JP Morgan PARA Media - Initiating Entertainment Coverage of DIS - TWX - VI

This document is being provided for the exclusive use of ASIA SECURITIES at ASIA
North AmericaSECURITIES
Equity Research
PRIVATE LIMITED. 07 October 2011
Media
Initiating Entertainment Coverage of DIS, TWX, VIAb,
DISCA
We are initiating coverage of the Entertainment sector with Overweight ratings on Media
Disney, Time Warner, and Viacom and a Neutral rating on Discovery. We are AC
Alexia S. Quadrani
generally positive on the outlook for the group, particularly those operating (1-212) 622-1896
leading cable networks, and find valuations attractive here at near-trough levels alexia.quadrani@jpmorgan.com
historically. We are mindful of the rapid changes in content distribution and
Townsend Buckles, CFA, CPA
consumption that threaten traditional monetization channels; however, we believe (1-212) 622-0461
owners of unique, high value content will maintain the leverage to drive attractive townsend.buckles@jpmorgan.com
returns on investment.
Monica DiCenso, CPA
(1-212) 622-0473
 Advertising growth likely to moderate but still remain healthy in 2012.
monica.dicenso@jpmorgan.com
While we do not expect the robust national ad growth to continue at current
levels, we also do not anticipate the same correction we saw in 2008/09. We Caroline Anastasi
(1-212) 622-0934
project the ad market will grow 3.5% in the US and 4% globally in 2012.
caroline.e.anastasi@jpmorgan.com
 Cable is an enduring high growth medium with strong profitability. J.P. Morgan Securities LLC
International expansion also still has a long way to go, suggesting good growth
for cable businesses going forward. Dual revenue streams provide some
protection in an uncertain macro environment.
 Content is still king in a new media world. A proliferation of backend digital

distributors has increased the demand for quality content. We believe much of
the headwind of declining DVD sales may now be made up from high margin
digital content deals, improving the outlook for studios.
 Challenges and uncertainties are present. An unsettled global economic

environment and so many changes in the consumption and distribution of media
do add risk to this sector. We favor Disney, Time Warner, and Viacom, the
companies with more diversified revenue streams and higher valued content
libraries in our coverage.
 Attractive valuations, strong balance sheets, robust FCF. Recent pullback in

shares has created a good entry point for many of these stocks, which all are
trending below their 3 year averages. Average earnings multiples are 11.4x with
P/E to growth of 0.8x. DIS is more of a longer term favorite given a somewhat
depressed projected 2012, while we see more near term upside at our two other
Overweight rated stocks, TWX and VIAb.
Equity Ratings and Price Targets

Mkt Cap Rating Price Target
Company Symbol ($ mn) Price ($) Cur Prev Cur Prev
Disney DIS 62,170.23 32.03 OW NC 42.00 —
Time Warner TWX 35,608.02 31.29 OW NC 40.00 —
Viacom VIAb 24,708.75 40.42 OW NC 54.00 —
Discovery Communications DISCA 15,826.00 38.60 N NC 43.00 —
Source: Company data, Bloomberg, J.P.Morgan estimates. n/c = no change. All prices as of 06 Oct 11.
See page 175 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
www.morganmarkets.com
This document is being provided for the exclusive use of ASIA SECURITIES at ASIA SECURITIES
PRIVATE LIMITED.
Alexia S. Quadrani North America Equity Research
(1-212) 622-1896 07 October 2011
alexia.quadrani@jpmorgan.com
Table of Contents
Industry Overview ....................................................................3
Company Overviews ...............................................................................................7
Optimistic on Advertising, Although Some Moderation in Spend Expected............11
Affiliate Fee Growth Engine Should Continue .......................................................17
Content Owners Maintain Leverage in Digital World.............................................21
Demand for Original Content Is Increasing............................................................24
International Opportunities....................................................................................26
Disney......................................................................................29
Time Warner............................................................................70
Viacom...................................................................................107
Discovery Communications ................................................134
Company Financials.............................................................163
All data on the cover priced as of 10/6/11’s close; all other data and valuation priced
as of 10/5/11’s close.
The authors acknowledge the contribution of Arpit Vinayak, of J.P. Morgan India
Private Ltd., to this report.
2
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Industry Overview
We are initiating on the Entertainment sector with Overweight ratings on Disney,
Time Warner, and Viacom and a Neutral rating on Discovery. We are generally
positive on the outlook for the group given 1) our positive view on content
creators/owners in an increasingly fragmented distribution marketplace, 2) a resilient
advertising market and relative strength of the cable segment, and 3) strong balance
sheets with robust free cash flows largely earmarked for shareholder returns. We are
mindful of the change in the landscape for media consumption but not discouraged
given the relatively steady subscriber rate of cable in this country (growing in many
markets outside the US), flattish attendance trends in theaters and increasingly high
dollar amounts being reaped by content providers as the battle for third party
distribution continues to heat up.
Much has changed in the 14 years we've covered the ad market – but content
and TV are still king
After over a dozen years following the ad market, we are surprised to see that several
themes that rang true in the 1990s continue to stand out within media today.
Paramount among these themes is the fact that content is king and ad dollars remain
very sticky to their media. These points continue to influence our view on the sector
today. Despite the hype around new distribution outlets, the demand for quality
content is greater than ever and the owners of that content, we believe, maintain
leverage over distributors. Not to say the model doesn’t adapt as, of course, it does
(the big fall-off in DVD revenue needs to be supplemented by another revenue
stream) but as long there is premium content that consumers want to see, over time
companies should find a way to monetize it. We believe those media companies that
own original, high quality content will continue to enjoy healthy viewership trends
on traditional channels and will likely supplement much of the lost revenues in other
channels, like DVDs, through new digital platforms. The more important question,
in our view (which we attempt to answer in the company sections later in this report),
is which company’s content assets put them in a superior position in this evolving
landscape longer term.
TV continues to garner outsized share of ad dollars

“There will always be a big, big Advertising dollars are surprisingly sticky despite ongoing changes in consumer
premium on quick reach, scale, behavior. Broadband penetration went from under 10% to over 60% between 2000
and high engagement." -
GroupM North America CEO Rob
and today, and time spent online jumped to 25% of time spent with media on average
Norman at this year’s today from a relatively insignificant number pre-2000. Yet advertising dollars online
Advertising Week commenting still remain around 15% of total ad spending (depending on definition) or even a
on the outlook for ad spending more paltry 7% when you look at branding (excluding search). Ad dollars should
on TV. continue to follow behavior into digital channels; just look at print, where its share of
ad dollars has declined from 36% to 14% over a period of 30 years, but ad dollars
move much slower than the change in consumption behavior and usually only when
a good alternative presents itself. TV continues to be the best channel for reach and
scale, and we therefore remain very bullish on the medium, particularly Cable where
CPMs (cost per thousand) are still cheaper and viewership is rising. We believe these
media companies that attain the majority of revenues from this segment of the market
continue to be well positioned for years to come.
3
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Ad market appears more resilient now than in 2008/09

The national ad market has been surprisingly resilient in 2011 and continues to
expand at above average rates even in the last several months in the face of
weakening economic data points and negative GDP revisions. The key question is
whether this is due just to an extended lag (in a typical cycle the ad market lags the
broader economy by about six months) or whether there is a disconnect this time
around that suggests the ad market can continue at its current pace. Unfortunately,
we likely will not know the answer until it hits us. However, we do believe that
advertisers are in relatively strong positions in terms of profitability, cash flows and
solid balance sheets. They have also been hesitant after 2008/09 to make
commitments in capacity or even head count and, therefore, have defaulted to more
discretionary advertising as a means to generate sales. We believe advertisers will
maintain this strategy as long as we are in this state of uncertainty and are only likely
to adjust their spending plans if the marketplace takes a more defined turn one way
or another. Looking back at the ad market over the last century, there have been few
periods of negative ad spend as the ad market tends to correct only when the macro
weakness has a long duration or takes a steep turn. Eventually we believe GDP and
the economy will once again meet in the middle with some likely moderation in ad
spend and some improvement in the overall market.
Strong balance sheets should position these companies well if faced with another
recession
Media companies also have stronger balance sheets today than they did ahead of the
last recession, which we believe will help insulate these stocks a bit if in fact the
economy continues to slow. In addition to healthier debt levels, all of the companies
within our universe have also been aggressively repurchasing shares recently as well
and have substantial authorizations in place, which we believe may also provide
some downside protection to shares.
Figure 1: Relative Leverage (Net Debt/LTM EBITDA)

3.0x
2.5x 2.4x
2.0x
1.7x
1.6x
1.5x
1.0x
1.0x
0.5x
0.0x
DIS TWX VIA DISCA
Source: Company reports
Compelling valuations despite macro uncertainty and likely earnings revisions

The group has traded off along with the market down 8% year to date (including SNI
and CBS (Covered by JPM analyst Michael Meltz)), with VIA and CBS performing
the best in the group, with Viacom only down modestly and CBS actually up year to
date. Multiples have contracted along with this pullback and on a forward P/E basis
are trading now at 11.5x (includes large cap media and the cable nets), below the
4
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
historical 3 year average of 14.4x (we use 3 years to conservatively capture the
downturn but also to reflect the limited trading history of Discovery and Time
Warner post AOL). This pullback has occurred despite ongoing signs of good
growth and optimism expressed by management teams for 2012. While we
understand current valuations reflect assumptions that earnings are too high as the ad
market is likely to slow following the weakening global economy, we do believe the
correction generally appears overdone, creating some opportunity especially once
stabilization occurs, at least in the US marketplace.
Figure 2: Media Comparable Valuations Table

FCF
JPM Price Market EBITDA EPS EV/EBITDA P/E PEG P/FCF Yield (b) Dividend
Company Rating Ticker 10/5/11 Cap. ($mm) Net Debt (a) 11E 12E 11E 12E 11E 12E 11E 12E 12E 11E 12E 12E yield
Diversified Media
DISNEY O DIS $ 31.51 $60,247.1 $9,719.0 $9,627.5 $10,279.0 $ 2.48 $ 2.70 7.6x 7.1x 12.7x 11.7x 1.3x 16.3x 11.8x 6.1% 1.3%
TIME WARNER O TWX 30.94 33,535.9 15,021.0 6,699.9 7,129.1 2.76 3.13 7.2 6.8 11.2 9.9 0.7 11.4 9.9 8.8% 3.0%
VIACOM O VIA.B 39.17 22,824.4 6,399.0 4,047.6 4,289.7 3.61 4.17 7.2 6.8 10.9 9.4 0.6 9.3 8.2 10.7% 2.6%
CBS (e) O CBS 20.85 14,303.1 4,650.0 3,014.0 3,363.0 1.82 2.20 6.3 5.6 11.5 9.5 0.5 7.1 5.9 14.1% 1.9%
Average: 7.1x 6.6x 11.6x 10.1x 0.8x 11.0x 8.9x 11.2% 2.2%
Cable Networks
DISCOVERY COMMS N DISCA 37.95 15,559.5 3,162.0 1,899.8 2,083.1 2.38 2.80 9.9 9.0 15.9 13.5 0.8 20.1 16.6 5.0% NA
SCRIPPS NETWORKS INT. N SNI 37.66 6,404.0 171.0 1,002.7 1,112.1 2.83 3.30 7.5 6.8 13.3 11.4 0.7 11.4 9.8 8.8% 1.0%
Average: 8.7x 7.9x 14.6x 12.5x 0.7x 15.8x 13.2x 9.5% 2.1%
Cinema
CINEMARK (e) O CNK 18.87 2,136.3 1,157.0 519.8 557.3 1.32 1.63 6.3 5.9 14.3 11.6 0.5 12.0 9.9 8.3% 4.5%
(e)
REGAL ENTERTAINMENT O RGC 12.62 1,948.5 1,827.9 514.0 561.7 0.43 0.81 7.3 6.7 29.0 15.6 0.2 8.5 8.2 11.8% 6.7%
Average: 6.8x 6.3x 21.7x 13.6x 0.3x 10.3x 9.1x 10.1% 5.6%
Entertainment Average: 7.4x 6.8x 14.9x 11.6x 0.7x 12.0x 10.0x 8.8% 3.0%
Ad Agencies
INTERPUBLIC GROUP O IPG $ 7.61 $4,138.0 ($310.3) $805.3 $933.7 $ 0.64 $ 0.79 4.3x 3.7x 11.8x 9.7x 0.4x 8.7x 6.6x 11.4% 3.2%
OMNICOM GROUP O OMC 38.73 10,987.7 1,567.5 1,949.5 2,154.3 3.23 3.73 6.4 5.8 12.0 10.4 0.7 9.9 8.6 10.1% 2.6%
WPP GROUP (1) N WPPGY 45.97 12,356.7 4,241.2 2,464.8 2,717.9 4.41 5.02 6.7 6.1 10.4 9.2 0.7 10.1 7.8 9.9% 2.7%
Average: 5.8x 5.2x 11.4x 9.7x 0.6x 9.6x 7.6x 10.5% 2.8%
Marketing Services
ARBITRON O ARB 36.49 1,006.9 (20.6) 121.0 133.4 2.03 2.36 8.2 7.4 18.0 15.4 0.9 14.6 13.1 6.8% 1.1%
HARTE-HANKS N HHS 8.77 558.7 117.6 100.0 105.8 0.71 0.80 6.8 6.4 12.4 11.0 0.9 10.4 9.5 9.6% 3.6%
(d)
NATIONAL CINEMEDIA O NCMI 14.45 792.1 703.5 246.8 267.5 0.72 0.77 9.3 8.6 20.2 18.7 2.3 13.8 13.3 7.2% 6.1%
VALASSIS O VCI 18.39 934.6 491.1 324.7 345.4 2.81 3.50 4.4 4.1 6.5 5.2 0.2 4.7 4.0 21.4% NA
Average: 7.2x 6.6x 14.3x 12.6x 1.1x 10.9x 10.0x 11.3% 3.6%
Publishing
GANNETT CO. N GCI $ 10.46 $2,552.2 $1,856.2 $1,173.6 $1,268.8 $2.13 $2.31 3.8x 3.5x 4.9x 4.5x 0.5x 3.6x 3.5x 27.9% 3.1%
MCCLATCHY N MNI 1.36 115.6 1,659.8 326.9 303.4 0.35 0.21 5.4 5.9 3.8 6.6 NM 0.9 0.9 115.3% NA
THE NEW YORK TIMES CO. N NYT 5.99 881.6 822.2 338.6 348.5 0.60 0.68 5.0 4.9 10.0 8.8 0.7 2.6 4.9 38.3% NA
E.W. SCRIPPS O SSP 6.53 372.5 (157.0) 29.0 89.3 (0.18) 0.53 7.4 2.4 NM 12.2 NM 17.1 5.8 5.9% NA
Average: 5.4x 4.2x 6.2x 8.0x 0.6x 6.0x 3.8x 46.8% 3.1%
S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Source: JPMorgan estimates; Factset; First Call. See notes on last page.
Note: DIS and SNI EV/EBITDA multiple are adjusted to remove minority cable interests
Publishing EV/EBITDA multiples are not adjusted for hidden assets.
(e). CBS is covered by JPM analyst Michael Meltz 4.2x
Source: JPMorgan estimates; Factset; First Call
Sizing the key issues across the group

In considering how to value these media stocks, we look at several key
characteristics they generally all share to give us a sense of relative strength and
positioning going into 2012. In this comparative analysis, we take into account both
the choppy macro marketplace as well as characteristics that may give one company
a better footing given the ongoing changes within media, such as the migration of
viewership to digital formats and outsized opportunities in international markets. We
obviously also take into account some financial metrics in this comparative snapshot.
5
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 3: Comparative Snapshot

DIS TWX VIA SNI DISCA
Defensive ABOVE AVERAGE: Most diverse ABOVE AVERAGE: Well AVERAGE: Significant network BELOW AVERAGE: Pure play BELOW AVERAGE: Pure play
business mix and lowest diversified, with only 22% of exposure; advertising accounts cable network with the highest cable network with 44% of
exposure to advertising at only revenue from advertising. for 34% of revenue. exposure to advertising at 68% revenue from advertising.
19% of revenue. Parks and of revenue. Highest international exposure
resorts comprise 29% of (37%), a risk if Europe
revenue. continues to weaken.
International ABOVE AVERAGE: International ABOVE AVERAGE: International ABOVE AVERAGE: International BELOW AVERAGE: Less than AVERAGE: Already has highest
accounts for 24% of revenue. comprises 27% of revenue and accounts for 29% of revenue. 4% of revenue comes from exposure to international at
Opportunity Parks and studios continue to management expects International cable margins international. Content does not 37% of revenue, but we expect
expand overseas, as does international profits to double projected to nearly double over translate well overseas and continued growth. Content
Disney Channel. Film studio over the next 3 years. next two years. international expansion has translates well overseas.
content suited well for foreign been slower than peers.
auds.
Affiliate Fee ABOVE AVERAGE: Affiliate fees AVERAGE: Affiliate fees AVERAGE: Affiliate fees are BELOW AVERAGE: Affiliate fees BELOW AVERAGE: Affiliate fees
are 73% of cable revenues account for 28% of revenue. only 23% of cable revenue. No account for 29% of revenue. comprise 48% of revenue, the
Leverage (22% of total co). ESPN TBS and TNT have some sports programming to Although we expect growth in highest among the group, but
continues to provide affiliate fee leverage through leverage, but Nick in particular affiliate revenue, SNI may not like SNI, DISCA may lack
unmatched negotiating deals with MLB, NBA, and a "must have" network. Above have "must have" networks. "must have" networks.
leverage. NCAA tournament. avg growth projected.
Margin Expansion ABOVE AVERAGE: Upside AVERAGE: Upside from ABOVE AVERAGE: International BELOW AVERAGE: Already BELOW AVERAGE: Already
driven largely by networks and networks partially offset by margins projected to double highest margin in group. near top end of the group.
Opportunity parks. print business. over next two years.
FCF Conversion
52% 42% 38% 47% 36%
ABOVE AVERAGE: Some deals ABOVE AVERAGE: With a ABOVE AVERAGE: Deals in place BELOW AVERAGE: While a deal AVERAGE/ABOVE AVERAGE:
Potential for
in place but expect more to substantial TV and film library, with NFLX and Hulu already is possible, there has been no Recently announced a deal
Digital come for library content in the the company has done few meaningful to results. Strong library speculation up to this point. with NFLX . Financial details
between Paramount (thru Epix) and
Monetization of near future. Co to launch its deals to date, implying
Nick, MTV, Comedy Central.
soon to be disclosed will add
own cloud offering in increased opportunity going clarity to financial benefit
Content KeyChest. forward. ahead.
Near-Term BELOW AVERAGE: AVERAGE: Management gives AVERAGE: No formal guidance. AVERAGE: Management gives ABOVE AVERAGE:
Management does not give annual guidance and quarterly Concentration in cable limits guidance but results have been Management gives annual
Earnings formal guidance and as a result updates. number of variables. Paramount as mixed in recent quarter. guidance and quarterly
any movie studio tends to be
Predictability estimates vary widely. More
volatile.
updates.
variables with diverse business
set.
Recent Buyback
7.5% 8.0% 10.0% 4.0% 6.0%
(% of s/o)
Dividend Yield 1.3% 3.0% 2.6% 1.0% NA
PEG 1.3x 0.7x 0.6x 0.7x 0.8x
Source: JPMorgan estimates; Company reports
6
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 4: Company Breakdown Comparison

Revenue Source DIS TWX VIA DISCA SNI
Advertising 19% 22% 34% 44% 68%

Cable TV 9% 15% 34% 44% 68%
Broadcast TV 10% - - - -
Print, other - 7% - - -
TV Affiliate Fees 22% 28% 24% 48% 29%

Cable 21% 15% 24% 48% 29%
Pay - 13% - - -
Broadcast 1% - - - -
Studio Content 20% 41% 36% - -

Theatrical studio 4% 15% 14% - -
Theatrical in-home 12% 10% 22% - -
TV studio, syndication 4% 16% - -
Theme Parks and Resorts 29% - - - -
Consumer Products 8% 3% NA NA NA
Print NA 4% - NA NA
Other 2% 2% 7% 8% 3%
Revenue By Geography
Domestic 76% 73% 71% 63% >96%
International 24% 27% 29% 37% <4%
Operating Income Source
Cable Networks 60% 52% 92% 100% 100%

Broadcast TV 10% - - - -
Pay TV - 21% - - -
Studio Content 7% 18% 8% - -
Theme Parks and Resorts 17% - - - -
Consumer Products 10% - - - -
Print - 9% - - -
Other -3% - - - -
Source: JPMorgan estimates; Company reports
Company Overviews
Disney (DIS) – Initiating coverage with an Overweight rating and $42 price
target (F2011E EPS $2.48 and F2012E EPS $2.70)
Disney stands out as our favorite stock of the group as we believe the disconnect
between current valuation and potential opportunity to be the greatest. DIS shares
have fallen 17% this year, reflecting, we believe, some disappointing earnings
results, concerns over theme park attendance and high capital expenditures. While
we believe near term there may remain some likelihood for negative earnings
revisions Street-wide (we are notably below consensus at $2.70 for F2012 vs.
consensus of $2.93), longer term we are attracted to what we view as its great brand
value, margin opportunity at the theme park and ABC, and the ongoing strength and
predictable robust revenue stream from ESPN and Disney Channel. Our 2012 price
target assumes DIS shares return to their historical premium to the S&P 500 of 20%,
implying a 13x multiple applied to our 2013E EPS. We believe the company’s
strong brand, unique assets, and strong cash flows will drive this return to premium
valuation. We also note this implied multiple is a discount to Disney’s three, five and
ten year average P/E ratios.
7
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 5: Disney Revenue and EBITDA by Segment (F2010)
Source: Source: Company reports
Time Warner (TWX) – Initiating coverage with an Overweight rating and $40
price target (2011E EPS $2.76 and 2012E EPS $3.13)
Time Warner is attractively valued, in our view, trading at a discount to its peers at
9.9x 2012E EPS or with a PEG ratio of 0.8x. We are most enthused by the deep
content library that can enhance earnings growth going forward, the high
concentration of predictable affiliate revenue and robust cash balance that fuels one
of the largest buybacks in the group. We do recognize that the cable networks rank
relatively low in their concentration of original programming and live sports but also
see them as general “must haves,” particularly following the new NCAA contract.
We believe we will see meaningful digital distribution deals coming out of Time
Warner over the next 3-6 months, which will help highlight the value of the vast TV
library and act as a catalyst to shares. Our year-end 2012 price target of $40
represents 30% upside from current levels and assumes that TWX trades at only a
modestly higher multiple versus its current level of approximately 11x but remains at
a discount to its entertainment peer group and its recent historical average.
Figure 6: Time Warner Revenue and EBITDA by Segment (2010)
Publishing Publishing
13% 10%
Filmed
Networks Entertainment
45% 22%
Filmed Networks
Entertainment 68%
42%
8
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Viacom (VIAb) - Initiating coverage with an Overweight rating and $54 price
target (F2011E EPS $3.61 and F2012E EPS $4.17)
We view Viacom’s leading cable assets as long-term earnings generators. Currently
trading at 9.4x our fiscal 2012E EPS, 7x EBITDA, and 8x FCF, we find valuation
attractive for a near pure play cable network operator with a double digit earnings
outlook and substantial returns of capital to shareholders. Furthermore, the stock has
recently pulled back, apparently on lowered FQ4 revenue guidance that was driven
by a shortfall in revenues. Viacom’s networks have shown improvement in recent
weeks, giving us confidence that ad revenue can once again return to double digit
rates of increase in FQ1,12 which we believe will be a catalyst to shares. Our year-
end 2012 price target is $54 based on Viacom’s 3 year historical forward P/E of 11x
applied to our 2013E EPS.
Figure 7: Viacom Revenue and EBITDA by Segment (F2010)

Filmed
Entertain-
Media ment 9%
Networks
62%
Filmed
Entertain-
ment 38%
Media
Networks
91%
Discovery (DISCA) – Initiating coverage with a Neutral rating and $43 price
target (2011E EPS $2.38 and 2012E EPS 2.80).
We believe Discovery is a great company that is well managed and has a favorable
mix of assets but is a slightly less appealing stock given its premium valuation.
While we like the breadth of high quality cable assets, ongoing international
expansion opportunities and healthy cash flows, we are concerned that the story lacks
a near term catalyst and are mindful that the stock trades at the high end of the group.
We believe a premium valuation is warranted given its pure play nature and above
average revenue growth, but it seems that these attributes are already reflected in the
stock at current levels and so we see limited upside near term. Our year-end 2012
price target of $43 assumes that DISCA trades at roughly 13x forward EPS by year-
end 2012, similar to its current forward multiple as we believe multiple expansion
from its premium level will be difficult in a more challenging ad market and with
few meaningful catalysts.
9
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 8: Discovery Revenue and EBITDA by Segment (2010)
Education &
Other
Education & Other
1%
4% International
Networks
28%
International
Networks
33%
US Networks
63% US Networks
71%
10
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Optimistic on Advertising, Although Some Moderation in

Spend Expected
Our outlook is generally positive on advertising, as spending has been surprisingly
resilient in 2011 and continues to expand at above average rates even in the last
several months in the face of weakening economic data points and negative GDP
revisions. We believe this is in part due to a lag (in a typical cycle, the ad market
lags the broader economy by about six months), but there may also be some
disconnect this time around allowing the ad market to expand despite the weakening
macro marketplace. This expansion is in part due to advertisers choosing to drive
revenue through more discretionary advertising spending rather than making bigger
capital commitments such as new hires and increased capacity in this uncertain
market. While there is likely to be some moderation in spending plans, particularly if
the consumer reacts negatively to the volatile markets , we believe advertisers will
generally maintain this strategy as long as we are in this state of uncertainty and are
only likely to cut their spending plans if the marketplace takes a more defined turn
one way or another. If you look back at the ad market over the last century, there
have been few periods of negative ad spend as the ad market tends to correct only
when the macro weakness has a long duration or takes a steep turn. Eventually, we
believe GDP and the economy will once again meet in the middle with some likely
moderation in ad spend and some improvement in the overall market.
We forecast U.S. advertising Our advertising forecast calls for 4.5% growth in 2011(down from 5% previously)
growth of 4.5% in 2011 and 3.5% and 3.5% growth in 2012. On a global basis, our estimates are 5% and 4% in 2011
in 2012. Globally, we estimate
5% growth in 2011 and 4%
and 2012 with the later year benefiting in part from quadrennial events.
growth in 2012.
Ad spend once again tracking ahead of GDP
As a percentage of GDP, US advertising spending has averaged 2.1% since 1950,
hitting a peak of 2.5% in 2000 with the dot-com bubble and since returning to a low
of 1.7% for 2009. Ad spending has a lagging cyclical relationship with the economy,
typically by 6-8 months. The advertising industry has historically moved through
long cycles: in the first year or two out of an economic recession, ad spending tends
to lag nominal GDP growth, then match GDP growth in the second or third year, and
then surpass it in subsequent years. This historical lag was shorter in the most recent
recovery as ad spending outpaced GDP growth in 2010, and we expect it will do the
same in 2011.
11
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 9: Annual Change in US Ad Spend vs. Nominal GDP, 1951-2012E

20%
15%
10%
5%
0%
-5%
-10%
-15%
Recession Ad Spending %chg GDP %chg
Source: BIA; Magna; J.P. Morgan estimates.
In three of the last six In the two previous recessions of 1991 and 2001, advertising expenditures declined
recessions, ad spending relative to GDP. Ad spending fell 1.2% in 1991 and 6.5% in 2001, dipping as a
continued to increase.
percentage of GDP in both years. This behavior was atypical as growth was
particularly robust in three of the last five recessions, increasing on average 6% in
1973-75, 10% in 1980, and 10% again in 1982 as companies worked especially hard
to boost consumption and differentiate their products. However, ad spending did
once again underperform GDP growth in the most recent severe recession, falling
13% in the US in 2009 versus a 1.7% decline in GDP.
The recession in 2009 was the worst since WWII for ad spending, if not even since
the 1930s. We estimate advertising spend fell 13% in the US in 2009. This falloff
was largely driven by a very weak local ad market, with more modest declines at the
national level.
The local ad market is hampered by 1) ad dollars continuing the trend of moving out
of the local market into the national market due to the “Wal-Mart effect” (small
businesses being eaten up by bigger national chains); 2) high concentration in the
more cyclically sensitive industries (auto and retail make up close to 50% of the local
ad market); and 3) the less resilient nature of the local businesses to spend in a
downturn, which leads to bigger cuts early in a down cycle and a lag in a recovery. A
decline in audience at many major local media (fewer readers of newspapers, fewer
listeners to radio, and the migration of viewership to cable and the Internet away
from local TV) has also played into the decline as advertisers are reluctant to spend
on a medium that is reaching smaller audiences.
National ad spending fell as well in 2009, largely reflecting declining revenues

among major advertisers. While large advertisers tend to lag on the way into a
downturn as they will fight the tide and keep spending as long as they can to preserve
market share and stimulate growth, at a certain point ad budgets contract in an effort
to preserve profitability in a declining revenue environment, which is what we
eventually saw in 2009.
12
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
We have been impressed by how quickly the ad market bounced back last year.
Advertisers appeared more optimistic about an economic recovery and to some
degree flushed their unused marketing budgets, leading to better levels of ad
spending than most had expected, as early as 4Q09. Those healthy ad trends
continued into 2010 as declines at first lessened year over year, and as early as 2Q10,
advertisers began to grow their budgets at impressive rates. For the full-year 2010,
we believe budgets were up at most companies in the mid- to high single digit range,
beginning to erase the declines in 2009.
The national ad market has been surprisingly resilient in 2011 and continues to
expand at above average rates even in the last several months in the face of
weakening economic data points and negative GDP revisions. Eventually, we
believe GDP and the economy will once again meet in the middle with some likely
moderation in ad spend and some improvement in the overall market.
National likely to continue to outpace local – although a political infusion may

help close the gap in 2012
National advertising continues to outgrow local for several reasons. 1) Local is still
suffering from small and regional businesses that have not fully recovered or
survived the downturn. In some regions of the country in particular, such as
California, Nevada, and Florida, many advertisers never made it through the
downturn or are not yet in a position to reinvest in spending, leaving the recovery in
those markets still quite muted. 2) Political spending has created tough comparisons,
which we believe amounted to roughly $2 billion in local ad dollars in 2010. This
should be more negative in 2H11 and perhaps modestly helped by early spending for
2012, but we still believe the net effect will be to weigh on local growth this year. 3)
Auto has suffered from a pullback in foreign auto dealership spend, however, this is
expected to come back now that much of the supply issues seem to be resolved. 4)
National advertisers seem to be in better financial health in general and seem to be
more aggressively pursuing share gains. This relative spending relationship,
however, may reverse itself a bit in 2012 as close to $4 billion in political spend is
expected to flood the local ad market.
Twin peaks define the market as dollars build in TV and digital

Broadcast upfront is still bigger We see the “twin peaks” continuing to thrive as dollars are largely siphoned to TV
than the cable upfront, but the and Digital. Within TV, we believe cable will continue to take share away from
gap is narrowing.
broadcast but again, staying with our earlier theme of ad dollars being sticky, this
will continue at a slow pace. To put it into perspective, this year in the Upfront,
CPM’s increased an average of high single digit growth on broadcast and low
double-digits on cable networks. The gap between broadcast and cable CPMs is still
narrowing (approximately 25%-30%), although a bit smaller than the 35% gap seen
several years ago. Another way to look at it is by market share among media over
the last five years, where Cable has added 500bps to its overall share.
13
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 10: Ad Trends Continue to Shift Towards Digital and Away from Print
2006 2011E
Digital (Internet &

Cable TV Mobile) Cable TV
8% Digital (Internet & Mobile)
10% 15% 17%
Outdoor
3%
Directories Outdoor
6% 4%
Newspapers Directories
23% 3%
Newspapers
Radio 12%
10% Radio
9%
Local TV (ex. Cable) National TV (ex. Cable)

9% National TV (ex. Cable) Local TV (ex. Cable) 10%
9% 9%
Direct Mail Magazines

Magazines Direct Mail
12% 9%
10% 12%
Source: J.P. Morgan estimates, MAGNA
Digital should continue to be an ad share gainer but over the long haul
Digital ad spend has moved from Digital spend also continues to grow as advertisers can’t ignore the growing amount
under 3% in 2000 to an of time spent online. Spending has moved from under 3% in 2000 to an estimated
estimated 17% in 2011 but has
still not kept pace with changing
17% in 2011. Time spent online, however, has jumped more significantly recently
consumer habits. and is estimated at 25% of consumers time spent with media (which may even be
understated when taking into account the proliferation of mobile devices), implying
that ad spending has not yet caught up with consumer habits. Advertisers/buyers we
spoke with use search consistently for traffic generation but still struggle in finding
ways to brand their products online. Not surprisingly, social network appears to be
the area of most interest, but budgets appear largely experimental as it is still
unproven how effective advertising is on social networking sites. There is a lot of
interest in mobile applications as well, but again, budgets here are largely
experimental at this stage.
14
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 11: Consumers Spend an Estimated 25% of Time with Media Each Day Online
Mobile
3%
Internet
25%
Television
51%
Magazines
2%
Radio
15%
Newspapers
4%
Source: J.P. Morgan estimates, TVB
Other media appears either somewhat stable (local TV, Outdoor) or in decline (print,
radio) with the largest moves coming out of print (more so in local newspapers)
moving into digital and local cable/broadcast.
TV Continues to Expand Upfront still commands the market

Despite declining audiences and TV in general has been surprisingly resilient. We ask advertisers/buyers all the time
rising prices, TV remains the why they keep coming back to TV in the face of declining audiences and rising
favored advertising medium.
prices. The answer is always the same - it is still the best alternative out there. In a
recent conversation with a marketer from a top ten consumer packaged goods
company, this executive said that they spend a lot of time discussing digital strategies
and allocation but every year so much money that was earmarked to digital at the
start of the year ends up on TV as they know TV still moves product while digital is
still seen as experimental. We believe this year’s Upfront is a great example of the
strong demand for TV as total dollars committed were up 12% as advertisers
demanded more inventory at even higher prices. While we expect scatter to
moderate during the new broadcast year, buyers we speak to still anticipate positive
growth year over year. Early indications are promising with the new season just
beginning as scatter prices appear to be holding up very well over the new Upfront
levels (still up in the double digit range year over year on broadcast and even higher
on some cable networks).
Television allows for cost-effective reach of advertising to mass audiences,

especially since 98% of US households have at least one television, according to the
TVB. As a result, TV is suited to marketers selling products that are widely
distributed, such as consumer packaged goods, autos, and retail goods. Broadcast and
cable TV captured approximately 18.5% and 14.2% of total ad spending in 2010,
respectively.
Content key to driving ad and affiliate revenue growth

Content is an important driver of a network’s ability to attract advertisers and raise
CPMs as top shows can often earn many times the revenue for a 30-second spot than
15
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
a lower rated show can command. Content is critical on the cable side as well: the
leading cable networks have distinguished themselves as those with the best-rated
shows, and this leads to some pricing power in cable upfront negotiations. Hence,
MTV’s Jersey Shore, for example, has been a leader in the ratings game, which has
translated into above-average CPM gains.
TV’s CPMs vary by daypart. Broadcast TV CPMs are determined by demand and
limited supply, in which an increase in demand is augmented by a decrease in supply,
thereby leading to higher CPMs. Cable revenues are a bit different. As demand for
cable continues to grow, supply continues to grow as well, effectively muting some
of the growth in cable CPMs.
The TV buying market

Advertisers have two main opportunities to purchase TV advertising time: 1) upfront
and 2) scatter. Advertisers work through media buyers to negotiate placement and
rates for their ads.
2011 saw upfront pricing From May through July every year, broadcast networks sell 75-85% of their ad space
increase in the mid- to high for a 12-month period beginning in September (50%-55% for cable networks). In
single-digits and cancellations
return to a more normal 5%
exchange for early commitments, advertisers get ratings guarantees and options to
range. cancel their commitments during certain windows throughout the year. The media
buyers negotiate these deals on behalf of the advertiser during this upfront process. In
years of very strong demand for advertising space, the upfront selling season can be
as short as a few days. In more “normal” times, the process lasts several weeks to
over a month. In 2009, the process, not surprisingly given the weak market, lasted
several months with no notable deals completed until August. In the face of a very
weak ad market, advertisers also took advantage of cancellation options in upfront
contracts, with cancellations ranging from 10% to -12% through mid-2009, up from
the historical average of ~5%. 2011 was a much stronger year as cancellations
returned to just under a more normalized 5% range following mid- to high single
digit increases in upfront pricing and in the midst of very strong scatter prices.
Upfront cancellations typically Figure 12: Upfront Media Cancellation Schedule

begin in the late fall – so far, we Period % Cancellable Cancellation Dates
have not heard of any
1Q (Dec) 0% -
meaningful cancellation activity.
2Q (Mar) 25% Oct 15 - Nov 1
3Q (June) 50% Jan 1 - Feb 1
4Q (Sept) 50% April 1 - May 1
Source: J.P. Morgan estimates, MediaCom
Scatter
The scatter market is the sale of ad space that was not sold in the upfront market. It is
sold on a shorter term basis. Supply and demand dynamics determine pricing, which
is typically higher in the scatter market as it provides for short term buying decisions,
but ratings are not guaranteed. Scatter pricing is referred to in percentage premiums
or discounts versus upfront pricing.
16
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 13: Scatter Market Pricing Compared to the Upfront in Typical Years
Period Supply Demand CPMs
1Q (Dec) In line In line Flat
2Q (Mar) Increase Decrease Flat/Down
3Q (June) Decrease Increase Up
4Q (Sept) Decrease Increase Up
Source: J.P. Morgan estimates, GroupM
In the first broadcast quarter (fourth calendar quarter), demand typically equals
supply for advertising inventory on network TV, causing CPMs to be roughly in line
with upfront pricing. In the second broadcast quarter (first calendar quarter), demand
drops off a bit as advertisers do not spend much at the beginning of the year, post-
holiday season. Supply is decent as the percentage of inventory sold in the upfront
for this quarter is not particularly high, and scatter market pricing may remain stable.
In the third and fourth broadcast quarters (second and third calendar quarters),
demand increases and supply decreases (sellout rates in the upfront for these quarters
is typically higher than it is in the first half of the season, around 90%, which limits
supply and hence tightens up the market). This causes scatter market pricing to
typically sell at a premium to the upfront. This pattern is beneficial to the networks as
it raises scatter market pricing going into the upfront negotiation period.
While this is a typical cycle, in reality scatter market dynamics often vary (especially
in the current season, as described below) as there are other factors affecting supply
and demand such as audience deficiency units (ADUs). If ratings are particularly
poor and fall short of guarantees, networks will eat into inventory (read: decrease
supply) in order to offer advertisers the free air time owed to them, known as a
“make-good.” This can tighten the market and, in turn, raise prices.
Scatter, which we look to as a Going into the 2011/12 season, it looks like scatter has maintained its strength,
gauge of the health of the ad reflective of the healthy ad market and ongoing bias toward TV. Scatter currently is
market, remains strong going
into the 2011/12 season.
priced well above the most recent upfront (10-15%) and better than in the prior year.
We look to the strength of the scatter market as a great real-ish time gauge on the
health of the ad market.
Affiliate Fee Growth Engine Should Continue

Affiliate fees earned by cable networks are based on contractual agreements with
cable, telecom and satellite providers, with most deals agreed upon for multi-year
periods with annual escalators built into the contract period. Agreements are
generally based upon the network’s ratings, strength of programming and popularity
with consumers. As discussed earlier, the popularity of sports programming
combined with consumers' tendency to watch sports live (as opposed to delayed
DVR viewing) tends to give those programmers like ESPN greater leverage and
higher rates. Stronger networks also tend to have the leverage to gain distribution for
their smaller fledgling networks or get paid more than they would have on a stand
alone basis. Cable affiliate fees have grown nicely in the US in recent years driven
primarily by growth in popular cable content (and subsequently ratings) and the
entrance of telecom and satellite providers who have driven competition with
incumbent cable providers, spurring efforts to differentiate their offerings.
There is much industry discussion about providers and consumers reaching a

“breaking point” on paying for programming and possible alternatives to the current
17
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
system include a tiering of cable offerings (offering fewer channels at a lower price),
offering a la carte packages, or simply cutting back on affiliate fee growth.
However, our discussions with most executives on both sides of the table indicate
most of these options are either undesirable or impractical, and current trends and
practices will likely continue. We likewise expect industry affiliate fees will likely
continue to grow mid- to high single digits, though see potential for a greater
bifurcation in rates paid to the strongest “must have” networks, and those garnering
smaller audiences.
Figure 14: Affiliate Fees Have Grown At An Annual Rate of Over 11% Since 2005 ($ in millions)
30,000.0
2005-2010 CAGR = 11.3%
25,000.0
20,000.0
15,000.0
10,000.0
5,000.0
-
2005 2006 2007 2008 2009 2010
US Cable License Fee Revenue
Source: SNL Kagan.
Subscription revenues become increasingly valuable as ad dollars fragment

