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What Recession: Premium Cable Channels Continue To Add Subs

This story was written by Rory Maher.
As we reported in last week's earnings recap, cable operators and networks are faring better than ad-driven media companies in the recession, thanks to subscription revenue. But what about premium cable channelssurely they must be taking a hit as consumers look for monthly expenses to pare back on, right? Actually, the opposite is happening. Recent 10-K filings and financial data from research company SNL Kagan show that some of the larger premium cable networks, including HBO, Showtime and Starz, are adding subscribers even in the thick of the downturn. Another sign of the bullishness around premium cable: Viacom (NYSE: VIA), Lionsgate and Metro-Goldwyn-Mayer are launching a new premium channel called Epix, which will carry original TV series, concerts and movies. Below are snapshots that show the recent growth at several premium channels:

Profits at HBO and Cinemax (Time Warner (NYSE: TWX) reports the two networks together) grew more than 10 percent during the fourth quarter of 2008, and the networks ended the year with their highest subscriber total ever40.9 million. Their longer-term contracts could mean a lag in results, causing weakness that many media companies experienced in the fourth quarter to pop up instead this year. But Time Warner said it expects double-digit profit growth in 2009.

Subscriber revenue at Showtime Networks was up 6 percent during the fourth quarter, and that momentum appeared to be continuing into this year: Morgan Stanley estimates revenue will grow another 6 percent in 2009.

Starz Entertainment revenue increased 8 percent during the fourth quarter, fueled by a 7 percent increase in the number of subscribers versus the same period in 2007; Encore's subscriber base was up by 8 percent during that period.

More after the jump on the implications for the networks and their parent companies.

The stakes aren't smallthe largest premium cable networks and their parent companies make serious money from their subscribers:

HBO and Cinemax generate about $3 billion in annual subscription revenue, or roughly $6.25 per subscriber, after splitting some of this with distributors. Much of this turns into profit, with the two networks generating profit margins in the 36 percent range. HBO generates additional revenue of about $700,000 from pay-per-view services, further boosting its results.

Showtime Networks, which includes The Movie Channel and Flix and is owned by CBS Corp. (NYSE: CBS), generates about $1.1 billion in annual revenue, with an additional $600,000 from pay-per-view services. Its average revenue-per-subscriber is $1.68, and its profit margins are about 30 percent.

Starz/Encore is owned by Liberty Entertainment and generates about $1.9 billion in revenue, all from subscriber fees of about $2.04 per head. Profit margins at Starz/Encore are about 32 percent.

If the economy gets worse and layoffs continue, more consumers may start to rethink the expense of premium cable. But for now, they don't seem to be torn over whether to pony up the extra $10 to $20 a month. 

By Rory Maher