Cable TV networks feel pressure of programming costs

Inflation in programming costs is the new reality for cable networks.

No longer able to simply stock their channels with reruns of "Seinfeld," "Golden Girls" and old movies, cable programmers have ratcheted up spending in the last five years to distinguish themselves with marquee franchises such as ESPN's "Monday Night Football" or provocative original shows including AMC's "Mad Men" and FX's "Sons of Anarchy." But while the spending increases are staggering, cable channels remain the most profitable divisions of many media conglomerates, including Walt Disney Co., NBCUniversal, News Corp. and Time Warner. ESPN, for example, is Disney's biggest profit engine and News Corp.'s cable channels deliver more than half of that company's operating income. Viacom Inc.'s children's network, Nickelodeon, has the industry's highest cash flow margin — a measure of how efficiently a company converts its sales dollars to cash — at nearly 65%, SNL Kagan's report found. The margin for financial news network CNBC approaches 60%. So far, rising costs have been offset by rising returns. Over the last decade, cable networks have increased their advertising revenue an average of 9% a year, according to SNL Kagan, which reported that annual programming expenses over the last five years have risen at the same rate. Last year, cable networks collected $22.3 billion in ad revenue and nearly $25 billion in fees from their affiliates and cable and satellite television operators such as Time Warner Cable and DirecTV. That brought cable networks' total revenue in 2010 to nearly $48 billion.

But Wall Street is concerned that the media industry will be unable to sustain its high margins.