The fragmentation of advertising dollars has caused some more traditional media to
rely more heavily on subscription revenues where historically they have happily
subsisted on advertising alone. Examples of this change are newspaper companies
that have pushed for greater increases in circulation revenues (or have begun to
charge for content online) as advertising dollars have waned. Broadcast is another
good example as most now demand a portion of the retransmission fees their cable
operators are giving the local affiliates.
During the past five years, local broadcasters have become more aggressive with
cable operators when their carriage agreements expire and many now demand to be
compensated on a per subscriber basis for their local network signals. Following
some pushback and complaints to the FCC a few years ago, it has now become the
industry norm that local broadcasters are receiving retransmission compensation,
particularly after large networks like CBS and ABC exerted their leverage with cable
operators and began negotiating for their owned and operated stations. For
broadcasters facing an increasingly difficult revenue environment (core ad revenues
at local TV stations have trended flattish in recent years), retransmission revenues
offer a high margin second revenue stream. In the past couple of years, the networks
have begun demanding a portion of the retransmission revenue that is earned by their
local affiliates, as they believe they should be compensated for the content they
provide to local stations. The amount of retransmission revenues that the networks
earn from their local affiliates varies by affiliate agreement, and many affiliates still
pay no portion of their retransmission revenues to the networks as they are operating
under long term affiliate deals. As more affiliate deals are up for renegotiation in the
next few years, we expect that the networks will receive on average 50% of the
retransmission dollars that their local affiliates earn. We believe there is likely a
wide range of per sub fees that local broadcasters are earning, with larger market
stations and local broadcast groups that have top ranked stations in a market likely
18
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
commanding $0.50 per sub or more, and lower fees for station groups that are lower
ranked and/or have less leverage with cable operators. For the networks, which often
have volatile results depending on the success of programming and timing of costs,
retransmission revenue offers a relatively predictable high margin revenue stream
that has become very meaningful. CBS has said that the opportunity for
retransmission revenue earned from its affiliate group is $225M, which is in addition
to the $250M+ that we estimate it will earn from its owned and operated stations in
2012. Disney has the most opportunity for upside from retransmission revenues
within our coverage universe, with $400-$500M in revenue expected by F2015, up
from under $100M estimated today.
While some traditional media is getting hurt by the fragmentation of consumption,

other media seem to be so far successful in adapting their offerings to keep the
consumer interested. As mentioned earlier in the report, cable subscriptions have
been relatively stable as hours spent viewing TV continues to rise. This healthy TV
consumption and ongoing migration away from basic broadcast to cable networks we
believe has helped maintain consumers’ willingness to sustain their cable
subscriptions despite opportunities to view programming on other outlets. The fact
that most cable operators offer a bundle package (inclusive of digital and often
telephone) we believe has also helped subscriptions rates. While prices have risen
steadily as cable distributors are under so much pressure from their programmers to
pay higher affiliate fees, offerings for a la carte cable have not been met with much
success, again indicating consumers’ willingness to continue to pay for the whole
package, in our view.
A la carte not a near term concern…

Following intense scrutiny on cable industry practices in recent years, the debate
about whether cable operators should unbundle channels and allow customers “a la
carte” pricing has waned. In the late part of the last decade then-FCC Chairman
Kevin Martin commissioned a new study that demonstrated that consumers would
enjoy lower cable bills with a la carte pricing (as much as 13% monthly savings were
cited) and even argued that it would benefit minority households more than others, as
they are often forced to purchase higher tiers to get access to foreign language
programming. Despite support for the FCC’s argument from many consumer
groups, Congress has not moved to change any laws governing the cable industry
and when recession concerns began in 2008, this topic did not receive much
Congressional scrutiny. Today, cable operators are generally required to offer a so-
called "basic" tier package that must include at a minimum the local broadcast
stations, and public, educational and government access channels that may be
applicable in the local municipality. Most basic packages include additional channels
as well and then offer other tiers that often include more extensive cable networks
and some premium movie channels (which sometimes may be purchased a la carte as
well). In our view, with the debate about a la carte programming losing some
momentum with the FCC and Congress (particularly as concerns about the economy
remain in the forefront) and the increased availability of network programming
online, we believe it is unlikely that a la carte pricing options will be mandated by
the government in the near to intermediate term.
19
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
…longer term a more defined tier structure may evolve

We believe original While we don’t see any intermediate term risk, longer term we do need to consider
programming, live unduplicated the possibility of risk to some cable networks from a more limited offering or cable
content, and duplicated
programming with limited
operators’ inability or unwillingness to pay higher affiliate fees to networks as dollars
availability will prove key to get stretched too thin. Particularly, as more content potentially becomes available on
networks’ ability to maintain other media outlets (with the proliferation of digital distribution), will consumers
value if a tier structure should keep paying regular increases for cable or can they be satisfied with a lot less? In
evolve longer term. this scenario, we believe higher value will likely be placed on those cable networks
that have exposure to 1) live unduplicated content (e.g. sports), 2) highly rated
original programming and 3) duplicated programming with limited availability.
Going back to the age old thesis of content being king, we believe the market will be
more finely divided between the haves and have-nots. We believe the live male-
demographic/sporting events will continue to demand the best premiums both in
terms of ad rates and affiliate fees and high rated original programming will also do
well. To a lesser degree, we believe second run, high rated programming will also
benefit but really only in the instances where there are limited other options to view
that content. Cable nets that just offer syndicated programming we believe will lose
negotiating power to maintain their affiliate rates and will see ad dollars wane as
viewership does not support higher rates.
The premium pay channels may also be increasingly viewed as at risk if content is
more widely available on other outlets. Generally, the exclusivity of deals during the
pay TV window (see below) varies by network and there is some concern that if
these films can ultimately be viewed elsewhere these channels may lose some of
their value. While we agree with this logic, we would highlight that HBO has
exclusivity during all of its windows under its studio agreements and has said it
would not work with studios if it did not have exclusive rights to air the content,
which protects the value of its offering. That said, currently consumers are charged
on average $12/month for the HBO/Cinemax package, a fee that some customers
might become unwilling to pay if vast amounts of film content are available to
stream elsewhere - which is not yet the case with Netflix (covered by JPM analyst
Doug Anmuth) but could become more of a threat longer term.
Figure 15: Pay TV Windows Give Premium Channels Exclusive Access to Films
Home
Entertainment
9-15
Theatrical 4-6 months
DVD, EST, and months
Pay TV 2
after Pay TV 1 Free TV 1 Free TV 2
Release release rental, with PPV after
release
and VOD either
concurrent or up
to 2 months later
Source: J.P. Morgan estimates, Disney company reports
To counter this concern, most of these channels have switched their programming to
rely more heavily on original shows rather than simply showing traditional movies.
20
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
HBO is a great example as it now airs 16 original shows, up from just five to eight
per year 10 years ago. This content not only helps maintain subscribers but also
typically drives relatively healthy subscription fee increases, which have averaged
6% over the past five years. It also provides valuable content that potentially can be
resold on another outlet.
Another possible risk is that cable operators may move some highly valued cable
networks to a separate tier. An example of this strategy would be putting ESPN on
its own tier given that consumers already pay about $4.59 a month for it and it may
go up a few more dollars in light of Disney’s new $15 billion deal with the NFL.
The CEO of Dish (covered by J.P. Morgan's Telecom Services analyst Phil Cusick),
Charles Ergon recently said he would consider this, although we don’t see this as
likely or even feasible near term given Disney’s longer-term contract with DISH.
Content Owners Maintain Leverage in Digital World

Fragmenting marketplace a risk to traditional channels?
The rate of change in consumption of media appears to be accelerating along with the
rate of technological innovation. Consumers now demand media where and when
they want to consume it and the media companies/distributors appear to be in a race
to satisfy those demands. The penetration rate of US multichannel subscribers has
remained generally steady as consumers at this point seem to be absorbing
multimedia at the same time rather than simply replacing their traditional outlets.
Figure 16: Cable Penetration Remains Relatively Steady Despite Cutting the Cord
92.0%
91.0%
90.0%
89.0%
88.0%
87.0%
86.0%
85.0%
84.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Source: MAGNA Global
Can content owners still maximize revenue on new distribution outlets?

As consumers spend so much more time consuming various media, the distributors
are also racing to provide content at these new outlets. Newspaper companies are
struggling to migrate their content online in a lucrative fashion, magazine businesses
are hoping to succeed in attracting subscribers on their iPads and cable distributors
are attempting to offer “TV Everywhere,” enabling subscribers of their service to
access programming on various outlets such as the iPad and mobile phones.
21
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
This issue with offering programming on multiple media, however, isn’t always as
clear cut as replicating the content for a new format. In the case of cable, the
question of who has the rights to distribute this content, the programmer or the
distributor, comes up. Time Warner Cable and Cablevision both offer their own
apps. This move away from the traditional cable outlet has disturbed some of the
content providers or cable programmers as it crosses an undefined line of at what
point does the programming belong to the distributor versus the owner. The
distributors argue that it is in their contracted right to distribute it to the customer
base while the owners don’t always agree. Viacom sued both Cablevision and Time
Warner Cable over this issue and settled with Cablevision recently, although Viacom
still blocks its channels on some of the newer media apps with Time Warner. Even
in the more clear cut cases, the dollars generated from the consumer appear to be
split in more ways as distribution becomes more complicated. For example, the New
York Times (NYT) owns its content and its digital site so it can receive all of the
subscription revenue attained online. However, once the NYT tries to go beyond the
traditional internet to media outlets like iPads and mobile devices, it has to give up a
portion of those proceeds to other distributors such as Amazon in the case of the
Kindle or Apple in the case of the iPad, spreading those dollars thin and potentially
impinging on the profitability of that distribution. In most cases, therefore, these
new endeavors may not be as lucrative as the traditional outlets; however, media
companies have no choice but to adapt their models to satisfy the consumer for fear
that someone else will engage them with their media offering.
To this point, studios are looking to new avenues to sell their content as more
traditional DVD sales continue to fall. While the sale of the content to digital
distributors such as Netflix or Hulu presents another set of issues (i.e. it may further
accelerate consumers’ move toward new media), it does provide an additional
revenue stream (with higher margins) that is becoming harder to bypass.
Subscription dollars are not the only thing becoming fragmented; advertising dollars
are also being spread out as there are so many more outlets to reach the consumer. In
a healthy ad market such as the one we are in today, this doesn’t appear to be a big
concern as budgets are up and just about every media seems to be enjoying the
increased spending (there are few exceptions such as newspapers). However, we
believe in a less exuberant time, ad dollars will increasingly migrate to the high
quality, higher trafficked content that can attract the most viewership making the
advertising buy worthwhile.
Digital demand for content is increasing

As subscription dollars become Back end deals also appear sizeable, although with limited data (relatively few deals
fragmented and traditional DVD and even fewer that have disclosed details), it is difficult to estimate the potential
sales continue to fall, we see
studios increasingly looking to
value that market can create. With more distributors emerging, we assume the
deals with digital distributors as market will further inflate as competition heats up to acquire content. Furthermore,
an additional source of revenue. we believe these deals will increasingly become non-exclusive, allowing for multiple
sales of the same content. Many of the major studios have stuck their toes in the
water with either short term deals (e.g. Disney) or sales of older content (e.g. CBS).
Some smaller studios such as Lionsgate have also done deals such as the sale of all
seven seasons of Mad Men (one year out)for $800,000 per episode, or an estimated
$73 million. Recently, renewal talks between Starz and Netflix fell apart as the two
parties could not agree on a price. We believe Netflix’s inability to secure this
content (when the existing deal expires) has put some pressure on Netflix as its most
22
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
recent deal to pay DreamWorks Animation an estimated $30 million per film is well
above what DreamWorks had been receiving from its current partner, HBO.
Table 1: Selected Digital Content Distribution Deals

Date Content Provider Distributor Length Content Non-Exclusive Details
Sep-11 Osiris Entertainment Netflix Solitary, An American in China, Tricks of a Woman, A Lure, Dumping Lisa and The Fall & more
shows from Discovery, TLC and Animal Planet, ID: Investigation Discovery, Science and
Sep-11 Discovery Communications Netflix 2- years Military Channel Non- Exclusive Renewal & Expansion agreement
Jul-11 NBC Netflix Multi-year Parenthood, The Event, Warehouse 13, Psych & more Non- Exclusive Renewal agreement
Jul-11 CBS Netflix 90210, Twin Peaks, Numb3rs, Californication, Dexter, Charmed, Nurse Jackie, Medium Non- Exclusive Canada and Latin Amaerica expansion
Jul-11 CBS Amazon Eternal Sunshine of the Spotless Mind, Gosford Park and Babe, among others Non- Exclusive ~2,000 movies and TV shows
Jul-11 NBC Amazon films like “Elizabeth,” “Babe” and “Billy Elliott.” Non- Exclusive ~1,000 titles
Jun-11 Miramax Netflix 5 years 100's of the company's films Non- Exclusive approx 20M/year
Jun-11 Open Road Films Netflix Multi-year Killer Elite, The Host Exclusive Pay TV window
Jun-11 Viacom Netflix Jersey Shore, SpongeBob SquarePants, South Park, Hot in Cleveland, Basketball Wives Non- Exclusive Renewal
Jun-11 Miramax Hulu Plus Multi-year films such as Good Will Hunting, The English Patient and Pulp Fiction Non- Exclusive ~100 films
2Q11 Revolution Studios Netflix Black Hawk Down, Across the Universe, Shakespeare in Love, Daddy Day Care, Hellboy, Non- Exclusive
Apr-11 Fox Netflix Sons of Anarchy, Glee, Ally McBeal, The Wonder Years Non- Exclusive Expansion agreement
Apr-11 Lionsgate Netflix Mad Men Series (4 Seasons) Exclusive Internet only 200M
Apr-11 CBS Netflix 2 Years Cheers, Frasier, Star Trek Series, Twilight Zone, Twin Peaks Non- Exclusive 200M/year
Mar-11 Paramount Netflix Multi-year The Last Airbender, Iron Man 2, The Curious Case of Benjamin, Titanic & more Non- Exclusive ~350 movies
100M. The show will be first run on netflix
Mar-11 TV Series: House of Cards Netflix 2 Seasons/ 26 Episodes Exclusive before anyother broadcast/ cable netwrok
Feb-11 CBS Netflix 2 years Flashpoint, Frasier, Family Ties, Star Trek, Twin Peaks, The Twilight Zone & more Non- Exclusive Expansion agreement
Amazon launches streaming service Amazon Prime Video with 16 content partners including
Feb-11 16 content partners Amazon Warner Bros. and Sony Pictures,as well as indies Magnolia, IFC and Shout Factory. ~5000 titles
Feb-11 Viacom Hulu Plus Access to “The Daily Show” and “Jersey Shore.” & more
Dec-10 FilmDistrict Netflix Multi-year First-run theatrical films including: "Drive" and "Lockout" Non- Exclusive
Episodes from Disney- ABC family including: old seasons of "Grey's Anatomy", "Brothers &
Dec-10 Disney/ABC Netflix 1 year Sisters", "Desperate Housewives", "Phineas and Ferb", Lost, "Ugly Betty", "Scrubs", Non- Exclusive ~175M/year
Dec-10 CBC, Freemantle Media, Netflix varies Titles for dustribution in Canada: "Weeds" seasons 1-2; The Big C season 1; "Undercover Non- Exclusive
Sep-10 NBC Universal Netflix Multi-year Every season of "Saturday Night Live" plus day-after broadcast of the 2010-2012 seasons; all Non- Exclusive Expansion agreement
The Expendables, John Rambo, Brooklyn's Finest, Righteous Kill, 16 Blocks and Black
Sep-10 Nu Image/ Millenium films Netflix Multi-year Dahlia. Exclusive
Aug-10 EPIX Netflix 5-year Movies from Paramount, Lionsgate, MGM Exclusive Internet only ~180M/year
Jul-10 Warner Bros. Netflix Movies plus TV shows including "Nip/Tuck", "Veronica Mars", "Pushing Daisies", "Terminator: Non- Exclusive Expansion agreement
Jul-10 Relativity Media Netflix Movies including "The Fighter" and "Skyline" Exclusive
Jun-10 Fox/ NBC/ Disney-ABC Hulu Plus 2-year Full current season runs of hit TV programs Exclusive ~45 current programs
Apr-10 Universal Netflix Gosford Park, Billy Elliott, The Pianist, Being John Malkovich, Do the Right Thing Non- Exclusive DVD & Blue-ray
Apr-10 Fox Netflix Avatar, Lie to Me, Bones, 24, King of the Hill, Prison Break & more Non- Exclusive Expansion agreement
Aug-09 Disney - ABC Netflix Grey's Anatomy, Legend of the Seeker, Desperate Housewives, Lost Non- Exclusive Expansion agreement
Apr-09 Showtime (CBS) Netflix United States of Tara, "The L Word", "Secret Diary of a Call Girl"
Apr-09 MTV Networks (Viacom) Netflix Comedy Central, South Park, iCarly, SpongeBob SquarePants Non- Exclusive >300 episodes from Nickelodeon
Oct-08 Starz Netflix 3-year Starz Play, which includes approximately 1,000 movies, TV shows, and concerts Non- Exclusive 200M/year
Sep-08 CBS Netflix CSI, NCIS, Numb3rs, Jericho, Star Trek and more Non- Exclusive ~350 episodes
Sep-08 ABC (Disney) Netflix Hannah Montana, Wizards of Waverly Place and more Non- Exclusive ~500 episodes
Nov-07 NBC (Comcast) Netflix Heroes, 30 Rock, Friday Night Lights, The Office
Jul-07 Showtime (CBS) Netflix Californication season 1
Source: J.P. Morgan.
While so far the deals have been relatively few and mostly much older content, we
believe we will see many more deals going forward perhaps for content that is more
recent, as in Lionsgate’s deal for Mad Men. We also believe the deals will rarely be
exclusive given the proliferation of new distributors in the market.
We believe this new revenue stream will be substantial down the road, especially for
a company like Time Warner, whose WB studio has a very extensive content library
with over 50,000 episodes of TV and 7,000 films or Disney, whose library we
believe would sell at a nice premium given brand value of content. Growing revenue
streams from digital deals may go a way toward offsetting the ongoing declines in
DVD sales. DVD revenue has dropped an estimated 14% over the last five years and
while now less of a headwind given a smaller base, is still likely to be down in the
high single-digit range in 2011, in our view.
23
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 17: Outlook for DVD Sales Remains Challenged
Source: J.P. Morgan estimates, Bloomberg
Demand for Original Content Is Increasing

Most studios are increasing their With the proliferation of cable networks and an increased focus on original
TV production. Warner Brothers programming to drive ratings, most studios are increasing their TV production. Also,
estimated its production is up
15% this year.
broadcast networks appear healthier than they have been in a while as the new
growing retransmission revenue stream provides them with more cash to invest in
content. Warner Brothers, the largest TV producer, estimated its production is up
15%+ this year.
Figure 18: Demand for Original Programming Is Increasing – Series Supplied to Broadcast and
Cable Networks
35
33
7 30
27
14 1 25
11
28
26
19 19
16
Warner Bros. NBC FOX CBS ABC

Broadcast Networks Cable Networks
Source: J.P. Morgan estimates, Time Warner Investor Presentation May 2010 – data for 2010/11 season
24
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 19: Hours of Primetime Programs for ABC, CBS, NBC, and FOX Are Increasing
49
46
45.5
45
44
2000/01 2007/08 2008/09 2009/10 2010/11
Source: J.P. Morgan estimates, Time Warner Company Reports, Time Warner Investor Presentation May 2010 – data for 10/11
broadcast season
We believe the primary drivers We believe there are two main drivers behind this stepped up investment in content.
behind the increased investment
in content are retransmission
revenues and increasing
First is the influx of affiliate revenue on the broadcast side from retransmission deals
demand from back end (at the O&O stations) and reverse compensation at the networks, which has provided
distributors. funds that can be reinvested in content. This new revenue stream, which is largely
expected to increase as new deals get negotiated, can be earmarked in part to
improve original programming rather than to invest in a lot of lower cost reality TV.
Second is the new wave of back end distributors with large checkbooks that have
once again highlighted the value of content at these studios driving the studios, in our
view, to make the investments in this increased production. These studios support
their own networks and increasingly sell content to other networks as well.
Figure 20: Warner Bros. Produces the Largest Amount of Scripted Content
Studio Total Series Affiliated Non-Affiliated % Non-Affiliated
Warner Bros. 24 8 16 67%
FOX 17 14 3 18%
Disney/ABC 14 12 2 14%
NBC 15 14 1 7%
CBS 18 18 0 0%
Source: Company reports and J.P. Morgan estimates.
Following the first run, studios have a long lifeline of dollars to be reaped, especially
for successful content, ranging from international distribution, syndication, and, of
course, newer back end digital outlets. A great example of the long lifeline of this
content is CBS’s I Love Lucy, which hasn’t been in production for over 50 years yet
made CBS over $20 million last year. First run, in fact, doesn’t always make money
for the studio; therefore, reliance on strong back end deals supports much of the
increased investment in programming. For a sense of how the economics break out,
take a look at Hawaii Five-0, produced by CBS and aired on ABC. We estimate that
CBS likely made a reasonable amount on this show in first run (CBS gets paid a
licensing fee and owns international rights as well as back end deals and ABC is able
to sell advertising around the show). However, CBS recently announced that it sold
this program to Turner for $2 million an episode or roughly $200 million, assuming
25
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
the series lasts 5 years. CBS assumes a similar deal internationally and with likely
longer term sale to a digital distributor such as Netflix, CBS could ultimately make
close to $1 billion on a show that was not necessarily considered a huge hit.
International Opportunities
Cable networks look outside the US for further growth opportunities
Lower penetration levels, less Given the potential revenue constraints in the US, many studios continued to expand
audience erosion, and their international efforts to exploit another revenue stream. International markets
significant opportunity to grow
advertising dollars make
often offer significant upside: 1) lower penetration levels in newer markets, 2) less
international markets attractive audience erosion as cable networks continue to gain share in emerging regions and 3)
areas for expansion. significant opportunity to grow advertising dollars as many o f these markets are just
beginning to be ad supported on cable networks. Pay TV penetration remains
relatively low in many international markets and advertising revenues on those
Less than 25% of residents in outlets are even smaller. For example, according to Euromonitor, less than 25% of
Latin American have pay TV,
according to Euromonitor.
residents in Latin America have pay TV compared to 90% in the US, suggesting
significant room for growth going forward. Latin and South America are two regions
often cited by many entertainment companies as areas of focus for network
According to SNL/Kagan, cable expansion and many countries within the region should have healthy cable growth in
households in Brazil and Mexico the near to intermediate term, according to SNL/Kagan, which noted particularly
are expected to grow at 14% and strong growth in Brazil and Mexico, where cable households are expected to grow at
12% CAGR, respectively,
through 2018.
a CAGR of 14% and 12%, respectively, through 2018. Furthermore, advertising
penetration on these cable systems is in its infancy, suggesting both upside to
subscription fees and advertising going forward. Therefore, the companies that have
high demand, portable content should continue to see outsized growth from their
international expansion efforts.
Theatrical business is also focused on international markets

Studios are also shifting their focus to international markets, and revenues from those
markets have significantly exceeded those of the US. With flattish attendance in the
US, studios increasingly appreciate the positive secular trends in many emerging
markets where attendance continues to climb, leading to a stronger box office.
26
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 21: International Box Office Is Now a Large Portion of Total Sales – Top 100 Films’ Domestic vs. International Box Office Share
$3,000 90%
80%
$2,500
70%
$2,000 60%
50%
$1,500
40%
$1,000 30%
20%
$500
10%
$0 0%
1977 1998 2003 2005 2007 2009 2010
Domestic Box Office Int'l Box Office % of total BO from Int'l Linear (% of total BO from Int'l)
Source: Box Office Mojo; J.P. Morgan.
In focusing more on international distribution, the studios have also shifted their
strategy toward fewer larger blockbusters that are more likely to do well abroad than
a larger group of different genre films. The result has been a drop in the number of
films made by many of the large studios. Both Viacom and Disney have announced
strategies to reduce the number of films made going forward. Viacom’s Paramount
specifically has targeted dropping from 30 films a year to 15, and Disney has not
been as specific but has stated it is moving to a strategy of fewer bigger blockbuster
films that build onto their existing franchises. In an interesting turn of events, the
theaters have seen this reduction in the film slate as a potential opportunity and two
of the larger exhibitors in the US recently formed a production/distribution company
called Open Road Films that is aimed at producing smaller budget films to be
released during the seasonally slower periods of the year.
27
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Premium cable exposure and valued content key to positive outlook

Given our positive view on TV (especially highly rated cable networks) and a
premium on content today, we are positive on the group of Entertainment stocks.
Even the studio business, which isn’t often well liked given lumpy box office
performance, is generally well positioned, in our view, given the positive secular
trends outside of the US. Our investment rationale on each individual stock largely
comes down to the relative value of the assets at current valuation levels. We believe
Disney, Time Warner and Viacom stand out as Overweights while Discovery is still
a great company with compelling assets, but a premium valuation keeps us at Neutral
today.
28
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Disney
Initiate with Overweight and $42 YE12 Price Target
We are initiating coverage of The Walt Disney Co. at Overweight with a year-end
2012 price target of $42, implying 33% upside from current levels in addition to a
1.3% dividend yield. We find shares attractively valued for two of the strongest
brands in all of media, Disney and ESPN. While the stock may lack an immediate
catalyst given ongoing concerns about the ad market, heavy investment spending in
parks and a murky theatrical slate in 2012, we believe recent underperformance in
the shares, reflective of these challenges, creates an attractive entry point to a strong
long term story. The impressive brand value and cash flow of ESPN, nice upside
potential at Parks from current investments, and largely untapped value of the Disney
content library to digital distributors will ultimately unleash upside to shareholders,
in our view. Our 2012 price target assumes DIS shares return to their historical
premium to the S&P 500 at 20%, implying a 13x applied to our 2013E EPS. We
believe the company’s strong brand, unique assets, and strong cash flows will drive
this return to premium valuation. We also note this implied multiple is a discount to
Disney’s three, five and 10 year average forward P/E ratios.
Investment Thesis
Diverse asset base with high affiliate fee revenue protects against cyclical risk
Disney’s diverse business mix allows for more steady earnings growth through
economic cycles, in our view, particularly from its cable networks, which drive 60%
of earnings. Disney is the least leveraged to advertising among its peers at less than
20% of revenue, while high margin, recurring affiliate fees to its cable networks
(mostly for ESPN) represent over 20% of company revenues. We also view the
parks and resorts as more cyclically resilient compared to advertising in the event of
weak trends, evidenced by the relatively solid performance in the last downturn.
ESPN and Disney Channel drive steady, highly profitable growth in all
economic cycles
Disney operates two of the premier networks on television, ESPN and Disney
Channel. We see ESPN's dominant position in live sporting events as a continued
driver of outperformance vs. other cable networks. We believe exclusive rights to
major sporting events - while a major investment - effectively ensure a stable of
consistent “hits” in the traditional content sense of TV shows.
Overweight
The Walt Disney Company (DIS;DIS US)
Company Data FYE Sep 2010A 2011E 2012E 2013E
Price ($) 32.03 EPS Reported ($)
Date Of Price 06 Oct 11 Q1 (Dec) 0.44 0.68A 0.66 -
52-week Range ($) 44.34 - 28.19 Q2 (Mar) 0.48 0.49A 0.55 -
Mkt Cap ($ mn) 62,170.23 Q3 (Jun) 0.67 0.77A 0.86 -
Fiscal Year End Sep Q4 (Sep) 0.43 0.54 0.64 -
Shares O/S (mn) 1,941 FY 2.03 2.48 2.70 3.15
Price Target ($) 42.00 Bloomberg EPS FY ($) 2.09 2.50 2.91 3.33
Price Target End Date 31 Dec 12 Source: Company data, Bloomberg, J.P. Morgan estimates. Note: Quarterly EPS may not add up to full-year
numbers due to rounding. 'Bloomberg' above denotes Bloomberg consensus estimates.
29
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
For advertisers, audience is virtually assured and sports are the most immune to time-
shifted viewing of any other genre, providing marketers the best access to the
coveted male demographic, which in turn will likely be watching live. This asset has
not gone un-monetized as ESPN receives the highest affiliate fee per subscriber of
any network by roughly a factor a 4x. However, as content distribution becomes
more fragmented across platforms and audiences tougher to reach and monetize, we
expect ESPN’s leverage with distributors and advertisers will only grow. We believe
this negotiating leverage also flows to Disney’s other networks, including ABC and
its owned and operated stations.
The Disney Channel, which does not sell advertising, also achieves leading affiliate
fees, demonstrating its consistent success with young audiences. In a volatile
cyclical environment, this means that Disney Channel's cash flow is effectively
nearly assured, in our view.
Retransmission fees transform the outlook for ABC

The advent of retrans revenue to broadcast stations dramatically improves the
earnings outlook of stations and networks, in our view. With a dual revenue stream
similar to cable, ABC can become attractively profitable for the first time in many
years. The head of Comcast’s (covered by J.P. Morgan Telecom analyst Phil Cusick)
NBC Universal recently called future retrans revenue to its NBC broadcast network
as the biggest opportunity amongst all its assets, including cable and studio. We
estimate Disney will receive roughly $80 million in direct retrans to its owned and
operated stations and "reverse comp" to ABC Network from its un-owned affiliates
in F2011. Management has guided toward realizing $400 -$500 million annually by
fiscal 2015 as distributor agreements are renewed, which we believe is achievable.
Parks set for rebound in profitability; major investment cycle to peak next year
Disney’s Parks and Resorts are in the midst of one of a heavy capital investment
initiative. Management has indicated that F2011 and F2012 will be the peak of this
capital cycle with a meaningful drop-off starting in F2013 as projects open. While
pre-open and launch costs from various projects will continue for the next several
years, as these attractions come on line - like the new cruise ships, which have met
with earlier than expected success - we believe the business is likely to see margin
improvement. In addition, the company has recently restructured its pension plan,
which is heavily weighted toward the park segment, and should decrease the ongoing
expense going forward.
Studio in transition, but refocusing and poised to benefit from foreign box office
growth
Taking a look at Disney’s slate for F2012, we believe it is clearly somewhat of a
transition year under its new leadership. The company does not have a major self-
produced holiday tent-pole in FQ1 (it will distribute two movies in the quarter for
DreamWorks Pictures) and faces very difficult comparisons next summer from the
F2011 releases of Cars 2 and Pirates of the Caribbean. However, we see a
promising slate developing for F2013, and the company is increasingly focused on
foreign distribution with great success in recent releases outside of the US (this
years’ Pirates has grossed over $1 billion, mostly from international audiences). We
believe the Pixar, Marvel, and other family focused product sets up well for foreign
audiences and may deliver some upside in international revenues despite low
expectations.
30
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Strongest balance sheet among peers; robust free cash flow with return of
capital to shareholders
Disney’s net debt to EBITDA stands at 1x, the lowest of its diversified peers, as the
company generates impressive free cash flow, in our view. While currently
suppressed to an extent by the high Parks and Resorts capital investment cycle that is
expected to peak this year and next, Disney has stated it will still have repurchased
roughly $5 billion in stock by year-end F2011, indicating its financial flexibility to
concurrently pursue different initiatives.
Valuation
Disney shares have fallen 17% this year, and 23% since late July (albeit with the
S&P down 15% over this same period), we believe from a combination of worries
over the advertising market, potential drop-off in attendance at the theme parks in
this shaky environment and inconsistent earnings results, which have left doubt on
whether current consensus estimates can be met. While there is some near term
uncertainty given the instability in the economy, we do believe Disney’s strong
brand, attractive longer term margin story (post capital investment cycle) at theme
parks, its consistent high margin revenue stream from the cable networks and
substantial potential digital distribution opportunity from its vast library make these
shares very attractive for the patient investor, in our view. At 11.7x our F2012 EPS
estimate that is well below consensus, DIS shares are trading roughly in line with the
S&P 500 (vs. a historical 20% premium) and at a meaningful discount to historical
trading levels, which we believe is unwarranted given its free cash flow outlook. We
look for some stability in the overall marketplace or more consistent signs of
improvement at the theme parks as a catalyst for shares.
Risks to Rating and Price Target

Diverse business mix can limit upside versus more pure play peers
Disney operates an attractive diverse set of businesses that are each influenced by
many unique factors. In any one period, one business may be met with good success
while another may be underperforming, limiting the potential upside to earnings
(e.g., strong theme park trends can be occurring during a poor period at the box
office). Furthermore, even within one segment such as the theme parks, the company
may be doing well in one geography while another location may be requiring further
capital infusion. While this diversity may provide some buffer in periods of
economic weakness, it could also limit upside potential in a period of prosperity.
Parks present higher exposure to consumer weakness vs peers; elevated capex

hampers free cash flow
With capital expenditures expected to jump to more than $3 billion in F2011 as well
as F2012, Disney is siphoning off a significant portion of its cash to reinvest largely
in theme park developments. While much of these investments are closing out,
management will have close to $4.4 billion earmarked for Shanghai (split with the
Shanghai government) as well as some funds for other initiatives such as its recent
Avatar investment at Animal Kingdom that will continue to weigh on FCF for the
next several years. While Disney fared relatively well in the last downturn
(attendance actually grew in F2009 and fell slightly in F2010) given heavy
discounting, there is some sensitivity to the weak consumer especially given the high
fixed cost nature of this business. While management has indicated that they
continue with rebuilding pricing with little hit to attendance in F2011, the overhang
31
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
still exists especially if the economy weakens and this segment may take another step
down.
Shift in cable provider structure to tiering or a la carte would likely pressure

ESPN’s and Disney Channel’s subscriber base
Rising programming and subsequent affiliate fees have led to regulatory calls to
establish a la carte cable options to consumers, and some distributors have sought to
put ESPN into a premium tier separate from a basic cable package. If these changes
were to occur (Time Warner already offers a service without ESPN), ESPN and
Disney Channels could face reduced affiliate revenue.
Studio business has been volatile with weak performance expected through
F2012; in home pressure persists through declining DVD sales
Taking a look at Disney’s slate for F2012, it is not likely Disney will have a great
year in the box office, in our view. The company faces very difficult comparisons
from Cars 2 and Pirates of the Caribbean released in F2011. The DVD business is
also in secular decline. The CFO recently compared it to a “melting ice cube,” which
creates a significant headwind to be offset elsewhere in this division. We believe
Disney is in a stronger position in this declining DVD market (the company has a
better conversion rate given the family oriented nature of the films) and still is likely
to see healthy declines for the next few years. While we believe Disney has the
opportunity to monetize its vast library with more deals with digital distributors, it
remains to be seen how significant this revenue stream may become.
Investment into online and social gaming has seen mixed results, and may be an
ongoing drag on profitability and cash flow
With the acquisition of Playdom, Disney directed its focus toward online and social
gaming, which has so far been met with disappointing results and has been a drag on
earnings. While this loss is not substantial, the company does not expect this
segment to return to profitability before F2013.
Recent choppy results raise risk to near term earnings

Disney has surprised investors during the last two earnings calls with mixed results,
creating some uncertainty in the outlook. This inconsistency, combined with limited
visibility given the shaky economic environment, could limit investor conviction in
current estimates and create an overhang to shares.
32
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Company Description
The Walt Disney Company is a worldwide entertainment company operating in five
key businesses: 1.) Media Networks (45% of F2010 revenues/68% of EBITDA),
which include cable channels ESPN and the Disney Channel, and broadcast network
ABC; 2.) Parks and Resorts (28%/17%), consisting of Walt Disney World Resort,
Disneyland, cruise ships, vacation time share properties, and interests in Euro
Disney, Hong Kong Disneyland, and Tokyo Disney; 3.) Studio Entertainment
(18%/9%), which includes movie studios Walt Disney Pictures, Pixar, and Marvel;
4.) Consumer Products (7%/8%) through merchandise licensing, publishing, and
retail stores; and 5.) Interactive Media (2%/-2%), including multi-platform games
and website publishing. Disney also owns 30% of online video site Hulu. Company
revenues for the fiscal year ended Oct 2, 2010, were $38 billion.
Figure 22: Revenue and Operating Income by Segment

Revenue Operating Income
Consumer Interactive Media, Interactive Media,

Products, 7% Consumer
2% (3)%
Products, 9%
Studio
Studio Cable Networks, Entertainment,
Entertainment, 30% 9%
18%
Parks & Resorts, Cable Networks,

17% 59%
Broadcast TV,
Parks & Resorts, 15%
28% Broadcast TV,
9%
Source: J.P. Morgan estimates, Company data.
Content Is Still King and Disney Holds an Edge

As content distribution evolves and becomes more global, Disney looks well
positioned to monetize and grow its compelling IP base
No entertainment company has built a more complete extension of entertainment
assets around the world than Disney. In its traditional family oriented content, it
seems that every touch point is achieved: theatrical, TV, amusement parks and
hotels, cruise ships, merchandise, and now digital platforms. This content
proliferation is also increasingly spreading throughout the world, including the
emerging consumer markets of China, India, and Latin America.
Disney’s other major content edge is, of course, sports programming through its
ESPN cable networks, by far the dominant sports broadcaster in the US. There is no
content genre with more of an upper hand in a changing world of distribution than
live sporting events and the programming surrounding them, where the decisions on
when and how to consume is effectively out of the consumer’s control. Time
shifting, awaiting a cheaper window, or seeking out the same content for less on the
internet are not considered options for sporting events given their live nature. Thus,
even as providers such as ESPN expand distribution online and over mobile devices,
33
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
the monetization decision remains theirs. ESPN, likewise, is the most valuable asset
to cable and satellite and a key protection against consumers “cutting the cord”,
resulting in Disney’s ongoing ability to receive very attractive affiliate fee rates that
are the biggest driver of company earnings.
Digital distribution and changing consumer habits do present challenges to

traditional monetization channels, though new opportunities also arise. Emerging
platforms such as Netflix, Hulu (of which Disney is a partial owner), and Apple, of
course, must have a broad content base to provide their subscriber and user base.
While consumers may no longer value owning a physical library of content in the
form of DVDs, their proclivity for entertainment has not waned, and disposable
income, while challenged in these economic conditions, is not meaningfully lower
than the prior decade.
We believe Disney’s combination of unique branded family assets and sports

programming give the company a competitive advantage as media consumption and
distribution becomes more fragmented. In short, we expect that in good times – and
even in bad – consumers will continue visiting Disney World, keep watching The
Lion King, Toy Story and the other Disney/Pixar films past and future, buy Cindarella
dolls and Cars toys for their children, and, of course, continue watching live sports
with increasing fervor.
34
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Media Networks
Figure 23: Disney's Networks The largest operating segment within Disney consists of cable networks and
Cable Networks Ownership broadcasting assets, representing over 45% of the company’s revenues and 68% of
ESPN 80% operating income in F2011E. The vast majority of these profits come from the
ESPN2 80%
ESPN 3D 80% Cable side, which is comprised of three core networks: ESPN (8 networks in total),
ESPN Classic 80% Disney Channel (2 networks), and a much smaller ABC Family. A fourth network,
ESPN Deportes 80%
ESPNews 80%
SOAPnet, will be reprogrammed in 2012 as Disney Junior, aimed at young children.
ESPNU 80% Disney owns 80% of ESPN and holds minority ownership interests in 10 other cable
Disney Channel 100%
Disney XD 100%
networks, including A&E, History, and Lifetime Television.
ABC Family 100%
SOAPnet (future Disney Jr.) 100% Internationally, Disney Channel has wide-reaching distribution in close to 170
Broadcast Network countries through several Disney Channel brands, while ESPN is represented in 200
ABC 100% countries and has a JV investment abroad. Other assets included on the Cable
Cable Networks - Minority Owned Networks are the respective radio networks for ESPN and Disney Channel.
A&E 42%
Bio 42%
Crime & Investigation 42%
The Broadcasting side is comprised of three key businesses: ABC Television
History 42% Network (~50% of broadcasting revenue), ABC Studios television production
History en Espanol 42% (~30%), and eight owned and operated broadcast TV stations (~15-20%).
History International 42%
Lifetime Television 42%
Lifetime Movie Network 42% In term of revenue streams, the cable networks benefit from the dual streams of
Lifetime Real Women 42%
Military History Channel 42% advertising and affiliate fees. Unlike most of its cable peers, affiliate revenue to
Disney’s network is a much greater contributor than advertising, owing in large part
Source: Company data
to ESPN’s dominant position in sports programming as well the fact that Disney
Channel does not run advertising. ABC Network and the TV stations are just
beginning to realize retransmission revenue from cable providers, thus advertising
still accounts for nearly all revenue.
Figure 24: Media Networks Revenue Breakdown
TV Production/
Syndication, Other Affiliate fees
12% 73%
Ceble Networks
65%
Broadcasting
23%
Advertising
27%
Source: Company data; J.P. Morgan.
ESPN: The Crown Jewel of Cable

Strongest negotiating leverage with distributors means superior affiliate fee
growth
ESPN is simply the most valuable network on cable, and its affiliate fees prove it
with per subscriber rates of over $4.50 per month while the next largest cable
network’s rate is around $1. In addition, ESPN has grown its affiliate fee revenue at
a 15% CAGR over the last 10 years (17% growth when including all ESPN
35
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
properties), compared to the next 25 largest cable networks averaging 10% growth
over the same period. We believe the network’s premium growth will continue
owing to ESPN having by far the most substantial leverage in negotiations due to its
continued investment in exclusive sports programming.
Figure 25: ESPN Affiliate Revenue Growth vs. Next 25 Largest Networks, 2001-2014E
40%
36%
30%
28%
23%
20% 22%
17%
16%
ESPN Networks
15% 11% 10% 11% 11% 11%
10% 9% 8% 8% 8% 9% 10%
9% 9% 10%
7% 8%
6% 6%
6% 6% 5%
Next 25 Largest
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E
Source: SNL Kagan; J.P. Morgan estimates.
High affiliate revenue exposure also provides resilience to ad fluctuations

