Neil Macker: We recently published a report looking at the television ecosystem and outlining a four-part moat framework for media companies. As a result of this work, we've downgraded Discovery Communications (DISCA) to a narrow moat from wide moat. In our report, we looked at some of the challenges facing the media industry, such as cord-cutting, and how the media industry can evolve to tackle these challenges.
We've examined trends facing the industry, including declining television penetration and lower viewership by young adults, along with some common reasons given for these problems such as pricing. We believe that the industry is ripe for innovation on the distribution side and believe that content owners should work with new distributors such as Apple and Sony to protect the value of the bundle to consumers. Based on this work, we've created a four-part framework for evaluating the competitive positioning of media firms within the industry.
One important moat driver for these companies is the ability to produce a variety of programming across a number of different sectors. Companies such as Walt Disney (DIS), Time Warner (TWX), and Twenty-First Century Fox (FOX) are the best at doing this. Other drivers in the framework include a strong portfolio of network brands, lower exposure to cyclical advertising revenue, and larger exposure to the faster-growing international markets. Based on this framework, we've lowered our moat rating for Discovery Communications and are reiterating our wide moat ratings for Disney, Time Warner, and Twenty-First Century Fox.