $705 $705Comcast Summer Olympics 2004 2004 $794 $794Comcast Summer Olympics 2008 2008 $893 $893Comcast Summer Olympics 2012 2012 $1,181 $1,181Comcast Summer Olympics 2016 2016 $1,226 $1,226Comcast Summer Olympics 2020 2020 $1,418 $1,418Comcast Super Bowl 2006 2013 $355 $178Comcast Super Bowl 2014 2022 $771 $257Comcast Wimbledon 2004 2007 $52 $13Comcast Wimbledon 2008 2011 $48 $12Comcast Winter Olympics 2002 2002 $545 $545Comcast Winter Olympics 2006 2006 $613 $613Comcast Winter Olympics 2010 2010 $820 $820Comcast Winter Olympics 2014 2014 $775 $775Comcast Winter Olympics 2018 2018 $963 $963 Deal start/deal end based on season; a season that runs from 2011-12 would be listed as starting in 2011.

* Deal end date based on expected or actual end date. Thus, if a deal was ended before its expected completion (perhaps one side exercised an option) then (1) the deal end date would be the final season in which the contract was effective, (2) the total rights fee would be based on the total rights fee recognized over the term in which the deal was in effect (say five years) rather than the term it would have been in effect had it run to completion (say 10 years). Average annual price is also based on the average rights fee recognized over this shortened term. ** Average price for Super Bowl based on total cost over number of Super Bowls telecast (rather than years, because broadcasters don’t get the game every year). ***The following deals are assumed to have 50/50 split in costs: NCAA Men’s Basketball Tournament-CBS/Time Warner; Pac-12-Disney/News Corp.; PGA Tournament-Comcast/CBS

Source: RBC Capital Markets estimates, see first page of this Appendix for sources used to build sports rights database


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Exhibit 97 cont.: Summary Of Deals For Which Some Financial Estimates Were Available Network League/Event Deal Starts Deal Ends Rights Fee (mm) Avg. Annual Price (mm)Raycom Sports ACC 2001 2010 $300 $30Univision MLS 2007 2014 $79 $10Cox MLB San Diego Padres 2002 2011 $150 $15Cox NBA New Orleans Hornets 2002 2011 $100 $10DTV MLB Pittsburgh Pirates - Root Sports Pittsburgh 2010 2019 $203 $20DTV MLB Seattle Mariners - FS Northwest 2011 2020 $450 $45DTV NFL 2006 2010 $3,500 $700DTV NFL 2011 2014 $4,000 $1,000TWC MLS Galaxy - TWC SportsNet 2012 2021 $55 $6TWC NBA LA Lakers - TWC SportsNet 2012 2031 $3,500 $175YES MLB NY Yankees - YES 2013 2042 $5,647 $188YES NBA Brooklyn Nets - YES 2002 2010 $67 $7YES NBA Brooklyn Nets - YES 2011 2022 $220 $20NWSA BIG TEN 2011 2016 $145 $24NWSA BIG12 2008 2011 $78 $20NWSA BIG12 2012 2024 $1,170 $90NWSA Bowl Championship Series 2006 2009 $330 $83NWSA Conference USA 2011 2015 $35 $7NWSA EPL 2007 2009 $29 $10NWSA EPL 2010 2012 $80 $27NWSA MLB 2001 2006 $1,364 $227NWSA MLB 2007 2013 $1,426 $204NWSA MLB 2014 2021 $4,000 $500

NWSAMLB Texas Rangers and NHL Dallas Stars - Fox For OTA Rights 2000 2009 $250 $25