ESPN’s recurring, high margin affiliate revenues represent roughly 75% of the
network’s revenue, according to SNL Kagan, providing resilience to potential ad
market fluctuations given the current macro environment. In addition, as discussed
further below, we believe sports programming is the most valuable advertising
inventory on television, which we believe translates to relative strength in ad revenue
performance vs. peers.
Ensuring sports dominance through long term rights contracts; programming

expenses should continue to grow
ESPN’s ongoing strategy is to secure exclusive rights to high value sporting events
over a long duration, often with a willingness to pay handsomely. The network is
eager to stave off any budding competition among other broadcasters and add to its
negotiating leverage with distributors, with which Disney in turn also looks to enter
into longer term contracts.
ESPN spends roughly $6 billion ESPN currently holds broadcast rights with over 28 professional leagues, college
per year on programming. conferences, and other organizations that own sporting events. SNL Kagan estimates
ESPN’s networks will collectively pay close to $6 billion for programming in
calendar 2011, by far the largest spender of any cable network with TNT the next
highest at just over $1 billion.
The network has entered into several longer term rights contracts in recent years,
including a 15 year contract with the SEC football conference, 12 year contracts with
the PAC-12 and ACC, and most significantly the recent 8 year renewal for Monday
Night Football to take the agreement through 2021 (discussed below). The recently
launched Longhorn Network is another example of ESPN aggressively seeking out
36
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
exclusive content. ESPN reportedly paid $300 million in rights for 20 years to the
University of Texas to start a channel dedicated to Texas sports.
In addition to the sporting events themselves, ESPN has built successful franchises
around the major sports, including NFL and college football, which run year round;
and, of course, its general shows like SportsCenter have become institutions.
Key NFL renewal through 2021: Priming the pump for affiliate renegotiations
NFL extension helps ensure ESPN and the NFL announced last month a $15.2 billion, eight year extension to
fruitful affiliate growth outlook broadcast Monday Night Football through 2021, as the current contract expires in
with renewals on the horizon.
2013. The network also gained immediate rights to air 500 additional hours of NFL
related programming, which it has already started, and stream the games through its
authenticated ESPN Watch application to iPads, tablets, and other internet based
devices except smartphones (for which Verizon separately holds exclusive rights).
Also included are international broadcast rights (previously a separate deal), and
ESPN may be allocated a wild card playoff game at the NFL’s option.
The new NFL contract comes to $1.9 billion per year. This compares to ESPN’s
existing contract at roughly $1.1 billion, or around $1.2 billion when factoring in
digital, highlights, international that were previously separate. As mentioned above,
this step-up in fees will begin after the current contract expires at the end of 2013.
Disney has stressed that the point-to-point CAGR of these fees over the contract
term, including the initial step-up, is roughly 6%, which is similar to the current deal,
and slightly lower than the agreement before that.
Just as ESPN is considered the crown jewel of cable, the NFL is seen as the crown
jewel of ESPN. Aside from the games themselves, the network airs NFL
programming virtually every day of the year. With the addition of up to 500
programming hours, ESPN will have more higher value ad inventory to sell. Most
importantly, of course, this long term contract should solidify ESPN’s key bargaining
chip in affiliate fee renewals that begin in F2013, and discussed further below.
Table 2: Selected Major ESPN Sports Rights Agreements

Estimated Contract Total
Contract with Expiration Annual Cost Duration Value Notes
Monday Night Football 2013/2021 $1.2bn/$1.9bn 6/8 $ 15,200 Recently signed 8yr extension through 2021. Adds 500hrs of programming
NBA on ESPN 2016 463 8 3,700 ESPN and TWC together in $7.4bn deal
Major League Baseball 2013 337 8 2,696 Incl. radio and highlights rights
NASCAR 2014 270 8 2,160
PAC-12 2024 250 12 3,000 Includes launch of Pac-12 Network
SEC 2023 205 15 3,075
ACC 2022 155 12 1,860
Bowl Championship Series 2014 124 4 496
Big 10 2015 100 10 1,000
Big 12 2016 60 8 480
Wimbeldon 2011 40 12 480 ESPN takes on all matches
Rose Bowl 2014 37.5 8 300
Big East 2011 33 6 198
US Open 2014 23 6 140
Univ of Texas 2031 15 20 300 Establishes Longhorn Network
IndyCar 2012 14 4 56
FIFA (incl World Cup) 2014 12.5 8 100 Incl. 2010 & 2014 mens World Cup. Univision owns Spanish rights
Major League Soccer 2014 8 8 64
Source: Company; media reports; J.P. Morgan estimates
37
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
An edge in advertising as well: Marketers flocking to sports programming away

from DVR-heavy shows
In addition to sports programming offering the best access to the coveted male
demographic, live sports (as well as pre/post-game shows) typically see the least time
shifted viewing, meaning more people are watching the commercials. As DVR
penetration continues to grow and consumers increasingly turn to advertising-free
scripted content services such as Netflix, we believe sports programming will only
increase in value to advertisers.
Ad revenues at ESPN have well exceeded industry and overall cable growth in recent
years, in part due to its high exposure to the auto category. While auto drove heavy
declines during the recession, the category has led the US advertising rebound in the
industry and for ESPN. Other male targeted categories, such as financial services,
have also rebounded nicely after steep recession cuts, and the beer category is a
sports stalwart. Year to date in F2011, ESPN’s ad growth as been well into the
double digits, along with most of cable, thanks to the strong ad market. The scatter
market continues to be up year over year in the third quarter and still is selling to a
premium to high Upfront pricing in Q4, suggesting this strong growth in ad market is
likely to continue at least through the end of the year. While there is some risk of a
slowdown in 2012 given the uncertain economy, double digit CPM increases in the
2011/12 Upfront lays the groundwork for nice increases in ad revenues next year, in
our view.
Figure 26: ESPN Normalized Advertising Revenue Growth, 1Q08-4Q12E

30% 27%
Auto and financial drove 23%
25% 22%
a bigger cyclical swing for
20% ESPN 17%
15% 12%
10% 9%
10% 8% 8% 7%
5% 5% 5% 5% 6%
5%
0%
-5% -2% -3%

-10% -8% -8%
-9%
-15%
Note: Normalized growth adjusts for non-recurring items, such as one extra/less week in a quarter, and programming
shifts between ABC.
Disney Channel: Another Affiliate Fee Engine

Affiliate-only revenue model insulates network from ad market fluctuations
Disney’s other major network group is comprised of various Disney branded
Channels in both the US and overseas. Major networks within the Disney Channel
group include Disney Channel, a 24-hour cable network with programming that
includes original series and movies targeted to children and families (well known
programming includes Wizards of Waverly Place and Good Luck Charlie), and
DisneyXD, which targets boys aged six to 14 and features a combination of live
38
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
action and animated programming, including popular shows such as Phineaus and
Ferb and Kick Buttowski. In early 2012, Disney will rebrand its soap opera focused
channel, SOAPnet, as Disney Junior, which will include content from Playhouse
Disney (currently a programming block on the Disney Channel) and target preschool
aged children with educational focused programming, creating a group of networks
that targets a wide range of children. XD is the only network in the group that sells
advertising.
Across its channels, Disney produces much of the programming itself, but also
acquires some programming from third parties and uses content from its own
libraries. As noted above, only XD sells advertising, thus Disney Channel revenues
are mainly driven by affiliate fees from cable/satellite and telecommunications
providers, making results at this business more stable than traditional TV networks as
they are based on long term contracts, and less susceptible to swings in the economy.
Ratings have also been fairly consistent at the network, with a steady performance in
recent years. Disney's main competitor is Nickelodeon and some other broadcast
stations and cable networks that air children's programming during limited dayparts
(i.e. the broadcast networks air children's programming on Saturday mornings).
With relatively solid ratings in recent years and a strong brand and array of
entertainment assets that can be leveraged towards programming, we expect Disney
to continue to command relatively strong momentum on the affiliate front as
negotiations come up in the future.
Punching above its weight on affiliate fees; ESPN a help

The Disney Channel generates nearly double the affiliate rates than primary
competitor Nickelodeon. This is generally attributed to Nick’s significant ad revenue
(whereas Disney Channel runs no advertising), but we also believe that ESPN’s
leverage carries over to all of the company’s networks and suggests the likelihood of
attractive ongoing growth in the future as Disney looks to strike more bundled
affiliate renegotiations. Last year’s Time Warner Cable renewal included all of
Disney’s TV properties: ESPN Networks, Disney Channel/XD, ABC Family, and
even the company’s O&O ABC stations.
Figure 27: Disney Channel Affiliate Revenue, 2000-2010

$ in millions
1200
10yr CAGR: 8%
1000
800
600
400
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: SNL Kagan; J.P Morgan.
39
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
International Expansion an Ongoing Growth Opportunity for Disney Channel

Currently, Disney operates numerous networks overseas, with a broad presence in
much of Western Europe, Latin America and parts of Asia. Looking ahead, we do
believe that Disney can further expand its Disney Channel offerings in new markets
– particularly Asian markets, where the subscriber count is relatively low today and
other developing markets, including South America, India, and the Middle
East/Africa. Right now, we believe the company is focused on increasing its
penetration in existing international markets (including Europe and Latin America)
as well as expanding into new markets, including a couple key markets that are
relatively untapped, such as India and China. For example, today there is no Disney
Channel in China due to media restrictions, but Disney does have programming
airing on Chinese TV and has an extensive retail presence and even English learning
centers that leverage the Disney brand in the market. Shanghai Disney also should
help greatly in developing in the region.
Figure 28: Disney Channel Subscribers by Region

Subscribers in millions
Oct-10 Oct-09 % Chg
United States 99.6 98.2 1.4%
Latin America 27.6 24.0 15.0%
India 7.0 10.2 -31.4%
United Kingdom 9.0 8.9 1.1%
Italy 5.8 5.4 7.4%
Taiwan 6.0 5.9 1.7%
France 5.6 5.4 3.7%
Japan 5.3 5.0 6.0%
Scandinavia 4.8 4.6 4.3%
Poland 5.5 4.4 25.0%
Romania 5.1 3.9 30.8%
Hungary/Czech/Slovakia 3.6 3.6 0.0%
Asia 3.2 2.9 10.3%
Australia 2.5 2.4 4.2%
Germany 2.3 1.6 43.8%
Korea 1.7 1.8 -5.6%
South Africa 1.9 1.7 11.8%
Portugal 2.1 1.5 40.0%
Israel 1.2 1.2 0.0%
Turkey 1.3 1.0 30.0%
Benelux 5.4 0.0 NM
Serbia 0.7 0.1 NM
Middle East 0.4 0.4 0.0%
Angola 0.2 0.2 0.0%
Malta 0.4 0.1 NM
International Sub-Total 108.6 96.1 13.0%
Worldwide Total 208.1 194.3 7.1%
Broadcasting: Retrans Breathes New Life into ABC

At 23% and 13% of Media Networks revenue and segment income in F2010, the
Broadcasting business is a relatively small portion of the overall company and
growth has been slower in recent years than at Cable Networks. ABC Network is the
largest portion of the Broadcast business at roughly 50% of broadcast revenues,
followed by ABC Studios TV production, then owned and operated TV stations.
40
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Disney owns and operates eight ABC affiliated stations in the US, with six of those
stations in the top ten US markets. While Disney does not break out revenues and
expenses for this business, we believe that Disney is a good operator of its stations,
with the bulk of stations ranking number one or two in its local markets.
Retransmission fees provide new, and much needed, revenue stream

We estimate that Disney will earn roughly $80 million retransmission revenues in
F2011 from both its owned and operated stations and ABC network affiliates. On
the owned and operated side, Disney’s stations are in top US cities and earn a
significant share of revenues in their respective markets, which bodes well for their
ability to use their signals as leverage in retransmission negotiations.
Figure 29: Disney Owned and Operated Stations Have Significant Market Share
Market Estimated 2010 Estimated Market
Market Rank Station Revenue Revenue Share
New York, NY 1 228 18%
Los Angeles, CA 2 204 18%
Chicago, IL 3 148 22%
Philadelphia, PA 4 132 29%
San Francisco-Oakland-San Jose, CA 6 72 17%
Houston, TX 10 81 20%
Raleigh-Durham, NC 25 33 27%
Fresno-Visalia, CA 55 18 26%
Total Estimated O&O Station Revenue $917
Source: BIA Financial, J.P. Morgan estimates
Disney has already struck deals for its own stations with several cable and telecom
companies, including Verizon, Cablevision and Time Warner Cable. We believe that
as this was Disney’s first round negotiating with the cable providers, it will likely
enjoy escalators through the existing contracts and down the line be able to argue for
even higher subscriber fees. As there is relatively little cost associated with
retransmission agreements outside of legal and administrative costs to negotiate with
cable providers, the bulk of these revenues should flow through to discretionary cash
flow (e.g. programming investment) and earnings.
On the network affiliate side, Disney has been very vocal about its intention to
pursue a meaningful piece of the retransmission revenues earned (or a flat fee from
its affiliates) as deals have and will come up for renewal in future years. Today, we
estimate that Disney is receiving a share of retransmission from over 40% of its non-
owned affiliates. Going forward, we expect the company to strike deals with
substantially all of its affiliates, which themselves will exercise retrans deals with
providers. Disney recently stated that it expects to earn between $400 million and
$500 million in total retransmission revenues by F2015 between the owned and
operated and affiliate stations, which we believe is attainable assuming large market
per sub rates in excess of $0.55.
A successful Upfront with reinvestment in programming

Disney has owned the ABC Television (previously known as Capital Cities/ABC)
network since 1996 when it acquired it for $19.6 billion. Ratings were a bit choppy at
the network following Disney’s acquisition, and despite some hit shows in the years
following the deal, including Who Wants to Be A Millionaire’s launch in 1997, ABC
lagged its broadcast peers. The network earns the bulk of its revenues from the sale
41
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
of commercial time during its programming, which often varies based on the health
of the overall ad market and the strength of ABC’s programming line-up and ratings
delivered. ABC’s ratings were relatively soft at the time of the Disney acquisition,
but did begin to improve in the middle part of the last decade, with shows such as
Desperate Housewives, Lost and Grey’s Anatomy garnering solid ratings. ABC’s
ratings have tempered a bit since the highs of 2004-2007, and the network ended the
most recent broadcast season behind Fox and CBS in the coveted 18-49 demographic
and based on total viewers for the season.
ABC has taken a relatively aggressive stance this upcoming season, with the most
new shows planned (13) versus its peers. While we are optimistic on the possibility
of a couple hits among ABC's new offerings, we believe this strategy is a risk and
could result in additional content investments down the line to replace shows that are
not successful. In the early weeks of the season, new shows Pan Am, Revenge,
Suburgatory appear to be having early success, while Charlie’s Angels is off to a
weak start.
ABC held its own during the Advertisers do appear to be relatively positive on ABC’s prospects this season, as
Upfront with commitments press reports indicate that the network was able to secure upfront increases in the
reportedly up 10-12%.
10% to 12% range (up from an estimated 8%-9% in the prior year) on $2.3-$2.4
billion in upfront commitments, ahead of NBC, in line with Fox and just shy of the
percentage increases at CBS as reported by various publications. We estimate that
Disney sells approximately 75% of its advertising inventory in the upfront market,
leaving the remainder for sale in scatter. Going into the new season, early scatter
trends appear to be holding up well with ongoing premiums over new upfront
pricing.
Non-election year should hurt owned and operated results this fall, though
record political spending expected next year
Local TV ad trends have been mixed coming out of the recession and we estimate
that revenue at Disney’s stations in F2010 was still below pre-recession levels of
2006 and 2007. While results haven’t fully bounced back yet, Disney and many
local TV operators have reported positive core ad spending in the past few quarters,
and we believe Disney is well positioned to have a significant boost in revenues at
the end of its 2012 and early 2013 fiscal years as political ad spending is expected to
reach record levels in 2012, with over $2B spent on TV advertising alone.
Longer term, we believe that the broadcast business will likely grow core revenues
(ex-political) in the low to mid-single digit range. While we believe that Disney does
see synergies between the network business and owning broadcast stations, the
company has pared down its broadcast exposure in recent years, most recently selling
its two smallest owned and operated stations in 2010, and we believe that it may
consider selling additional stations in the future if a reasonable offer is made for the
assets. M&A has been relatively quiet since the recession, though aside from
Disney’s recent station sales, McGraw Hill just recently sold its stations to E.W.
Scripps.
Digital and retrans add to the outlook for ABC Studios and Disney Channel
The increasing flow of retrans dollars to all broadcast networks allow for a
meaningful new cash flow stream that we expect to be partly reinvested in new
42
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
content, providing opportunity for ABC Studios and the other TV production
companies to sell more shows.
1 year Netflix deal for ABC, ABC Last December, Disney signed a short term, one year streaming rights agreement
Family, and Disney Channel at with Netflix for shows on ABC, ABC Family, and Disney Channel. At a reported
$150-$200 million.
$150 million - $200 million (LA Times), it is not a significant contribution to total
company results, but we believe it is high margin and indicates the new monetization
opportunities for content owners. We expect Disney will look to renew the contract
(though new terms sought on either side could imperil a deal), and look to other
emerging providers such as Amazon and Dish for potential deals as well. Disney is
also a part owner of Hulu (currently speculated to be up for sale, WSJ) on which it
provides content to both the free and Hulu Plus paid portions of the site, also on a
delayed basis. We believe Hulu can be a valuable partner for Disney with or without
ownership given the site's rise in popularity.
43
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Parks and Resorts

Domestically, Disney owns and operates the two largest theme parks in the world -
Figure 30: Top 10 Theme Parks Walt Disney World Resort in Florida and Disneyland in California - three cruise
Worldwide
ships, its Disney Vacation Club timeshare business, and Adventures by Disney,
WW 2010 which sells vacation packages to non-Disney attractions.
Rank Park Attendance
1 Disney World, FL 47.1
2 Disneyland, CA 22.3 Outside of the US, the company manages and partially owns Disneyland Paris (51%
3 Tokyo Disneyland 27.1 ownership) and Hong Kong Disneyland Resort (47% ownership), and licenses the
4 Disneyland Paris 15.0 operation of Tokyo Disney Resort. The results of the Paris and Hong Kong parks
5 Universal Studios, FL 11.9
6 Univ. Studios, Japan 8.2 are consolidated into the segment’s operating results.
7 Everland, Korea 6.9
8 Hong Kong Disney 5.2 The Parks and Resorts segment represented 28% of total company revenue in 2010,
9 Lotte World, Korea 5.6
10 Seaworld Florida 5.1 and 17% of operating income.
Table 3: Summary of Parks and Resorts Holdings

Source: TEA; J.P. Morgan Hotels/ Park Attendance (millions)
Open Ownership Venues Rooms C2010 %of Region %of Global
Figure 31: Segment Revenues by DOMESTIC
Geography Walt Disney World 1971 100% 17 22,350 47.1 68% 40%
Disneyland Resort 1955 100% 3 2,415 22.3 32% 19%
Int'l
22%
Disney Cruise Line 1998 100% 3 ships 3,004
Disney Vacation Club 1991 100% 10 3,060
Adventures by Disney 2005 NA 22 NA
Total Domestic 55 30,829 69.3 100% 59%
INTERNATIONAL
Disneyland Paris 1992 51% 7 5,760 15.0 32% 13%
US Hong Kong Disneyland 2005 47% 2 1,000 5.2 11% 4%
78% Tokyo Disney 1983 Royalty 3 1,710 27.1 57% 23%
Total International 12 8,470 47.3 100% 41%
Global 67 39,299 116.7
Source: Company; J.P. Morgan Note: Disneyland Resort includes California Adventure
Source: Company reports; TEA; J.P. Morgan.
Balancing Rates and Attendance

Rolling back recession discounting, carefully
During the recession in 2009, Disney discounted admissions and room rates in order
to maintain attendance. These included promotions such as “5 nights for the price of
4”. As a result, attendance and hotel occupancy actually grew over this period,
though per guest spending declined in the high single to double digits, resulting in a
domestic revenue decline of 6% in F2009.
In 2010, the company began paring back its discount pricing, which continues now.
As shown below, this pricing elasticity remains strong as domestic attendance and
occupancy promptly declined over the first several quarters while per guest spending
grew. Domestic revenues fell slightly for the fiscal year 2010.
Through three quarters in F2011, park attendance has been slightly positive while
occupancy is up and per capita guest spending is up 7%, resulting in double digit
revenue growth. This growth is helped in part by the January launch of the Dream
cruise ship, which has been performing well. We expect FQ4 to show similar trends,
44
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
though at a slightly lower magnitude as September gets back into seasonal

discounting.
Figure 32: Domestic Parks Attendance and Spending

20%
15%
10%
5%
0%
-5%
-10%
-15%
Recession Attendance Growth Per Cap Park Guest Spending Growth
Figure 33: Domestic Hotels Occupancy and Per Room Spending

20% 100%
15% 95%
90%
10%
Guest SPening Growth
85%
5% 80%
Occupancy
0% 75%
-5% 70%
65%
-10%
60%
-15% 55%
-20% 50%
Recession Per Room Guest Spending Hotel Occupancy Rate
A return to discounting if needed

Management remains focused on paring back discounting for fear of consumers
becoming too conditioned to demand concessions in order to pull out their
pocketbooks. However, some level of economic and consumer health is needed, in
our view. Depending on attendance and booking trends, Disney will reapply more
aggressive discounting if needed to maintain business.
Some bookings slowing heading Parks and resorts performance typically lags the economic and consumer conditions
into seasonally quiet fall. given bookings typically occur 3-4 months ahead of a patron’s visit. On its latest
quarterly call, management commented on lower bookings rates, though the fall
period is seasonally among the slowest. Furthermore, the company said it would
have disclosed at a late-September investor event if it had seen any material
incremental slowing of trends.
45
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Profitability Should Improve as New Attractions Open

Guidance: margin expansion in The Parks and Resorts segment hit trough margins in F2010, and we forecast
F2012 and ongoing. minimal improvement for F2011, albeit impacted by the Japan earthquake. Going
forward, barring a further material weakening in consumer trends, we believe
margins will steadily expand as capital projects come on line. Earlier this year,
Disney's third cruise ship, the Dream was launched with strong performance so far;
management has commented on already accretive margins. However, significant
projects are still to be opened over the next several years (detailed below), including
the current phased-in opening of Aulani Resort, a 4th cruise ship, and a substantial
expansion of both California Adventure and Magic Kingdom. Management recently
commented on roughly $300 million of incremental revenue from new properties in
F2011, though matched by an equal amount of launch and pre-opening costs. The
same dynamic is expected to occur again in F2012 at a level of $500 million, though
margin progress is still expected to be made.
Pension expense savings going forward; though low rate environment and
market weakness are ongoing headwinds
Another source of improved profitability is expected to come from pension savings.
Approximately 50% of the company's labor costs are generated in the parks and
resorts segment, thus changes to pension and health care benefits will
disproportionately impact this business. With its FQ2 results, Disney announced a
change to its pension plan from defined benefit to a defined contribution, which is
projected to save $350 - $400 million over five years.
The current interest rate environment and market volatility do present risks to
pension liability and expense. The company and its auditors will reassess the
discount rate this fall after year-end, which is typically tied to investment grade
corporate yields. The company estimates that a 100 basis point change in the
discount rate equates to roughly $200 million of incremental pension expense.
Current rates are trending below the level Disney used for F2011 of 5.25%,
presenting risk of a lower discount being applied in F2012. In addition, the market
weakness YTD likely could hurt plan asset levels, boosting the liability.
Eventual return to pre-recession profitability

The company has said repeatedly that there are no structural impediments to
returning to pre-recession profitability at roughly 18%, above our projected 12.5%
for F2011. That said, the high number of projects ongoing over the next five years
likely prevents the business from realizing these levels in the foreseeable future, in
our view, though we still expect meaningful improvement.
Looking back into the profitability levels in the 1990s, we believe heightened
pension and benefits cost levels prevent return to those higher margins.
46
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 34: Parks and Resorts Operating Margin and Revenue Growth, 1993-2013E
24% 24%
25% 23% 23% 23%
22% 21% 22%
20%
20% 18%
16%
15% 14% 15% 16%
15% 13% 13% 14%
12% 13% 13%
10%
5%
0%
-5%
-10%
Operating Margin Revenue Growth
Note: Normalized revenue growth adjusts for non-operating items, such as the consolidation of Euro
Disney and Hong Kong Disney results first consolidated into segment results in 2004-2005.
Full Pipeline of New Attractions Ahead; Elevated Capex

The Parks and Resorts business appears to be tracking to reach all time high capital
spending levels as it completes approximately 8 new properties over the next two
years. During F2011, Disney launched its third cruise ship, the Dream (Jan 2011),
and just recently opened its first stand alone resort, Aulani, in Hawaii. While these
projects will be a meaningful use of cash, they provide opportunity to generate
meaningful incremental revenue growth, in our view, ideally at improved margins;
encouragingly, the Dream is already achieving profitability ahead of the overall
business.
Figure 35: Parks and Resorts Capital Expenditures, 1994-2013E

$ in millions
2900 Roughly10 Projects
Animal Kingdom, to Open thru 2013
California Adventure
2400 & Tokyo Disney land
1900 Hong Kong Disney Land
1400
900
400
Parks and Resorts CapEx
Source: Source not specified.
47
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Aulani (Aug 2011): Disney’s first major stand alone resort, though stumbling
out of the block
Disney just opened the first phase of its Aulani Resort & Spa in Hawaii, which is to
have 360 hotel rooms and 480 Vacation Club villas once fully opened by calendar
year- end. The reported cost of the resort is $480 million. With its recent late
August opening, roughly 60% of the resort’s hotel rooms are initially available, and
roughly 15% of its eventual Vacation Club units. Pre-launch costs, its partial initial
operations and the ongoing build-out of the resort should result in a drag on segment
results through at least F1Q12. The impetus behind building Aulani was to satisfy
Vacation Club member demand for properties in Hawaii, which Disney had to
outsource to other providers. Disney does not have plans for others at present.
An unexpected setback for Aulani’s has been Disney’s discovery that management
had been under-pricing its management fee contracts for the resort’s Vacation Club
sales for over a year. Unit sales (via “points”) include fees for ongoing management
of the properties. The mis-priced contracts are projected to result in annual fees that
are too low, and furthermore can’t be renegotiated for the life of the contract,
resulting in Disney likely managing these properties at a loss. The error was at least
caught with only a portion of Aulani’s units sold, though any units sold under the
contract terms will likely be an ongoing hindrance to results. Furthermore, all
Vacation Club sales had to be halted until new fee schedules – at a 33% increase -
were submitted to Hawaii regulators, which were approved several weeks ago,
allowing sales to resume. The head of Vacation Club was dismissed over the issue,
as well as several others. Despite these issues, we see this property as having
limited impact on the business given its relatively small size.
Cars Land at California Adventure (Summer 2012): Making CA "more Disney”

As Disney further builds upon its franchise strategy, it will follow its theatrical
release of Pixar’s Cars 2 this past summer (the two films have grossed $1 billion
worldwide to date) with a new Cars Land at California Adventure (CA). In recent
years, management has been working on strategies to boost CA attendance and make
it more unique to Disney.
Disney Fantasy (April 2012): Sister ship to the successful Dream

The Fantasy is essentially the same ship as the Dream, including 1,250 staterooms,
and estimated to cost around $1 billion. Disney's Cruise initiative has been an
overall success, and the Dream has so far performed well, already achieving
accretive margins to the overall segment. We believe the Fantasy will also be a
positive revenue and earnings driver in the back half of next year, though, like the
Dream, will incur high marketing costs leading up to the launch.
Hong Kong Disney: three new Lands (Oct 2011, 2012, 2013)
Disney continues to develop the Hong Kong park. Learning the lessons of over
building Euro Disney, the company took the opposite strategy with Hong Kong,
which management feels does not provide enough attractions currently to drive
meaningful incremental attendance. Beginning with Toy Story Land, to open this
month (and again furthering the film franchise strategy), two more themed lands will
open in successive years: Grizzly Gulch in C2012 and Mystic Point in C2013.
48
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Walt Disney World: Art of Animation "value" resort (2012)

Disney announced in early 2010 that it would build its first new hotel since opening
its Pop Century and All Stars resort in 2003. Called the Art of Animation Resort, it
will be themed to The Lion King, Little Mermaid, Finding Nemo, and Cars. The
hotel will have 2,000 rooms, and like Pop Century, will be priced at the “Value”
level, including 1,200 suites for up to six people each. The expansion of low price
point lodging indicates Disney’s outlook toward future attendance demand in the
difficult macro environment. We do note, however, that the Four Seasons recently
announced it will be building a 444 room “luxury” resort on Disney World property
at a cost of $360 million.
Expansion of Fantasy Land/Magic Kingdom (2012-2013)

Disney is in the process of upgrading and expanding Fantasyland, which will be the
first major capital improvement at Magic Kingdom since it was opened in 1971.
The project will double the size of Fantasyland and open in two stages, the first in
2012 (“Princess Realms”) and the next a year later (“Pixie Hollow”). The cost has
not been disclosed, but we believe could be in excess of $1 billion. The main ride,
The Little Mermaid (similar to California Adventure), is reported to have a $100
million cost alone.
Walt Disney World: Avatar Land at Animal Kingdom (2016)

Just announced, Disney signed an agreement with Fox and James Cameron to
develop an Avatar land at a reported cost of $500 million (Orlando Sentinel, 9/20/11)
to be a part of Walt Disney World’s Animal Kingdom. Specifics are still to be
determined, though James Cameron will be involved in the development.
Furthermore, there are two Avatar sequels planned in coming years that should help
maintain interest in the franchise.
The Next Major Park: Shanghai Disneyland (2016)

At $4.4 billion, twice the size of Disneyland/California Adventure; building the
brand in the fastest growing consumer market in the world
43% ownership vs. Shanghai Disney broke ground this year on its next major undertaking, a full Disney World-
government at 57%. style park several miles outside of Shanghai, China, and scheduled to open in 2016.
Shanghai Disneyland will cover nearly 1,000 acres, or roughly twice the size of
Disneyland/California Adventure, and Disney estimates the cost at $3.7 billion to
build the park and another $0.7 billion to build the hotels, retail, dining, and
entertainment areas. The development is in partnership with the Shanghai
government, which will own 57% of the park. Disney will also own 70% of a joint
venture management company to operate the park with the Shanghais government
owning the rest. The overall facility is expected to have three themed parks (similar
to Magic Kingdom and others possibly along the lined of Epcot and Animal
Kingdom), several themed hotels, a lake, and entertainment, retail, and dining.
Capital expenditures on the project are expected to be light in the first few years,
before ramping closer to the opening of the park.
49
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Studio Entertainment
Figure 36: Segment Revenue Disney’s studio entertainment division encompasses its three core theatrical
Breakdown production studios - Disney Pictures, Pixar, and Marvel – which releases 14 films in
TV F2011. Through its Buena Vista entity, the company also typically distributes all of
distribution
, other
Theatrical
distribution
its own films in theatrical and in-home markets, as well as movies for other studios
30% 30%
such as DreamWorks. Year to date in calendar 2011, Buena Vista has grossed $950
million in domestic box office revenue, which is the fourth most of any studio with
12.5% market share.
Home
entertainm Other businesses included in the segment are Disney Music Group (DMG) and
ent
40% Disney Theatrical Productions. DMG includes several record labels that produce and
distribute music albums, and commission new music for the company’s motion
pictures and TV programs. Disney Theatrical Productions develops, produces, and
Source: Company reports licenses live events, including Broadway musicals (e.g., The Lion King) and touring
versions of past movies and TV shows (e.g., The Little Mermaid and High School
Musical).
In Quest of the Franchise with Multiplatform Opportunities

Shift to fewer, bigger budget movies with global appeal
Disney has refocused its theatrical strategy over the last year or so toward developing
existing and future ‘franchises’ under its three core studios, Disney, Pixar and
Marvel. This strategy has included a shift toward releasing fewer films, though often
with bigger budgets that are ideally a sequel with consumer awareness already built
in. Over roughly the last five years, Disney has trimmed its annual slate to a target of
16-18 films (including distribution agreements), down from around 30. Over this
time, the company made two significant acquisitions over this period with Pixar in
2006 and Marvel last year, and Disney’s box office receipts have steadily grown.
DreamWorks Pictures distribution augments slate with ~6 films per year

In 2009, Disney signed a 5 year, 30 picture distribution deal with DreamWorks
Pictures that began in 2011 (which does not include DreamWorks Animation).
These are generally mid-budget, live action films that will help Disney utilize its
distribution infrastructure with lower risk; Disney receives a fee that is roughly 9%
of the film's gross receipts. Disney had already seen early success with the surprise
hit, The Help¸ which has grossed over $150 million domestically. Its other
DreamWorks release was I Am Number Four, which was a moderate disappointment,
though grossed $145 million worldwide. Coming up in FQ1 are Real Steel and War
Horse, both with box office expectations under $100 million domestically.
F2012 somewhat of a transition year; DreamWorks should help fill holes

Disney’s studio’s leadership and strategy change are still working through the
company's production and release schedule. The impact on F2012 should be a
limited slate of big titles, including no major tentpoles currently scheduled for this
coming holiday season. Pixar is also releasing an original film, Brave, next summer
that will face a difficult comparison against Cars 2 that extends into the consumer
products business. Management has itself conceded little opportunity on the product
side for Brave, while Cars has been its most successful consumer products extension
ever. In addition, looking into Dec F2013, Disney’s planned tentpole, The Lone
Ranger with Johnny Depp, may not be produced due to budget concerns.
50
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Finding new gold in the vault

The Lion King 3D re-release has Disney recently re-released The Lion King in 3D in theatres to correspond with a
grossed over $100m to date. newly remastered DVD release. The run was only to be for 2 weeks leading up to the
More should be on the way.
DVD release date, however, the box office performance was so strong - grossing
$100 million worldwide to date, including $80 million in the US - that the movie is
entering its fourth week in theaters. Disney has also just announced it will re-release
in 3D Beauty and the Beast, Finding Nemo, Monsters Inc, and The Little Mermaid
over the next two years,
Table 4: Upcoming Release Schedule

Dist
Title Studio Only Expected Release
F2012
Real Steel DreamWorks  10/7/11
The Muppets Disney 11/23/11
War Horse DreamWorks  12/28/11
Beauty and the Beast (3D re-release) Disney 1/13/12
Secret World of Arrietty Disney 2/17/12
King of the Elves Dis Animation Spring 2012
John Carter of Mars Disney 3/9/12
Chimpanzee DisneyNature 4/20/12
The Avengers Marvel 5/4/12
Brave Pixar 6/22/12
The Odd Life of Timothy Green Disney 8/15/12
Finding Nemo (3D re-release) Pixar 9/14/12
F2013
Midnight Express DreamWorks  TBA
Frankenweenie Disney 10/5/12
Wreck-It Ralph Dis Animation 11/2/12
The Lone Ranger (in question) Disney 12/21/12
Monsters Inc (3D re-release) Pixar Jan 2013
Oz: The Great and Powerful Disney 3/8/13
Iron Man 3 Marvel 5/3/13
Monsters University Pixar 6/21/13
Robopocalypse DreamWorks  7/13/13
Thor 2 Marvel 7/26/13
The Little Mermaid (3D re-release) Pixar Sep 2013
F2014
Untitled Henry Selick Film Disney 10/4/13
Untitled Dinosaurs Film Pixar 11/27/13
Marvel untitled 1 Marvel 5/16/14
Untitled brain movie Pixar 5/30/14
Marvel untitled 2 Marvel 6/27/14
Interstellar DreamWorks  TBA
Source: Company reports; Box Office Mojo; J.P. Morgan.
51
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Confronting In-Home Challenges: The "Melting Ice Cube"

Disney looks best positioned to ride out the twilight of the DVD era
We believe Disney is one of the better positioned studios to weather the ongoing
decline in DVD sales. While the entire industry is suffering from this pullback, the
family oriented nature of Disney's films, particularly the animated films generally
have a higher conversion ratio from theatrical. The recent success of The Lion King
3D re-release truly underscores the high value of Disney’s content library, in our
view.
Pay TV and digital distribution through Starz; Netflix deal to end in early 2012
Disney’s exclusive pay TV outlet is Starz for its theatrical films. The latest renewal
was signed in March 2010 and runs through 2015. Part of Starz's rights include the
ability to sign digital distribution deals, such as it currently has with Netflix for its
subscription streaming service. Starz signed its deal with Netflix for $30 million per
year in 2008 when Netflix had a relatively small subscriber base. Netflix now has
roughly 25 million subs and its CEO publicly commented that the company would
offer Starz $300 million per year to renew the agreement, however Starz was
reportedly looking for a substantially higher amount. To this end, no new deal has
been reached and we believe talks have ended at least for now.
We do believe Disney's library carries above average value that Starz and Disney -
which appear to be negotiating aggressively - will likely to see significant revenues
from digital distribution deals.
KeyChest the next in-home initiative, similar to Ultraviolet

In FQ1, Disney plans to launch its KeyChest cloud service, which will allow
consumers who purchase any copy of a Disney movie, TV series, or video game to
also have access to a digital version from any internet-enabled device. Unlike
Ultraviolet, which is a partnership among several studios, Disney is going it alone in
the hope its family focused library and brands will be strong enough to sustain a fully
proprietary service. The service also will be competing against cloud products like
Apple. We do believe that if Ultraviolet proves successful, Disney will be willing to
join the partnership.
52
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Consumer Products
Figure 37: Segment Revenue Disney’s Consumer Products division is relatively small at only 7.5% of our
Breakdown projected F2011 revenues,, but a high margin business for the company at over 25%
of segment operating income. Consumer Products is comprised of the company’s
Retail, Licensing and Publishing division (~63% of F2011 segment revenues), which
other
36% includes Disney’s merchandise licensing business across the globe and its book and
magazine publishing interests, and Retail/other (~37% of segment revenues), which
includes Disney’s retail stores and items sold through its retail websites, such as
Licensing & DisneyStore.com and DisneyOutlet.com.
publishing
64%
Success of Disney film and TV franchises should drive licensing growth

Disney's licensing and publishing division includes revenues generated from
merchandise licensing around the globe across product categories, including toys,
clothing, furnishings, accessories and electronics, as well as from Disney Publishing
Worldwide, which publishes children's books and magazines, as well as Marvel
Licensing is a high-margin
comic books and other ancillary businesses, including an English learning center in
business and generates the China. The majority of division revenues, at $1.4 billion in F2010, or over 80% of
majority of profit within the the division revenues, are from the licensing business and given the challenges facing
Consumer Products segment. the publishing industry today, expect the bulk of revenue growth at the division to be
driven by licensing. More importantly, licensing is a very high margin business, one
of the highest at Disney, and we estimate represents the majority of Consumer
Segment profits.
Film product feeds the business, though princesses and cars sell year in and
year out
Merchandise royalties are generally earned based on an agreed upon percentage of
the item’s retail or wholesale price. Top licensed properties at Disney include
Mickey, Pooh, Disney Princesses, Toy Story and Cars, and Disney estimates that it
owns five of the top six franchises based on merchandise and consumer sales, with
the other top property being Barbie. Disney categorizes its franchises for consumer
products into those that are “evergreen" and generate relatively stead revenue streams
(Mickey and Princesses) and those that are more cyclical and tied to releases of new
content, such as Pirates. Given the importance of franchises to Disney's results,
management has begun to focus more on franchises with regard to its film and TV
decisions, and has already stated that it intends to focus more on franchises in the
future film slates.
Retail stores a key branding tool – especially abroad – but not an earnings
generator
Disney retail business is a significant contributor to segment earnings, but is
important for the brand, particularly in new markets overseas where management
views the retail stores as a launchpad for the brand. At year-end F2010, Disney
owned and operated 211 stores in North America, 104 stores in Europe, and 48 stores
in Japan, and while it has opened a small number of new format stores in the US and
Europe recently, Disney does not plan to significantly grow its base beyond this
footprint. It has, however, invested in new store layouts recently, including grouping
items by brand (e.g., Cars) rather than by product type, which management has
indicated is delivering positive results.
53
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Interactive Media
Figure 38: Segment Revenue At roughly 2% of revenues and operating at a segment loss of $234M in F2010, the
Breakdown Interactive segment is by far the smallest for Disney, although recent strategic
decisions within the segment have garnered significant attention. Interactive Media
Advertising
is comprised of Disney’s gaming and online businesses, with the bulk of revenues
, other
26%
(~74% of F2010 revenues) comprised of multi-platform game sales and
subscriptions. The remainder of Interactive revenues are derived from advertising
revenues on Disney’s websites and Disney’s branded mobile phone service in Japan.
Games,
Sub- Gaming Industry Expected to grow steadily in next few years - Playdom
scriptions
74% acquisition adds to Disney’s exposure
The bulk of interactive revenues are driven by Disney’s gaming assets, which create
and distribute games for consoles, mobile devices and websites. Gaming revenues
Source: Company reports fluctuate rather significantly between quarters based on the timing of new game
releases and pricing. The gaming industry has experienced rapid growth in recent
years, although sales in the US have slowed recently. A rising segment, however,
has been gaming over social sites and mobile devices. We believe Disney’s recent
acquisition of Playdom signified a clear strategic change for the company away from
console-based games toward the online space.
Rocky start with Playdom

