The Writers’ Guild strike has definitely gone on longer than anticipated and a NT resolution is not anticipated. However, there is precedence for the strike lasting more than six months (See 1988), which would put an end date in May ’08.

If the strike continues through that date, then TV network EBIT forecasts should drop by around 10%, on average. However, the impact on total conglomerate EBIT growth would be a percentage point at most on average because networks aren’t meaningful contributors to conglomerate EBIT.

The silver lining here is that the studios may use the strike as an excuse to finally reduce bloated overhead costs at the network and EBIT margins at the network would actually IMPROVE if the strike lasted through the Spring.

The LT impact of the strike is negative though as it could accelerate the transition from a network-model to a digitally-distributed model. Once a viewer leaves, it will be hard to get him back, and this will most likely create revenue dislocations while during the model transition period, which could last multiple years.

Ticker specific: earnings would be hit significantly at CBS, slightly at DIS & NWS, and barely at VIA & TWX. If the strike continues then the most likely scenario is that ’08 TV EBIT estimates drop by 10% on average.

The near-term earnings risk is in those companies with exposure to original, scripted television programming whether on broadcast or cable television. This typically represents 50% of the revenue at a broadcast network and 15% at a cable network. Alternative programming (reality, animated, game shows, news, and sports - the ones Doug mentioned) are not governed by the writers’ guild and are therefore unaffected. I think that its silly to say Americans are tired of this stuff - you may be, but ratings for most sports and reality TV shows is at all time highs. American Idol has increased its ratings every year, as has Dancing with the Stars, survivor might be an example of one that is slipping but its on its 15th season - still going very strong though. The truth is that with the exception of a few major dramas (Grey's Anatomy, Desperate Housewives, House, Dirty Sexy Money, and a small handful of others) that network shows lack nearly the importance they did in any previous strike. Reality TV is here to stay and is a producers dream - obviously some reality TV shows are better than others, but this is no different in any other medium as there are bad movies and bad TV shows as well. Invnetory is burning out though as most networks have enough scripts written to last through February.

The strike should impact the latter half of the 07-08 season and the first half of the 08-09 season. Networks likely will not be able to put alternative programming (reality, news, etc) into the re-run slots. CPMs and ratings drop by 20% because on prime-time re-runs are generally 20% lower than first-runs. Finally, networks get some leverage from lower production and overhead costs

CBS has the most at risk in the case of a prolonged strike given the lack of diversity in its revenue stream. Its EBIT growth will be close to flat. DIS’ total EBIT growth would still be in the high single digit territory, and NWS’ growth rate would be hit by just 50bps. TWX and VIA have very little scripted programming, so the earnings impact would likely not be meaningful.

The fear of the digital transition is driving the strike and there is just one issue on the table. Currently, the guilds and the studios have agreed to give a revenue share of any product originally written for TV or film that is later monetized on the internet. However, writers also want a revenue share of any programming that is written specifically for the internet, not for any related television show or film. Today, there are very few examples of content produced by studios that is only for the internet because the internet-only revenue model does not support the typical studio production costs. However, the guilds’ objective with this demand is to avoid disintermediation over the long-term as television and film content migrates slowly away from the current network distribution models into an all digital one. Studios are resistant to this demand because it puts them at a cost disadvantage to non-Hollywood internet content producers (like Google, Facebook, or even Yahoo).

A typical network P&L demonstrates many levers can be pulled to offset revenue blow from lost content. Many shows have shut down production due to the strike and, as mentioned, the networks likely will only have enough first-run material to last through mid-to-late February. A few networks are already taking measures to reduce overhead costs (witness for example, the firing of the production staff of all of the late-night television shows), and additional measures will be taken should the strike drag on. From an earnings standpoint, the first few months of re-runs (meaning March-April ’08) will have a significant negative impact, but as the strike drags on and the networks adjust programming offerings and cost structures, the net impact would be muted over a 12-month time period. Prime Time represents 50-55% of the revenue, but only 30-35% of EBIT given the bloated cost structure of original scripted programming. In addition, most of the costs are variable and directly related to shows in production. If the size and the scope of those shows is dramatically reduced, then so should the cost structure. Earnings impact of the strike depend on how long it lasts. The last writers’ strike in 1988 lasted 5.5 months. If the current strike follows suit, that would put us in mid-May ’08, just in time for the actors’ strike.

I think there are three phases to how this plays out:

First, If strike lasts through Dec. ’07, the ‘07/’08 TV season is in re-runs beginning in February ’08.

Second, If strike lasts through May ‘08, the ‘08/’09 TV season will be in re-runs beginning in September ’08.

Third, If strike lasts through Fall ’08, there will be fewer tentpole movies in ‘09, but the Movie studio impact is unlikely and has precedent as actually being a positive for Box Office performance and as well as for the lagged DVD sell through as production ramps up drastically in the year rolling up and then once they end the strike the studios have materially more movies for an 18 month period than they do in a normal environment. Also, there is still enough Wall Street money in Hollywood right now through 2010 and these guys are going to want movies made - they will all lose money, but at least they can take their girlfriends to the premiers and tell their buddies they financed the last James Cameron movie.

Movie studios won’t be impacted unless the strike carries over through Fall ’08, when typically production begins for the Summer ’09 tentpole films. Without scripts, production cannot begin. TWX would be the most impacted if tentpole production halted as most of its films are of the tentpole variety and they have no animation facilities to pick up the slack. DIS would be the least impacted as most of its films are animated, and its studio is the smallest of the group anyway. In addition, the theater stocks would suffer as a lack of movies makes box office performance very hard - NCMI would likely not suffer much unless attendance was off by something drastic like and they were required to do alot of make goods.

Overall, I would say the writers and actors collectively cave in by May / June as the composition of the writers guild is such that only 5% to maybe 10% are extremely rich and could care less how long it takes. In contrast, the remaining writers / actors are poor unworking people and would likely love to go back to work sooner than later - especially knowing the spending patterns of these people.