NWSAMLB Texas Rangers and NHL Dallas Stars - FS Southwest 2000 2014 $300 $20

NWSA MLB Dodgers 2002 2013 $350 $29NWSA MLB Los Angeles Angels of Anaheim - FS West 2006 2011 $270 $45NWSA MLB Arizona Diamondbacks - FS Arizona 2008 2015 $250 $31NWSA MLB Detroit Tigers - FS Detroit 2008 2017 $500 $50NWSA MLB St. Louis Cardinals - FS Midwest 2008 2017 $151 $15NWSA MLB San Diego Padres 2012 2031 $1,200 $60NWSA MLB Los Angeles Angels of Anaheim - FS West 2012 2031 $3,000 $150NWSA MLB Cleveland Indians - SportsTime Ohio 2013 2022 $400 $40NWSA MLB Texas Rangers - FS Southwest 2015 2034 $3,000 $150NWSA MLS 2011 2011 $6 $6NWSA NASCAR 2001 2006 $1,200 $200NWSA NASCAR 2007 2014 $1,760 $220NWSA NASCAR 2015 2022 $2,400 $300NWSA NBA Miami Heat - FS Florida 2004 2014 $248 $23NWSA NBA Detroit Pistons - FS Detroit 2008 2017 $250 $25NWSA NBA Charlotte Bobcats - Fox Sports South 2010 2019 $109 $11NWSA NBA New Orleans Hornets - FS New Orleans 2012 2021 $100 $10NWSA NFL 1998 2005 $4,400 $550NWSA NFL 2006 2013 $5,152 $644NWSA NFL 2014 2022 $9,140 $1,016NWSA NHL Detroit Red Wings - FS Detroit 2008 2017 $250 $25NWSA NHL LA Kings - FS West 2012 2023 $250 $21NWSA PAC-10 2007 2011 $97 $19NWSA PAC-12 2012 2023 $1,500 $125NWSA Super Bowl 2006 2013 $548 $274NWSA Super Bowl 2014 2022 $850 $283NWSA Super Bowl 2005 2005 $0 $0NWSA UFC 2012 2018 $630 $90NWSA University of Florida-Sun Sports 2008 2017 $100 $10NWSA World Cup 2018 2018 $203 $203 Deal start/deal end based on season; a season that runs from 2011-12 would be listed as starting in 2011.

* Deal end date based on expected or actual end date. Thus, if a deal was ended before its expected completion (perhaps one side exercised an option) then (1) the deal end date would be the final season in which the contract was effective, (2) the total rights fee would be based on the total rights fee recognized over the term in which the deal was in effect (say five years) rather than the term it would have been in effect had it run to completion (say 10 years). Average annual price is also based on the average rights fee recognized over this shortened term. ** Average price for Super Bowl based on total cost over number of Super Bowls telecast (rather than years, because broadcasters don’t get the game every year). ***The following deals are assumed to have 50/50 split in costs: NCAA Men’s Basketball Tournament-CBS/Time Warner; Pac-12-Disney/News Corp.; PGA Tournament-Comcast/CBS

Source: RBC Capital Markets estimates, see first page this Appendix for sources used to build sports rights database