In August 2010, Disney completed its acquisition of Playdom, an interactive
company that develops games for social networking sites for $563 million and up to
$200 million in performance based earn-out payments. Some of Playdom’s more
popular games include Social City and Market Street. The acquisition has had a
somewhat rocky start, with losses extending longer than many had originally
anticipated, and Disney making the decision earlier this year to take a brief hiatus
and work to improve the quality of the games planned for release to better meet
customer demands and the competition. Since coming out of this retrenchment,
Disney has commented that the response from consumers has been positive with its
game Gardens of Time ranking in the top ten on Facebook. Key game titles targeted
in the second half of the year include Cars 2 and Lego Pirates, which should help
boost revenue in upcoming quarters.
Business expected to reach profitability by F2013; acquisition costs to wind

down beginning mid- next year
Operating results continue to be dampened by purchase accounting related to the
Playdom acquisition. While the acquisition is still relatively recent and it remains to
be seen how the integration will go, investors appear somewhat disappointed so far,
particularly following losses in the segment in recent quarters. Disney has spoken in
the past about the segment reaching profitability in F2013. Compensation and
payments to Playdom executives is projected to be around $110 million in F2011 and
will continue through F2Q12, after which the margin profile should be improved.
However, at a very small portion of Disney's business, we don't expect this segment
to meaningfully contribute to results in the near to intermediate term.
Advertising/Other
Advertising/Other is a relatively small portion of Disney, but we believe the
company is committed to expanding its offerings on its main Disney.com sites and
creating new sites for its content, which should help drive growth in future years.
54
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Disney is currently working on a redesign of its main site in an effort to improve the
interface and create more opportunities for revenue generation down the line.
Advertising revenues at the segment increased approximately 35% in F2010 to
nearly $200 million, and we expect 9% growth in F2011. Online advertising remains
very strong in spite of economic weakness in many global markets, giving us
confidence in the outlook for the advertising-based portion of Disney’s Interactive
business. As detailed in the chart below, online advertising is expected to grow at a
healthy rate for the next few years as it continues to take share from other forms of
traditional advertising. We also believe that Disney is committed to expanding its
content offerings on its sites around the world and as the newly designed main site is
launched and other improvements are made, Disney should be able to achieve
healthy growth at its online advertising business in future years.
55
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Financial Outlook
Table 5: Viacom FQ4, 11 Fiscal Q4 outlook: Noisy quarter likely to result in modest earnings growth
Financials
Following an overall solid FQ3 in which EPS grew 15% off of 7% revenue growth,
$ in millions we expect similar themes in the final fiscal quarter of the year. Positives include
F4Q10 F4Q11E ongoing affiliate fee gains in Cable and good top line growth at Parks and Consumer
Revenue: Products. Advertising growth may be more moderate given programming comps at
Media Networks 4,414 4,603 ESPN and we expect challenges at the Studio and Broadcasting as well as cost
% change -6.6% 4.3%
Parks & Resorts 2,819 2,939
headwinds at Cable and Parks and Resorts. Management has guided to roughly a
% change -0.9% 4.3% $0.07 impact per share from the combination of cost headwinds and difficult studio
Studio 1,591 1,481 box office comps. We forecast FQ4 EPS of $0.54, up 25% year over year, off 3%
% change 6.4% -6.9%
revenue growth and boosted by an impressive $5 billion in projected buybacks in the
Consumer Products 730 803
% change 13.0% 10.0% fiscal year, including $2 billion in FQ4.
Interactive Media 188 216
% change 19.7% 15.0% Cable Networks: Higher programming costs likely to eat into solid top line
Total Revenue 9,742 10,042
% change -1.3% 3.1%
growth
We forecast 8% affiliate fee growth with an ongoing boost from new retrans
Operating Income: contracts for ABC (approx. $20 million), offset in part by other moderating contracts
Media Networks 1,217 1,389
% change -18.0% 14.1%
that are nearing their expirations.
Parks & Resorts 316 338
% change -8.1% 6.9% We believe advertising revenue growth will come in well, reflecting the ongoing
Studio 104 115
strength in the ad market, a strong ratings start to college and Monday Night
% change -900.0% 10.3%
Consumer Products 184 223 Football. ESPN's recently renewed NFL contract has also immediately allowed for
% change 21.9% 21.0% expanded programming and highlights usage – the network has already added an
Interactive Media (104) (80) extra hour of NFL Countdown on Sunday mornings and three new shows during the
% change -8.8% -23.1%
Total Op Income 1,717 1,984
week. We believe this is higher value advertising inventory than the replaced
% change -7.3% 15.6% programming that will add to growth. Offsetting ad growth at ESPN somewhat is the
circling of last year’s World Cup early in the quarter and other soft ratings from the
Diluted EPS: $0.43 $0.54 NFL lockout and the British Open golf tournament.
% change -7.1% 24.7%
Source: Company reports; J.P. Morgan Within Disney’s other cable networks, Disney XD has seen extraordinary ratings
estimates. growth, up 25% in FQ4, while ABC Family saw its best ratings month ever in July in
its target demo, but was flattish for the quarter; we expect both to provide nice ad
growth in the quarter. Our cable ad revenue estimate is for 7% growth.
Table 6: Disney Cable Networks Ratings, FQ4

All Households (HH in '000s) Key Demographic (Persons in '000s)
2011 2010 Y/Y change Key 2011 2010 Y/Y change
Rating HHs Rating HHs Rating HHs Demo Rating Pers. Rating Pers. Rating Pers.
(ESPN) 0.7 773 0.8 871 (11.8%) (11.3%) M18-49 0.6 388 0.7 455 (13.0%) (14.7%)
(ESPN2) 0.2 264 0.3 288 (8.0%) (8.3%) M18-49 0.2 112 0.2 123 (10.5%) (8.9%)
(DSNY) 1.2 1,401 1.3 1,512 (7.6%) (7.3%) F2-11 3.0 607 3.1 626 (3.2%) (3.0%)
(FAM) 0.4 500 0.4 492 0.0% 1.6% P18-49 0.2 309 0.2 309 4.3% 0.0%
(SOAP) 0.1 116 0.1 137 (16.7%) (15.3%) F18-49 0.0 8 0.0 10 (25.0%) (20.0%)
(DXD) 0.2 254 0.2 203 22.2% 25.1% F2-11 0.4 77 0.3 56 35.7% 37.5%
Source: Nielsen; J.P. Morgan.
Programming costs will see a moderate spike in the quarter, driven by ESPN’s
launch of the Longhorn Network and expanded contract for ACC football. Higher
costs are also expected from Disney XD, which continues to invest in new content,
and ABC Family added a third night of original programming over the summer.
Year over year earnings comparisons in the segment are eased by last year’s $58
million in charges, mostly reflecting a programming write-off at Lifetime Network,
56
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
which are not expected to repeat. On a reported basis, we look for moderate margin
expansion to drive nearly 20% operating income growth.
Broadcasting: Tough syndication and political comps to pressure the top line
ABC Studios will face a difficult comparison as it has no shows sold into syndication
this quarter vs. two prior year (Ugly Betty, My Wife and Kids), which should result in
revenue declines. Disney’s eight owned and operated TV stations will also face very
tough comps with the absence of political ad dollars in the quarter - we expect O&O
revenues to decline in the high single digits. At the ABC Network, we expect flattish
ad growth given weak ratings offset by the boost in retrans revenue.
We look for overall Broadcasting revenue to post a 3% decline with modest margin
compression resulting in a 10% operating income decline.
Parks and Resorts: Aulani opening, Vacation Club troubles will likely hamper
otherwise solid results
We expect management’s focus on pricing growth as a favorable tradeoff to
attendance will continue in FQ4. In addition, the second full quarter of Disney’s new
ship, the Dream should remain a positive contributor and the international business
appears to be holding in with noted improvement in Tokyo. A headwind to results,
however, should be the late August partial opening of the Aulani Resort in Hawaii
and management errors at Disney Vacation Club.
On the domestic parks side, pricing will see the impact of two ticket pricing increases
in the preceding year – the first in Aug 2010, and the second this past May at roughly
10% - which should result in another quarter of high single digit per capita spending
growth. Meanwhile, we expect slight attendance growth, which could lead to parks
revenue growth approaching last quarter’s double digit growth.
On the domestic hotels side, we expect more moderate performance than FQ3’s
double digit growth. On its FQ3 earnings call on August 9, management commented
that room bookings were tracking down 2% while room rates were up mid-single
digits. Given September is a seasonally slow month with little room for expanding
pricing (typically more discounting is seen in September), we would not expect a
pickup from management’s mid-quarter tracking; we forecast 5% revenue growth.
Disney Cruise Line should be another strong grower thanks to its second full quarter
of its Dream ship, which appears to be performing well with strong bookings and
margins already ahead of the segment. We believe this business will contribute
double digit revenue and earnings growth.
Aulani’s Vacation Club troubles The launch of Disney’s first major stand alone hotel, Aulani in Hawaii, which isn’t
– fee mispricing to hurt associated with a park, will likely be a slight drag on results. The resort is scheduled
profitability.
to open in phases with the initial opening in the last week of August with roughly
60% of the resort’s hotel rooms available, and 15% of its eventual Vacation Club
units. Pre-launch costs, its partial initial operations and the ongoing build-out of the
resort should result in a drag on segment results.
An additional and unexpected headwind from Vacation Club and Aulani is Disney’s
discovery that management had been under-pricing its management fee contracts on
Aulani unit sales for over a year. Unit sales include agreements for ongoing
57
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
management fees of the property. The mis-priced contracts are projected to result in
annual fees that are too low, and furthermore can’t be renegotiated for the life of the
contract. The error was at least caught with only a portion of Aulani’s units sold,
though any units sold under the contract terms will likely be an ongoing hindrance to
results and all Vacation Club sales were halted from July through much of
September. The head of the business, as well as several others, were dismissed.
Internationally, Tokyo should have a much stronger quarter than since the earthquake
with the park open throughout the quarter and the Oriental Land Company
commented on stronger attendance trends. At Paris and Hong Kong, we expect mid-
single digit top line growth, though at the latter heavy investment spending ahead of
the launch of its first of three new lands this fall. We look for overall segment
revenue growth of 4% with modest margin expansion.
Another tough quarter at the top line for the Studio despite nice surprises from
The Lion King 3D and The Help
The studio business should continue to face headwinds for at least the next several
quarters, both from ongoing DVD sales pressure but also a lighter movie slate that
will likely work its way downstream. Cars 2 is the only sizeable box office driver in
the quarter, which compares directly with last year’s much stronger Toy Story 3
performance. Disney’s distribution of DreamWorks’ The Help was a nice upside
surprise, though the resulting fee revenue should be a more modest contributor, while
the Lion King re-release in 3D also performed well ahead of expectations, which
bodes well for future re-releases but again should do little to overcome the Cars vs
Toys discrepancy.
The in-home side should also be challenged with ongoing industry DVD sales
headwinds and little flow through from Disney’s tough start to the year.
Helping to ease earnings comparisons was last year's $100 million write-off of
ImageMovers Digital, with no similar charges expected this year. As a result, we
expect operating income to be up year over year.
Cars driving strong Consumer Products sales

While Cars 2 couldn’t stack up against Toy Story 3 at the box office, it is the top
selling consumer products franchise in the history of the company. We project
double digit sales growth in FQ4 and nearly 20% earnings growth as the prior quarter
captured much of the benefit ahead of release.
Fiscal 2012: Somewhat of a transition year strategically;

macro uncertainty adds to established headwinds
The current macroeconomic uncertainty in the US and Europe presents lower than
usual visibility into several Disney revenue streams, such as advertising, parks and
resorts attendance, and retail sales. In addition, F2012 is another year of ESPN
affiliate agreements winding down with the next major renewals not beginning until
F2013, the theatrical side will have a lighter than typical slate under its new
leadership (impacting consumer products as well), and the Parks business will still be
spending heavily to launch new properties. We project modest revenue growth of
3% and slight margin expansion to drive EPS of $2.70, up 9.3%, with ongoing
aggressive share buybacks.
58
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Affiliate fees provide stable growth in uncertain macro environment; strong

upfront provides solid ad foundation
While fee growth will likely be more muted due to high the proportion of ESPN’s
contracts that are late in their life when escalators are typically lowest, we continue
to expect high single digit growth, which should be a strong base for the company at
roughly 20% of total revenues.
On the advertising side, we ESPN will face challenging comparisons in the first half
of the year, though we believe football will continue to be a big ratings and advertiser
draw. The overall ad market remains strong so far and Disney’s other ad supported
networks also have good ratings momentum: ABC Family and Disney XD. SoapNet
will be relaunched as Disney Jr. early in calendar 2012, which we expect to be a
future benefit, though likely to see some higher programming and launch expenses.
Look for modest improvement at Parks as several projects come on line

The Parks and Resorts business should still be very much in investment mode in
F2012 as several properties will be opening. Starting the year off, Aulani is still
ramping up and Hong Kong will open its first of three new lands. Toward mid-year,
Disney’s fourth ship, the Fantasy, should launch, though these costs will circle the
Dream's launch. The biggest opening of the year will be Cars Land at California
Adventure in FQ3, for which we expect meaningful spending through its open.
Aside from these projects, Disney will be spending toward the initiatives still to
come.
Assuming macro conditions do not materially worsen, we expect underlying trends

to be similar to F2011 with an ongoing effort to reestablish pricing at the expense of
some attendance trends. Given the macro uncertainty, we project slight domestic
attendance growth and more moderate pricing lifts. Overall for the year, we look for
good top line growth, helped by these new properties, and management has guided
toward margin expansion. We forecast 6% revenue growth and a modest 30bps of
margin expansion.
Studio facing a tough year as leadership transition continues to play out

Looking at the upcoming slate, it appears the studio is still cycling through cancelled
projects from years past under its new leadership. As previously mentioned, there
are no major tentpoles on the schedule this coming holiday season (vs. Tangled and
Tron Legcay prior year). F2Q12 faces easy comparisons against Mars Needs Moms
for its promising John Carter of Mars in 3D, however, Tron and Tangled both rang
up strong international receipts during the quarter. Going into summer, a likely solid
Avengers will come up against the 8th best performing movie of all time globally in
Pirates of the Caribbean. To round out the year, Pixar will release Brave, which as
an original movie should carry greater risk than Cars 2.
The anticipated theatrical weakness should flow through the downstream channels,
including the continued tough comps for Cars against Toy Story for DVD sales.
Overall, we project a 7.5% revenue decline, however, we expect the modest slate will
be prepared for in terms of cost and further will carry lower P&A and other costs that
will help preserve profitability (e.g. while Pirates grossed over $1 billion worldwide,
management has been forthcoming that its profitability did not correspond as much
with its box office success). We project margins can actually improve in the year,
59
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
though still expect earnings to decline mid- to high single digits noting that film
performance is notoriously difficult to predict.
Light theatrical slate flows through to Consumer Products

We expect a tough start and finish to the year as the business laps two highly
successful consumer products films: Tangled and Cars 2. There is no comparable
movie this quarter for Tangled, which drew excellent “princess” sales, and
management has conceded that Pixar's Brave next summer has minimal consumer
products opportunity while circling Cars. We look for low single digit revenue
declines and margin compression of roughly 500bps, reflecting in part the very
successful F2011.
Table 7: Disney Earnings Outlook, F2010-F2013E

$ in Millions
F2010 F2011E F2012E F2013E
Revenue:
Media Networks 17,162 18,519 19,490 20,745
% change 5.9% 7.9% 5.2% 6.4%
Parks & Resorts 10,761 11,607 12,286 13,026
% change 0.9% 7.9% 5.8% 6.0%
Studio 6,701 6,373 5,934 6,161
% change 9.2% -4.9% -6.9% 3.8%
Consumer Products 2,678 3,036 2,942 3,089
% change 10.4% 13.4% -3.1% 5.0%
Interactive Media 761 975 1,019 1,070
% change 6.9% 28.1% 4.5% 5.0%
Total Revenue 38,063 40,510 41,671 44,092
% change 5.3% 6.4% 2.9% 5.8%
Operating Income:
Media Networks 5,132 6,073 6,506 7,089
% change 7.7% 18.3% 7.1% 9.0%
Parks & Resorts 1,318 1,470 1,597 1,828
% change -7.1% 11.5% 8.6% 14.5%
Studio 693 616 517 644
% change 296.0% -11.1% -16.0% 24.5%
Consumer Products 677 832 805 859
% change 11.2% 22.9% -3.2% 6.6%
Interactive Media (234) (294) (200) -
% change -20.7% 25.6% -32.0% -100.0%
Total Op Income 7,586 8,696 9,225 10,420
% change 13.7% 14.6% 6.1% 13.0%
Diluted EPS: $2.03 $2.48 $2.70 $3.15

% change 15.3% 22.0% 9.3% 16.5%
Source: Company reports; J.P. Morgan estimates.
Fiscal 2013: The story comes together

Affiliate renewals, new parks and resorts properties, stronger studio slate
provide foundation for robust earnings and free cash flow growth
It’s a while to wait, but we believe F2013 will mark several positive developments to
earnings. Most significantly, affiliate renewals will begin in F2013 for ESPN, ABC,
and Disney’s other networks, which we believe will drive significant long term
growth. In the parks business, new properties should be ramping up to stronger
profitability, while at the studio and consumer products business, a stronger slate
should feed growth and margin expansion
60
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Major affiliate renewals should benefit ESPN and ABC most

The year will kick off a series of major affiliate renewals that we expect to be
productive for ESPN, in particular given its heavy period of long term sports rights
agreements. ABC also stands to benefit meaningfully through retransmission fees to
its affiliates and Disney’s owned and operated stations. We believe affiliate revenue
can begin to re-accelerate toward a double digit growth profile, and we believe
higher retrans revenue to ABC will start to drive meaningfully higher margins. ABC
Studios should also deliver Castle into syndication next fall, which should be a
modest positive.
New Parks properties should drive revenue and stronger margin expansion;
step down in CapEx
As more projects are completed, new revenues should catch up to front end loaded
launch costs, driving margin expansion. In addition, capex levels should start to pare
back from peak levels. Projects to be opened from now through F2013 include a full
Aulani open, the Fantasy cruise ship, Cars Land at California Adventure, phase 1 of
the Fantasyland expansion and Art of Animation hotel, and two new lands at Hong
Kong Disney.
Stronger theatrical slate should feed consumer products

Early scheduling of films for F2013 indicate a return to a more robust slate, including
a Monsters sequel from Pixar, two Marvel sequels, a Disney Animation film, and an
Oz production that has received early media interest. The one bigger uncertainty is
the fate of The Lone Ranger, scheduled for December F2013, which may not come to
fruition over budget concerns. Augmenting the release schedule should be several
DreamWorks Pictures that Disney will distribute. We also expect the animated films
will help drive incremental consumer products sales after an expected slow F2012.
Interactive to reach profitability

Management has guided toward the Interactive Media business to reach profitability
in F2013, in part through greater operating efficiencies and the cycling through of
Playdom purchase accounting charges. While the difference between losses and
profit in this business is relatively insignificant, we believe positive progress would
ease a perceptual overhang.
Strong earnings growth profile going forward

For F2013, we project 6% revenue growth driven by affiliate fee growth and
improved results from other businesses over a challenging F2012. We also see
stronger profitability in cable, broadcasting, and parks in particular driving total
company margin expansion potentially in excess of 100bps. Combined with ongoing
share buybacks, we expect EPS growth again in the mid-teens. In addition, lower
Parks capex spending should contribute to FCF per share growth in excess of 20% in
F2013.
61
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Uses of Cash
Figure 39: Management Use of Disney has historically focused its use of cash on capital expenditures (mostly parks
Cash Targets and resorts), M&A and organic growth initiatives, and shareholder returns through
aggressive stock buybacks and modest dividend levels.
Buybacks/
dividend,
20%
Parks to continue peak CapEx in F2012 before falling back
Fiscal 2012 is expected to see a continuation of heavy capital investment into the
many projects in the Parks and Resorts business. We expect Disney to spend much
more in capex than peers due to the parks business, however, the properties are
M&A/orga CaoEx,
nic grpwth, 60% unique and we believe will drive positive returns on capital.
20%
Figure 40: Disney Capital Expenditures by Segment, 2000-2013E

$ in millions
3500 3,258 3,055
3000 2,503
Source: Company reports; J.P.
2500 2,110
Morgan 1,823 1,753
2000 1,566 1,578
1,427 1,292
1500 1,049
2,529 2,320
1000 1,800
1,437 1,533
500 1,008 915 1,072 933 1,182
577
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Parks and Resorts Media Networks Studio Entertainment

Consumer Products Interactive Media Corporate
Figure 41: Disney Free Cash Flow Generation, 2009-2013E

$ in millions
2009 2010 2011E 2012E 2013E
OCF 5,319.0 6,578.0 6,950.2 8,043.1 8,426.6
CapEx (1,753) (2,110) (3,258) (3,055) (2,503)
Free cash flow 3,566.0 4,468.0 3,692.3 4,987.7 5,924.1
% of revenue 9.9% 11.7% 9.1% 12.0% 13.4%
FCF per share $ 1.90 $ 2.29 $ 1.93 $ 2.68 $ 3.23

% change -10.1% 20.6% -15.9% 38.9% 20.6%
Stepped up buybacks
$5 billion in buybacks in F2011. Disney has recently stepped up its share repurchase activity given the declines in the
stock price. Through FQ3, the company bought back $3 billion in stock, including
$1.4 billion in the June quarter. For FQ4, management recently commented that it
will have repurchased another $2 billion in stock to make the full year buyback a
sizeable $5 billion in total, or roughly 7.5% of total shares. Looking ahead, we
expect more moderate repurchase levels, likely reverting more to management’s
guidance of roughly 20% of operating cash flow ($1-2 billion) applied to shareholder
returns.
62
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Modest dividend
Disney historically pays a dividend once per year, which has typically represented
roughly a 20% FCF payout ratio. We expect further dividend growth ahead, though
as a secondary priority to share repurchases.
Strong balance sheet

Disney maintains the lowest leverage of its diversified peers at 1x net debt to trailing
EBITDA (its debt is rated ‘A’ investment grade by the major ratings agencies),
which we believe allows for substantial flexibility to concurrently pursue both
growth initiatives and return of capital to shareholders.
Figure 42: Disney Net Debt/ LTM EBITDA vs. Peers

3.0x
2.5x 2.4x
2.0x
1.7x
1.6x
1.5x
1.0x
1.0x
0.5x
0.0x
DIS TWX VIA DISCA
Figure 43: Disney Future Debt Maturities

$ in millions, calendar years
s
9000
8000
7500
6000
4500
3000
2000
1500 750 750 650 500 750 500
450 300
25 25
0
2011 2012 2013 2014 2016 2017 2019 2021 2032 2039 2057 2093
Debt Obligation ($ millions)
63
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Valuation
Shares under pressure: We see a combination of macro uncertainty, choppy
earnings and rough F2012 ahead
We rate DIS Overweight with $42 YE2012 price target. Shares are off 17% this
calendar YTD, and more recently down 23% just since late July, albeit with the
market down 15% over this latter period as well. Disney has had several noisy
earnings reports lately and has indicated another on tap for FQ4, which we believe
has shaken investor confidence somewhat. In addition, with an uncertain macro
environment and several initiatives ongoing in F2012 that are likely headwinds (as
mentioned above), we believe shorter term investors have headed elsewhere.
Weakness presents compelling valuation for longer term investor

At current levels, we believe valuation is compelling despite a lack of positive
catalysts on the near term horizon. Using various methodologies, including relative
valuation and sum of the parts analysis, we see meaningful upside from present
levels.
Our year-end 2012 price target of $42 is based on a return to Disney’s historical
average forward P/E premium of 20% over the S&P 500, implying a multiple of 13x
applied to our 2013E EPS. We believe the company’s strong brand, unique assets
(e.g. ESPN, Walt Disney World), and strong cash flows will drive this return to
premium valuation. We also note this implied multiple is a discount to Disney’s
three, five and 10 year average P/E ratios.
Table 8: DIS Valuation Summary

Implied Share
Metric Multiple Value
P/E - 5yr avg. 15.2x $48
P/E - Peer Group 9.9x 31
P/E - S&P 500 11.2x 35
Prem to S&P - 10yr avg @ 20% 13.4x 42
EV/EBITDA - 5yr avg 8.2x 58
EV/EVITDA - Peer Group 6.5x 47
SOTP 8.2x 42
Source: Capital IQ; Bloomberg; J.P. Morgan estimates.
Historical and Relative Valuation

Trading well below historical levels, though we see attractive earnings growth
longer term
Looking at past trading, DIS shares are at a meaningful discount to long and mid-
term averages. While F2012 should present several headwinds to earnings, we
believe at current levels these issues and prevailing macro uncertainty are more than
priced into the stock.
Traditionally a 20% premium to the S&P; currently in line

Over the last 10 years, DIS shares have traded at an average premium to the S&P of
roughly 20% on a P/E basis, which we believe reflects the company’s strong brand,
unique assets (e.g. ESPN, Walt Disney World), and strong cash flows. We believe
these traits continue to be a benefit to the company that will continue to drive
attractive cash flow growth, and believe DIS deserves to return to a premium to the
market.
64
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 44: DIS Fwd P/E vs S&P 500, last ten years
DIS shares currently trading well 35.00x
below historical levels, and
roughly in line with the S&P.
30.00x
25.00x
20.00x
15.00x
10.00x
5.00x
DIS Fwd P/E SPX Fwd P/E
Source: Capital IQ; J.P. Morgan
Figure 45: DIS Trading Premium to the S&P 500 on Fwd P/E, from 2002
We believe Disney’s historical 80%
premium to the S&P will return.
60%
Return of premium
in 2010 recovery
40%
20%
0%
-20%
-40%
-60%
Source: Capital IQ; J.P. Morgan.
65
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 46: DIS Forward EV/EBITDA, Last Ten Years

18x $50
16x $45
Price
$40
14x
$35
12x
$30
10x
$25
8x
$20
6x
$15
4x
EV/Fwd EBITDA
$10
2x $5
0x $0
EV/Fwd EBITDA Price
Source: Capital IQ; J.P. Morgan
Table 9: Comparable Company Valuations

FCF
Diversified Media
TIME WARNER O TWX 30.94 33,535.9 15,021.0 6,699.9 7,129.1 2.76 3.13 7.2 6.8 11.2 9.9 0.7 11.4 9.9 8.8% 3.0%
VIACOM O VIA.B 39.17 22,824.4 6,399.0 4,047.6 4,289.7 3.61 4.17 7.2 6.8 10.9 9.4 0.6 9.3 8.2 10.7% 2.6%
CBS (e) O CBS 20.85 14,303.1 4,650.0 3,014.0 3,363.0 1.82 2.20 6.3 5.6 11.5 9.5 0.5 7.1 5.9 14.1% 1.9%
Average: 7.1x 6.6x 11.6x 10.1x 0.8x 11.0x 8.9x 11.2% 2.2%
Cable Networks
Average: 8.7x 7.9x 14.6x 12.5x 0.7x 15.8x 13.2x 9.5% 2.1%
Cinema
CINEMARK (e) O CNK 18.87 2,136.3 1,157.0 519.8 557.3 1.32 1.63 6.3 5.9 14.3 11.6 0.5 12.0 9.9 8.3% 4.5%
(e)
Average: 6.8x 6.3x 21.7x 13.6x 0.3x 10.3x 9.1x 10.1% 5.6%
Ad Agencies
WPP GROUP (1) N WPPGY 45.97 12,356.7 4,241.2 2,464.8 2,717.9 4.41 5.02 6.7 6.1 10.4 9.2 0.7 10.1 7.8 9.9% 2.7%
Average: 5.8x 5.2x 11.4x 9.7x 0.6x 9.6x 7.6x 10.5% 2.8%
Marketing Services
ARBITRON O ARB 36.49 1,006.9 (20.6) 121.0 133.4 2.03 2.36 8.2 7.4 18.0 15.4 0.9 14.6 13.1 6.8% 1.1%
HARTE-HANKS N HHS 8.77 558.7 117.6 100.0 105.8 0.71 0.80 6.8 6.4 12.4 11.0 0.9 10.4 9.5 9.6% 3.6%
(d)
VALASSIS O VCI 18.39 934.6 491.1 324.7 345.4 2.81 3.50 4.4 4.1 6.5 5.2 0.2 4.7 4.0 21.4% NA
Average: 7.2x 6.6x 14.3x 12.6x 1.1x 10.9x 10.0x 11.3% 3.6%
Publishing
Average: 5.4x 4.2x 6.2x 8.0x 0.6x 6.0x 3.8x 46.8% 3.1%
S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Source: Bloomberg; J.P. Morgan estimates.
66
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Sum of the Parts

We believe using a sum of the parts valuation is a useful method for Disney’s diverse
business mix. While some assets have no true comparison (e.g., Walt Disney
World), and others have few pure play peers (e.g. ABC and studio entertainment), we
feel it is a very useful exercise, and demonstrates the value of its cable networks in
particular. ESPN is arguably the strongest, most valuable network on television and
Disney Channel is also a superior property, in our view. We acknowledge these
networks’ already premium affiliate fee levels and ESPN’s growing programming
costs, thus we assign valuation more in line with the pure play cable operators, SNI
and DISCA.
For the broadcasting assets, we put a slight discount to pure play operators, though
believe the retrans opportunity is meaningful. On the Parks side, we look at the US
regional operators currently trading at 6.5x forward EBITDA, and take a slight
discount for Disney's high capital investment spending and exposure to Europe. We
assign similar multiples to the studio and consumer products businesses given their
close ties. While the studio business is challenged, we see relative value in Disney's
library and kids focused content.
ESPN’s stand alone valuation Table 10: Sum of the Parts Valuation
implies the rest of the business $ in millions
is currently valued at 3-4x F2013 Multiple Enterprise Value
EBITDA. Segment Adj. EBITDA Low Mid High Low Mid High
Cable Networks 6,288 6x 10x 14x 37,728 62,881 88,033
Broadcasting 1,064 5x 7x 9x 5,321 7,449 9,577
Parks & Resorts 3,131 4x 6x 8x 12,523 18,785 25,046
Studio 812 4x 6x 8x 3,247 4,871 6,495
Consumer Products 971 4x 6x 8x 3,886 5,828 7,771
Interactive Media 12 2x 6x 10x 24 73 122
Corporate (326) 5x 6x 7x (1,628) (1,954) (2,279)
Total EBITDA 11,953 5x 8x 11x 61,102 97,934 134,766
Minority holdings
Net Debt (9,719) (9,719) (9,719)
Minority interests (5,791) (9,480) (13,169)
Equity Value 45,592 78,735 111,877
Shares 1,861 1,861 1,861
Price Target $ 24 $ 42 $ 60
% change from current -22% 34% 91%
Source: J.P. Morgan estimates.
67
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Management
Robert A. Iger – President and Chief Executive Officer
Mr. Iger has served as the company’s President and Chief Executive Officer since
October 2, 2005, and previously served as the company’s President and Chief
Operating Officer beginning January, 2000. Mr. Iger first joined the senior
management team as Chairman of the ABC group in 1996 and in 1999 became the
President of Walt Disney International as well. He began his career with the
company at ABC in 1974.
James A. Rasulo – Senior Executive Vice President and Chief Financial Officer
Mr. Rasulo has served as the company’s Senior Executive Vice President and Chief
Financial Officer since January 1, 2010, and previously served as chairman of Disney
Parks and Resorts beginning in 2002. Prior to assuming this role, he led Disney
Regional Entertainment and later moved to Paris to serve as President, Euro Disney,
where he eventually became Chairman and CEO in 2000. Mr. Rasulo joined the
company in 1986 as Director, Strategic Planning and Development, and later became
Senior Vice President, Corporate Alliances.
Alan N. Braverman – Senior Executive Vice President, General Counsel and

Secretary
Mr. Braverman has served as the company’s Senior Executive Vice President,
General Counsel and Secretary since January, 2003. Before assuming his current
role, he served as Senior Executive Vice President and General Counsel, ABC,
beginning August 1996. He joined ABC in 1993 as Vice President and Deputy
General Counsel.
Kevin A. Mayer – Executive Vice President, Corporate Strategy and Business

Development
Mr. Mayer was appointed Executive Vice President, Corporate Strategy and Business
Development in June 2005, having rejoined Disney from L.E.K. Consulting LLC,
where was a partner and head of the Global Media and Entertainment practice. Mr.
Mayer first joined Disney in 1993 as manager, Strategic Planning and later served as
Executive Vice President at the Walt Disney Internet Group. He has also served as
chairman and CEO of Clear Channel Interactive, where he managed all aspects of
new media business.
Christine M. McCarthy – Executive Vice President, Corporate Finance,

Corporate Real Estate, Sourcing, Alliance and Treasurer
Ms. McCarthy serves as the company’s Executive Vice President, Corporate Finance
and Real Estate & Treasurer. Prior to joining the company, she served as the
Executive Vice President and Chief Financial Officer of Imperial Bancorp from 1997
to 1999.
Mary Jayne Parker – Executive Vice President and Chief Human Resources
Officer
Ms. Parker serves as the company’s Executive Vice President and Chief Human
Resources Officer and previously served as the Senior Vice President of Human
Resources, Diversity and Inclusion for Disney Parks and Resorts worldwide. She
first joined the company in 1988 and has held various positions, including Manager
and Director of Disney University, Director and Vice President of Organization
Improvement and Vice President of Organization and Professional Development.
68
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Disney’s Board of Director’s has 13 members, of which 10 are independent. The

Board is comprised of the following individuals:
Susan E. Arnold Independent

John E. Bryson Not Independent
John S. Chen Independent
Judith L. Estrin Independent
Robert A. Iger Not Independent
Steve Jobs Not Independent
Fred H. Langhammer Independent
Aylwin B. Lewis Independent
Monica C. Lozano Independent
Robert W. Matschullat Independent
John E. Pepper, Jr. Independent
Sheryl Sandberg Independent
Orin C. Smith Independent
Ownership
Figure 47: Top Shareholders
Steve Jobs’ death leaves the Holder Amount Held % Out
future of his holdings uncertain.
Steve Jobs 138,000,007 7.4%
Fidelity Management & Research 80,947,518 4.4%
State Street Corp 73,617,758 4.0%
Vanguard Group Inc. 68,782,673 3.7%
BlackRock Institutional Trust 45,193,689 2.4%
Massachusetts Financial Services 45,051,998 2.4%
State Farm Mutual Auto Insurance 42,206,018 2.3%
T. Rowe Price Associates 39,616,912 2.1%
Northern Trust Corporation 27,427,384 1.5%
Southeastern Asset Management, Inc. 26,051,158 1.4%
Total Ownership by Top 10 586,895,115 31.6%
Source: Bloomberg
69
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Time Warner
Initiating Coverage with Overweight Rating, $40 2012 Price
Target
We are initiating on Time Warner with an Overweight rating and a year-end 2012
price target of $40. We believe the company's breadth of diverse media assets,
including its well regarded TV production business, popular cable brands, including
HBO, international expansion and meaningful digital opportunities, combined with
somewhat negative market sentiment, create an attractive buying opportunity.
Robust free cash flow, healthy share repurchases and what we believe is a well
regarded management team give us additional comfort in this story despite a choppy
market. At 9.9x 2012E EPS, TWX is trading well below recent historical levels,
which we believe reflects the Street’s skepticism surrounding Time Warner’s longer
term growth opportunities and whether the company will ever sign meaningful
distribution deals, a concern we think is overblown. With less exposure to
advertising than its peers, an aggressive repurchase program and the TV production
business a steady contributor to profits, we believe that downside from current levels
is limited and view a potential digital deal as a meaningful positive intermediate term
catalyst to shares. Our 2012 price target assumes that TWX trades at roughly 11x
forward EPS by year-end 2012, just above its current forward multiple, but still at a
discount to its average historical levels and to where we expect peers will trade.
Investment Thesis
Lower exposure to ad market and high affiliate fee exposure benefits TWX in
choppy ad market
While we are still positive on the overall advertising market, expecting some
moderation but still good growth in 2012, we believe TWX shares will continue to
benefit from the lower risk associated with less advertising exposure as long as the
overall markets remain choppy. With an estimated 21% of 2011 revenue from
advertising, TWX is much less dependent on this cyclical revenue stream and more
weighted (~30% of total revenue) on more predictable cable affiliate and subscriber
fees.
Overweight
Time Warner Inc. (TWX;TWX US)
Company Data FYE Dec 2010A 2011E 2012E 2013E
Date Of Price 06 Oct 11 Q1 (Mar) 0.61 0.58A - -
52-week Range ($) 38.62 - 27.62 Q2 (Jun) 0.50 0.60A - -
Mkt Cap ($ mn) 35,608.02 Q3 (Sep) 0.62 0.76 - -
Fiscal Year End Dec Q4 (Dec) 0.66 0.83 - -
Shares O/S (mn) 1,138 FY 2.40 2.76 3.13 3.61
Price Target End Date 31 Dec 12 Source: Company data, Bloomberg, J.P. Morgan estimates. Quarterly EPS may not add up to annual due to
rounding. Excludes one-time items. EPS figures are pro forma for the spin-off of Time Warner Cable, a
reverse 1-for-3 split and a $9.25 dividend received from Time Warner Cable. 'Bloomberg' above denotes
Bloomberg consensus estimates.
70
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Furthermore , we see nice room for upside from these affiliate revenues given built in
escalators and untapped potential step ups that will likely come beginning in the next
couple of years when the company renews its contracts for its cable networks that are
now benefiting from the highly valued NCAA deal. With more NCAA games
migrating from CBS to TWX’s networks as the 14 year contract matures, we would
expect further increases in affiliate revenues as well longer term.
Conservative content deals and extensive library give TWX a strong position to
monetize assets in the future
With the extensive Warner Bros. library and relatively conservative deals with digital
distributors so far, we believe that TWX likely has much more upside potential down
the line when it continues to further monetize its content. So far, TWX has been very
deliberate with its digital content deals in an effort to ensure that it doesn’t impinge
on ratings at its cable networks, which largely still rely on second run programming
for a meaningful amount of content. While a bigger content deal may heighten
concerns of cutting the cord due to broader content distribution, we see the potential
revenue benefit (and high margins) from these deals far outweighing these concerns
and a net positive for the stock. In our view, these deals will become more common
whether or not TWX’s WB participates in them or not; therefore, sitting on the
sidelines is not really a prudent option and TWX will want to maximize this new
revenue stream. Time Warner' DVD distribution deal with Netflix expires in late Q4,
so between this deal up for renegotiation and our view that Amazon will look for
more content for its new tablet device, we believe that Time Warner will likely enter
into some digital content deals in the near term.
HBO concerns appear overblown

While HBO U.S. penetration has fallen slightly in recent years, revenue continues to
grow and it is expanding overseas. The network has long term deals with a
significant amount of studios for content and its original programming remains
popular with viewers. While we do agree that this premium content is the sweet spot
digital distributors look to replicate, we believe ongoing momentum in original
programming, their exclusive rights with studios and the initial positive reception of
HBO GO help protect the HBO model in the foreseeable future.
Healthy balance sheet and strong FCF

TWX has the heftiest buyback among its peers with a five billion dollar authorization
and has repurchased 65 million shares for $2.3 billion year to date through the end of
July, and we expect repurchases to continue at a healthy pace. While there is some
risk that TWX may become a bit more acquisitive down the line given very healthy
free cash flow generation, we believe it is more likely management will continue to
return cash to shareholders in the form of repurchases and possibly a dividend
increase going into 2012 given management’s history of returning excess capital to
shareholders.