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Exhibit 97 cont: Summary Of Deals For Which Some Financial Estimates Were Available Network League/Event Deal Starts Deal Ends Rights Fee (mm) Avg. Annual Price (mm)DIS ACC 2004 2010 $258 $37DIS ACC 2011 2011 $124 $124DIS ACC 2012 2026 $3,600 $240DIS BIG EAST 2007 2013 $200 $29DIS BIG TEN 2007 2016 $1,000 $100DIS BIG12 2008 2011 $221 $55DIS BIG12 2012 2024 $1,430 $110DIS Bowl Championship Series 2010 2013 $495 $124DIS Conference USA 2006 2010 $22 $4DIS IZOD IndyCar Series 2009 2012 $57 $14DIS IZOD IndyCar Series 2013 2018 $85 $14DIS Longhorn Network 2011 2030 $300 $15DIS MLB 2001 2006 $2,048 $341DIS MLB 2007 2013 $350 $50DIS MLB 2007 2013 $2,142 $306DIS MLB 2014 2021 $5,328 $666DIS MLS 2007 2014 $64 $8DIS NASCAR 2007 2014 $2,160 $270DIS NBA 2002 2007 $2,399 $400DIS NBA 2008 2015 $3,880 $485DIS New Bowl Championship Series 2014 2025 $5,640 $470DIS NFL 1998 2005 $9,200 $1,150DIS NFL 2006 2013 $8,800 $1,100DIS NFL 2014 2021 $15,062 $1,883DIS NHL 1999 2003 $600 $120DIS NHL 2004 2005 $140 $70DIS Orange Bowl 2014 2025 $440 $37DIS PAC-10 2006 2011 $53 $9DIS PAC-10 2007 2011 $125 $25DIS PAC-12 2012 2023 $1,500 $125DIS Rose Bowl 2006 2013 $300 $38DIS Rose Bowl 2014 2025 $640 $53DIS SEC 2009 2023 $2,250 $150DIS Sugar Bowl 2014 2025 $640 $53DIS Super Bowl 2005 2005 $142 $142DIS USTA U.S. Open 2009 2014 $140 $23DIS Wimbledon 2008 2011 $38 $10DIS Wimbledon 2012 2023 $480 $40DIS World Cup 2010 2010 $45 $45DIS World Cup 2014 2014 $55 $55TWX MLB 2007 2013 $1,040 $149TWX MLB 2014 2021 $2,400 $300TWX NASCAR 2001 2006 $600 $100TWX NASCAR 2007 2014 $668 $84TWX NBA 2002 2007 $2,201 $367TWX NBA 2008 2015 $3,560 $445TWX NCAA Men's Basketball Tournament 2010 2023 $5,400 $386MSG NHL New York Islanders - MSG 1999 2030 $640 $20VIAB UFC 2009 2011 $105 $35 Deal start/deal end based on season; a season that runs from 2011-12 would be listed as starting in 2011.

* Deal end date based on expected or actual end date. Thus, if a deal was ended before its expected completion (perhaps one side exercised an option) then (1) the deal end date would be the final season in which the contract was effective, (2) the total rights fee would be based on the total rights fee recognized over the term the deal was in effect (say five years) rather than the term it would have been in effect had it run to completion (say 10 years). Average annual price is also based on the average rights fee recognized over this shortened term. ** Average price for Super Bowl based on total cost over number of Super Bowls telecast (rather than years, because broadcasters don’t get the game every year). ***The following deals are assumed to have 50/50 split in costs: NCAA Men’s Basketball Tournament-CBS/Time Warner; Pac-12-Disney/News Corp.; PGA Tournament-Comcast/CBS

Source: RBC Capital Markets estimates, see first page of this Appendix for sources used to build sports rights database


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Exhibit 98: Summary Of “Best Guesses” Made When Deal Financials Were Available For Part Of But Not For The Entire Term Of Our Analysis