Ratings softness at Turner and challenges with syndicated programming
With choppy ratings at some of TWX’s major networks recently and so much
reliance on syndicated programming and films, we believe the risk is that these
networks don’t have the leverage needed to maintain healthy affiliate fee increases
going forward, which would weigh on earnings growth and margins.
71
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Global economy still uncertain

Time Warner earns roughly 30% of its revenue overseas and we expect a significant
portion of growth and margin expansion in the near to intermediate term to come
from international markets. If the global economy does weaken more than we
currently anticipate, weak advertising trends and softer cable growth would weigh on
TWX’s growth prospects and profitability.
Potential acquisitions could be a concern

With so much cash on hand and healthy free cash flow of nearly $3 billion estimated
in 2011, the concern exists that Time Warner will use these funds in another big
acquisition (remember AOL).
Company Description
Time Warner, Inc. is a global media company with three business segments: 1.)
Networks (46% of 2010 revenues/68% of EBITDA), which includes domestic and
international cable networks such as CNN, TNT and TBS as well as premium pay
cable channels HBO and Cinemax; 2.) Filmed Entertainment (43%/22%), which
consists of Warner Bros. studio and television group and a home entertainment
business; and 3.) Publishing (14%/10%), which consists of a global magazine
business and related websites. Popular titles include Time and People. 2010 revenue
and EBITDA were $27 billion and $6.4 billion, respectively.
Time Warner’s Steady Businesses Look Increasingly

Attractive in a Shaky Market
Following a tumultuous period in its corporate history surrounding its investment in
AOL and the spin-off of its cable business, Time Warner is now a leaner, more
focused media company with what we view as a solid group of assets spanning the
TV, film and print industries. With uncertainty surrounding the global economic
outlook, we believe that Time Warner's relatively low exposure to advertising versus
its peers (estimated at 22% of 2010 revenue versus 34% for Viacom and 60%+ for
CBS) and significant exposure to more steady affiliate fees make its business mix
very attractive in a shaky market and relatively more steady in general than many of
its peers. We believe that Time Warner’s Networks (the bulk of company profits)
business is in a favorable position today with more leverage on the affiliate side at
Turner following its acquisition of NCAA coverage and a stable business at HBO.
Quality TV content is in high demand as broadcasters and cable networks are
investing more in original content than ever before, which should drive healthy
results at Warner Bros. TV business as it is the largest provider of content in the TV
industry. Given TWX's extensive TV and film library and limited digital content
deals to date, we believe it is also best positioned to take advantage of an
increasingly heated marketplace and enter into some deals to license a portion of its
library and generate a new, meaningful high margin revenue stream. And while print
will likely remain under pressure for the foreseeable future, at only 10% of EBITDA,
we don't anticipate it to be a significant drag on company results, and we view Time
Warner’s position in the industry very favorably.
72
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 48: TWX’s Network Business Is Less Than Half of Revenue, But The Most Significant Profit Area
Revenue EBITDA
Publishing Publishing
13% 10%
Filmed
Networks Entertainment
45% 22%
Filmed Networks
Entertainment 68%
42%
Networks
Cable Networks Account for the Bulk of Profits
At roughly 45% of 2010 revenue and 68% of adjusted EBITDA, Time Warner's
Figure 49: Networks as a Percent cable networks business is by far the bulk of company’s profits. We view TWX's
of Total Revenue (2010) larger exposure to this segment positively, as we believe that this business is
generally more stable than some of its others, particularly as subscription and
affiliate fees comprise over 60% of Networks revenue. In our view, fluctuations in
box office trends at the studio business and secular challenges facing Publishing
make those segments less highly valued.
Networks
45%
Networks results are driven by two divisions – Turner (over 60% of Network
revenue) and HBO. Turner includes the domestic and international cable networks,
including TNT, TBS and CNN, while HBO includes Time Warner’s domestic and
international premium pay cable networks, including HBO and Cinemax.
High Exposure to Subscription and Affiliate Fees Creates

Source: Company reports More Stability in Networks Model
The majority of segment revenue is from subscription payments, which is mainly
driven by subscription fees paid for HBO and Cinemax (estimated at 45% of TWX’s
subscription revenue), as well as affiliate fees from Turner’s cable networks.
Advertising revenue is mainly from the Turner division, as HBO and Cinemax do not
air advertisements.
73
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 50: Subscription Payments Are the Majority of Networks' Revenue

Other- Networks,
Content, 8%
1%
Figure 51: Networks as a Percent
of Total EBITDA (2010)
Advertising, 30%
Networks
Subscription,, 61%
68%
In our view, TWX’s high exposure to affiliate and subscription revenue is a positive
Source: Company reports for its cable networks business, as this revenue stream is generally less cyclical, and
should help insulate network profitability if the ad market slows further than we
currently anticipate. For example, in the past four years, subscription revenues have
grown relatively steadily at TWX, in spite of the recent recession, while advertising
revenue declined during the recession in 2009 and we believe is a higher risk area
heading into 2012 when we expect ad spending will likely slow a bit (we expect
global ad growth to slow 100bps to 4% in 2012) and the global economy will remain
uncertain.
Figure 52: Subscription Revenue is Less Volatile than Advertising

$9,000
Subscription 07-11 CAGR = 7%
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2007 2008 2009 2010 2011E
Subscription revenue Advertising
In general, subscription revenue is more steady as deals are long term in nature (we
estimate that Turner's deals average 5+ years in length) and many have regular price
escalators built into them. Also, as we will discuss further below, we believe
subscription revenue will be a steady growth area in future years at both Turner and
HBO, as Turner further leverages its newly acquired NCAA relationship (which
should at the least give it leverage in the next round of affiliate deals) and monetizes
its investment in original programming and as both Turner and HBO continue
expanding overseas.
74
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Continued Content Investments Are Key to Driving Turner

Growth
While subscription revenue makes up a larger portion of the Networks segment,
advertising revenue is growing at a faster pace and increased at a CAGR of 9%
between 2007 and 2011E, despite a decline in 2009, and Turner networks account for
the bulk of advertising revenue at the segment. We believe that Turner has benefited
in recent years from increased original programming and sports on its networks, as
well as from solid ratings and a healthy overall ad market. With some moderation
expected in advertising growth ahead, we believe that a focus on continued content
investments will be key to driving ad growth and maintaining healthy affiliate
revenue trends as well.
Within the Turner Networks division are Time Warner's non-premium cable
networks that focus on a variety of programming, including news, sports, original
syndicated series, news broadcasts, films and syndicated series.
Figure 53: Increased Sports Exposure and Original Programming Should Help Turner's Networks
Network Demo Top/Upcoming Programming Sports Programming Other Notes
TNT A25-54 The Closer, Rizzoli & Isles, Leverage, Falling Skies, SouthlLAnd; syndicated includes Bones, Law & Order NBA, NASCAR, NCAA TNT has made significant investments in original programming in recent years
TBS A18-49 Conan , Tyler Perry's House of Payne, syndicated includes: Family Guy, The Office, Seinfeld MLB, NCAA Upcoming syndicated programming includesBig Bang Theory, more original programming planned
CNN A25-54 American Morning, The Situation Room with Wolf Blitzer, Anderson Cooper 360 N/A
Cartoon Network Kids 6-11/A18-34 Tower Prep, Adventure Time, Robot Chicken, Venture Brothers N/A Adult Swim airs in the evening on Cartoon Network and targets Adults aged 18-34
The CW A18-34
Gossip Girl, Supernatural, The Vampire Diaries, 90210, One Tree Hill, America's Next Top Model, Ringer, The Secret Circle, Hart of DixieN/A 50/50 JV with CBS, not consolidated into Network results
Turner Classic Movies N/A Classic films from around the world N/A Commercial free network
HLN A25-54 Nancy Grace, The Joy Behar Show, Morning Express with Robin Meade N/A
truTV A18-49 The Smoking Gun Presents: Worlds Dumbest…, It Only Hurts When I Laugh NCAA
Boomerang N/A Yogi Bear, Tom & Jerry, The Flinstones, Pink Panther, The Jetsons N/A Commercial free network
Among Turner's networks, we estimate that the bulk of revenue is driven by three of
the networks – TNT, TBS and CNN generate an estimated 75% of Turner's domestic
revenue, and also have the largest amount of original programming, sports content
and news, which we believe is most valuable to consumers in an increasingly
cluttered cable TV environment.
Figure 54: Three Networks Account for the Bulk of Turner's US Results
CNN/HLN, 19%
Other, 24%
TBS, 22%
TNT, 35%
Source: J.P. Morgan estimates. SNL/Kagan
75
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Turner ratings have trended well historically as networks added more original
programming and sports
Ratings at Turner's top three networks have held fairly steady over time, as Turner
expanded programming at all three and introduced more sports content to TBS and
TNT and more original programming.
Figure 55: Historical Ratings at Top Turner Networks Have Been Relatively Steady in Recent
Years
1.200
1.000
0.800
0.600
0.400
0.200
-
2007 2008 2009 2010
CNN/HLN TBS TNT
Source: Nielsen, ratings based on average primetime ratings
We attribute some of the ratings stability in recent years to Turner increasing the
amount of original programming and sports on its networks, improving their
relevance and popularity with viewers. For example, Turner has noted in the past
that ratings for its original series on TNT and TBS averaged 45% and 31% higher,
respectively, than its other programming, and CPM’s were over 100% higher than
those for licensed programs.
Sports have performed relatively well this year with management noting that the
NBA playoffs were the most watched since 2005 and the networks surpassed ad sales
expectations in the first year of its NCAA deal (see below for additional comments
on the NCAA agreement). However, this strength was offset a bit by weaker than
expected results at TNT and TBS during some of the syndicated and original
programming, creating the need for additional programming investments, in our view
(this trend is evidenced by the relatively soft ratings for TBS and TNT in Q3 below).
We believe that management is working to improve ratings trends at the networks
and has made some moves to improve the programming line-up. TBS recently
canceled The George Lopez Show and the company acknowledged on a recent
conference call that some of its syndicated programming needed to be refreshed.
TWX has already made some investments with The Big Bang Theory (which is
produced by Warner Brothers) set to launch on TBS in Q4, 2011 and The Mentalist
at TNT, expanding its frequency in 2012, which may help alleviate some of the
recent ratings weakness at these networks by the end of the year and into early 2012.
76
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 56: 3Q Ratings Have Been Mixed So Far at Turner

Primetime QTD Live + SD AA (000), P25-54
3Q 2011 3Q 2010 Y/Y change
CNN 218 147 48.3%
HLN 186 126 47.6%
TBS 605 766 (21.0%)
TNT 879 990 (11.2%)
Source: Nielsen
A strong upfront and healthy scatter bode well for ad growth although ratings
remain an important piece of the puzzle
We believe the backdrop remains strong for Turner to perform well in 2H,11 and into
2012. We expect cable ad spending to increase in the high single digit range on
average in 2011, and we believe Turner likely secured upfront commitments that
were even higher than that, in the high single digit to low double digit range on
average. A strong upfront, combined with continued strength in scatter (which is
pacing up in the mid-teens on average so far in 3Q, according to various media
executives that have commented publicly recently) should support good ad growth
through the remainder of the year. However, if recent ratings weakness continues
and new programming planned for later this year is not as popular as expected,
Turner could face more meaningful make-goods, which would weigh on 2H results.
Looking out to 2012, we expect another good year for cable advertising growth,
likely up 5%-6% for the year. A relatively healthy cable ad market, combined with
potentially better ratings at TBS and TNT following recent programming
investments should deliver high single digit top line growth in this segment in 2012.
CNN should also benefit from increased news viewership surrounding the 2012
election, potentially resulting in an above average year at that network.
Sports Deals Should Mitigate Some Risk of More

Challenging Affiliate Renewals in Coming Years
At 61% of Networks revenue, subscription fees from subscribers of HBO and
Cinemax and affiliate fees from cable operators are a very important component of
Networks revenue and, as mentioned above, tend to be more stable over time than
advertising revenue
Figure 57: HBO/Cinemax Accounts for the Majority of Subscription Revenue
Turner, 46%
HBO/Cinemax, 54%
Source: SNL/Kagan, JP Morgan estimates
77
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Additional Sports content should give Turner leverage in upcoming affiliate

negotiations
Turner's move towards increasing its sports programming has already paid off in
terms of ratings during those broadcasts, but the hefty price tag of sports
programming generally means that advertising alone is not enough to make the
contract profitable for networks. As a result, networks rely on their ability to
monetize sports programming through affiliate negotiations with cable providers and
Turner will only enter into contracts for sports when it believes it can be monetized
on the affiliate side. Today, we estimate that TNT, TBS and CNN account for over
80% of Turner’s subscription revenue, with TNT alone accounting for nearly 40%,
making affiliate trends at the network increasingly important.
Over the past few years, affiliate subscription revenue has averaged high single digit
growth at Turner's top three networks, and we expect that despite increased pressure
on cable operators to pay broadcasters retransmission revenues and consumer
resistance to higher cable bills, TWX will likely be successful in negotiating for
healthy step-up payments (and then annual escalators in the mid-single digit range)
as Turner is able to leverage new sports deals such as the NCAA. Turner started
airing NCAA basketball in 2011 and while the company does not disclose the timing
of its affiliate deals, we believe that it has a large portion of contracts up for
negotiation in the next three years or so, which should allow the company to leverage
its new sports contracts and investments in original programming to command higher
affiliate rates. We expect ratings to remain in focus and if Turner is not able to turn
around the recent ratings challenges at its networks, it should influence the affiliate
deals regardless of the strength in sports.
Cable operators may be While negotiations for affiliate fees will likely become more contentious now that
resistant to pay increased broadcasters are demanding retransmission revenue, we believe that increased sports
affiliate fees as deals expire, but
we believe that Turner now has
programming on its networks helps make Turner’s networks “undroppable” by cable
enough sports and original operators, mitigating a broader risk longer term. There has been some speculation in
programming to make its the press (New York Post 9/9/11) that DISH could drop ESPN (when its contract with
networks “undroppable.” Disney is up for renewal) from its main tier and offer it as a premium channel, which
would hurt ESPN's subscriber base. Given TNT’s and TBS's significantly lower per-
subscriber fees, we don't believe that the networks will run into this issue in the near
future with cable operators. Also, while we don’t expect a la carte pricing to come to
the market in the near term, we do believe it is more likely over time as cable bills
continue to increase and more consumers have access to content on various
mediums, which could pose a threat to the Networks business in the intermediate to
long term.
NCAA deal is the most recent example of Turner’s increased focus on sports
Turner’s most significant sports deal in recent history was its agreement with CBS in
2010 to broadcast National Collegiate Athletic Association (NCAA) Division 1
Men’s Basketball tournament games for 14 years, beginning in 2011, for an
aggregate fee of $10.8 billion. Under the contract, games are aired on TNT, TBS,
truTV and CBS, with CBS and Turner selling advertising on a joint basis. CBS and
While the loss-cap is a risk to Turner will also share programming costs, however, there is a loss cap for CBS that
Turner if ad demand weakens, stipulates that if the programming fee and production costs exceed advertising and
we believe the NCAA contract sponsorship levels, CBS’ annual losses are capped in the range of $30 million to $90
will be profitable longer term, million (varies by year), and in total $670 million for the contract period. Turner
particularly when affiliate deals
come up for renewal.
accounts for the contract by amortizing the programming fee over the agreement
78
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
term in proportion to expected ad revenues. Given that Turner is due to air more
games in later years (up to 2/3 of games by the end of the contract), we expect
Turner’s revenue and amortized cost associated with this contract to increase over
time. So far, CBS did hit the loss cap in the first year of the contract, although
Turner has said that the additional loss that it incurred as a result of the cap was not
meaningful, and we estimate losses in the first year likely approximated $100 million
and should decline as the contract progresses.
Going forward, we expect the deal to be profitable for Turner, particularly as it has
the opportunity to leverage the programming for higher affiliate fees in future years,
as noted above. Given that Turner should be able to negotiate for higher affiliate fees
at its three networks that are airing NCAA games, we estimate that it will not take
too meaningful a step-up to make up for annual losses, which should taper off the
highs of the first year. However, if we were to enter another ad recession, (which we
currently don’t anticipate), losses related to the contract could become more
significant, creating downside risks to current estimates. Going forward, we believe
that management is interested in pursuing some additional sports contracts, but that
acquisitions will likely be tempered as we do not believe their goal is to become the
next ESPN, but rather to maintain an appropriate mix between original, sports and
syndicated programming to broaden their networks’ appeal and make them a “must
have” for cable operators.
Impact of potential NBA lockout likely not meaningful for Time Warner
As it stands today, the NBA league owners and Players Association have not been
able to reach an agreement and the NBA is expected to announce the cancellation of
the first two weeks of regular season play, which was set to begin October
9th. Among the issues between the two sides are hard and soft salary caps and other
benefits the players receive (i.e. one point of contention is the percentage of
basketball related revenue the players are entitled to from the league – players used
to receive 57%, while the league is reportedly now offering below 50%). The
cancellation of training and preseason games is not a positive sign for the potential
outcome or for Turner’s NBA coverage, but it is important to note that the regular
season is scheduled to open November 4th, and many believe that the two sides have
until mid-October to reach an agreement before the a meaningful portion of regular
season is truly in jeopardy.
Turner has relatively extensive NBA programming

Turner has aired NBA programming for many years and has relatively extensive
programming rights, with TNT and TBS airing games weekly during the regular
season (TNT has branded double-header games on Thursday nights) and it also has
exclusive coverage to air the Eastern or Western Conference finals each year. Turner
has aired the Eastern Conference Finals in odd numbered years and the Western
Conference Finals in even numbered years. While Turner has rights to the
Conference Finals, the rights are not exclusive during the first round, as local sports
networks can still air the game as well, and Turner’s deal becomes exclusive during
the second round. ESPN has rights to air the other Conference Final and weekend
coverage of ESPN’s series and the Finals are broadcast on ABC.
Financial impact from potential lockout does not appear meaningful

While Turner does broadcast a fair amount of NBA coverage during primetime as
discussed above, we believe that the NBA deal is likely unprofitable from an
79
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
advertising standpoint for the company and in the event of the cancellation of a
portion of the NBA season, it may be more profitable for Turner to air alternative
programming. On the affiliate side, we believe that Turner may have some
contractual obligations to air a certain amount of live sports programming, which
could result in some make-good type payments if a large portion of the season does
not air, particularly the playoffs. However, if just a portion of the season does not
air, which we believe is the most likely scenario at this point given continued
negotiations, we estimate that the impact to Time Warner is likely negligible, which
is consistent with management comments to date.
TV everywhere rollout also helps protect value proposition of Turner networks

While we believe that Turner’s efforts to broaden the appeal to consumers (and,
therefore, cable operators) of its networks through more original programming and
sports content should position the networks well during affiliate negotiations, TWX
has also been a vocal supporter of and invested in TV Everywhere technology that
makes its networks available to consumers on mobile devices if they are cable
subscribers.
By logging in online and authenticating that a consumer is a cable subscriber (which

we’ve heard can be a bit cumbersome at first), consumers will then have on-demand
While TV Everywhere may not access to an extensive amount of content from Turner networks like TNT and TBS.
result in a near-term boost to
While not all content on those networks is available on TV Everywhere (some older
ratings or subscribers, we
believe it helps protect the value deals may not have included digital distribution rights), the majority of Turner’s
proposition of Turner’s networks content and specifically newer, more popular programming is available. Today, TV
longer-term and could help Everywhere is available to roughly 80% of Turner’s consumer base, with many large
mitigate some risk from over the cable operators, including DirecTV, Dish, Comcast, Cablevision and Verizon on
top consumption.
board. Time Warner Cable is one of the largest companies not participating in TV
Everywhere as it is promoting its own apps that stream some channels. Interestingly,
programming on TV Everywhere includes the same commercials as shown when
broadcast, and Nielsen also counts viewership in its ratings if it occurs within three
days of the original broadcast, giving TV Everywhere the potential to help modestly
boost ratings for Turner networks. In our view, there will likely not be a meaningful
financial impact to Turner’s results from TV Everywhere in the near term, but we do
believe that improving the value proposition for cable subscribers may help protect
its position in the longer term and provide some additional leverage when negotiating
for affiliate fees.
International opportunity at networks remains a bright spot

International revenues remain a relatively small portion of Turner’s revenue, at
roughly 15%. Going forward, we expect international networks to represent an
increasing portion of revenue and profit as management appears focused on growing
its brands overseas. In the last three years alone, Time Warner has spent over $2B on
acquisitions, with 90% of its deals relating to international markets and 80% of deals
within the network space, highlighting management’s focus on expanding into new
markets. In particular, we believe that TWX is focused on expanding its brands in a
few key areas – Latin America, Central and Eastern Europe and parts of Asia/Pacific
(India could be a growth area in particular, but we believe TWX has not yet been
successful at achieving meaningful penetration in the market), and we would expect
future deals to be focused on those markets. As detailed in the chart below, many of
Time Warner’s focus areas are expected to experience healthy growth in cable in the
near to intermediate term.
80
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 58: Pay TV Households Are Growing Nicely in Many of TWX's Markets...
% change y/y 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Asia-Pacific (CAGR 6.8% ) 9.9% 9.4% 9.2% 10.4% 8.4% 6.7% 5.1% 5.3% 4.9% 4.3% 4.2%
Western Europe (CAGR 4.7% ) 9.8% 7.2% 7.9% 8.1% 5.9% 4.5% 3.1% 3.3% 2.6% 2.2% 2.2%
CEEMEA (CAGR 7.3% ) 4.4% 9.2% 12.5% 15.7% 8.9% 6.2% 5.6% 4.3% 4.2% 3.8% 3.2%
Latin America (CAGR 10.7% ) 9.3% 9.2% 11.9% 13.5% 9.6% 17.9% 11.3% 9.7% 9.4% 8.4% 6.9%
Source: J.P. Morgan estimates, Company data, SNL/Kagan
On the profit side, management has stated that operating income earned overseas
approximates $500M today (the bulk of which is earned at Turner and HBO,
although that estimate does include the results of HBO’s unconsolidated international
properties in which the company owns a majority stake but does not consolidate due
to accounting policies) and that it anticipates profits will grow to $1 billion in the
next four years as it continues to expand in new markets. While we believe this sort
of profit increase is achievable given anticipated growth rates in many international
markets, the market does not appear to give Time Warner credit for this level of
profit improvement in its trading multiple, implying some upside from current levels
is possible if management can in fact reach its target.
Concerns over HBO model appear overblown

HBO is the most widely distributed premium pay TV channel in the US with roughly
28 million subscribers at the end of 2010, and combined with Cinemax (with which it
is often packaged), the channels had over 39 million subscribers at the end of 2010.
The majority of HBO programming is recently released films in their original form
(HBO has contracts with Warner Brothers, New Line, Fox, Universal and
DreamWorks studios) and HBO also creates its own original programming.
Acclaimed original programming on HBO today and in the past includes The
Sopranos, Sex and The City, True Blood, The Wire and Entourage. Cinemax
programming is mainly focused on recently released films, but has also recently
moved into original programming as well, with the newly released show Strike Back
garnering critical acclaim at its recent debut.
To improve its positioning and help maintain relevance, HBO has increased its
investments in original programming in recent years and while many people
associate the channel with some of its prior hit series (The Sopranos and Sex and The
City), HBO will have 12 original programs on air in 2011(staggered throughout the
year as detailed in the chart below, to help retain subscribers on an annual basis) and
its programming continues to garner significant critical acclaim and has led the
Emmy award nominations for the past eight years and continues to produce what is
often considered among the highest quality original programming, miniseries and
documentaries on TV.
81
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 59: HBO Staggers Original Programming Throughout the Year

Series Season Premiere Date
The Ricky Gervais Show 2 1/14/2011
Funny or Die Presents… 2 1/14/2011
Real Time with Bill Maher 9 1/14/2011
Big Love 5 1/16/2011
Game of Thrones 1 4/17/2011
Treme 2 4/24/2011
True Blood 4 6/26/2011
Curb Your Enthusiasm 8 7/10/2011
Entourage 8 7/24/2011
Boardwalk Empire 2 9/25/2011
Hung 3 10/2/2011
How to Make It in America 2 10/2/2011
Bored to Death 3 10/10/2011
Enlightened 1 10/10/2011
Angry Boys 1 12/5/2011
Life & Times of Tim 3 12/10/2011
HBO’s film rights are extensive and exclusive for digital distribution -
mitigating the risk from Netflix
While some investors have expressed risk over the sustainability of HBO’s model
given competition from Netflix and other over the top providers, it’s important to
highlight that HBO has extensive film studio contracts in place today, and most
extend through the mid- to late part of this decade.
Figure 60: HBO Has Film Rights with the Majority of Major Studios
HBO Starz Showtime Epix
Warner Bros. Sony DreamWorks Paramount
New Line Walt Disney Summit Lionsgate
Fox Weinstein Co. MGM
Universal
DreamWorks Animation
Source: Company reports and J.P. Morgan estimates. Note: DreamWorks Animation will end its agreement with HBO in 2013, when
HBO begins airing Summit content
For all of its studio deals, HBO has the exclusive digital streaming rights to the films
during its window. HBO’s window is generally 8 years or so in length and while
films do have the option to air on cable or broadcast for a period during the HBO
agreement period, digital streaming is not allowed at all during the window. Also,
when films are airing on HBO channels they are not available to rent online through
iTunes or other providers, providing further protection for HBO’s position in the
market. Therefore, HBO's current agreements negate much of the threat from Netflix
and other providers, and through its favorable studio relationships, HBO has the
rights to more recent blockbuster films than its peers (as noted in the chart below –
which is based on 2010 domestic box office). Down the line, it is possible that when
deals are up for renewal with other bidders such as Netflix and Amazon in the
market, studio deals could get more expensive, but HBO generates meaningful cash
flow (EBITDA margins are estimated at over 30%) and has the capacity to do large
82
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
deals. This issue became highlighted recently when DreamWorks Animation

announced that it would end its deal with HBO a year early in 2013 and entered into
a deal with Netflix beginning at that time. Some press reports speculated (Hollywood
Reporter 9/25/11) that this was the beginning of a trend and that HBO would have a
difficult time holding onto its content down the line. We believe that the importance
people have placed on DreamWorks’ decision is a bit excessive. Firstly, we believe
that DreamWorks Animation content likely isn’t the best fit with HBO’s core
audience, and would highlight that HBO recently entered into a deal with Summit for
four years beginning in 2013, demonstrating that the network does in fact have the
ability to win deals in today’s competitive environment. Secondly, while it is
possible that HBO will not be able to garner exclusive deals with as many studios as
it enjoys today five plus years from now, it is unlikely that any one digital content
provider would be able to corner the market itself due to anti-trust issues, so we
expect there will continue to be a few providers partnering with the bulk of studios
for TV and digital distribution. Also, we believe management is exploring this
contingency and may consider expanding its original content and/or other changes to
the model to maintain its unique product offering and we don't see over the top
providers of films as a near term threat to HBO.
Figure 61: HBO Has Exclusive Rights to Air More Hit Films than Its Peers (Based on 2010 Box
Domestic Box Office)
Showtime
10%
Epix
17% HBO
40%
Starz
33%
Source: J.P. Morgan estimates, Company data., Box Office Mojo
Some risk exists from recent shrinkage in subscriber base

HBO earns roughly three quarters of its revenue from domestic subscribers to HBO
and Cinemax, making the preservation of its domestic subscriber base important to
the businesses outlook, particularly as it grows its business in foreign markets.
83
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 62: HBO Revenue Is Mainly Comprised of Domestic Pay TV Today

International
Networks, 13%
Content Distribution,
11%
Domestic Pay TV
(Subscriptions), 76%
HBO subscribers grew at a fairly modest rate for much of the last decade, increasing
at a CAGR of 1.4% between 1999 and 2009, before subscribers took a substantial hit
Despite a 2% decline in average in 2010 and fell 3.9%. TWX attributed a portion of the loss in 2010 subscribers to a
subscribers in 2010, promotional issue that it had with DISH wherein a very low promotional rate was
subscription revenue and offered and when it expired during 2010 a lot of subscribers did not continue their
revenue per subscriber subscriptions. TWX has stated that at any given time approximately 10%-15% of
increased, implying more "high-
quality" paying subscribers and
subscribers are part of a promotional offer from a cable operator and the remaining
fewer promotional customers. 85%-90% are full-price subscribers, of which many have been customers for a
prolonged period. The company believes the bulk of subscribers lost in 2010 were
from the promotional category and has stated that its paid subscribers were actually
flat during the time period, implying no significant drop off in subscribers from over
the top video consumption trends. This statement is supported by published
estimates of HBO's revenue by SNL/Kagan, which states that while there was a drop
in subscribers, subscription revenue and revenue per subscriber actually both
increased in 2010, implying some growth in paying subs and a drop-off in
promotional customers. While relatively flat trends in total subscribers (excluding
the promotional impacts) are encouraging given all of the noise surrounding
consumers cutting the cord, when we examine subscribers as a portion of total cable
households, HBO penetration has actually declined over the past ten years, in spite of
modest growth in subscribers from 43% in 2000 to an estimated 40% in 2010.
Figure 63: HBO’s Domestic Subscribers Grew Steadily Over Time Before Taking a Dip in 2010 (in
millions)
90
80
70
60 33.3 37 42.5
23.9 28.3
50 21.4
40
30
20 39.9 40.5 40.6 40.9 41 39.4
10
0
2005 2006 2007 2008 2009 2010
Domestic Subscribers International Subscribers
Source: Company reports, SNL/Kagan and J.P. Morgan estimates.
84
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
HBO Go and strategic content deals could help protect HBO’s domestic position
With declining penetration in the US in recent years and increased focus on the trend
toward over the top consumption, concerns surrounding the future of HBO’s
business model have increased. We believe investors are increasingly concerned
over the relevance of HBO in a changing marketplace with more content available
online; however, we believe that HBO has made a few strategic decisions that should
help protect its subscriber base in the near term:
1. HBO Go should help protect core subscriber case: With HBO Go,
broadband subscribers with HBO service can access current and library
HBO content at no additional charge. Today, HBO Go is available in over
80% of US HBO homes (and is being rolled out in some overseas markets
as well), and more homes may have the service soon as well as we expect
HBO to reach a deal with Time Warner Cable, one of the largest cable
operators not supporting the service today, in the next few months. In our
view, by offering subscribers full access to current and historical content,
HBO decreases the risk that subscribers will end their subscription during
the year once their favorite show ends and may help protect HBO from
losing consumers to Netflix, etc., as HBO content is not available on those
services.
2. Strategic content deals. By keeping tight control over HBO’s original

content (some of it is available to purchase on sites like iTunes, but is not
available for free on Hulu or to stream on Netflix), HBO has made its
subscription service more valuable to consumers. Also, as noted above,
HBO has numerous long term deals with studios that give it exclusivity on
films aired on its channels (including Warner Brothers, Twentieth Century
Fox and Universal Pictures), and most of its deals extend through the later
part of this decade, again helping to protect the value proposition that HBO
offers consumers.
In our view, HBO’s introduction of HBO Go and its strategic content agreements
have helped protect its positioning with consumers in the near to intermediate term.
Longer term, we believe that HBO may not be able to control the amount of
exclusivity that it enjoys today with studios at the same price and Netflix and other
services will become more of a threat on the film side. However, if HBO and
Cinemax can continue to develop original programming for their channels that
resonates with consumers, they may be able to mitigate the impact from less film
exclusivity on their subscriber base and we continue to believe that international
expansion offers an area for meaningful growth, as discussed below.
International expansion offers HBO a growth area

With domestic subscriber growth challenged, we expect the bulk of growth at HBO
(outside of higher annual subscriber fees) to come from expansion into international
markets. Today, HBO has a presence in many international markets with networks
in three major regions through its international investments – HBO now fully owns
HBO Central Europe, and has an 80% stake in HBO Latin America and roughly an
80% stake in HBO Asia as well, although HBO Asia and HBO Latin America are not
consolidated into Networks results.
85
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
With cable penetration increasing in many international markets (discussed

previously in regard to Turner ), we believe that HBO’s best opportunity for growth
comes from digital distribution of its content and international expansion. HBO
already has a presence in many markets through network ownership (roughly 62
countries), but in markets where HBO licenses its products, there is an opportunity
with the roll-out of HBO Go to eventually reach consumers directly with its content
and bypass the cable operator middle-man given its strong brand and extensive
content. HBO plans to launch Go in Latin America and Central Europe in 2012, and
we expect further international roll-outs afterwards. While it is too early to quantify
the potential upside from HBO going directly to consumers in new international
markets, we do believe HBO is in a unique position as it owns all of its original
programming, giving it an excellent opportunity to leverage that content down the
line.
Networks Profitability Over Time Should Benefit from

Affiliate Renegotiations and International Expansion
Networks EBITDA margins have expanded nicely in recent years and we expect
adjusted EBITDA margins to decline a bit to 34.8% in 2011 (from 36.4% in 2010) as
the company incurs its most significant losses from the NCAA deal and invests in
new programming at Turner. Looking ahead, we believe margins should continue to
expand despite additional programming investments.
Figure 64: Networks Margins Should Expand with Higher Affiliate Fees
38.0%
37.0%
36.0%
35.0%
34.0%
33.0%
32.0%
31.0%
30.0%
29.0%
28.0%
2008 2009 2010 2011E 2012E 2013E
As previously discussed, we expect revenue to benefit from higher affiliate fees and a
relatively healthy ad market in the intermediate term (obviously trends will vary year
to year depending on the economy, but we believe that overall cable ad spending
should grow faster than the overall ad market), which when combined with
international expansion and higher fees at HBO, should make high single digit
revenue growth attainable on average. On the cost side – we estimate that
programming costs are the most significant portion of networks expenses (estimated
at over 50% of networks expenses) and examine them in a few tranches as noted in
86
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
the chart below. Based on our estimates, programming expenses should increase in
the mid- to high single digit range in the near to intermediate term, and when offset
by lower growth in SG&A expenses, we estimate total Networks expenses should
increase in the mid-single digit range, implying that margin expansion is in fact
attainable if Time Warner is in fact to able to get affiliate fee leverage, which we
believe is likely.
Figure 65: Longer-Term, Networks Expense Growth Should Approximate Mid-Single Digits
% of Networks Anticipated
Expenses Growth
Programming Expenses
Sports Agreements 13% 6%
HBO Film Rights 11% 3%
HBO Original Content 10% 10%
Turner Original/Other 21% 7%
SG&A/Other Expenses 45% 3%
Total Networks Expense Growth 5%
Filmed Entertainment
Figure 66: Filmed Entertainment Filmed Entertainment is TWX’s second largest segment, accounting for roughly 42%
as a Percent of Total Revenue of revenue and 22% of EBITDA in 2010. TWX's Filmed Entertainment business is
(2010)
more geographically diverse than its other segments, with roughly half of revenues
derived overseas. Margins for the segment are much lower than other areas of the
company as the studio business is traditionally lower margin.
Filmed
Entertainment
42%
Figure 67: Filmed Entertainment Is a Large Portion of Revenue, But a Relatively Low Operating
Margin Business
12%
10% 10%
10% 10%
Source: Company Reports 8%

7%
Figure 68: Filmed Entertainment 6%

as a Percent of Total EBITDA
(2010)
4%
2%
Filmed
Entertainment
22%
0%
2008 2009 2010 2011E
Source: Company Reports 87

PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Filmed Entertainment includes the production and distribution of films, TV shows

and videogames, as well as the distribution of home video products and the licensing
of rights to and characters from produced content. Time Warner breaks down its
business between the Theatrical product, Television product and Other. For purposes
of our analysis, we further breakdown the segment between:
- Theatrical – Includes box office for Warner Bros. films as well as licensing
revenue for films on TV
- Television – Includes television licensing for TV shows produced by

Warner Bros.
- Home Entertainment – Includes home video sales and electronic delivery

of films and TV programming, as well as video games and other made for
Figure 69: TV and Home
video product.
Entertainment Account for the
Bulk of Filmed Entertainment
Results There Is Life After Harry Potter
At roughly 34% of 2010 Filmed Entertainment revenues and an estimated low single
Other, 4% digit percentage of EBITDA, theatrical content is a relatively small portion of
Theatrical,
segment and company earnings, but is important as it creates content that can be
Home
Entertain
34% exploited across TWX’s asset base. Similar to other studios, TWX has reduced the
ment,
36%
number of films it releases each year, although with 23 films scheduled for release in
2011, it has the largest slate among its peers, and plans for several of its releases
each year to be "event" films. Event films often include sequels or other large budget
films that the company believes could become significant brands going forward.
TV, 26%
Solid theatrical franchises should come back in 2H and 2012

Source: Company reports and J.P. Morgan We have a relatively positive view of the domestic and international box office for
estimates. 2011 and believe that TWX is well positioned in the near to intermediate term with
what we consider to be a strong slate of films. Warner Bros. is a leader in the studio
industry, with a valuable portfolio of popular franchises and substantial global scale.
Similar to its peers, Warner Bros. is focusing on expanding its franchise opportunity
with its releases as they drive more revenue and profit through the pipeline longer
term.
Figure 70: TWX Has Numerous Successful “Event” Films Recently Outside of Harry Potter That It May Be Able to Leverage in the Future
Title Domestic Box Office ($ in M) I nternational Box Office ($ in M) Total Box Office Release Date
The Hangover Part 2 254.5 327.0 581.5 5/26/2011
Inception 292.6 533.0 825.5 7/16/2010
Sex and the City 2 95.3 193.0 288.3 5/27/2010
Sherlock Holmes 209.0 315.0 524.0 12/25/2009
The Hangover: Part 1 277.3 190.2 467.5 6/5/2009
The Dark Knight 533.3 468.6 1,001.9 7/18/2008
Source: J.P. Morgan estimates, Company data, Box Office Mojo
With the Harry Potter franchise extremely profitable for Warner Bros. (the last film
in the series was released in Q3 and has grossed over $1.3 billion so far in the box
office), TWX faces difficult comps for 2012. However, we believe it’s important to
highlight that TWX has a few other franchise releases upcoming, with Happy Feet 2
(3D) and Sherlock Holmes in theaters in Q4 (and home video releases planned for
2012), and the next installment of the Batman series, The Dark Knight Rises,
88
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
scheduled for release in Q3, 12, so we believe the company is well positioned in the
near to intermediate term. The first Dark Knight film grossed over $1 billion in
global box office , and while we are not assuming as meaningful a domestic haul
from the sequel (Dark Knight grossed $533M in domestic ox office), even if it
reached 75% of the original’s total in the US it would gross similar domestic levels
as the final Harry Potter film and we believe international prospects are very strong
as superhero films tend to perform very well outside of the US.
Figure 71: Upcoming Film Slate Looks Promising

Title Domestic Release Date Comments
A Very Harold & Kumar 3D Christmas 11/4/2011
J. Edgar 11/9/2011
Happy Feet Two 11/18/2011 Happy Feet grossed nearly $400M in global box
New Year's Eve 12/9/2011
Sherlock Holmes: A Game of Shadows 12/16/2011 Sherlock Holmes grossed over $500M in global box
Extremely Loud & Incredibly Close 12/25/2011
Joyful Noise 1/13/2012
Journey 2: The Mysterious Island 2/10/2012
Project X 3/2/2012
Wrath of the Titans 3/30/2012 Sequel to Clash of the Titans, grossed $500M in global box
Bullet to the Head 4/13/2012
Dark Shadows 5/11/2012 Tim Burton film starring Johnny Depp
Rock of Ages 6/1/2012
Jack the Giant Killer 6/15/2012
The Dark Knight Rises 7/20/2012 Dark Knight grossed over $1B in global box
Rivals 8/10/2012
The Lucky One 8/24/2012
Gravity 11/21/2012 3D sci-fi thriller starring George Clooney and Sandra Bullock
The Hobbit: An Unexpected Journey 12/14/2012 The Hobbitt has generated significant early buzz
Source: Company reports and J.P. Morgan estimates., Box Office Mojo
Looking ahead, we also see future opportunities in another Hangover Film, as well as
the much anticipated Hobbit series, which are scheduled for release in late 2012 and
2013. While it is still too early to determine whether The Hobbit will be a successful
franchise for TWX, the film is based on a popular franchise (The Lord of The Rings
grossed nearly $3 billion in domestic box office – and that was before premium
pricing for 3D) and with a famous director and writer (Peter Jackson who directed
Lord of The Rings), we believe it has all the ingredients for a successful film. While
we are optimistic on the outlook for The Hobbit and Dark Knight Rises, it is
important to note that these films were co-financed so TWX does not enjoy all of the
upside from what we expect will be a successful box office run. However, between
those two films and other event films slated for 2012, we believe that the company is
in a good position to recoup the bulk of lost box office from the absence of Harry
Potter.
In addition to creating solid brands that can be exploited across the company
franchise, “event” films tend to be very profitable for the studio as well, as
SNL/Kagan noted in an analysis that breaks out average film profitability across the
industry and noted that larger “event” type films average higher profitability than
smaller films. And as we noted earlier, these films also tend to do better overseas
where more and more studio profits are derived in recent years..
89
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 72: Larger Films Tend to Be More Profitable

1.8
1.6 1.67
1.4
Average KPI
1.34
1.2 1.24
1.16
1
0.8
0.6
0.4
0.2
0
$10-50 $50-90 >$90
Source: Time Warner Investor Presentation May 2010.
While we view TWX’s studio outlook and franchise pipeline positively, it’s
important to note that it is difficult to predict the success of films and even with a
popular cast and "event" film status, some films are not successful and can weigh on
results, making financial results at the studio business a bit choppy. For example,
most recently at Warner Bros., Green Lantern was poised to be the next franchise hit
for the studio, given its comic book foundation and plans for a big theatrical release
in 2Q, 11, followed by TV and consumer products and expanded publishing planned
for later in 2011. The film received generally poor reviews from critics when it was
released and with a reported budget of approximately $200 million and total box
office of $220M (domestic and international box office of roughly $116M and
$103M, respectively), the film did not live up to expectations and highlights the
inherent risk in the studio business.
TV Production Pipeline Looks Robust and Helps Stabilize

Volatility From the Studio
At over 25% of segment revenues and relatively high margins (estimated much better
than the studio business, which we believe is likely below 10%), we believe Time
Warner’s Warner Bros. TV studio is a very valuable asset to the company as it
provides a pipeline of content that can be monetized over a long period of time and a
relatively steady revenue stream to the Filmed Entertainment segment. Warner Bros.
is the largest provider of TV series in the broadcast and cable industry and provides
an array of programming to both its own networks and those of its peers. As detailed
in the chart below, Warner Bros. TV production slate for the upcoming season boasts
a good mix of new and returning programs, giving us comfort in the near to
intermediate term revenue and profit outlook for this business.
90
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 73: Warner Bros is the Largest Provider of TV Series to Broadcast and Cable
Broadcast and Cable TV Production for the 2011/2012 Season
Title Network Season Title Network Season
Alcatraz FOX 1 Pretty Little Liars ABCF 2
Are You There Vodka? It's Me Chelsea NBC 1 Rizzoli & Isles TNT 2
Hart of Dixie CWN 1 Shameless SHO 2
I Hate My Teenage Daughter FOX 1 The Middle ABC 3
Lying Game ABCF 1 The Vampite Diaries CWN 3
Person of Interest CBS 1 Fringe FOX 4
Ringer CWN 1 The Mentalist CBS 4
The Secret Circle CWN 1 Southland TNT 4
Suburgatory ABC 1 The Big Bang Theory CBS 5
Two Broke Girls CBS 1 Chuck NBC 5
Work It ABC 1 Gossip Girl CWN 5
Children's Hospital ASWM 2 The Closer TNT 7
Harry's Law NBC 2 Supernatural CWN 7
Memphis Beat TNT 2 Two and a Half Men CBS 9
Mike & Molly CBS 2 One Tree Hill CWN 9
Nikita CWN 2
We view Warner Bros.’ leading position very favorably as we believe that good,
original content is becoming increasingly important in the TV marketplace. With
cable networks increasingly turning to more original content to improve their brands
and provide leverage in affiliate negotiations, and broadcasters expected to invest
more in programming thanks to the new retransmission revenue stream they are
enjoying , we believe the outlook for TV demand is very robust and barriers to entry
are high, giving Warner Bros. a solid market position.
Digital Content Deals Have Been Minimal So Far – But We

Believe That’s About to Change
With the largest library of digital content, WB has the potential to generate
significant earnings from licensing deals with digital distributors. To date, WB has
participated in very few of these deals (most notably licensing older programs that
had no syndication opportunity such as Nip/Tuck), but has indicated a willingness to
do more deals going forward. With over 50,000 TV episodes and 6,000-7,000 film
titles, we believe the opportunity to monetize Warner Bros. library is likely the most
significant in the industry today, particularly on the TV side. While it is difficult to
determine the potential value of WB's library, if we assume there is demand for 50%
of it (based on CBS's estimate for its library), we come up with an estimated value of
nearly $3 billion (roughly based on the $200 million CBS received for 7% of its
content, and assuming that Warner Bros. library is likely at least 50% larger than
CBS).
We do believe Time Warner is proceeding very cautiously on this front. If some of

the sales of its library include second run content currently available on its Turner
networks, it may heighten the concern about the demand for those networks (and
leverage with cable operators for increased affiliate fees) potentially mitigating some
of the value a deal may create. However, we believe it is likely that some deals are
announced in the next three to six months. TWX has a physical DVD distribution
deal with Netflix that expires in late December, and we wouldn’t be surprised if a
91
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
streaming deal were struck along with the renewal of its DVD deal. Ultimately, we
believe any announcements surrounding more content deals will be generally well
received given the likely hefty boost to earnings; however, we do understand that
there may be some sensitivity surrounding the type of content Time Warner chooses
to sell and the potential impact (if any) on its other media assets.
Digital distribution not yet enough to overcome declining home video sales
TWX’s home video sales (including both film and TV home video) accounted for
roughly 30% of revenue at the Filmed Entertainment segment in 2010 and 13% of
total company revenue and has declined in recent years as consumers have spent less
on DVDs and shifted more consumption to digital products.
Figure 74: Home Video Sales Have Been Under Pressure and Will Likely Remain So Near-Term
2005 2006 2007 2008 2009 2010
U.S. Home Entertainment Spending Trends
DVD 18,900 20,200 19,700 18,400 15,800 14,000
% change 6.9% -2.5% -6.6% -14.1% -11.4%
Blu-Ray - - 300 900 1,500 2,300
% change 200.0% 66.7% 53.3%
Digital 800 1,000 1,300 1,600 2,100 2,500
% change 25.0% 30.0% 23.1% 31.3% 19.0%
Video On Demand - - - - 1,500 1,800
Electronic Sell-Through - - - - 600 700
VHS/UMD 2100 400 100 100
Total U.S. Home Entertainment Spending ($M) 21,800 21,600 21,400 21,000 19,400 18,800
% change -0.9% -0.9% -1.9% -7.6% -3.1%
Time Warner Home Video Trends

Theatrical Home video and electronic delivery 3,483 3,320 2,820 2,707
TV Home video and electronic delivery 832 814 777 790
Total Time Warner Home Video and Electronic Delivery 4,315 4,134 3,597 3,497
% change -4.2% -13.0% -2.8%
Source: Company reports and J.P. Morgan estimates, Digital Entertainment Group (DEG).
Time Warner has begun doing deals for digital sales of its content, which appears to
have mitigated some of the losses on the TV home video side (as many of its deals
are for older library content), as TV sales actually increased in 2010 and we expect
modest improvement in 2011 also as more titles are sold.
However, on the Theatrical side, which is the majority of home video sales, the
outlook remains challenging. Theatrical home video sales are flat so far in 2011,
mainly due to the success of some recent releases such as Harry Potter, but looking
Ultraviolet-enabled products ahead we expect modest declines once again on the theatrical side for the remainder
may help stem some of the of 2011. While our view of traditional DVD sales is relatively cautious, some
losses in DVD sales.
upcoming industry changes, such as Ultraviolet enabled DVDs that allow consumers
that purchase a DVD to also access the content online and via mobile devices, do
help improve the value proposition of DVD purchases, in our opinion. As structured
today, ultraviolet technology gives users the assurance that they have lifetime access
to content that they purchased, and will be allowed to share that content with a
specified number of others that can be linked to their Ultraviolet account. Today,
studios in the Ultraviolet partnership include Warner Brothers and Sony Pictures, as
well as other companies such as Netflix and Best Buy, which should help ensure, for
example, that iPad users can access Ultraviolet content through a NetFlix app. TWX
has commented that by Q4, 2011, nearly all home video releases will be Ultraviolet
enabled, which is a positive for the company’s positioning as we believe that
92
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
consumers want the ability to watch content they have purchased on multiple devices
(which has been the main drawback of DVDs to date). One issue with the
technology as it stands today is that without support from all of the major studios
(Disney is not a part of the consortium) and technology players (Apple), it is unclear
whether the technology will be embraced widely by consumers. Also, users are
required to be online to download content to their TV's or other media, which may be
frustrating for some consumers. While it is still very early in he implementation of
Ultraviolet, we believe that its introduction could help stem some home video losses,
although likely will not reverse the trend. In our view, the most likely way that
studios can make up for lost revenue and profits from declining home video sales
will be on the digital distribution side, which we believe Time Warner is pursuing
and could provide a boost to future quarters’ results.
Figure 75: Ultraviolet Should Improve the Value Proposition of DVDs
Publishing
Time Warner’s publishing business is mainly comprised of Time, Inc., which is the
Figure 76: Publishing as a largest domestic magazine publisher (based on revenue), and publishing is the
Percent of Total Revenue (2010)
smallest business segment within Time Warner, accounting for approximately 13%
and 10% of 2010 revenues and EBITDA, respectively.
Publishing
13%
Time publishes 22 magazines in the US and over 70 in international markets and also
manages its magazines’ corresponding websites and a small direct marketing
business. Within the US (which accounts for approximately 80% of publishing
revenue) Time’s business is divided into four operating segments:
- Style and Entertainment: Includes People magazine and Entertainment

Weekly, InStyle, and Essence
Source: Company Reports
- Lifestyle: Includes Real Simple, Southern Living, Cooking Light, and
Health
- News: Includes Time and Fortune
- Sports: Includes Sports Illustrated and Golf
93
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 77: Publishing as a Time’s international magazines are published by various overseas publishers,
Percent of Total EBITDA (2010) including IPC in the UK and GEX in Mexico.
Advertising accounts for over half of publishing revenue and is mainly driven from
Publishing advertisements in TWX’s print publications, as well as from advertisements on
10%
related websites and tablet products.
Figure 78: Advertising Is the Bulk of Publishing Revenue, Though Subscriptions Will Be
Increasingly Important
Other- Publishing,
10% Content, 2%
Source: Company Reports
Advertising, 53%
Subscription, 35%
TWX’s top advertising magazines are People, Sports Illustrated and Time, and we
estimate that the top three magazines account for over 30% of publishing revenue.
Print advertising trends remain challenged

Following fairly significant advertising declines of 10% and 22%, respectively, in
2008 and 2009, ad trends rebounded a bit in 2010 and grew a modest 3%, on higher
total pages sold (but at a lower rate per page). Looking ahead, we expect continued
challenges for the print advertising business (we estimate print accounts for over
85% of advertising at Publishing), as buyers we speak with have said that ad dollars
will likely continue to move from print to other media, and as shown in the chart
below, ad pages remained challenged at TWX’s major publications so far in 2011
and are down at two if its largest publications, People and Sports Illustrated. We
also believe that rates are likely under pressure as well, implying that even if a
magazine sees flattish to modest increases in ad pages, revenue may still decline.
94
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 79: Time's Ad Pages Have Fallen at Two of TWX’s Largest Magazines So Far in 2011
Ad pages YTD
2011 2010 % Chg
People 2,563.2 2,681.8 -4.4%
Entertainment Weekly 815.8 829.3 -1.6%
InStyle 2,054.7 2,043.7 0.5%
Real Simple 1,222.7 1,289.9 -5.2%
Southern Living 765.8 801.1 -4.4%
Cooking Light 867.8 1,022.9 -15.2%
Time 990.8 953.2 3.9%
Fortune 1,049.9 1,145.3 -8.3%
Sports Illustrated 1,085.9 1,188.1 -8.6%
Golf 699.6 710.7 -1.6%
Note: InStyle had an extra issue in 2010; Time's 9/11 issue
carried no advertising
Source: J.P. Morgan estimates, MIN
While TWX’s recent move to make more of its publications available on tablets
(discussed further below) does present an opportunity to stem some of the losses in
print, it is not clear yet that a boost from tablet versions of publications will be
enough to offset print declines.
Aggressive Move Toward Digital Products Could Help

Mitigate Print Circulation Declines and Soft Advertising
Digital revenue represented roughly 13% of publishing revenue in 2010 and is
expected to increase in the coming years as more publications are available online.
TWX recently announced that it will be the first major US publisher to make all of its
titles available on each of the major tablets by the end of 2011 (initially only People,
Time, Sports Illustrated and Fortune were available on tablets). Print subscribers
will be able to upgrade their subscriptions to include digital at no additional cost, and
TWX will also sell subscriptions separately via various devices for print, digital or
print and digital access. We view TWX’s moves towards digitizing its publications
positively as we believe that consumers want the ability to consume content on
multiple devices and that the graphical quality of advertisement in magazines lend
themselves well to tablets. This could create an advertising opportunity for more
interactive ads and may help attract some advertisers that haven't used magazines
heavily in the past due either to the timing of ad placement (often a fairly significant
lead time) or to the ability to change advertisements in real time. For example, when
the New York Times began expanding its website and digital products it was able to
attract more leisure and retail spending as advertisers liked the ability for rich
graphics and the opportunity to link to their sites through the paper’s page. While we
view TWX’s move towards digitizing its content positively, the company is still at
the beginning of this transition and with continued weakness in print circulation, it
remains unclear whether potential upside to revenue from new digital subscriptions
will be enough to offset declines on the print side.
95
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 80: Circulation Trends Remain Soft at TWX’s Most Read US Papers
People Magazine Subscription Single Copy Total Sports Illustrated Subscription Single Copy Total
Six Month Period Ended # Sold Change Share # Sold Change Share # Sold Change Six Month Period Ended # Sold Change Share # Sold Change Share # Sold Change
December 2005 2,161,532 0.8% 58.6% 1,529,635 1.5% 41.4% 3,691,167 1.1% December 2005 3,168,474 (2.3)% 97.8% 69,627 (15.6)% 2.2% 3,238,101 (2.6)%
June 2006 2,300,496 0.3% 60.2% 1,523,108 2.6% 39.8% 3,823,604 1.2% June 2006 3,113,344 (4.1)% 96.9% 99,066 5.5% 3.1% 3,212,410 (3.8)%
December 2006 2,189,162 1.3% 58.4% 1,561,386 2.1% 41.6% 3,750,548 1.6% December 2006 3,130,996 (1.2)% 97.7% 73,703 5.9% 2.3% 3,204,699 (1.0)%
June 2007 2,300,886 0.0% 61.5% 1,438,016 (5.6)% 38.5% 3,738,902 (2.2)% June 2007 3,163,869 1.6% 97.3% 87,043 (12.1)% 2.7% 3,250,912 1.2%
December 2007 2,189,958 0.0% 60.5% 1,428,760 (8.5)% 39.5% 3,618,718 (3.5)% December 2007 3,137,385 0.2% 97.6% 75,640 2.6% 2.4% 3,213,025 0.3%
June 2008 2,290,741 (0.4)% 60.2% 1,512,476 5.2% 39.8% 3,803,217 1.7% June 2008 3,157,327 (0.2)% 96.8% 103,637 19.1% 3.2% 3,260,964 0.3%
December 2008 2,219,670 1.4% 60.1% 1,472,149 3.0% 39.9% 3,691,819 2.0% December 2008 3,149,227 0.4% 97.9% 68,906 (8.9)% 2.1% 3,218,133 0.2%
June 2009 2,296,508 0.3% 63.5% 1,319,350 (12.8)% 36.5% 3,615,858 (4.9)% June 2009 3,174,372 0.5% 97.6% 77,926 (24.8)% 2.4% 3,252,298 (0.3)%
December 2009 2,288,572 3.1% 63.3% 1,325,330 (10.0)% 36.7% 3,613,902 (2.1)% December 2009 3,141,179 (0.3)% 98.1% 60,345 (12.4)% 1.9% 3,201,524 (0.5)%
June 2010 2,263,953 (1.4)% 63.7% 1,289,467 (2.3)% 36.3% 3,553,420 (1.7)% June 2010 3,134,492 (1.3)% 97.6% 77,786 (0.2)% 2.4% 3,212,278 (1.2)%
December 2010 2,344,470 2.4% 65.1% 1,257,536 (5.1)% 34.9% 3,602,006 (0.3)% December 2010 3,125,091 (0.5)% 98.4% 49,264 (18.4)% 1.6% 3,174,355 (0.8)%
June 2011 2,402,979 6.1% 67.6% 1,153,774 (10.5)% 32.4% 3,556,753 0.1% June 2011 3,144,499 0.3% 98.0% 63,362 (18.5)% 2.0% 3,207,861 (0.1)%
2 Year CAGR 2.3% (6.5)% (0.8)% 2 Year CAGR (0.5)% (9.8)% (0.7)%
5 Year CAGR 0.9% (5.4)% (1.4)% 5 Year CAGR 0.2% (8.6)% (0.0)%
Time Subscription Single Copy Total Southern Living Subscription Single Copy Total
December 2005 3,881,812 0.5% 96.4% 145,079 (16.3)% 3.6% 4,026,891 (0.2)% December 2005 2,512,876 2.3% 92.7% 223,513 (14.0)% 7.3% 2,754,937 0.9%
June 2006 3,980,116 2.2% 97.1% 119,466 (24.0)% 2.9% 4,099,582 1.2% June 2006 2,619,968 (1.6)% 92.9% 201,011 10.5% 7.1% 2,820,979 0.0%
December 2006 3,933,461 1.3% 96.7% 133,084 (8.3)% 3.3% 4,066,545 1.0% December 2006 2,615,183 2.5% 92.6% 208,922 3.3% 7.4% 2,824,105 2.4%
June 2007 3,296,763 (17.2)% 97.0% 103,204 (13.6)% 3.0% 3,399,967 (17.1)% June 2007 2,623,325 0.1% 93.3% 189,791 (5.6)% 6.7% 2,813,116 (0.3)%
December 2007 3,244,595 (17.5)% 96.8% 107,277 (19.4)% 3.2% 3,351,872 (17.6)% December 2007 2,628,808 0.5% 93.8% 173,450 (17.0)% 6.2% 2,802,258 (0.8)%
June 2008 3,293,216 (0.1)% 97.2% 95,950 (7.0)% 2.8% 3,389,166 (0.3)% June 2008 2,634,339 0.4% 94.0% 168,105 (11.4)% 6.0% 2,802,444 (0.4)%
December 2008 3,222,525 (0.7)% 95.9% 137,610 28.3% 4.1% 3,360,135 0.2% December 2008 2,657,788 1.1% 93.8% 176,801 1.9% 6.2% 2,834,589 1.2%
June 2009 3,271,858 (0.6)% 97.0% 100,382 4.6% 3.0% 3,372,240 (0.5)% June 2009 2,695,664 2.3% 94.9% 144,577 (14.0)% 5.1% 2,840,241 1.3%
December 2009 3,239,837 0.5% 97.3% 89,592 (34.9)% 2.7% 3,329,429 (0.9)% December 2009 2,687,781 1.1% 94.1% 168,192 (4.9)% 5.9% 2,855,973 0.8%
June 2010 3,240,320 (1.0)% 97.8% 72,164 (28.1)% 2.2% 3,312,484 (1.8)% June 2010 2,694,608 (0.0)% 94.8% 147,286 1.9% 5.2% 2,841,894 0.1%
December 2010 3,235,672 (0.1)% 97.6% 79,274 (11.5)% 2.4% 3,314,946 (0.4)% December 2010 2,687,692 (0.0)% 94.4% 159,065 (5.4)% 5.6% 2,846,757 (0.3)%
June 2011 3,292,430 1.6% 97.5% 83,796 16.1% 2.5% 3,376,226 1.9% June 2011 2,700,714 0.2% 95.4% 129,465 (12.1)% 4.6% 2,830,179 (0.4)%
2 Year CAGR 0.3% (8.6)% 0.1% 2 Year CAGR 0.1% (5.4)% (0.2)%
5 Year CAGR (3.7)% (6.8)% (3.8)% 5 Year CAGR 0.6% (8.4)% 0.1%
Cooking Light Subscription Single Copy Total Entertainment Weekly Subscription Single Copy Total
December 2005 1,515,716 4.5% 88.1% 204,452 (11.4)% 11.9% 1,720,168 2.4% December 2005 1,698,482 (0.2)% 96.5% 62,333 (29.9)% 3.5% 1,760,815 (1.7)%
June 2006 1,508,953 (0.3)% 86.6% 233,948 0.2% 13.4% 1,742,901 (0.2)% June 2006 1,767,229 (0.8)% 97.1% 53,626 (24.0)% 2.9% 1,820,855 (1.7)%
December 2006 1,493,918 (1.4)% 87.0% 222,718 8.9% 13.0% 1,716,636 (0.2)% December 2006 1,725,378 1.6% 97.1% 51,554 (17.3)% 2.9% 1,776,932 0.9%
June 2007 1,534,429 1.7% 88.2% 205,572 (12.1)% 11.8% 1,740,001 (0.2)% June 2007 1,755,607 (0.7)% 97.6% 43,147 (19.5)% 2.4% 1,798,754 (1.2)%
December 2007 1,577,645 5.6% 87.4% 228,262 2.5% 12.6% 1,805,907 5.2% December 2007 1,763,296 2.2% 97.4% 47,302 (8.2)% 2.6% 1,810,598 1.9%
June 2008 1,631,541 6.3% 88.4% 213,417 3.8% 11.6% 1,844,958 6.0% June 2008 1,773,264 1.0% 97.8% 40,147 (7.0)% 2.2% 1,813,411 0.8%
December 2008 1,623,831 2.9% 90.6% 169,360 (25.8)% 9.4% 1,793,191 (0.7)% December 2008 1,746,123 (1.0)% 97.2% 50,437 6.6% 2.8% 1,796,560 (0.8)%
June 2009 1,600,728 (1.9)% 90.3% 171,301 (19.7)% 9.7% 1,772,029 (4.0)% June 2009 1,739,043 (1.9)% 97.7% 40,494 0.9% 2.3% 1,779,537 (1.9)%
December 2009 1,596,883 (1.7)% 90.0% 176,546 4.2% 10.0% 1,773,429 (1.1)% December 2009 1,756,570 0.6% 97.7% 41,105 (18.5)% 2.3% 1,797,675 0.1%
June 2010 1,608,314 0.5% 90.2% 174,825 2.1% 9.8% 1,783,139 0.6% June 2010 1,764,152 1.4% 98.1% 34,491 (14.8)% 1.9% 1,798,643 1.1%
December 2010 1,626,380 1.8% 90.3% 175,595 (0.5)% 9.7% 1,801,975 1.6% December 2010 1,759,557 0.2% 97.8% 39,620 (3.6)% 2.2% 1,799,177 0.1%
June 2011 1,621,538 0.8% 90.9% 162,270 (7.2)% 9.1% 1,783,808 0.0% June 2011 1,765,561 0.1% 98.2% 31,823 (7.7)% 1.8% 1,797,384 (0.1)%
2 Year CAGR 0.6% (2.7)% 0.3% 2 Year CAGR 0.8% (11.4)% 0.5%
5 Year CAGR 1.4% (7.1)% 0.5% 5 Year CAGR (0.0)% (9.9)% (0.3)%
Source: MIN, J.P. Morgan estimates
Financial Outlook
Q3 looks to be another strong quarter in spite of some ratings weakness at
Turner
We expect Q3 EPS of $0.76, just above consensus of $0.75 and up nearly 22% from
the prior year’s adjusted results. Earnings should benefit from healthy operating
margin expansion of nearly 100bps to 22.6%, as a solid quarter at Filmed
Entertainment more than offsets the impact of some ratings softness and additional
programming investments at Turner. We also expect share repurchases to remain
very strong with an estimated $1 billion spent in Q3, similar to Q2 levels. There
could be some upside to buybacks as well, as free cash flow generation continues to
be strong and we don't believe management has allocated cash towards any
significant M&A, etc., implying strong buybacks in the near to intermediate term.
96
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Networks saw some ratings softness at Turner, with TBS down over 20% in Q3, and
TNT down just over 10%. Management had highlighted ratings issues at these
networks during the last call so this does not come as a surprise and new
programming slated for Q4 and 2012 should help alleviate some of the ratings
pressure. Despite some softness in ratings, we believe Turner secured very healthy
upfront increases of high single-digit to low double-digit growth, which when
combined with healthy scatter, should help ad revenue hit high single digit growth in
the quarter in spite of ratings. At HBO, we believe that subscriber levels have
stabilized and there does not appear to be any meaningful churn similar to what the
company saw last year, which should support mid-single digit subscription revenue
growth. Networks adjusted operating income margins should be quite a bit softer in
Q3, down an estimated 270bps, reflecting the impact of the timing of programming
investments that are heavily weighted in Q3 this year and to a lesser degree ratings
softness. Looking ahead, we believe margins should stabilize in Q4 and are not
concerned with the longer term profitability of this segment.
Filmed Entertainment should have very solid results in Q3 on the heels of the
release of the final Harry Potter movie, strong TV production demand and the sale of
Big Bang Theory in syndication, which should all contribute to a 14.5% increase in
content revenue. We expect margins to expand very nicely to 13.9%, over 600bps of
improvement as syndication sales are very high margin and should help offset what
are generally low margins at the film studio.
Publishing revenue should increase only modestly at less than 1%, as ad page trends
have been very soft recently and we expect advertising revenue to dip negative for
the first time this year, showing a deceleration from 1H results. The decline in
advertising should be partially offset by better subscription trends as TWX’s rollout
of digital subscriptions should provide a modest boost to results. In spite of better
subscription trends, we expect margins will likely remain under pressure in Q3 (and
in the near term) as long as advertising remains soft.
97
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 81: Q3 Trends Look Healthy, with Solid Margin Expansion in Spite of Softer Advertising
3Q10 3Q11E Comments
Revenue:
Networks 3,004 3,226 Subscription revenue up 6.7%, consistent with prior quarters, while ad revenue
% change 7.4% should decelerate a bit to 9.5%, reflective of no NBA and some ratings softness in Q3.
Filmed Entertainment 2,776 3,185 Content revenue up 14.5% reflecting Big Bang Theory sale in Q3 and strong box
% change 14.7% office with Harry Potter
Publishing 901 907 Expecting ad revenue to decline 2.5% on a decline in print trends recently, partially
% change 0.7% offset by relatively stable circulation trends.

% change 8.5%
Adjusted Operating Income:

Networks 1,138 1,135 Timing of programming investments will depress Q3 margins, but they are expected
% change -0.2% to rebound in Q4 and investments should help drive future ratings
% margin 37.9% 35.2%
Filmed Entertainment 209 444

% change 112.5% Syndication sales should boost margins in Q3
% margin 7.5% 13.9%
Publishing 141 132

% change -6.5% Ad weakness will weigh on margins in the near-term
% margin 15.6% 14.5%
Corporate/Intersegment/Other (132) (146)

% change
Total Adj. Op. Income 1,358 1,566

% change 15.3%
% margin 21.3% 22.6%
EPS:
Adjusted Diluted EPS $0.62 $0.76
% change 21.8% We expect narly $1B spent on share repurcahses in the quarter, similar to 2Q.
2011 results appear on track to meet guidance, 2012 outlook assumes modest ad
market contraction but stable businesses help insulate earnings
We expect 2011 to be in-line with management guidance for low double digit
adjusted EPS growth and look for earnings to reach $2.76, up 15% from the prior
year. 2011 operating income margins should contract a modest 10bps as margin
contraction at Networks weigh on overall results. Looking out to 2012, we expect
margins to expand roughly 80bps as a softer ad market will likely slightly offset
growth at the Networks business. Additional color on the other segment is as
follows:
Networks’ ad growth should soften to roughly 8% in 2012 from over 14% in 2011,
as a softer overall ad market and our expectation for moderating scatter pricing
impact results. Despite these macro challenges, we still expect ad revenue to grow at
a faster rate than the overall market (we expect 4% global ad growth in 2012), and
believe that Networks’ ad revenue should benefit from programming improvements
in 2H, 11 and better growth overseas. On the subscription side, we expect revenue in
2012 to increase 7%, in line with recent trends, before likely enjoying a nice step-up
in 2013 when new affiliate deals kick in. As we discussed earlier, we believe that
over time, this segment should enjoy high single digit revenue growth and modest
margin expansion as it continues to increase original programming at Turner and
garners healthy affiliate fee increases from expanded sports and original content.
98
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Filmed Entertainment revenue should come in flattish in 2012 as, although we

view the 2012 movie slate positively so far, we believe it will be difficult for TWX to
see meaningful growth of 2011 levels when the Harry Potter franchise ended. We
believe that the next Dark Knight film and some successful home video releases
should help mitigate some of the lost revenue from Harry Potter, and that the rest of
the shortfall will likely be made up at the TV production side, where additional
syndication sales will boost results. One factor to consider, however, is that our
estimates do not currently include any potential upside from digital content sales,
which could prove very meaningful for TWX. We believe TWX is in the process of
negotiating deals with OTT providers now and wouldn't be surprised if some deals
were announced before year-end, which could provide some nice upside to our
estimates.
Publishing ad revenue should continue to decline in 2012, as we believe that

pressure on the print sector will only increase in a softer overall ad environment. We
look for print ad revenue to decline roughly 2% in 2012, an acceleration from the
1.5% decline expected in 2011. We expect some upside from digital subscriptions to
partially offset ad softness. Despite a modest boost on the digital front, we still
expect margins to increase only modestly in 2011 on revenue growth in the first half
of the year and note that the outlook for this segment remains challenged, in our
view, for the foreseeable future. While we believe the segment margins will likely
keep declining near term, the business is not a meaningful contributor to TWX’s
consolidated results.
99
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 82: Annual Outlook Suggests Steady Revenue Growth and Margin Expansion in Spite of Economic Uncertainty
2010 2011E 2012E Comments
Revenue:
Networks 12,480 13,754 14,724 2011 ad revenue growth is expected to reach 14.2% and temper a bit in 2012 to 8.2% , reflecting a softer ad
% change 10.9% 10.2% 7.1% market and likely some moderation in scatter.
Filmed Entertainment 11,622 12,440 12,531 Content revenue growth should reach nearly 6.5% in 2011 off of a good year at the box office and syndication
% change 5.0% 7.0% 0.7% sales. We expect flattish 2012 revenue as a likely weaker box office is offset by continued upside from syndication.
If Time Warner does make digital content distribution deals as we expect, there could be upside to these estimates.
Publishing 3,675 3,701 3,711 2011 ad revenue is expected to decline 1.5%, with weakness accelerating to a 2% drop in 2012. We expect only
% change -1.6% 0.7% 0.3% modest upside from transitioning to digital subscriptions in the near-term.
Total Revenue 26,888 28,779 29,767

% change -3.4% 7.0% 3.4%
Adjusted Operating Income:

Networks 4,165 4,426 4,867 With the impact of the NCAA deal and increased programming investments, 2011 margins should contract. We
% change 21.7% 4.7% 10.0% expect expansion to resume in 2012 and beyond as the impact from NCAA decreases and affiliate deals are up for
% margin 33.4% 32.2% 33.1% renewal.
Filmed Entertainment 1,105 1,210 1,245 A good year at the box office and syndication sales should drive nice margin expansion in 2011. 2012 is more
% change -1.1% 9.5% 2.9% challenging with the loss of Harry Potter, but the TV production business remains strong and with more syndication
% margin 9.5% 9.7% 9.9% deals coming we believe further margin expansion is possible.
Publishing 526 542 512 Publishing margins should continue to cotnract as we expect print weakness to continue and don't expect upside
% change 88.5% 3.0% -5.5% from digital subscriptions will be enough to offset advertising challenges.
% margin 14.3% 14.6% 13.8%
Corporate/Intersegment/Other (390) (417) (436)

% change
Total Adj. Op. Income 5,400 5,768 6,188

% change 16.9% 6.8% 7.3%
% margin 20.1% 20.0% 20.8%
EPS:
Adjusted Diluted EPS $2.40 $2.76 $3.13
% change 11.1% 15.1% 13.5% We expect another $2B in repurchases in 2H, 11, and upward of $3B spent in 2012.
Manageable Leverage and Solid Free Cash Flow Support

Additional Repurchases and Investments in Growth Areas
Modest Near Term Maturities Should Give TWX Significant Balance Sheet
Flexibility
Time Warner ended the most recent quarter with leverage of approximately 2.4x.
Management has stated that around 2.5x is a very comfortable level and given that
the company has no significant maturities in the next few years, we expect the bulk
of free cash flow to go towards investment in growth areas (particularly overseas)
and share repurchases.
100
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 83: TWX Has No Meaningful Maturities Through 2013

$ in millions
$16,000
$14,031
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$638 $732 $1,000
$0
$0
2011 2012 2013 2014 2015 Thereafter
Figure 84: TWX Should Generate Significant FCF in the Next Few Years
$ in millions
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
2010 2011E 2012E 2013E
Stock repurchases should remain strong for the foreseeable future

Time Warner has been very aggressive returning capital to shareholders in recent
years and currently has a $5 billion authorization in place. So far this year, TWX has
spent over $2 billion repurchasing 65 million shares and we expect repurchases to
continue at a healthy pace for the remainder of the year and into 2012. We believe
that share repurchases remain a priority for management and with no significant
acquisitions likely in the near term, we look for TWX to spend roughly $2 billion in
2H, 11 and at least another $3 billion in 2012 repurchasing shares, which should
provide some downside protection for the stock if the market remains volatile.
Valuation
We are initiating on Time Warner with an Overweight rating and a year-end 2012
price target of $40. At 9.9x 2012E EPS, TWX is trading well below recent historical
101
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
levels, which we believe reflects the street’s skepticism surrounding Time Warner’s
longer term growth opportunities and whether the company will sign meaningful
distribution deals. With less exposure to advertising than its peers, an aggressive
repurchase program and the TV production business a steady contributor to profits,
we believe that downside from current levels is limited and view a potential digital
deal as a meaningful positive near term catalyst to shares. Our 2012 price target
assumes that TWX trades at roughly 11x forward EPS by year-end 2012, just above
its current forward multiple but still below historical averages and its peers, which
we believe is attainable, particularly if results remain as steady as we expect and
management can secure some digital content deals.
Figure 85: Time Warner Trades at a Discount to Its Entertainment Peer Group
FCF
Diversified Media
TIME WARNER O TWX 30.94 33,535.9 15,021.0 6,699.9 7,129.1 2.76 3.13 7.2 6.8 11.2 9.9 0.7 11.4 10.0 8.8% 3.0%
VIACOM O VIA.B 39.17 22,824.4 6,399.0 4,047.6 4,289.7 3.61 4.17 7.2 6.8 10.9 9.4 0.6 9.3 8.2 10.7% 2.6%
CBS (e) O CBS 20.85 14,303.1 4,650.0 3,014.0 3,363.0 1.82 2.20 6.3 5.6 11.5 9.5 0.5 7.1 5.9 14.1% 1.9%
Average: 7.1x 6.6x 11.6x 10.1x 0.8x 11.0x 9.0x 11.2% 2.2%
Cable Networks
Average: 8.7x 7.9x 14.6x 12.5x 0.7x 15.8x 13.2x 9.5% 2.1%
Cinema
CINEMARK (e) O CNK 18.87 2,136.3 1,157.0 519.8 557.3 1.32 1.63 6.3 5.9 14.3 11.6 0.5 12.0 9.9 8.3% 4.5%
REGAL ENTERTAINMENT (e) O RGC 12.62 1,948.5 1,827.9 514.0 561.7 0.43 0.81 7.3 6.7 29.0 15.6 0.2 8.5 8.2 11.8% 6.7%
Average: 6.8x 6.3x 21.7x 13.6x 0.3x 10.3x 9.1x 10.1% 5.6%
S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Time Warner is trading below historical averages

TWX is trading well below its recent (we look at the past three years following he
disposition of AOL and split with Time Warner Cable) average forward P/E multiple
of 12.3x, which we believe reflects the market’s concern over another recession and
skepticism surrounding the execution of digital content deals. We believe that TWX
should post solid Q3 results and with a healthy outlook for 2012 in spite of the
choppy economy, it should begin to trade back in line with historical levels, implying
some upside to current valuation.
102
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 86: Time Warner Is Trading Below Historical Levels

20
18
16
14
12
10
0
Sep-29-2008 Mar-29-2009 Sep-29-2009 Mar-29-2010 Sep-29-2010 Mar-29-2011
TWX Fwd P/E S&P 500 Fwd P/E TWX 3 Yr. Average Fwd P/E
Mix of valuation metrics suggests TWX is attractively priced at current levels

When looking at a variety of valuation metrics, we obtain additional comfort in our
Overweight rating on TWX, as most metrics suggest the company is attractively
valued at current levels. We don’t expect Time Warner to reach its recent peak
multiples given that the market remains challenged today, but we do believe that as
the Street becomes more comfortable with the company’s outlook, its current
valuation should appreciate modestly and the gap between its current and historical
average levels should narrow.
Figure 87: Variety of Metrics Also Suggest Attractive Value for TWX
Implied
Multiple Share Price
Historical Average P/E 12.3x $44
Entertainment Peer Group Average Forward P/E 11.6x $42
S&P P/E 10.9x $39
Trough P/E 8.0x $29
Peak P/E 14.0x $51
Historical Average EV/EBITDA 7.1x $39
Entertainment Peer Group EV/EBITDA 6.8x $36
Trough EV/EBITDA 6.2x $31
Peak EV/EBITDA 7.8x $43
Company History
In the past few years, Time Warner has undergone a series of transformative changes
to its business. These changes have resulted in a company with exposure to a more
diversified group of industries. In 2007, Time Warner derived the majority of its
revenues from the Time Warner Cable segment (33%) and the Warner Brothers
segment (24%). The company’s other four operating segments, AOL, HBO, Time
Inc., and Turner Broadcasting, contributed almost equally to the remaining 43% of
revenue.
On March 12, 2009, the company disposed of all of its shares of Time Warner Cable
through a dividend of all shares of TWC common stock held by Time Warner to the
103
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Time Warner shareholders, effectively separating TWC from the company. On July
8, 2009, Time Warner repurchased Google’s 5% interest in AOL, giving Time
Warner full ownership of AOL, with which it had merged in 2000. Then, on
December 9, 2009, Time Warner completed the spin-off of AOL through a dividend
of all shares of AOL common stock held by Time Warner to the Time Warner
shareholders.
As a result of the Time Warner Cable and AOL spin-offs, Time Warner’s operations
are now divided into four, rather than six, operating segments: Warner Brothers,
Turner Broadcasting, Time Inc., and HBO. In 2010, Time Warner derived the
majority of its revenues from Warner Brothers (42%) and Turner Broadcasting
(29%). HBO contributed 16% of revenues, with Time Inc. contributing the
remaining 13%.
Figure 88: Time Warner's Business Mix Has Shifted Significantly in Recent Years
2007 Revenue 2010 Revenue
Time, Inc.
10% Time, Inc.
13%
AOL
Time Warner Cable
11%
33%
HBO Warner Bros.

16% 42%
HBO
9%
Turner
13%
Warner Bros. Turner

24% 29%
Management
Experienced Management Team
We believe Time Warner’s management team is well regarded by investors and are
viewed as good operators with extensive experience within the industry.
Jeffrey L. Bewkes – Chairman and Chief Executive Officer

Mr. Bewkes has served as the company’s Chairman and Chief Executive Officer
since January 2009, has been a Director of the company since January 2007, and has
been with the company for over 20 years. Prior to becoming Chairman, he served as
President and Chief Executive Officer from January 2008 and as President and Chief
Operating Officer from January 2006. Mr. Bewkes served as Chairman of the
Entertainment & Networks Group from July 2002 to January 2006, before which he
served at HBO. At HBO, Mr. Bewkes served as Chairman and Chief Executive
Officer beginning May 1995, having previously served s President and Chief
Operating Officer of HBO since 1991.
Paul T. Cappuccio – Executive Vice President and General Counsel
104
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Mr. Cappuccio has served as the company’s Executive Vice President and General
Counsel since January 2001, having served as Senior Vice President and General
Counsel of AOL from August 1999 to January 2001.
Gary Ginsberg – Executive Vice President, Corporate Marketing and

Communications
Mr. Ginsberg has served as the company’s Executive Vice President, Corporate
Marketing and Communications since April 2010. Prior to joining the company, he
served as Executive Vice President of News Corporation from January 1999 to
December 2009, most recently as Executive Vice President of Global Marketing &
Corporate Affairs.
John K. Martin, Jr. – Executive Vice President, Chief Financial and

Administrative Officer
Mr. Martin has served as the company’s Executive Vice President, Chief Financial
and Administrative Officer since January 2011 and as Executive Vice President and
Chief Financial Officer since January 2008, having previously served as Executive
Vice President and Chief Financial Officer of TWC from August 2005 to January
2008. Before joining TWC, Mr. Martin served for nearly 12 years at Time Warner,
most recently as Senior Vice President of Investor Relations from 2002 to 2005. Mr.
Martin first joined the company as a Manager of SEC financial reporting in 1993.
Carol A. Melton – Executive Vice President, Global Public Policy

Ms. Melton has served as Executive Vice President, Global Public Policy since June
2005. She worked at Viacom Inc. from 1997 to 2005, most recently as Executive
Vice President, Government Relations, before rejoining Time Warner. Ms. Melton
joined the company in 1987 as Washington Counsel to Warner Communications Inc.
and later served as Vice President in Time Warner’s Public Policy Office until 1997.
Olaf Olafsson – Executive Vice President

Mr. Olafsson has served as Executive Vice President since March 2003. He joined
the company in November 1999 as Vice Chairman of Time Warner Digital Media,
serving in that role until December 2001, at which time he left to pursue personal
interests. Prior to joining Time Warner, Mr. Olafsson served as President of Avanta
Corp. from March 1998. Previously, Mr. Olafsson was the founder, President, and
Chief Executive Officer of Sony Interactive Entertainment, a unit of Sony
Corporation.
105
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Time Warner’s board of directors has 13 members, of which 12 are independent.

The board is comprised of the following individuals:
James L. Barksdale Independent

William P. Barr Independent
Jeffrey L. Bewkes Not Independent
Stephen F. Bollenbach Independent
Frank J. Caufield Independent
Robert C. Clark Independent
Mathias Dopfner Independent
Jessica P. Einhorn Independent
Fred Hassan Independent
Michael A. Miles Independent
Kenneth J. Novack Independent
Paul D. Wachter Independent
Deborah C. Wright Independent
Source: Company reports.
Share Ownership
Time Warner has one class of common shares and top ownership is concentrated
among various well known long only funds.
Figure 89: Top Shareholders

Holder Amount % Out
Dodge & Cox 55,792,515 5.34%
Capital Research Global Investor 55,679,525 5.33%
JP Morgan Chase & Co. 48,858,728 4.68%
T. Rowe Price Associates 45,521,549 4.36%
Fidelity Management & Research 40,617,388 3.89%
State Street Corp. 40,091,508 3.84%
Capital World Investors 28,505,000 2.73%
BlackRock Institutional Trust 28,182,239 2.70%
Marsico Capital Management LLC 26,112,486 2.50%
Source: Bloomberg
106
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Viacom
Initiate with Overweight and $54 YE12 Price Target
We are initiating coverage of Viacom with an Overweight rating and year-end 2012
price target of $54. We view the company's leading cable assets as long term
earnings generators, as well as relatively resilient properties nearer term in the event
of an advertising pullback in the current weak economy. Currently trading at 9.4x
our fiscal 2012E EPS, 7x EBITDA, and 8x FCF, we find valuation attractive for a
near pure play cable network operator with a double digit earnings outlook and
substantial returns of capital to shareholders.
Investment Thesis
The story is cable; Viacom’s networks are among the strongest
Cable TV networks as an industry have proven to be one of the strongest, most
profitable revenue growers within media. Cable is also among the most resilient in
challenging economic environments through steady viewership, broad reach and dual
revenue model that includes consistent, highly visible affiliate fees. Viacom’s
networks, which account for over 90% of company earnings, are some the strongest
performers on television. Nickelodeon is the top rated network in all of cable. MTV
is second only to ESPN in the primetime 18-34 demo with strong ratings growth
driven in part by Jersey Shore. Other top networks such as Comedy Central, BET,
and Spike are significant affiliate fee and advertising generators. The properties have
delivered ad growth in F2011 in line with its strongest peers, up 11% through the
June quarter, and its successful upfront for the coming F2012 year garnered
commitment volumes up mid-teens percent. On the affiliate fee side, revenue is up
13% YTD through FQ3, which includes a meaningful contribution from new digital
distribution agreements. We see a double digit growth earnings profile in Viacom’s
Media Networks business.
International opportunity for Networks

Management has guided for meaningful margin expansion at its international cable
networks over the next two years. Viacom projects current profitability to be in the
"low teens" for F2011, which is projected to climb over 20% by F2013. The drivers
of improved margins are to be a combination of greater cost and operating
efficiencies, and revenue growth through increased distribution. From a revenue
standpoint, we believe secular pay TV growth in emerging markets will be an
ongoing driver, and among Viacom’s networks, Nickelodeon holds the biggest
opportunity for meaningful distribution growth abroad, in our view.
Overweight
Viacom Inc. (VIAb;VIA/B US)
Company Data FYE Sep 2010A 2011E 2012E 2013E
Date Of Price 06 Oct 11 Q1 (Dec) 1.19 1.02A 1.20 -
52-week Range ($) 52.67 - 35.13 Q2 (Mar) 0.42 0.63A 0.85 -
Mkt Cap ($ mn) 24,708.75 Q3 (Jun) 0.71 0.97A 1.08 -
Fiscal Year End Sep Q4 (Sep) 0.80 1.00 1.03 -
Shares O/S (mn) 611 FY 3.11 3.61 4.17 4.80
Price Target ($) 54.00 Bloomberg EPS FY ($) - 3.75 4.30 4.95
Price Target End Date 31 Dec 12 Source: Company data, Bloomberg, J.P. Morgan estimates. Previous 2010 estimates are on a calendar year
basis EPS excluding one-time items. Quarterly EPS may not add up to yearly totals due to rounding.
'Bloomberg' above denotes Bloomberg consensus estimates. The company is in the process of transitioning
to a September fiscal year-end.
107
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Digital monetization becoming increasingly meaningful

Viacom, through its cable networks and movie studio, owns a significant library of
content, much of which is not regularly monetized through traditional distribution
channels such as TV syndication. Deals have already been executed with Netflix and
Hulu, and we believe Viacom stands to continue generating meaningful revenues
through digital content deals. Management has guided to achieving $200 million in
recurring digital content fees by year-end at margins in excess of 75%.
Paramount has successfully refocused

Over the last several years, Paramount has undergone a successful strategic overhaul
toward a refined release slate and reduction in production and overhead costs. On
the revenue side, the studio has had a highly successful run of strong releases at the
box office throughout F2011, capped by the latest Transformers, which has grossed
over $1 billion worldwide to date. We expect double digit revenue growth for
F2011 despite the ongoing headwinds of the declining DVD market. Profitability has
also meaningfully improved from running barely positive to a 9% operating margin
in F2010 (despite a decline in revenue), which we expect to be at a similar level in
F2011.
Strong balance sheet with robust free cash flow allows for aggressive buybacks
and dividend growth
We project Viacom’s free cash flow per share to grow 75% in F2011 to $2.4 billion,
and representing a high revenue conversion rate of 16.5%. This performance is
driven by robust earnings growth and minimal capital expenditures. With a strong
balance sheet at only 1.6x net debt to EBITDA, management has applied this cash
flow to aggressive buybacks of $2.5 billion in F2011E, and a 67% increase to its
dividend, currently yielding 2.5%. The company has guided to another $2.5 billion
in buybacks for F2012, representing roughly 10% of shares outstanding at current
prices.
Valuation looks attractive

Currently trading at 9.7x our fiscal 2012E EPS, 7x EBITDA, and 9x FCF, we find
valuation attractive for an almost pure play cable network operator with a high single
to double digit earnings outlook and substantial returns of capital to shareholders.
Our year-end 2012 price target is $54 based on its 5 year historical forward P/E of
11x applied to our 2013E EPS. We believe this is a low valuation in itself, but
acknowledge higher uncertainty to future earnings given the current macro
environment.