In some cases, these estimates reflect partial reporting of deal financials or duration. In other cases, these assumptions are a guess to fill in rights fees for 2008-2017 at a reasonable rate. These assumptions are in no way intended to reflect our estimate of the deals’ total duration, start, or end date (although in some cases we do our best to have them do so, or the estimates reflect partial or vague information available in the press), but rather to provide a estimate of the actual payment in the specific years between 2008 and 2017 only. Network League/Event Deal Starts Deal Ends Rights Fee (mm) Avg. Annual Price (mm)CBS BIG EAST 2013 2018 $92 $15CBS BIG TEN 2017 2022 $108 $18CBS Conference USA 2016 2021 $74 $12CBS Mountain West 2016 2021 $47 $8CBS SEC (1) 2005 2008 $210 $70CBS USTA U.S. Open 2015 2017 $93 $31NBC EPL 2016 2018 $375 $125NBC Kentucky Derby 2016 2020 $25 $5NBC MLS 2015 2018 $60 $15NBC NBA Portland Trail Blazers 2002 2006 $27 $5NBC NBA Golden State Warriors 2005 2009 $45 $9NBC NBA Boston Celtics - SportsNet New England 2005 2017 $260 $20Univision MLS 2015 2018 $59 $15DTV MLB Seattle Mariners 2006 2010 $100 $20DTV MLB Pittsburgh Pirates 2007 2009 $27 $9DTV NFL 2015 2018 $5,714 $1,429TWC MLB Dodgers (4) 2014 2038 $7,500 $300YES MLB NY Yankees - YES 2002 2012 $785 $71NWSA BIG TEN 2017 2022 $218 $36NWSA Conference USA 2016 2021 $71 $12NWSA MLB Arizona Diamondbacks 2016 2035 $1,563 $78NWSA MLB Los Angeles Angels of Anaheim 2005 2005 $20 $20NWSA MLB Pittsburgh Pirates 2005 2006 $16 $8NWSA MLB Detroit Tigers 2005 2007 $33 $11NWSA MLB Arizona Diamondbacks 2005 2007 $42 $14NWSA MLB St. Louis Cardinals - FS Midwest 2005 2007 $20 $7NWSA MLS Galaxy - FS West 2005 2011 $4 $1NWSA NBA Charlotte Bobcats 2008 2009 $17 $9NWSA NBA Miami Heat (5) 2015 2029 $1,350 $90NWSA NBA Detroit Pistons 2005 2007 $17 $6NWSA NBA LA Lakers 2005 2011 $187 $27NWSA NHL Dallas Stars 2015 2024 $250 $25NWSA NHL Detroit Redwings 2005 2007 $17 $6NWSA NHL LA Kings 2005 2011 $60 $9NWSA University of Florida-Sun Sports 2005 2007 $21 $7DIS BIG EAST 2014 2019 $291 $49DIS BIG TEN 2017 2022 $900 $150DIS BIG12 2006 2007 $33 $17DIS BIG12 2006 2007 $96 $48DIS MLS 2015 2018 $48 $12DIS NASCAR (3) 2015 2022 $2,945 $368DIS NBA (2) 2016 2023 $5,432 $679DIS USTA U.S. Open 2015 2020 $161 $27TWX NASCAR (3) 2015 2022 $911 $114TWX NBA (2) 2016 2023 $4,984 $623 Deal start/deal end based on season; a season that runs from 2011-12 would be listed as starting in 2011. 1SEC/CBS deal listed here also believed to include payments made to Raycom. 2NBA deal implies a first year step-up of 8%. 3New NASCAR deals assume same term and same step-up in average annual rate that is reported for the Fox renewal starting in 2015 4Dodgers deal included in this section because it has not yet been approved by the league, and details of deal structure have not been made available. 5Annual value of Miami Heat deal based on long-term value estimate according to forbes.com Source: RBC Capital Markets estimates, see first page of this Appendix for sources used to build sports rights database


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Exhibit 99: Sample Of Assumed Quarterly Weightings For Distributing Rights Costs Between Quarters League/Event Q1 Q2 Q3 Q4NFLRegular Season 0.0% 0.0% 23.5% 76.5%Regular Season + Post Season 15.0% 0.0% 20.0% 65.0%Super Bowl 100.0% 0.0% 0.0% 0.0%NBARegular Season 50.0% 15.4% 0.0% 34.6%Regular Season + Post Season 38.2% 35.3% 0.0% 26.5%MLBRegular Season 0.0% 50.0% 50.0% 0.0%Regular Season + Post Season 0.0% 43.3% 43.3% 13.3%NHLRegular Season 48.1% 3.7% 0.0% 48.1%Regular Season + Post Season 36.1% 27.8% 0.0% 36.1%MLSRegular Season 11.8% 38.2% 38.2% 11.8%Regular Season + Post Season 10.3% 33.3% 33.3% 23.1%NASCARRegular Season + Post Season 15.4% 33.3% 33.3% 17.9%NCAA FootballRegular Season 0.0% 0.0% 35.7% 64.3%Non BCS/playoff bowl games 0.0% 0.0% 0.0% 100.0%Old BCS system 100.0% 0.0% 0.0% 0.0%New BCS playoffs 85.0% 0.0% 0.0% 15.0%NCAA BasketballRegular Season 55.6% 0.0% 0.0% 44.4%Conf. Tournaments and NCAA Tournamen 75.0% 25.0% 0.0% 0.0%NCAA Tournament Only 100.0% 0.0% 0.0% 0.0%English Premier LeagueFull Season 32.5% 17.5% 17.5% 32.5%WimbledonFull Schedule 0.0% 25.0% 75.0% 0.0%PGA TourFull Schedule 27.1% 27.1% 27.1% 18.8%IZOD IndyCar SeriesFull Schedule 4.0% 52.0% 44.0% 0.0%Blended NCAA Football/BasketballBlended Regular Seasons 18.2% 0.0% 24.0% 57.8%Generic college conference schedule 18.2% 0.0% 24.0% 57.8% Typically these weightings are based on the number of weeks of the season or event that occur in a given quarter. Source: RBC Capital Markets estimates


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Ticker CBS DIS DISCA NWSA SNI TWX VIAB

CompanyCBS

CorporationWalt Disney

Discovery

Comm.

News

Corporation

Scripps

NetworksTime Warner Viacom

Price as of: 2013/02/01

Class A Shares N/A $54.59 $70.31 $28.16 $62.15 $50.88 $62.30

Class B Shares $42.41 N/A $69.90 $28.61 N/A N/A $60.54

Class C Shares N/A N/A $64.19 N/A N/A N/A N/A

ENT. VALUE CALCULATION

Total Diluted Shares Outstanding 658,376 1,796,018 378,956 2,323,563 152,989 970,063 491,492

Diluted Equity Market Cap $27,921,725 $98,044,604 $25,684,414 $65,790,863 $9,508,260 $49,356,788 $29,844,968

Total Enterprise Value $33,409,725 $108,444,604 $28,388,414 $61,550,863 $10,374,720 $64,015,788 $37,728,968

KEY FINANCIAL METRICS

Net Revenues

2010A 14,059,800 39,040,000 3,783,000 33,082,000 2,067,162 26,888,000 13,245,000

2011A 14,245,000 40,956,000 4,235,000 34,152,000 2,127,184 28,974,000 15,038,000

2012E 14,773,672 42,739,112 4,513,940 34,125,100 2,314,920 28,843,781 13,249,000

2013E 15,534,360 45,157,201 5,381,930 35,931,026 2,503,378 30,148,526 14,064,564

2012-13 Growth 5% 6% 19% 5% 8% 5% 6%

EBITDA

2010A 2,378,600 8,855,000 1,517,000 5,763,000 873,836 6,342,000 3,504,000

2011A 3,077,000 9,716,000 1,819,000 6,509,000 987,156 6,831,000 3,948,000

2012E 3,508,079 10,583,033 2,008,731 6,684,793 1,048,719 6,960,536 3,913,000

2013E 3,815,169 12,005,863 2,380,576 7,701,015 1,147,249 7,407,464 4,296,991

2012-13 Growth 9% 13% 19% 15% 9% 6% 10%

EPS

2010A $1.12 $2.28 $1.74 $1.15 $2.39 $2.41 $2.86

2011A $1.90 $2.64 $2.31 $1.31 $2.86 $2.89 $3.81

2012E $2.52 $3.04 $2.66 $1.53 $3.37 $3.20 $4.06

2013E $2.93 $3.56 $3.46 $1.76 $3.76 $3.69 $4.86

2012-13 Growth 16% 17% 30% 15% 12% 15% 20%

FCF/Share

2010A $1.60 $1.69 $1.97 $1.11 $2.68 $2.63 $3.28

2011A $2.39 $2.16 $3.08 $1.31 $2.80 $3.07 $3.94

2012E $2.97 $2.48 $3.17 $1.48 $3.41 $3.41 $4.37

2013E $3.37 $3.04 $3.64 $1.78 $3.80 $3.88 $4.96

2012-13 Growth 13% 23% 15% 20% 11% 14% 13%

TRADING/VALUATION MULTIPLES Average

EV/2010A EBITDA 14.0x 12.2x 18.7x 10.7x 11.9x 10.1x 10.8x 12.6x

EV/2011A EBITDA 10.9x 11.2x 15.6x 9.5x 10.5x 9.4x 9.6x 10.9x

EV/2012E EBITDA 9.5x 10.2x 14.1x 9.2x 9.9x 9.2x 9.6x 10.3x

EV/2013E EBITDA 8.8x 9.0x 11.9x 8.0x 9.0x 8.6x 8.8x 9.2x

2012-13 EV/EBITDA To Growth 1.00 0.67 0.64 0.53 0.96 1.35 0.89

Price/2010A Earnings 38.0x 23.9x 40.5x 24.6x 26.0x 21.1x 21.2x 27.9x

Price/2011A Earnings 22.4x 20.7x 30.4x 21.4x 21.7x 17.6x 15.9x 21.4x

Price/2012E Earnings 16.8x 17.9x 26.5x 18.4x 18.5x 15.9x 14.9x 18.4x

Price/2013E Earnings 14.5x 15.3x 20.3x 16.0x 16.5x 13.8x 12.5x 15.6x

2012-13 P/E To Growth 0.90 0.90 0.67 1.09 1.41 0.91 0.64

Price/2010A FCF 26.6x 32.3x 35.8x 25.3x 23.2x 19.3x 18.5x 25.9x

Price/2011A FCF 17.7x 25.3x 22.9x 21.5x 22.2x 16.6x 15.4x 20.2x

Price/2012E FCF 14.3x 22.0x 22.2x 19.0x 18.2x 14.9x 13.9x 17.8x

Price/2013E FCF 12.6x 17.9x 19.3x 15.8x 16.4x 13.1x 12.2x 15.3x

2012-13 FCF/Share To Growth 0.94 0.79 1.29 0.78 1.44 0.95 0.91

Figures in thousands, except per share data. All multiples based on calendar year estimates/consensus

FCF excludes changes in working capital and related items due to the high level of volatility in some large-cap media companies

Source: Company reports, RBC Capital Markets estimates


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Required Disclosures

Conflicts Disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