Slowing economy poses risk to advertising revenue
Roughly one-third of Viacom’s revenue comes from advertising on its cable
networks. The company held a very robust upfront for the F2012 season with pricing
up double digits and commitment volumes increasing in the mid-teens, providing a
strong foundation for another year of attractive ad revenue growth. However, upfront
sales only account for roughly 50% of inventory and advertisers have the opportunity
to pull back commitments through the year. The industry advertising outlook for
2012 is relatively uncertain with downside potential, in our view. In F2009,
Viacom’s ad revenues declined 6.6%, though outperformed the industry.
108
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Recent ratings hiccup attributed to reduced ad revenue performance

At a recent industry conference, CEO Philippe Dauman noted that domestic
advertising revenues in FQ4 will likely fall a bit short of guidance provided at the
start of August with its earnings report, now to grow high single digits (vs. double
digit growth in FQ3), reflecting a mid-quarter fall off in ratings at several networks,
including Nick at Nite and Comedy Central, due to transitioned programming.
Management has stressed ratings trends through the end of the quarter have been
strong, and expect a re-acceleration in ad growth in the December quarter. That
shares have fallen 11% since then, reflecting investors’ sensitivity to any ratings
softness that could put a crack in the recent Viacom success story, in our view. We
believe more than at many other cable networks, investors will closely monitor
Viacom’s ratings to look for signs of movement one way or another.
Lack of sports programming means less leverage in affiliate fee renegotiations;

greater risk of viewing leakage online
As Disney has shown through ESPN, sports programming is a much more powerful
affiliate fee generator than other TV content. While we see Nickelodeon as an
”absolute must have” network for operators, which confers significant negotiating
power, Viacom’s networks have no major sports related programming. In addition,
scripted programming is more likely to be viewed on a delayed basis (e.g. via DVR
or internet) where there is increased advertising skipping. Scripted programming is
also the primary TV content that digital video providers such as Netflix offer to
subscribers. If delayed DVR viewing increases and/or consumers meaningfully
begin to ‘cut the cord' or watch content ‘over the top’, we see Viacom’s cable
networks, such as MTV, as more exposed to any resulting advertising and affiliate
fee pressure.
Challenge to continue MTV ratings success. Viacom impressively turned around

ratings at several of its networks, but most notably at MTV. Several years of
improving ratings performance that is largely hinged on the success of several key
shows raise the concern of the continuation of this momentum. Rating erosion on
MTV or other major networks would weaken ad growth and its longer term affiliate
revenue story creating downside risk to shares.
Studio business tends to be volatile with low margins; in-home pressure persists
through declining DVD sales
Movie studios are inherently volatile given the high capital commitments required to
produce and promote a small slate of movies whose commercial success is
notoriously difficult to predict. Further, Paramount's distribution agreement with
Marvel has ended and DreamWorks Animation expires in 2012, creating some added
risk from the studio either replacing those films with its own productions, or simply
having a smaller slate of releases. We believe management’s ongoing success in
improving profitability and releasing successful titles is encouraging, though secular
revenue pressures (DVD sales) will likely continue to be a headwind.
Concentration of ownership with lack of shareholder power

Viacom, like CBS, is controlled by National Amusements, which is led by the two
companies’ chairman, Sumner Redstone. National Amusements owns 79% of Class
A voting shares. We believe shares receive a discount for the concentration of
control with Mr. Redstone.
109
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Company Description
Viacom is a global entertainment company operating in two key businesses: 1.)
Media Networks (62% of F2011E revenues/93% of operating income), which
include US-based cable television networks MTV, Nickelodeon, and Comedy
Central, among others; and 2.) Filmed Entertainment (28%/7%), which includes
Paramount Pictures movie production studios and distribution. Total company
revenues for the fiscal year ended September 30, 2011, are projected by to be $14.7
billion, of which roughly 30% from operations outside the US. Viacom was spun off
from its parent company, now known as CBS Corp, at the end of 2005. The
company is majority owned by National Amusements, which is controlled by
Viacom and CBS Chairman Sumner Redstone.
Figure 90: Revenue by Segment Viacom’s cable networks have turned the corner
Reinvestment in programming paying off
Media Over 90% of Viacom’s operating income comes from its cable properties, by far the
Networks
62%
highest of its diversified peers. Within its stable of networks, MTV and Nickelodoen
together represent roughly 50% of revenues. Nickelodeon as the highest rated
Filmed
Entertain- network in all of cable is arguably the most valuable non-sports channel, while MTV
ment 38%
only trails ESPN as the highest rated in cable in the primetime 18-34 demo.
On a performance basis, the company’s networks historically struggled to keep up

with industry and peer growth in terms of ratings and advertising, including
underperformance in the recent recession and early recovery. The main culprit was
Source: Company reports MTV, which went through a multi-year ratings slump that some in the industry
believed reflected the network’s young audience base moving away from TV
altogether in favor of online media consumption.
Figure 91: Operating Income by Over the last several years, since new CEO Philippe Duaman took over, Viacom has
Segment invested more heavily in original programming, including a focus on research at
roughly $100 million spent per year, with successful results. MTV, thanks to hits
such as Jersey Shore and Teen Mom, has become a big ratings turnaround story that
Filmed appears to be delivering superior ad growth. Nickelodeon continues to be cable’s
Entertain-
ment 9% highest rated network with a large stable of successful shows, and Viacom has
boosted original and scripted programming on VH1, BET, and Spike with good early
success.
Viacom’s revenue performance has since caught up with its strongest peers again.
Media
Networks
We expect double digit growth in both advertising and affiliate revenue in F2011.
91% Looking forward, we see the ad market maintaining peer levels while we see
premium growth from affiliate fees, digital content deals, and margin improvement at
Viacom's international markets.
Paramount, the Forgotten Stepchild, Improving
Like its peers, management has refocused strategy at Paramount over the last several
years, including cutting its annual slate in half to focus on bigger budget films that
are typically either a sequel or an effort to establish a new, successful franchise that
in turn will spawn numerous sequels. Franchises typically benefit from being a
proven success (by definition) with built-in awareness, ideally on a global scale, that
in turn reduces risk of being a failure at the box office.
110
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
While we would not consider Paramount to be historically a franchise heavy studio,

in recent years several successful series have emerged, notably Transformers,
Paranormal Activity, and GI Joe. Among its ‘classic’ franchises, the studio
successfully revived Star Trek, Indiana Jones, a fourth Mission Impossible is coming
this December, and it has plans to reboot the Tom Clancy based Jack Ryan series
(e.g., Patriot Games, Clear and Present Danger).
On the profitability side, margins have meaningfully improved from running barely
positive to a 9% operating margin in F2010 (despite a decline in revenue), which we
expect to be at a similar level in F2011. The studio continues to consolidate
operations and realign for the new media world of distribution with early success.
Digital Distribution Opportunity Is Meaningful

Viacom has made several deals for both its cable networks and its studio (through
Epix) with digital distributors such as Netflix and Hulu. Management has already
benefited nicely from these agreements, most recently seeing an approximate $75
million bump in revenues on the cable side in FQ3. Meanwhile, the Epix deal with
Netflix single-handedly brought the channel to profitability. The company has
guided to 200-300 basis points of additional subscription growth (bringing total
affiliate fee growth guidance to low double digits) and has estimated about $200m in
digital distribution revenues a year from existing deals with potential upside for any
new deals signed going forward.
111
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Media Networks
Figure 92: Media Networks Viacom’s Media Networks segment consists of 24 domestic cable networks, of
Revenue by Geography which its two flagship properties, Nickelodeon and MTV, generate over half of the
segment’s revenue. Nickelodeon is the highest rated cable network in the US and the
third largest revenue producer, while MTV is the seventh largest domestic network in
Int'l 16% terms of revenue. Other significant channels include VH1, Comedy Central, Spike
TV, and BET. Viacom’s domestic media networks generate 53% of total company
revenue, though roughly 85% of operating profits.
Internationally, Viacom owns and operates or partially owns networks, as well as

Domestic licenses and syndicates programming through MTV Networks International in more
84%
than 160 countries. International programming is both pre-existing from its US
networks and original local content.
Viacom also owns 50% of pay TV network EPIX, which is not consolidated into
Source: Company reports results. Other owners include Lionsgate (31%), several private equity firms (11%),
Sony (4%), and Comcast (3.5%). EPIX was launched in late 2009 as a JV between
Viacom, MGM, and Lionsgate with exclusive content agreements with their
respective studios - Paramount, MGM/United Artists, Lionsgate/Mandate – as well
Figure 93: Media Networks as several smaller studios. EPIX has also aired original programming and sports.
Revenue by Source, F2010
Table 11: Viacom Cable Properties
Ancillarry MTV Networks Kids/Family Entertainment BET Networks Pay TV
8% Advertising MTV Nickelodeon/Nick@Nite Comedy Central BET EPIX (50%)
55%
MTV2 Nick Jr. Spike TV Centric
MTV Hits TeenNick TV Land BET Int'l
MTV Jams Nicktoons
VH1 Nick Too
VH1 Classic
Affiliate
VH1 Soul
Fees 37% CMT
CMT Pure Country
Logo
Palladia
Tr3s
Source: Company; J.P. Morgan.
112
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Category Leaders
Viacom’s flagship networks stand at the top of their audience demos. Nickelodeon,
aside from leading the children’s category, is the top rated network on all of cable
(total day, all households). Meanwhile, as mentioned before MTV is second in P18-
34 primetime viewing, and Comedy Central attracts the sixth highest viewership in
the same category. BET is the only network of scale entirely devoted to African-
Americans, and is top 20 in total P18-34 primetime.
Figure 94: U.S. Media Networks Revenue by Network

Other Networks
(16) 12%
CMT 3%
Nick/Nick at
TV Land 5% Nite 29%
VH1 7%
BET 8%
Spike TV 8% MTV 18%

Comedy
Central 10%
Source: SNL Kagan; J.P. Morgan.
The Situation: MTV has become a ratings juggernaut

MTV struck ratings gold with Jersey Shore beginning in 2009, and now in its fourth
season, as well other successful reality and scripted programs such as Teen Mom and
Awkward. In addition, MTV’s Video Music Awards recently drew the network’s
largest ever audience at 12.4 million viewers. F2011 primetime P18-34 ratings grew
13%, including the recently started season 4 of Jersey Shore, which continues to
drive growth.
Young audiences DO still watch Prior to Jersey Shore, MTV went through a multi-year rough patch of programming
TV. that saw a steady ratings skid, leading to concerns that its core demographic was
leaving TV viewing altogether and shifting their time toward newer media, such as
Facebook, YouTube, and mobile. MTV is increasingly competing with new media
for media consumption; however, its resurgence in viewership appears to confirm
that young audiences will continue to seek out ‘compelling' programming, regardless
of the medium.
Nickelodeon, the cash flow stalwart, steady as it goes

Nickelodeon is the strongest asset of the company, in our view. It has been the
highest rated channel on cable for years and stands ahead of competitor Disney
Channel. Ratings performance has been flattish recently, though it is still the highest
rated channel on cable. The network has a number of ongoing hits, including
animated shows like Spongebob Squarepants, and scripted programs such as iCarly
and Victorious. Viacom also recently acquired the Teenage Mutant Ninja Turtles
property to expand its programming targeted to boys.
113
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Somewhat similar to the Disney model, Viacom is striving to develop Nickelodeon’s

brand potential with increased emphasis on consumer products and Nickelodeon
branded theatrical movies. Further, Nick’s content travels well overseas where
management continues to expand distribution.
Retooling and making progress: VH1, Spike, BET

After successfully rebounding viewership at MTV, Viacom has set its sights on its
other weaker performing networks. Both VH1 and Spike both had weak starts to the
year in F2011, though recent scripted programming such as Basketball Wives on
VHI, The Game and Let’s Stay Together on BET have seen early success. On Spike,
management has worked to broaden the channel’s audience from young males to
older viewers. Spike's core programming continues to be Ultimate Fighting
Championship, though new shows like Auction Hunters, and Pickers appear to be
successfully broadening the audience base; as management describes, they are trying
to make Spike more into network for “men” as opposed to “guys”.
Table 12: Network Ratings Performance, FQ4 and F2011

Successful ratings turnaround at FQ4
VH1, Spike, BET; FQ4 weakness 2011 2010 Y/Y change Key 2011 2010 Y/Y change
at Nick at Nite, TV Land, Comedy Network Rating HHs Rating HHs Rating HHs Demo Rating Pers. Rating Pers. Rating Pers.
Central and CMT brought (MTV) 0.5 530 0.4 506 4.5% 4.7% P12-34 0.5 449 0.5 443 0.0% 1.4%
(MTV2) 0.1 127 0.1 122 0.0% 4.1% P12-34 0.1 98 0.1 97 10.0% 1.0%
makegoods. (NICK) 1.4 1,564 1.5 1,684 (7.5%) (7.1%) F2-11 3.0 599 3.1 617 (3.6%) (2.9%)
(NAN) 0.9 1,022 1.1 1,289 (21.4%) (20.7%) P18-49 0.4 527 0.5 606 (13.0%) (13.0%)
(VH1) 0.2 226 0.2 232 0.0% (2.6%) P18-49 0.1 174 0.1 167 0.0% 4.2%
(TVL) 0.4 475 0.4 474 0.0% 0.2% P25-54 0.2 225 0.2 260 (14.3%) (13.5%)
(CMT) 0.1 157 0.2 170 (6.7%) (7.6%) P18-49 0.1 97 0.1 105 (12.5%) (7.6%)
(SPIKE) 0.4 427 0.4 426 0.0% 0.2% P18-49 0.2 274 0.2 256 10.5% 7.0%
(BET) 0.3 333 0.3 327 3.6% 1.8% P18-49 0.2 225 0.2 216 6.3% 4.2%
(CMDY) 0.4 439 0.4 473 (7.3%) (7.2%) P18-34 0.3 223 0.4 244 (8.3%) (8.6%)
2010/2011 Season to Date:

2009-2010 2010-2011 Y/Y change Key 2009-2010 2010-2011 Y/Y change
Rating HHs Rating HHs Rating HHs Demo Rating Pers. Rating Pers. Rating Pers.
(MTV) 0.4 435 0.4 486 10.5% 11.7% P12-34 0.4 365 0.4 411 12.8% 12.6%
(MTV2) 0.1 116 0.1 120 0.0% 3.4% P12-34 0.1 92 0.1 94 0.0% 2.2%
(NICK) 1.5 1,680 1.4 1,631 (3.4%) (2.9%) F2-11 3.1 618 3.1 625 0.3% 1.1%
(NAN) 1.1 1,308 1.0 1,179 (10.5%) (9.9%) P18-49 0.5 601 0.4 574 (4.3%) (4.5%)
(VH1) 0.2 271 0.2 224 (20.8%) (17.3%) P18-49 0.2 207 0.1 171 (18.8%) (17.4%)
(TVL) 0.4 461 0.4 490 5.0% 6.3% P25-54 0.2 260 0.2 255 0.0% (1.9%)
(CMT) 0.2 183 0.1 163 (12.5%) (10.9%) P18-49 0.1 114 0.1 102 (11.1%) (10.5%)
(SPIKE) 0.4 482 0.4 437 (9.5%) (9.3%) P18-49 0.2 313 0.2 283 (8.3%) (9.6%)
(BET) 0.3 336 0.3 338 0.0% 0.6% P18-49 0.2 230 0.2 228 0.0% (0.9%)
(CMDY) 0.4 443 0.4 430 (5.1%) (2.9%) P18-34 0.3 220 0.3 222 0.0% 0.9%
Source: Nielsen; J.P. Morgan.
Strong Affiliate Fee Growth Outlook

Long term guidance for high single to double digit growth
80% of subs renewed in last two Affiliate fee growth has been impressive, up double digits in recent years. YTD
years provides high visibility. through FQ3, fee revenue is up 13% helped in part by new digital content deals
struck with Netflix and Hulu. Management has guided to future affiliate growth to
run in the high single to double digits for the “foreseeable future", which is broken
down into traditional distribution growth in the high-single digits and expanded
digital distribution revenue getting the target into the double digits.
Viacom’s confidence in continuing this premium growth starts with having recently
renewed affiliate agreements covering roughly 80% of its subscribers in just the last
114
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
two years. Management also actively sought to lengthen and stagger its contracts -
now ranging from 3 to 10 years in duration from previously averaging 4-5 years - so
that now no more than 20% of subs come up for renewal in any given year. As new
agreements come up, management’s confidence centers around the strength of its
core networks, and its belief they continue to be underpriced relative to peers that
benefit from higher leverage from sports programming. The Disney Channel, for
instance, leads Nickelodeon’s per sub rates by roughly a factor of 3x.
Digital distribution revenue becoming meaningful

Viacom booked roughly $75 million in digital distribution revenue in FQ3, adding
over 1,000 basis points to year over year growth driven by its recently signed deal
with Netflix. Speaking earlier in the year, management commented on recurring
revenue visibility of over $200 million in digital content fee revenue stemming from
its negotiations at the time – they since signed the Netflix deal - with margins
exceeding 75%. We do note that the FQ3 boost is not quarterly recurring, so added
lumpiness in results should be seen going forward. Aside from Viacom’s current
digital deals in place. we see opportunity for expanded arrangements and new deals
with other emerging players, such as Amazon and Dish Network.
 Netflix: Viacom originally signed a streaming deal in April 2009 with old
episodes across its networks. In May 2011, Viacom significantly expanded its
content provided to Netflix, which contributed to its roughly $75 million lift in
affiliate revenue in FQ3. We note that Epix also has a content agreement with
Netflix, which includes Paramount.
 Hulu/Hulu Plus: Viacom first signed on as a content provider in mid-2008 with

episodes of Comedy Central’s The Daily Show, Steven Colbert, and other
selected shows. However, in early 2010, Viacom pulled all content from Hulu
as it didn't feel there was adequate monetization. With the development of Hulu
Plus, a new arrangement was struck in Feb 2011. The Daily Show and Steven
Colbert are back on the free Hulu – given the time sensitive nature of these
shows, management sees these as effective promotions – while current season
shows are available on the subscription Hulu Plus on generally 21 days after TV
broadcast. Management is particularly supportive of Hulu Plus as it replicates
the tradition dual revenue stream cable model of subscriber fees and advertising.
International Targeted for Improved Profitability

Low teens margin currently, should expand to over 20% by F2013
Management has guided for meaningful margin expansion for its international
networks business over the next several years. It expects current profitability to be in
the "low teens" this year, which is projected to climb over 20% for F2013. The
expected drivers of improved profitability are a combination of revenue growth
through increased distribution and greater cost efficiencies such as1.) licensing
content vs. owning and operating channels that are low margin, 3.) replacing
localized content with more regional programming that can play across more
territories (e,g, its Viva networks), 2.) investing in back-end efficiencies through
technology and centralization that reduces processes and personnel.
115
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Growth opportunities driven by Nickelodeon, BET, new international channels

Viacom is both expanding its distribution of US based channels and growing or
launching new international networks. On the US-based side, we believe MTV is a
great example of a network realizing nearly “full distribution” abroad (considering
constraints to entering some countries) with nearly 520 million subscribers outside
the US. While this level of distribution reflects in part past efforts to expand the
brand very aggressively (possibly at the cost of attractive profitability), we believe it
serves as an indication that Nickelodeon, in particular, has clear growth opportunities
abroad given its content travels well to foreign audiences. Nick currently has
roughly 260 million subscribers abroad, roughly half the distribution of MTV.
Among other networks, VH1 and Comedy Central have both grown abroad over the
years, and management has recently pointed to BET as a notable opportunity and
plans to launch the channel in several more countries.
The company also continues to launch new networks abroad. COLORS was recently
introduced in India, and Blink just started in Poland with plans to expand.
Paramount Channel is another in which Viacom is seeking to leverage the studio's
brand awareness.
Digital distribution provides Management also sees emerging digital distribution as an entry into markets it
access to countries currently otherwise is unable to penetrate due to either a lack of cable infrastructure or
unable to be entered. government restrictions on TV networks, though we believe this opportunity is likely
years away before it could become meaningful.
Figure 95: International Subscribers by Network, 2007 vs. 2011

Subscribers in Millions
1200 +45%
1000
800
600 +25%
400 +111%
200 +21% +63% +55% new +368%
0
MTV Nick VH1 Comedy Viva Centric BET Intl Total Int'l
Central
June 2007 June 2011
Source: Company reports; J.P. Morgan
116
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Filmed Entertainment
Figure 96: Filmed Entertainment Viacom’s Paramount Pictures has been the second largest grossing movie studio at
Revenue by Geography the domestic box office for the last three years, behind Warner Bros. Paramount
produces its own theatrical content, acquires films for distribution (theatrical and in-
Domestic home), and distributes films for other production studios, such as DreamWorks
51%
Animation. Paramount’s movie library consists of over 1,100 self produced titles, as
well as acquired rights to roughly 2,200 movies and several TV programs.
Segment revenues are reported in four categories: Theatrical (27% of segment

Int'l 49% revenue), Home Entertainment (41%), TV Distribution (27%), and Ancillary (6%).
Theatrical revenues represent Viacom’s share of box office ticket sales and
distribution agreements with third party studios, Home Entertainment includes the
sale of DVD/Blue-Ray, TV Licensing Fees includes revenue for providing content to
Source: Company reports pay TV, cable and broadcast networks. Ancillary revenue comes from digital
platform distribution, game distribution, production services to third parties (incl.
Paramount’s studio lot), and consumer products licensing.
Like others, trimming the slate to focus on big budget films

with global appeal
Figure 97: Filmed Entertainment As we’ve seen with the other major studios, such as Disney, production strategy has
Revenue by Channel shifted toward franchise films (or new films with franchise potential) that will
Theatrical
leverage off built-in consumer awareness (e.g. Mission Impossible), appeal to foreign
Ancillary 27% audiences (typically through special effects and big name actors, such as Johnny
6%
Depp), and which tend to perform better downstream, particularly in DVD sales.
Also in the vein of harnessing brand power is an effort to make more films tied to its
main cable networks, MTV (e.g., the Jackass series) and Nickelodeon (e.g., Rango),
TV
License
with a particular eye for the latter toward consumer products extensions.
Fees 27% Home
Entertain
ment 41% Over the last several years, Paramount’s annual slate of releases has been cut roughly
in half from 30 to around 15 films with fewer mid-sized productions. The studio will
have distributed 15 films in F2011, including two titles from DreamWorks
Animation (a deal that runs through 2012) and the last two movies under its
distribution agreement with Marvel, struck before it was acquired by Disney.
A Small and Relatively Young Franchise Base, But Expanding

Relative to other major studios, such as Warner Bros. and Disney, we do not consider
Paramount to have as robust a stable of franchises properties. However, its active
franchise set is somewhat younger and more recent, which allows for more room
ahead to develop.
Transformers is the studio’s most successful series in its history with the third
installment released this past summer, which has so far grossed over $1.1 billion
globally at the box office, the most successful release of the year only behind the
final Harry Potter installment and Paramount's second highest grossing film ever
behind Titanic.
Other developing franchises for the studio include Star Trek and GI: Joe, both with
sequels in development, as well as Paranormal Activity (in its third installment next
month), while more entrenched series include Mission: Impossible (MI4 out this
117
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
December), Indiana Jones (successfully resurrected in 2008), and the Tom Clancy
character Jack Ryan (e.g., Patriot Games).
Table 13: Paramount Upcoming Release Slate

Quarter Title Sequel Studio Release Date
Footloose (2011) Par. 10/14/2011
Paranormal Activity 3  Par. 10/21/2011
Puss in Boots  Par./ DWA 11/4/2011
F1Q12 Hugo Par. 11/23/2011
Young Adult Par. 12/9/2011
Mission: Impossible - Ghost Protocol  Par. 12/21/2011
The Adventures of Tintin Par. 12/23/2011
World War Z Par. 2012
A Thousand Words Par. 1/13/2012
F2Q12 The Devil Inside Par. 2/24/2012
Hansel and Gretel: Witch Hunters Par. 3/2/2012
My Mother's Curse Par. 3/30/2012
Titanic (3D re-release) Par. 4/6/2012
The Dictator Par. 5/11/2012
F3Q12
Madagascar 3  Par./ DWA 6/8/2012
G.I. Joe: Retaliation  Par. 6/29/2012
F1Q13 Rise of the Guardians Par./ DWA 11/21/2012
The Brazilian Job (a.k.a. The Italian Job II)  Par. TBD
Ripley's Believe It or Not Par. TBD
TBD
The Smoker Par. TBD
Untitled Star Trek Sequel  Par. TBD
Source: Company; Box Office Mojo; J.P. Morgan
Foreign audiences a growing driver of box office

Transformers: Dark of the Moon did not perform as well domestically as its prior
iteration; however, was much more successful overseas. The movie has grossed
$352 million domestic (19th all time), though a very impressive $767 million abroad
to make its $1.1 billion global haul the fifth highest of all time. Foreign audiences
are increasingly consuming theatrical content, driven by emerging countries such as
Brazil, Russia, and China, which have a growing middle class. We expect this
secular growth story in theatrical will continue and we believe the downstream
monetization will also improve as in-home distribution improves.
Paramount Animation: Better late than never

Following the persistent blockbuster performance of animated films from such
studios as Disney’s Pixar and DreamWorks Animation (for which Paramount has
been its distributor), as well as Paramount’s own success with Rango earlier this
year, the studio announced several months ago that it would established a dedicated
division for feature animated films. Production budgets are not to exceed $100
million with a target for one film per year, the first to be released in 2014. As
mentioned above, these films will carry a Nickelodeon branding and Viacom hopes
to drive consumer products licensing as well.
DreamWorks agreement renewal uncertain

We believe Paramount’s formal entry into animated film production is likely tied to
the impending expiration of its long running distribution agreement with
DreamWorks Animation, which has historically put out two animated films per year.
118
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Media sources such as the LA Times (7/6/11) have reported that Paramount has been
seeking a distribution fee higher than the current reported 8% of film revenue,
beginning 2014, while DreamWorks is seeking a reduced fee.
Pursuing digital opportunities

Management is actively pursing digital monetization opportunities for Paramount's
vast library. Through Epix, Paramount has streaming rights agreement with Netflix,
and we believe other deals are likely to be signed with other emerging digital
distributors.
Streaming Tranformers direct to The company been aggressive in trying new digital channels as well. Last year it
consumers through its own made its Jackass movies available to rent on Facebook for several weeks. More
website.
recently, Paramount is offering streaming rentals of its latest Transformers release
from its own website, vod.transformers.com. The charge is $4.99 for HD and $3.99
for standard definition and is expected to be offered into the new calendar year.
Paramount is also a member of the Digital Entertainment Content Ecosystem

(DECE) that includes other studios and entertainment companies, which is launching
UltraViolet. The service is a cloud based digital rights locker for consumers so that
once they buy content in any format (e.g. DVD), it will be available in the future
stream on any type of device at any location.
Continuing to right size the business

Paramount recently announced at the end of FQ4 that it was reorganizing its
theatrical marketing and distribution, and home entertainment and licensing
divisions. Among the moves, its international head will move to LA from London
and many of the global roles will be centralized, reflecting on one hand the rise in
importance of international markets, and on the other the ongoing challenges in
traditional home entertainment. We expect restructuring charges to be recognized in
the quarter as a result of these moves.
119
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Financial Outlook
F2011 YTD
Cable nets were firing on all cylinders through FQ3
Viacom’s networks have delivered robust double digit growth in both advertising and
affiliate revenue so far this year. Through the first three quarters of F2011 (9/30/10-
6/30/11), Viacom’s cable advertising grew 11% year over year, similar to most of its
cable peers, while affiliate fees have outperformed the group, up 13% with a boost
from digital distribution. Margins have also expanded off this growth, up nearly 200
basis points, driving 15% operating income growth.
On a ratings basis, as mentioned above, MTV has seen strong growth over this
period off the strength of Jersey Shore. Meanwhile, Nickelodeon has been flattish
for the year with continued strong viewership and VHI and Spike appear to have
turned the corner lately after a rough start to the year.
The combination of a strong cable ad market and good ratings performance enabled
robust upfront sales for the F2012 season. Viacom garnered double digit volume
growth with pricing up mid-teens, which lays a solid foundation for ad revenues in
the coming year, in our view.
Digital distribution revenue On an affiliate fee basis, digital distribution deals contributed more than half of
becoming highly accretive FQ3’s 20% domestic growth. Going forward, management believes affiliate fees
revenue generator. will grow in the high single to low double digits for the foreseeable future with
digital revenues contributing several points.
Blockbuster year for Paramount; though still a limited earnings contributor

Paramount is the top grossing studio at the box office YTD in C2011, up 16% from
its prior year haul at this point, and only slightly behind Warner Bros with half the
number of releases than WB. The studio has put out a string of hits, many far
exceeding expectations such as True Grit, Rango, and Justin Bieber, while
Transformers has proven its box office power again, so far grossing $1.1 billion
worldwide, setting up a big FQ4 for Paramount’s theatrical revenue.
Undermining this theatrical success to a degree are the ongoing challenges in the
DVD market, which has contributed to an 18% decline in home entertainment
revenue.
While Paramount's revenues are up 5% YTD through the June quarter, earnings are
down 5%, though we expect significant earnings in FQ4 to cap a banner year for the
business.
Robust free cash flow has allowed for aggressive buybacks and dividend growth
Viacom’s EPS through the fiscal third quarter grew 12%, while free cash flow was
up 59% to $1.8 billion. This impressive FCF generation has allowed for significant
share buybacks of $1.6 billion YTD, and another $900 million expected in the last
quarter. The company also raised its dividend 67% to $0.25 per quarter, representing
roughly a 20% FCF payout and currently yielding a peer leading 2.5%. Meanwhile,
capital expenditures continues to be negligible and management has done little in the
way of acquisitions.
120
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
FQ4 Likely Mixed as Ratings Weakness Offsets Studio

Strength
Lowered ad growth guidance due to mid-quarter ratings weakness
While the ad market remains strong and several of Viacom's networks have had a
promising start to the new season, a recent ratings shortfall at Nick at Nite (largely
due to late launch of new line-up), TV Land, Comedy Central and VHI weighed on
revenues somewhat as management now expects high single digit ad revenue growth
versus previous expectations of low double digits in the quarter. Ratings have since
rebounded everywhere except VHI and assuming the Fall launch continues to
deliver, we would expect to see a rebound in F1Q12.
Figure 98: Viacom Ratings, FQ3 to date

FQ4
All Households (HH in '000s) Key Dem ographic (Persons in '000s)
2011 2010 Y/Y change Key 2011 2010 Y/Y change
Network Rating HHs Rating HHs Rating HHs Dem o Rating Pers. Rating Pers. Rating Pers.
(MTV) 0.5 530 0.4 506 4.5% 4.7% P12-34 0.5 449 0.5 443 0.0% 1.4%
(MTV2) 0.1 127 0.1 122 0.0% 4.1% P12-34 0.1 98 0.1 97 10.0% 1.0%
(NICK) 1.4 1,564 1.5 1,684 (7.5%) (7.1%) F2-11 3.0 599 3.1 617 (3.6%) (2.9%)
(NAN) 0.9 1,022 1.1 1,289 (21.4%) (20.7%) P18-49 0.4 527 0.5 606 (13.0%) (13.0%)
(VH1) 0.2 226 0.2 232 0.0% (2.6%) P18-49 0.1 174 0.1 167 0.0% 4.2%
(TVL) 0.4 475 0.4 474 0.0% 0.2% P25-54 0.2 225 0.2 260 (14.3%) (13.5%)
(CMT) 0.1 157 0.2 170 (6.7%) (7.6%) P18-49 0.1 97 0.1 105 (12.5%) (7.6%)
(SPIKE) 0.4 427 0.4 426 0.0% 0.2% P18-49 0.2 274 0.2 256 10.5% 7.0%
(BET) 0.3 333 0.3 327 3.6% 1.8% P18-49 0.2 225 0.2 216 6.3% 4.2%
(CMDY) 0.4 439 0.4 473 (7.3%) (7.2%) P18-34 0.3 223 0.4 244 (8.3%) (8.6%)
Source: Nielsen
Affiliate revenue growth remains strong as well, though without the digital spike
seen in FQ3 that added more than 10 percentage points to growth. We expect high
single digit affiliate fee growth, which is roughly in line with YTD growth
normalized for the digital component.
With total media networks revenue growth projected at 8%, we expect further margin
expansion of roughly 50bps to drive operating income growth of 9%.
Table 14: Media Networks Performance, F1Q10-F4Q11

Media Networks Segment 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E
Advertising Growth -3.3% 2.6% 4.5% 7.0% 7.0% 12.1% 13.6% 6.8%
Affiliate Fee Growth 11.1% 8.7% 14.5% 9.8% 9.9% 8.7% 19.1% 8.8%
Total Revenue Growth 1.2% 5.4% 8.4% 7.5% 5.6% 10.5% 15.8% 6.6%
Adj. Operating Margin Expansion (bps) 16 109 17 45 59 76 393 38
Adj Operating Income Growth 1.6% 8.5% 8.9% 8.7% 7.0% 12.7% 27.4% 7.6%
Record box office at Paramount

Paramount booked its highest box office quarter ever, led by the third installment of
Transformers, which has grossed over $1.1 billion in box office sales worldwide and
will mostly fall in FQ4. International receipts for Super 8 contributed over $80
million in box office, and Paramount’s distribution of Captain America and Kung Fu
Panda 2 also delivered nice international success in the quarter. On the Home
Entertainment side, we expect Range’s DVD sales to drive growth.
121
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 15: Paramount Gross Box Office Receipts, F4Q11 vs. F4Q10
Gross Receipts ($MMs) Gross Receipts ($MMs)
3D Title Domestic Int'l Global Dist. Only Release 3D Title Domestic Int'l Global Dist. Only Release
3D Transformers: Dark of the Moon $287 $547 $834 6/29/11 3D Shrek Forever After $8 $356 $364  5/21/10
Captain America: First Avenger 175 186 361  7/22/11 3D The Last Airbender $132 $177 $308 7/1/10
Super 8 10 113 123 6/10/11 Dinner for Schmucks $73 $9 $81 7/30/10
3D Kung Fu Panda 2 26 85 112  5/26/11 3D Iron Man 2 $5 $5 $10  5/7/10
Total F4Q11 box office gross $502 $938 $1,440 Total F4Q10 box office gross $220 $547 $767
y/y % change 129% 72% 88%
Source: Box Office Mojo; J.P. Morgan
Transformers should be the key earnings driver, having incurred much of its P&A in
the prior quarter. The strong international performance through the rest of the
summer slate should also contribute to earnings growth. We expect recurring
operating income to grow upwards of 200% year over year to nearly $170 million.
An intervening factor to reported results could be the end of quarter restructuring by
Paramount, discussed above, that we believe could result in charges being taken.
Another $900 million of buybacks

Management has indicated its plan to spend $900 million toward stock repurchases
in FQ4, bringing the full year total to $2.5 billion. We project a lower diluted share
count will add roughly $0.03 to EPS in the quarter.
Robust EPS Outlook

We project the combination of double digit earnings growth in the Cable business, a
record quarter at Paramount, and ongoing share buybacks will lead to FQ4 EPS of
$1.00, or 25% growth over the prior year’s recurring results (excl. discontinued
operations, Harmonic charge). For F2011, we estimate that recurring EPS will be
$3.61, up an impressive 16% year over year on top of prior year growth of 63%.
122
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 16: FQ4, 2011 vs 2010 Earnings Comparison

FQ4, 10 FQ4, 11E Notes
Revenue
Media Networks 2,128 2,269
% change y/y 7.5% 6.6% Reflects softer ad growth at 7%
Filmed Entertainment 1,231 1,554
% change y/y 0.6% 26.3% Transformers has grossed over $1.1bn globally
% change y/y 5.0% 13.8%
Adj. Operating Income

Media Networks 873 940
% change y/y 8.7% 7.6%
% of segment revenue 41.0% 41.4% Expansion limited somewhat by ad shortfall
Filmed Entertainment 52 153
% change y/y -28.8% 193.4%
% of segment revenue 4.2% 9.8% Boosted by Tranformers P&A coming in FQ3
Corporate expenses (54) (57)
% change y/y 17.4% 5.0%
% of segment revenue -1.6% -1.5%
Stock comp expense (34) (35)
Total Op. Income 837 1,000
% change y/y 4.5% 19.5%
% of revenue 24.9% 26.2%
Interest expense (103) (104)
Other (expense) (10) (10)
Tax rate 33.4% 34.5%
Diluted shares 611 578 $900m of buybacks projected
% change y/y 0.4% -5.4%
EPS $ 0.80 $ 1.00 Slightly below consesus
% change y/y 7.0% 24.8%
F2012: The Bar Is Set High

Viacom's robust F2011 performance will be difficult to repeat, in our view. While
we believe key elements of its attractive profile will remain intact, such as steady
affiliate fee growth and free cash flow conversion, other revenue streams may be
much more challenging, notably the advertising environment, ratings performance,
and studio results.
Strong upfront sets foundation for ad growth; FQ1 tracking well…

Like its peers, Viacom’s cable networks fared very well in the annual TV upfront for
the upcoming F2012 year. Thanks to the strong advertising and TV scatter market
leading up to the May/June negotiations, as well as excellent ratings performance at
MTV and ongoing success at Nick, Viacom secured mid-teens growth in total dollars
of commitments, including double digit pricing growth and slightly more inventory
sold vs. the prior year.
Despite FQ4’s reduced ad growth guidance, management stressed positive earnings

momentum into the December quarter. Furthermore, there are no options for
cancellations in FQ1 (management said no advertisers are even asking) and scatter
pricing is tracking up double-digits over the upfront, setting up a potential re-
acceleration in ad growth in FQ1.
123
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
…but shaky economy adds uncertainty to ad market in F2012

While advertisers make commitments during the upfront, they have opportunities
throughout the year to exercise a certain level of cancellation rights ahead of each
quarter. In addition, roughly half of a network’s inventory is still sold in the short
term scatter market, which can swing widely. In the current challenging
macroeconomic environment with slowing GDP growth, we see incrementally higher
uncertainty to advertising revenue performance ahead, particularly in calendar 2012
when many advertisers recast their spending plans for the year. In the event of a
broad ad pullback, we see cable TV (incl., Viacom’s networks) as a relative
outperformer within media, though performance could still weaken meaningfully.
We project Viacom’s cable advertising revenue to grow mid-single digits in F2012,

in part reflecting this higher macro uncertainty – for which we see downside risk –
as well as difficult comparisons to F2011’s projected double digit growth.
Affiliate fees should maintain steady, robust growth

We believe one of the key attractions to cable networks is their dual revenue stream
of advertising and affiliate fees. At close to 40% of the segment’s top line, affiliate
fees provide a steady, recurring flow of revenue in good times and bad. In addition,
we believe strong growth can continue. Management has given high conviction in
high single to double digit growth for the foreseeable future, with digital content
deals providing the boost to the high end of the range. We expect affiliate revenue
from traditional providers will grow in the high single digit range next year, while
the digital side is tougher to forecast given its choppy nature, such as this past
quarter’s roughly $75 million one time boost from its Netflix deal. We forecast
affiliate growth in the mid-single digits next year but note this may be conservative
given management’s guidance of $200 million per year in digital distribution.
Margin growth should continue with International providing a boost

We expect US cable margins will continue to show moderate improvement through
high single digit revenue growth. On the international side, management has
indicated it expects to make progress toward its F2013 goal of 20+% margins from
current low teens levels. We expect any meaningful progress toward these levels
with solid revenue growth will likely drive attractive earnings growth.
Momentum at Paramount should continue - until it circles Transformers and