RBC Capital Markets, LLC makes a market in the securities of CBS Corp. and may act as principal with regard to sales or purchasesof this security.

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for TheWalt Disney Company in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from TheWalt Disney Company in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of The Walt Disney Company and may act as principal with regard tosales or purchases of this security.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from The Walt Disney Company during the past 12 months. During this time, a member company ofRBC Capital Markets or one of its affiliates provided non-securities services to The Walt Disney Company.

RBC Capital Markets is currently providing The Walt Disney Company with non-securities services.

RBC Capital Markets has provided The Walt Disney Company with investment banking services in the past 12 months.

RBC Capital Markets has provided The Walt Disney Company with non-securities services in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of News Corporation and may act as principal with regard to sales orpurchases of this security.

RBC Capital Markets, LLC makes a market in the securities of Time Warner Inc. and may act as principal with regard to sales orpurchases of this security.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

For the calendar quarter ended September 30, 2012, David Bank did not attest in the time frame required under Regulation AC that (i)the views expressed by the author in all public appearances during such calendar quarter actually reflected the author's own personalviews at that time about any and all of the subject securities or issuers discussed, and (ii) no part of the author's compensation was, is,or will be, directly or indirectly, related to the specific recommendations or views expressed by the author in such public appearances;provided, however, that the author has, as of the date of this report, affirmatively made the foregoing attestations for such calendarquarter.

Explanation of RBC Capital Markets Equity Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned toa particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst'ssector average.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with afavorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Qualifiers (any of the following criteria may be present):Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; nosignificant cash flow/financing concerns over coming 12-24 months; fairly liquid.Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; maynot be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.


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Distribution of Ratings

For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).

Distribution of RatingsRBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 791 50.64 281 35.52HOLD[SP] 701 44.88 180 25.68SELL[U] 70 4.48 8 11.43

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q18

16

24

32

40

48

2010 2011 2012 2013

07/05/11I:OP:33

10/13/11OP:31

01/17/12OP:32

02/16/12OP:34

03/14/12TP:38

05/02/12TP:40

10/18/12TP:39

11/08/12TP:41

01/16/13TP:45

Rating and Price Target History for: CBS Corp. as of 02-01-2013 (in USD)

Legend:

TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated; NA: Not Available;

RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was removed from a recommended list.

Created by BlueMatrix

Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q116

24

32

40

48

56

2010 2011 2012 2013

04/07/10OP:38

08/11/10OP:39

11/12/10OP:41

01/21/11OP:44

02/09/11OP:48

08/10/11OP:43

10/13/11OP:40

11/11/11OP:41

01/17/12OP:43

04/16/12OP:45

05/09/12OP:50

07/19/12OP:52

08/08/12OP:53

11/09/12OP:54

01/25/13OP:56

Rating and Price Target History for: The Walt Disney Company as of 02-01-2013 (in USD)

Legend:





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Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q15

10

15

20

25

30

2010 2011 2012 2013

05/04/10OP:18

03/18/11OP:20

04/07/11OP:21

12/29/11TP:21

01/17/12TP:23

03/02/12OP:23

06/29/12OP:26

10/18/12OP:29

01/25/13OP:33

Rating and Price Target History for: News Corporation as of 02-01-2013 (in USD)

Legend:




Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q116

24

32

40

48

56

2010 2011 2012 2013

04/07/10OP:36

05/05/10OP:37

08/04/10OP:38

01/21/11OP:40

02/02/11OP:41

02/28/11RL 7 On

02/08/12OP:42

07/19/12OP:44

08/02/12OP:45

10/18/12OP:48

01/14/13OP:50

Rating and Price Target History for: Time Warner Inc. as of 02-01-2013 (in USD)

Legend:




References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by a business unit of the Wealth Management Division of RBC Capital Markets, LLC. These RecommendedLists include a former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio:Large Cap (RL 7), Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL9), and the Guided Portfolio:ADR (RL 10). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off'means the date a security was removed from a Recommended List.

Conflicts Policy

RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. Toaccess our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdfor send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, SouthTower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of Research and Short-Term Trade Ideas

RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regardto local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensure eligibleclients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be


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done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contactyour investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. RBC CapitalMarkets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color andcommentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or otherresearch reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com. A Short-Term Trade Idea reflectsthe research analyst's directional view regarding the price of the security of a subject company in the coming days or weeks, based onmarket and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our publishedresearch reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result ofthe differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject company that isconsidered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity as a result of temporaryselling pressure in the market; conversely, the security of a subject company that is rated a long-term 'Outperform' could be consideredsusceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings, nor are they part of any ratings system,and RBC Capital Markets generally does not intend, nor undertakes any obligation, to maintain or update Short-Term Trade Ideas.Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been tailored to individual investorcircumstances and objectives, and investors should make their own independent decisions regarding any Short-Term Trade Ideasdiscussed therein.

Analyst Certification

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of thesubject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial ServicesLLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties oforiginality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no eventshall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive,consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada,Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation orwarranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness.All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and areprovided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. Thismaterial is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons whoreceive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor ifyou are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analystcompensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province inCanada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may beoffered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBCCapital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/or internal compliance policies. If this is thecase, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies.RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstances should beconstrued as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of asecurities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, acceptsany liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in thisdocument may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents:This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which acceptsresponsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a brokeror dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and placeorders with RBC Capital Markets, LLC.To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution inOntario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and thatwishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC DominionSecurities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized and regulated by Financial Services Authority ('FSA'), in connection withits distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FSA.However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in theUnited Kingdom.To Persons Receiving This Advice in Australia:This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared


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for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting onthis material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition orpossible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product andconsider that document before making any decision about whether to acquire the product.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets(Hong Kong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institutionunder the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, orneeds of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC InvestmentServices (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong Kong Branch at17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).To Singapore Residents:This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities grantedoffshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and does not takeinto account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing anyproduct. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance.If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada (Asia) Limited.To Japanese Residents:Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financialinstruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

.® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.Copyright © RBC Capital Markets, LLC 2013 - Member SIPC

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