Marvel comps
Paramount’s strong box office run in F2011 should contribute a nice downstream
boost, notably from Transformers. We believe the FQ1 holiday slate looks solid
with films such as Mission Impossible 4, Paranormal Activity 3 and Tin. However,
in the back half of F2012, Paramount will face very tough comps with Transformers,
but also the lack of Marvel distribution (though it was compensated for the rights by
Disney). Overall, we expect the Transformers comps, in particular, will be too hard
to overcome, and Paramount will see revenue and earnings declines for the year.
Solid EPS performance, boosted by ongoing aggressive buybacks

We project F2012 EPS of $4.17, reflecting good growth at Media Networks,
hampered by weaker results at Paramount against record comps. Helping to boost
EPS should be another big year of share buybacks with management recently
commenting it intends to repurchase another $2.5 billion of stock, representing
roughly 10% of shares outstanding.
124
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 17: Viacom Earnings Outlook, F2010-F2013E

$ in millions
2010 2011E 2012E 2013E
Revenue:
Media Networks 8,331 9,122 9,648 10,281
% change 5.5% 9.5% 5.8% 6.6%
Filmed Entertainment 5,153 5,684 5,654 5,698
% change -6.3% 10.3% -0.5% 0.8%
Total Revenue 13,356 14,656 15,151 15,828
% change 0.9% 9.7% 3.4% 4.5%
Operating Income:
Media Networks 3,381 3,830 4,091 4,476
% change 6.5% 13.3% 6.8% 9.4%
% of segment reveue 40.6% 42.0% 42.4% 43.5%
Filmed Entertainment 340 309 310 315
% change 962.5% -9.2% 0.5% 1.7%
% of segment reveue 6.6% 5.4% 5.5% 5.5%
Total Operating Income 3,721 4,138 4,401 4,792
% change 16.1% 11.2% 6.3% 8.9%
% of revenue 27.9% 28.2% 29.0% 30.3%
Diluted EPS: $3.11 $3.61 $4.17 $4.80

% change 63.1% 16.0% 15.6% 15.0%
F2013 and beyond; Cable an enduring, high value asset

Looking further out, we see Viacom's networks as continued high earnings growth
stories. Domestically, Cable TV continues to see significant CPM pricing discount
to broadcast, and we believe the operators of ‘must-have’ cable properties will
maintain leverage with distributors to drive ongoing attractive affiliate fee growth.
Internationally, we believe management can execute on its plans to expand margins
significantly. Furthermore, we see emerging markets as a high growth distribution
opportunity for networks such as MTV and Nickelodeon.
On the Paramount side, we are encouraged by success both at the box office and in
profitability in recent years and believe the studio is executing on the right strategy.
Despite the in-home challenges of the DVD market, we believe foreign audiences
will provide an ongoing lift to theatrical results, and possibly further downstream.
We project longer term EPS growth rates approaching double digits off mid- to high
single digit revenue growth. We also expect management to maintain a disciplined
M&A approach that will allow for continued high returns of cash to shareholders.
125
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Strong Free Cash Flow

Viacom’s cable networks are a big cash flow driver thanks to the attractive operating
leverage in the business. We project record free cash flow for F2011 of $2.5 billion,
or $4.20 per share, representing roughly a 10% yield at the current share price.
Priorities for use of cash are share buybacks and dividends, which we expect to
continue.
Figure 99: Free Cash Flow, F2009-F2013E

$3,000 $2,707 $2,661 20%
$2,500
$2,500
$2,025
$2,000 15%
FCF ($MM)
$1,396
$1,500
$1,000 10%
$500
$- 5%
2009 2010 2011E 2012E 2013E
Free Cash Flow % of revenue
Balance sheet strength allows for aggressive buybacks and dividend growth
Re-levering to fund another High free cash flow, combined with low leverage has allowed for significant
$2.5bn of buybacks in F2012, flexibility to return cash to shareholders. Viacom is currently below its 2x debt/LTM
representing ~10% of shares at
current levels.
EBITDA target thanks to its robust earnings growth YTD. Management has said the
company will repurchase $2.5 billion in shares in F2011 and intends to issue new
debt in F2012 (getting back up to 2x leverage) to help fund a similar level of
buybacks in the year, representing roughly 10% of shares outstanding at current price
levels. We also expect further dividend growth after a 67% hike earlier in the year,
especially as we believe management likely will remain disciplined with M&A.
Figure 100: Viacom Net Debt/ LTM EBITDA vs. Peers

3.0x
2.5x 2.4x
2.0x
1.7x
1.6x
1.5x
1.0x
1.0x
0.5x
0.0x
DIS TWX VIA DISCA
Source: Company reports; J.P. Morgan.
126
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 101: Viacom Debt Maturities

$ in millions
2000
$1,750
1500
$1,000
$918
1000
$600 $550 $500
500
$250 $250
0
2014 2015 2016 2017 2019 2021 2036 2037
Debt Amount Maturing
127
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Valuation
Shares have slipped with lowered FQ4 ad guidance
We rate shares Overweight with a YE2012 $54 price target. Through the broad
market weakness since July, Viacom shares were outperforming other media nicely,
as they had through the year. However, CEO Bauman’s recent comments at an
investor conference regarding slower ad growth in the fiscal fourth quarter than
previously guided on the last earnings call was followed by a sharp selloff. Shares
are down more than 10% since the CEO's Sep 22 comments vs. the S&P flattish over
that time. The ad revenue shortfall was mostly attributed to mid-quarter ratings
weakness at Nick at Nite and a few other networks as they transitioned to new
programming. Ratings at most of these networks have since improved, and as
mentioned above, overall ad and ratings trends are tracking very well into FQ1.
We see this recent sharp selloff as indicative of the skittishness of investors in this
uncertain macro environment where any signs of advertising slowing may be
perceived as the start of a broader pullback. While we share concern of a potential
advertising slowdown ahead, we are encouraged by commentary into the December
quarter, and furthermore believe any ad slowing in C2012 will be more a moderation
of growth, as opposed to the sharp declines seen in 2009. Viacom also demonstrated
strong resilience in the recent recession with flattish cable margins despite high
single digit revenue declines.
Recent dip presents attractive entry point

We have approached valuation of VIA/B shares using several methodologies, sum of
the parts, historical trading performance, and peer comparisons, which all present
upside scenarios. Our year-end 2012 price target is $54 based on its 3 year historical
forward P/E applied to our 2013E EPS.
Table 18: Viacom Valuation Summary

Implied Share
Metric Multiple Value
P/E - 3yr avg. 11.2x $54
P/E - Peer Group 10.6x 51
P/E - S&P 500 11.2x 54
EV/EBITDA - 3yr avg 6.7x 43
EV/EVITDA - Peer Group 6.5x 41
SOTP 8.0x 54
Source: Capital; J.P. Morgan estimates.
Historical Valuation
Viacom was spun off from its parent (now called CBS) beginning in 2006. Through
the downturn in 2008/2009 shares came under heavy pressure due, we believe, to ad
revenue underperformance and issues surrounding forced share sells by Sumner Red
stone’s National Amusements. However, the stock became a big outperformer as
fundamentals improved, particularly ad revenue performance, and the company
began returning significant capital back to shareholders. Current forward P/E
multiple is trading below the stock's 5 and 3 year averages. A return to these levels
would imply meaningful upside, and we view these averages as low themselves
given the extraordinary pressure shares came under in the downturn.
128
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 102: VIA/B Historical Price and Forward P/E Performance

25.0x $70
$60
20.0x
$50
15.0x $40
5yr Average: 12.5x
10.0x $30
3yr Average:11.2x
$20
5.0x
$10
0.0x $0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
P/E forward ratio 5yr average 3yr Average Price
Source: Bloomberg; J.P. Morgan.
Figure 103: VIA/B Historical Price and EV/Fwd EBITDA Performance

12.0x $60
10.0x $50
8.0x 5yr Average: 7.4x $40
6.0x $30
3yr Average:6.7x
4.0x $20
2.0x $10
0.0x $0
1/4/2006 1/4/2007 1/4/2008 1/4/2009 1/4/2010 1/4/2011
EV/EBITDA forward ratio 5yr average 3yr Average Price
Source: Bloomberg; J.P. Morgan.
Relative Valuation
With recent volatility, Viacom currently trades at a discount to its peers and the S&P
on P/E, as well as a discount to peers on P/FCF. On an EV/EBITDA basis, shares
are at a slight premium to its diversified media peers, though still a discount to the
pure play cable networks DISCA and SNI. As Viacom is nearly a pure play cable
network, which we view as the most attractive business in the group, we believe it
deserves to trade at a premium to its more diversified peers TWX, DIS, CBS, and at
less of a gap to DISCA and SNI .
129
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 19: Viacom Peer Comparisons

FCF
Diversified Media
TIME WARNER O TWX 30.94 33,535.9 15,021.0 6,699.9 7,129.1 2.76 3.13 7.2 6.8 11.2 9.9 0.7 11.4 9.9 8.8% 3.0%
VIACOM O VIA.B 39.17 22,824.4 6,399.0 4,047.6 4,289.7 3.61 4.17 7.2 6.8 10.9 9.4 0.6 9.3 8.2 10.7% 2.6%
CBS (e) O CBS 20.85 14,303.1 4,650.0 3,014.0 3,363.0 1.82 2.20 6.3 5.6 11.5 9.5 0.5 7.1 5.9 14.1% 1.9%
Average: 7.1x 6.6x 11.6x 10.1x 0.8x 11.0x 8.9x 11.2% 2.2%
Cable Networks
Average: 8.7x 7.9x 14.6x 12.5x 0.7x 15.8x 13.2x 9.5% 2.1%
Cinema
CINEMARK (e) O CNK 18.87 2,136.3 1,157.0 519.8 557.3 1.32 1.63 6.3 5.9 14.3 11.6 0.5 12.0 9.9 8.3% 4.5%
REGAL ENTERTAINMENT (e) O RGC 12.62 1,948.5 1,827.9 514.0 561.7 0.43 0.81 7.3 6.7 29.0 15.6 0.2 8.5 8.2 11.8% 6.7%
Average: 6.8x 6.3x 21.7x 13.6x 0.3x 10.3x 9.1x 10.1% 5.6%
Ad Agencies
(1)
WPP GROUP N WPPGY 45.97 12,356.7 4,241.2 2,464.8 2,717.9 4.41 5.02 6.7 6.1 10.4 9.2 0.7 10.1 7.8 9.9% 2.7%
Average: 5.8x 5.2x 11.4x 9.7x 0.6x 9.6x 7.6x 10.5% 2.8%
Marketing Services
ARBITRON O ARB 36.49 1,006.9 (20.6) 121.0 133.4 2.03 2.36 8.2 7.4 18.0 15.4 0.9 14.6 13.1 6.8% 1.1%
HARTE-HANKS N HHS 8.77 558.7 117.6 100.0 105.8 0.71 0.80 6.8 6.4 12.4 11.0 0.9 10.4 9.5 9.6% 3.6%
(d)
VALASSIS O VCI 18.39 934.6 491.1 324.7 345.4 2.81 3.50 4.4 4.1 6.5 5.2 0.2 4.7 4.0 21.4% NA
Average: 7.2x 6.6x 14.3x 12.6x 1.1x 10.9x 10.0x 11.3% 3.6%
Publishing
Average: 5.4x 4.2x 6.2x 8.0x 0.6x 6.0x 3.8x 46.8% 3.1%
S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Source: Bloomberg; company reports; J.P. Morgan estimates.
Sum of the Parts

Our sum of the parts analysis uses a range of valuations placed on each segment,
with the midpoint placed under the assumption that fundamental revenue
performance moderates in this environment, but does not enter a ‘double-dip’
scenario.
On the Media Networks business, we apply a mid-multiple of 8x, which is a discount

to DISCA and SNI given they are smaller pure plays, while Viacom’s networks are
somewhat more mature.
For Paramount, we apply a 6x midpoint multiple, a discount to DWA and LGF for
similar reasons above, and given Paramount's mixed performance history.
130
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 20: Sum of the Parts Analysis

F2013 Multiple Enterprise Value
Segment Adj. EBITDA Low Mid High Low Mid High
Media Networks 4,621 6.0x 8.0x 10.0x 27,728 36,970 46,213
Paramount 207 4.0x 6.0x 8.0x 826 1,239 1,652
Corporate (243) 6.0x 6.0x 9.0x (1,461) (1,461) (2,191)
4,584 5.9x 8.0x 10.0x 27,093 36,749 45,674
Less Net Debt 6,109 6,109 6,109
EV to Firm 20,984 30,639 39,565
Shares 571 571 571
Price Target $ 37 $ 54 $ 69
% change from current -11% 30% 67%
Source: J.P. Morgan estimates.
Management
Sumner M. Redstone – Executive Chairman of the Board and Founder
Mr. Redstone has served as the company’s Executive Chairman of the Board and
Founder as well as Executive Chairman and Founder of CBS Corporation since
January 1, 2006. Mr. Redstone was previously Chairman of the Board of the former
Viacom beginning in 1987 and Chief Executive Officer of the former Viacom
beginning in 1996. Mr. Redstone has served as Chairman of the Board of National
Amusements, Inc., Viacom’s controlling stockholder, since 1986, its Chief Executive
Officer since 1967, and its President from 1967 to 1999.
James W. Barge – Executive Vice President, Chief Financial Officer

Mr. Barge has served as the company’s Executive Vice President, Chief Financial
Officer since October 1, 2010. He previously served as Executive Vice President,
Tax and Treasury from January 2008 to September 2010 and as Controller beginning
March 2008. Before joining the company, Mr. Barge held various positions with
Time Warner, Inc., most recently as the Senior Vice President, Controller and
principal accounting officer.
Philippe P. Dauman – President and Chief Executive Officer; Director

Mr. Dauman has been the company’s President and Chief Executive Officer since
September 2006 and a member of the Board of Directors since January 1, 2006. He
previously held a position on the Board of Directors of the former Viacom beginning
in 1987. From May 2000 to September 2006, Mr. Dauman served as Co-Chairman
and Chief Executive Officer of DND Capital Partners, LLC, a private equity firm
focused on media and telecommunications that he co-founded with Mr. Dooley. Mr.
Dauman joined the former Viacom in 1993 and held various positions, including
Deputy Chairman and member of its Executive Committee. Mr. Dauman also serves
on the Board of Directors of National Amusements, Inc.
Thomas E. Dooley – Senior Executive Vice President and Chief Operating

Officer; Director
Mr. Dooley has served as the company’s Senior Executive Vice President since
September 2006, Chief Operating Officer since May 2010, and director since January
2006. Before becoming Chief Operating Officer, he was Chief Administrative
Officer beginning September 2006 and Chief Financial Officer beginning January
2007. From May 2000 to September 2006, he was Co-Chairman and Chief
Executive Officer of DND Capital Partners, LLC, which he co-founded with Mr.
131
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Dauman. In 1980, Mr. Dooley joined Former Viacom, where he held various
positions, including Deputy Chairman and member of its Executive Committee.
Viacom’s board of directors has 11 members, of which 6 are independent. The board
is comprised of the following individuals:
George S. Abrams Not Independent

Philippe P. Dauman Not Independent
Thomas E. Dooley Not Independent
Alan C. Greenberg Independent
Robert K. Kraft Independent
Blythe J. McGarvie Independent
Charles E. Phillips, Jr. Independent
Shari Redstone Not Independent
Sumner M. Redstone Not Independent
Frederic V. Salerno Independent
William Schwartz Independent
Share Ownership
Viacom has two classes of common shares. A shares are voting while B shares are
non-voting. Sumner Red stone’s National Amusements owns nearly 80% of A
shares, making it the controlling shareholder for the entire company. A shares
typically trade at a premium the B listing.
Figure 104: Viacom Class A Top Shareholders

Holder Amount Held % Out
Nairi Inc. 40,865,882 79.49%
Gamco Asset Management Inc. 3,671,850 7.14%
Gabelli Funds LLC 2,061,500 4.01%
Neuberger Berman LLC 1,438,282 2.80%
Pacific Heights Asset Management 910,000 1.77%
Avesta Capital Advisors LLC 471,032 0.92%
Alliance Bernstein LP 153,756 0.30%
Bank of America Corporation 150,758 0.29%
Skandia Global Funds PLC 140,000 0.27%
Invesco Ltd. 135,935 0.26%
Source: Bloomberg
132
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 105: Viacom Class B Top Shareholders

Holder Amount Held % Out
State Street Corp 24,778,938 4.74%
Invesco Ltd. 19,303,041 3.69%
NWQ Investment Management 16,691,660 3.19%
Blackrock Institutional Trust 15,120,669 2.89%
Massachusetts Financial Services 14,046,872 2.68%
AllianceBernstein LP 12,701,964 2.43%
Eton Park Capital Management 10,670,000 2.04%
Children's Inv. Fund Mgmt UK LLP 10,460,212 2.00%
Institutional Capital LLC 9,741,453 1.86%
Source: Bloomberg
133
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Discovery Communications
Initiate with Neutral Rating and $43 YE12 Price Target
We believe Discovery is a well run company with great assets, but is a less appealing
stock at current levels. While we like the breadth of high quality cable assets,
ongoing international expansion opportunities and healthy cash flows, we are
concerned the story lacks a near term catalyst and are mindful that the stock trades at
the high end of the group. We believe a premium valuation is warranted given its
pure play nature and above average revenue growth, but it seems that these attributes
are already reflected in the stock at current levels and, therefore, we see limited
upside near term. Our year-end 2012 price target of $43 is based on our belief that
DISCA should trade at roughly 13.1x forward EPS at December 2012, similar to its
current forward multiple.
Investment Thesis
Strong Brands and steady affiliate trends drive strong revenue growth
Discovery has a broad mix of branded networks in the US and international markets,
many of which rank very highly in their targeted demographic. The company
appears to have good leverage with cable operators, earning steady affiliate revenue
growth, which should increase in the mid-to-high single digit range going forward on
a consolidated basis. With just over 50% of total revenue from distribution
agreements and with no major cable operator deals up for renegotiation through
2012, this should provide a healthy revenue stream even in an uncertain macro
environment.
Nonfiction content translates well overseas and to digital providers

Discovery’s extensive library is often referred to as “evergreen” as it holds up very
well over time and tends to be less trendy than programming on other cable
networks.
Neutral
Discovery Communications, Inc. (DISCA;DISCA US)
Company Data FYE Dec 2010A 2011E 2012E 2013E
Date Of Price 06 Oct 11 Q1 (Mar) 0.40 0.54A 0.61 -
52-week Range ($) 45.81 - 34.75 Q2 (Jun) 0.45 0.63A 0.73 -
Mkt Cap ($ mn) 15,826.00 Q3 (Sep) 0.39 0.55 0.66 -
Fiscal Year End Dec Q4 (Dec) 0.46 0.68 0.81 -
Shares O/S (mn) 410 FY 1.71 2.38 2.80 3.31
Price Target End Date 31 Dec 12 Source: Company data, Bloomberg, J.P. Morgan estimates. Starting in Q3 '08 EPS reflect a new company
reporting structure and as such are not directly comparable to previous-period EPS. 'Bloomberg' above
denotes Bloomberg consensus estimates.
134
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
As a result, it translates well overseas and often times Discovery is able to simply
translate the program’s language and run it on networks around the world, helping to
make its international business much more profitable than those of some of its peers
that often have to invest in creating localized content. Also, we believe that
Discovery’s content will likely do well both in the US and overseas with digital
streaming providers. Discovery recently entered into a two year, non-exclusive deal
with Netflix in the US so a portion of its library content could be streamed online and
we wouldn't be surprised if it entered into similar deals with other domestic content
providers and worked with them overseas as well, which could provide another
revenue stream for the company.
Vast international presence supports healthy long term growth

With a vast library of television content and footage spanning the past 25 years as
well as an average of six networks in over 210 international markets, DISCA has a
well established international presence that we believe positions it well to take
advantage of increased pay TV penetration overseas. DISCA made the strategic
move to secure as many cable networks overseas as it could in prior years and as it
owns nearly all of its own content, it is able to repurpose its programming for foreign
markets, so far with very good success. DISCA already has a relatively successful
international business and we expect OIBDA margins will reach 46% in 2011, but
we believe there is substantially more room for growth as it brings over more of its
successful domestic brands. While we don’t expect DISCA’s international margins
to reach US levels due to the relative fragmentation of overseas operations versus the
US, we do believe OIBDA margins could top 50% in the next few years (up from
43.6% in 2010), implying nice growth in the near to intermediate term.
Healthy balance sheet and strong FCF

DISCA’s business operates at very high margins (we estimate 2011E Adjusted
OIBDA margins will reach 46%) and with a manageable level of debt at just 1.7x
Adjusted OIBDA, we believe DISCA has a very healthy balance sheet and capacity
to invest in growth areas while still returning a substantial amount of cash to
shareholders. DISCA currently has a $1 billion share repurchase program in place
(with $391 million remaining) and recently announced another $1 billion
authorization that management intends to begin when the current program is
complete. Discovery has picked up the pace of repurchases in Q3, spending $127
million in the first month of the quarter alone, and we expect management to remain
aggressive through the remainder of the year, particularly with the stock under
pressure recently. We expect DISCA to complete its current authorization by the end
of the year and with another $1 billion program already in place, we expect
continued repurchases to provide some level of support for the stock in this volatile
market.
Global economy still uncertain

With a substantial portion of its business overseas (33% of revenue and 28% of
OIBDA), DISCA’s international growth may be tempered if international economies
remain mixed. Of DISCA's international revenue, approximately 38% is derived
from Western Europe, which continues to face economic challenges that will likely
not dissipate in the near term. The JPM Economics team expects challenges in the
Euro area to have global repercussions and has commented that even if the US avoids
a recession, growth in developed markets around the world will likely be tepid at best
in the near term (JPM expects developed market GDP to grow at an 0.8% annualized
135
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
pace over the next four quarters), implying relatively soft cable advertising growth in
Western Europe and limited leverage on the distribution side. We conservatively
assume only modest growth from Europe and the bulk of our international growth
assumptions are driven by increased pay TV penetration in emerging markets, but if
the malaise we see in Europe today worsens and has a larger impact than currently
expected on other markets, there could be downside risk to our estimates.
Perceived lack of catalysts and premium valuation

With well established brands, solid growth in recent years, diversity throughout
international markets, strong content and a well respected management team
Discovery has historically been rewarded with a premium valuation to the group,
which we believe it has earned. However, in this market we believe that investors
are cautious about paying premium multiples for stocks without some near term
positive catalysts and further multiple expansion may be limited. Today, DISCA
trades at 13.5x our 2012E EPS, a 20% premium to SNI and our other coverage.
While it has historically traded at a similar premium to its peers and this is still below
its 3 year high of over 20x, we believe this rich valuation may keep investors from
adding to positions, particularly with the outlook for the global ad market in question
and a lack of any near term positive catalysts for the cable advertising market.

M&A Risk
DISCA has very high OIBDA margins, solid free cash flow and management has
been shareholder friendly recently by returning capital via share repurchases.
However, there has been some speculation in the press (see Daily Beast article “10
Media Predictions for 2011”, Dec 31, 2010) that DISCA may consider a purchase of
SNI to broaden its cable network exposure. While we think the two companies are
complementary given their focus on non-fiction programming, we believe a deal is
unlikely in the near term, particularly given SNI's recent decision to announce a large
repurchase plan and the fact that the Trust sold a large block of shares back to the
company earlier this summer. While a deal with SNI may not happen, DISCA may
pursue some other media asset, which could result in a messy integration and/or
hamper the businesses’ relatively favorable profit margins and prove a distraction for
management, which we believe would concern investors.
Affiliate leverage may be softer than we expect

We currently expect DISCA to earn mid-single digit affiliate growth in the US and
higher growth overseas in the near to intermediate term as we believe the company
has relatively good negotiating leverage with cable operators. However, cable
operators have been under pressure from most networks to pay higher affiliate fees
and if DISCA is not able to achieve the level of increases we expect during its
upcoming renewals (starting late 2012), there could be some downside risk to our
revenue and margin estimates.
Ad market may prove more resilient than currently anticipated

We believe the market is generally cautious on the outlook for media stocks,
particularly those with high advertising exposure like Discovery. We currently
anticipate global ad growth to slow 100 bps in 2012 to 4%. If advertising proves
more resilient in the face of economic uncertainty, there could be meaningful upside
to our Discovery estimates as advertising is a high margin contributor to its business
136
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
and Discovery could in fact see multiple expansion closer to levels it saw at its recent
peak following the 2008/09 advertising slowdown.
Digital deals could provide better than expected upside

The company has not disclosed details of its recent deal with Netflix but we
anticipate we will receive more information with Q3 results. If these revenues are
significantly more than the investors are expecting (we estimate the deal to be valued
at around $75 mil) the stock could react well as estimates will likely come up given
almost 100% margins associated with that revenue stream.
Company Description
Discovery Communications is a global media company focused on nonfiction
programming with operations across the globe. Discovery divides its business into
three segments: 1.) US Networks (63% of 2010 revenues/71% of Adjusted OIBDA),
which include its 13 domestic cable networks, including Discovery Channel, TLC
and Animal Planet; 2.) International Networks (33%/28%), which consist of its
international networks that are broadcast in over 40 languages in most cable markets
around the world; and 3.) Education (4%/1%), which includes Discovery’s
curriculum based products and services. 2010 revenue and adjusted OIBDA were
$3.8 billion and $1.7 billion, respectively.
137
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Popular Brands and International Opportunity Make an

Appealing Story
Discovery Communications is a global media company focused on nonfiction
programming in the US and overseas. Revenue and profit have grown steadily in
recent years as the company benefited from growth in affiliate fees from cable
operators and higher ad spending, aided by a relatively healthy network cable ad
market (with the exception of softness surrounding the recession in 2009) in the US
and overseas.
Figure 106: Revenue and Margins Have Increased Steadily in Recent Years
Revenue by Segment
Adjusted OIBDA Margin by Segment
$2,500.00
70.0%
$2,000.00 60.0%
50.0%
$1,500.00
40.0%
$1,000.00 30.0%
20.0%
$500.00
10.0%
$0.00 0.0%
2008 2009 2010 2008 2009 2010
US Networks International Networks
US Networks International Networks Education & Other
Discovery’s business is broken into three segments:
1. US Networks: Mainly consists of Discovery’s national television

networks, including popular brands such as Discovery Channel, TLC and
Animal Planet, which focus on nonfiction programming. Discovery also
operates a digital media business in the US, which includes its branded and
other miscellaneous websites as well as mobile and VOD services.
2. International Networks: Mainly consists of Discovery’s national and

regional television networks outside of the US. Discovery has a vast
international presence, with networks in over 210 countries and
programming in over 40 languages. Both the Discovery Channel and
Animal Planet have a wide international presence and Discovery is
expanding TLC to more international markets as well. Discovery also
distributes specialized programming that is developed for particular
geographic regions and operates branded local websites.
3. Education: The smallest of Discovery’s segments and includes its

curriculum based products and services as well as a postproduction
business.
138
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 107: US Networks Account for the Bulk of Discovery Revenue and OIBDA (based on 2010 results), but International Is the Main Source
of Growth
Revenue OIBDA
Education & Other Education & Other

4% 1%
International
Networks
28%
International
Networks
33%
US Networks
63% US Networks
71%
US Networks Include Well Developed Brands with Solid

Profit Trends
With healthy revenue growth and margin expansion during the past few years, in
spite of a very soft ad market during the recession, Discovery’s US Networks provide
a stable, core business for the company, with slower growth than its international
business, but higher margins.
Figure 108: US Revenue Has Steadily Expanded, Even Through the Last Recession
US Networks Revenue
$1,400.00
$1,200.00
$1,000.00
$800.00
$600.00
$400.00
$200.00
$0.00
2008 2009 2010
Distribution Advertising
Revenue at the networks is derived mainly from advertising and affiliate revenue and
is split nearly evenly between the two categories.
139
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 109: US Networks Revenue is Almost Evenly Split Between Advertising and Affiliate Fees
(based on 2010 results)
Other
4%
Distribution
44%
Advertising
52%
Figure 110: US OIBDA Margins Have Steadily Grown in Recent Years
59.0%
58.0% 57.8%
56.6%
57.0%
56.0%
55.0%
53.9%
54.0%
53.0%
52.0%
51.0%
2008 2009 2010
Adjusted OIBDA Margin
DISCA’s US Networks business consists of numerous fully distributed networks

with a broad variety in programming and target a diverse mix of demographics. By
having programming that targets both males and females across a wide age range,
Discovery’s advertiser base is well diversified among major ad categories (auto is a
large vertical for DISCA, but the auto companies within the vertical are broad and
TLC’s female skew helps attract other advertisers that have proven to balance out
140
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
auto exposure during downturns), which helps insulate its business when some ad
categories weaken. When we think about the growth opportunity in the US, the
networks can be analyzed in three tranches:
1. Fully Distributed: Discovery Channel, TLC and Animal Planet networks

are fully distributed and earn substantial distribution fees from cable
providers. As such, any future upside will likely come from rating gains,
and strength in the ad market and, to a lesser degree, higher affiliate fees
(likely mid-single digit growth range longer term). Also, as these brands are
well established, we believe there is an opportunity to supplement
distribution income from cable providers by selling rights to digitally stream
popular programming. DISCA recently announced a deal with Netflix and
we expect other deals down the line (discussed in greater detail below).
2. Emerging Brands: ID and Science Channel are approaching full

distribution on digital cable tiers, management does not expect them to go
analog, and with recent ratings success, particularly at ID (which has been
the fastest growing cable network in the past year or so), we believe there is
an opportunity for these networks to contribute higher affiliate fee gains
than at the fully distributed networks. Also, ad revenue growth should
benefit from higher audiences.
3. Early Stage Networks and Joint Ventures: Military, Planet Green and
Discovery Fit & Health are still in the early network stage and we believe
have room to grow both subscription and advertising revenue. If ratings
improve and programming attracts more viewers these networks could
move up tiers with cable operators and earn more meaningful distribution
fees, as well as appeal to more advertisers. We currently expect only
modest improvement at these networks in the near to intermediate term,
although we do note that while they may not be meaningful contributors to
US performance today, content used on these networks can be repurposed
overseas, making them valuable to Discovery. The Oprah Winfrey Network
(OWN) and Hub are networks that Discovery operates through joint
ventures between DISCA and Harp and Hasbro, respectively. Today, both
JV’s operate at a loss but are expected to be profitable longer term. As they
are accounted for under the equity method, results are not included in
DISCA’s segment results and are instead reported below the line. We
estimate that Hub results are relatively insignificant to Discovery, while
OWN is more meaningful from a financial perspective and as it pertains to
headline risk given Oprah Winfrey's popularity and speculation surrounding
her decision to launch her own network.
141
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 111: Discovery’s Top US Networks Include Established Brands That Serve a Broad Audience and Targeted, Niche Networks
Network Target Demographic Top Programs Households Other Notes
Discovery Channel 25-54, particularly men Deadliest Catch, Mythbusters, Dirty Jobs, Man Vs. Wild, Storm Chasers, 101M Most widely distributed TV
Swamp Loggers, and specials including Planet Earth and Shark Week brand in the world. Top 5
network for P25-54.
TLC 18-54, particularly women Cake Boss, What Not to Wear, Say Yes to the Dress, Toddlers and Tiaras 100M Top 10 network in all key
and 19 Kids and Counting Women demos.
Animal Planet 25-54 Whale Wars, River Monsters, Fatal Attractions, Pit Bulls and Parolees, 97M
Dogs 101, and Monsters Inside Me
Investigation Discovery (ID) 25-54 On the Case with Paula Zahn, Disappeared, I (Almost) Got Away With It, 78M Fastest growing cable
Who the (Bleep) Did I Marry?, Stolen Voices, Buried Secrets, Behind network. Primetime
Mansion Walls, and True Crime with Aphrodite Jones viewership up nearly 70% in
Q2 2011.
Science Channel 25-54 Through the Wormhole with Morgan Freeman, An Idiot Abroad, Wonders of 68M 11 consecutive quarters of y/y
the Solar System, Head Rush, Space Week, Sci Fi Science, How Do They growth among P25-54.
Do it?, Build It Bigger, and Punkin Chunkin
Military Channel 35-64 At Sea, Special Ops Missions, Great Planes,and Top Sniper 58M
Planet Green 18-54 The Fabulous Beekman Boys, Dean of Invention, Living with Ed, Conviction 57M
Kitchen, Blood, Sweat and Takeaways, Wasted, and Reel Impact
Discovery Fit & Health 25-54 Dr. G: Medical Examiner, I'm Pregnant And..., The Bronx, Untold Stories of 49M Rebranded from FitTV as of
the ER, Bodies in Motion with Gilad, Namaste Yoga, and Shimmy Feb. 1, 2011
HD Theater 25-54, particularly men Sunrise Earth, World Rally Championship, and Mecum Auto Auctions 38M Launching in 4Q, 11, network
is currently branded as HD
Theater
Source: Company reports and J.P. Morgan estimates. Household data based on Q2 2011.
Within its US Networks, the bulk of revenue and profit is derived from the top three
networks – Discovery, TLC and Animal Planet, which are well known, fully
distributed brands. We estimate that the top three networks account for over 70% of
US Networks revenue, and as shown below, are an even higher portion of advertising
revenue, as they are the most popular channels with the highest ratings at DISCA’s
US business and the greatest distribution.
Figure 112: Top Three US Networks Drive the Bulk of US Revenue and Profits
2010 Affiliate Revenue 2010 Advertising Revenue

Other
22%
Other
Discovery Channel
36%
37%
Discovery Channel
43%
Animal Planet
12%
Animal Planet
9% TLC
TLC
23%
18%
Source: SNL/Kagan and J.P. Morgan estimates.
142
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Domestic Cable Advertising Outlook Remains Healthy in

Spite of Economic Weakness
Despite concerns in the market surrounding an ad recession, trends appear to be
holding up well in the US, particularly with respect to national advertisers and cable
spending. All of the large advertising holding companies have publicly commented
in recent weeks that national ad trends in the US will remain steady for the remainder
of the year, despite continued shakiness in financial markets. And while the 2012
outlook is more uncertain, we still expect US ad spending to outpace GDP growth,
and look for 3.5% ad growth next year.
Figure 113: DISCA's Cable Ad On the cable side, we believe cable ad spending will once again outpace the overall
Revenue Should Continue to ad market. The upfront market was particularly strong this year, with most cable
Grow Despite Softer Economy networks securing increases in the high single digit to low double digit range.
$1,400.00
Discovery commented that it secured increases in the high single digit to low double
digit range, near the top if its peer group, and achieved the highest dollar volume of
$1,200.00 commitments in company history. With roughly half of its inventory sold upfront,
$1,000.00 the remaining portion of ad revenue should be driven by the health of the scatter and
overall ad market. So far, we believe scatter remains very healthy and is up in the
$800.00
mid-teens over the prior year, suggesting healthy ad growth through the remainder of
$600.00 the year. While we expect US cable ad spending to temper a bit in 2012 to 5%-6%
$400.00 growth, down from 7%-9% growth in 2011, we believe scatter will likely remain up
at least in the mid- to high single digit range, supporting mid- to high single digit
$200.00
growth for total cable advertising revenue in 2012.
$0.00
2008 2009 2010 2011E Figure 114: Cable Advertising Has Outpaced US Ad Growth in Recent Years and We Expect That
Trend to Continue
15.0%
Source: Company reports and J.P. Morgan
estimates
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
Total US Ad Growth US Cable Ad Growth
Source: J.P. Morgan estimates, MAGNA Global
Programming outlook looks solid and should support healthy ad growth

In addition to a relatively healthy ad market, we remain optimistic about Discovery’s
programming lineup. With its focus on nonfiction programming, DISCA's content
serves a niche that is desirable to advertisers, especially as they have targeted
143
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
networks aimed at both men and women. Furthermore, the programming typically
holds up well over time and is less trendy than many other cable networks, making
the content more valuable for reruns and sale to digital streaming platforms in the
future (discussed further below). DISCA’s networks consistently rank near the top
for their targeted demographics and four of its networks are in the top 50 overall for
viewers 25-54 in the US.
Figure 115: DISCA Has Four Networks in the Top 50 (based on season to date 25-54 viewership in primetime)
1 USA 11 Nickelodeon 21 Disney Channel 31 (HBOM) 41 ESPN2
2 ESPN 12 Food Network 22 Comedy Central 32 E! 42 Hallmark
3 TNT 13 ABC Family 23 Encore 33 Cartoon Network 43 CNN
4 History Channel 14 TruTV 24 Spike TV 34 VH1 44 Cinemax
5 TBS 15 HGTV 25 MTV 35 Travel Channel 45 National Geographic
6 A&E 16 TLC 26 Starz 36 MSNBC 46 Nick Jr.
7 HBO 17 AMC 27 Adult Swim 37 Animal Planet 47 Oxygen
8 FX 18 Bravo 28 TV Land 38 ID 48 (STZP)
9 Discovery Channel 19 Lifetime 29 BET 39 Lifetime Movie Network 49 CMT
10 SyFy 20 Fox News 30 Nick at Nite 40 Showtime 50 (VS)
Source: Company reports and J.P. Morgan estimates. Household data based on year-end 2010.
As noted below, Discovery has a solid programming track record, with healthy,
stable ratings at its top networks, and has made inroads at some of its smaller
networks (particularly ID) to improve the network’s appeal and broaden reach. In
2010, average primetime viewership at Discovery's domestic networks increased 7%
in the 25-54 age group, as new and existing programming resonated with viewers and
the company benefited from the success of ID.
Figure 116: Ratings Have Remained Relatively Steady at Larger Networks, While Smaller Networks Are Gaining Traction (based on 24hour
ratings)
0.700
0.600
0.500
0.400
0.300
0.200
0.100
-
Discovery Channel TLC Animal Planet Military Channel Science Investigation Discovery
2005 2006 2007 2008 2009 2010
Source: J.P. Morgan estimates, Nielsen
More recently, ratings have been a bit mixed. In Q3, Discovery had fewer
programming hours versus the prior year and difficult comps from Deadliest Catch
last year, which had very high ratings with programs that dealt with the death of one
of the main characters, Captain Phil. TLC has fared a bit better with a 9% decline
based on people 25-54, although DISCA sells the network based on women’s ratings,
which are actually about flat in 3Q, reflective of continued success at many of its
144
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
popular shows, but no particular standouts in the quarter that drew significant
audiences.
Figure 117: Recent Ratings Have Been Mixed, But Outlook Remains Positive
Primetime QTD Live + SD AA (000), P25-54
3Q 2011 3Q 2010 Y/Y change Comments
APL 252 259 (2.7% )
DI SC 593 678 (12.5% ) Fewer new premiere hours in 3Q vs. prior year skews rating. Also difficult
comp from Deadliest Catch prior year (death of Captain Phil).
ID 256 174 47.1%
TLC 474 522 (9.2% ) Flattish if you look at F25-54 demo.
Total 1575 1633 (3.6%)
Source: Company reports and J.P. Morgan estimates, Nielsen
Looking ahead, we expect Discovery’s ratings to improve in Q4 with more new

programming on the air, while TLC’s hit Toddlers and Tiaras just returned to solid
ratings (and some controversy in the press as well) and should also provide a boost to
4Q results at that network. While ratings do tell the story of the health of
programming at a network, it’s important to highlight that fluctuations in ratings
often don't correlate too closely to ad revenue in any given quarter as without
knowing what ratings advertisers were guaranteed, it is very difficult to predict the
amount of make-goods and ratings shortfall that a network faces.
Discovery has invested in programming for the upcoming year (and commented that
margins in 2Q and 3Q will be a bit softer because of programming investments) and
has announced the end of some popular shows that it feels were no longer viable
(most notably LA Ink and Kate Plus 8 on TLC). In our view, DISCA’s programming
slate looks promising with popular shows such as Toddlers and Tiaras on TLC, Gold
Rush on Discovery and River Monsters on Animal Planet set to air in Q4.
Figure 118: Upcoming Programming Looks Promising for Q4 Ratings

Discovery Channel Gold Rush, Flying Wild Alaska
TLC Toddlers & Tiaras, What Not to Wear
Animal Planet River Monsters, Hillbilly Handfishin'
Distribution Growth Should Remain Steady Near-Term

At roughly 44% of domestic revenue, with relatively steady growth in recent years,
averaging between 5% and 7%, distribution has been a steady revenue stream for
DISCA's US business and should provide some insulation from fluctuations in the ad
market.
145
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
No major distribution agreements up for negotiation near term

Figure 119: Distribution Revenue
We expect core US distribution revenue (excluding any upside from the recent
Remained Steady Through the
Recession and the Outlook Netflix deal and new agreements with any other digital providers) to grow in the 3%
Remains Solid to 5% range for the next few years, with an additional 1%+ growth from extra
distribution, resulting in average distribution growth in the mid-single digit range.
$1,150.00 DISCA does not have any significant distribution deals up for negotiation through
$1,100.00 the end of 2012, at which point it will have deals up for roughly 20% of its networks
annually, implying that we could see some acceleration in affiliate growth if ratings
$1,050.00
hold in well and Discovery is able to negotiate for some step-ups from cable
$1,000.00 operators.
$950.00
DISCA’s main networks have seen steady affiliate fee growth in recent years, and
$900.00
given their enduring popularity, as well as ID’s progress expanding its brand and the
$850.00 fact that DISCA negotiates with its entire suite of networks at one time, we believe
$800.00 the company will be successful in getting at least modest affiliate fee increases, but
2008 2009 2010 2011E are conservatively not assuming any major step-up in affiliate fees in the near term.
With continued pressure on cable operators to keep fees down and more fees paid to
broadcasters in recent years, we expect cable operators will be reticent to make
Source: Company reports and J.P. Morgan meaningful step-up payments unless a popular network has been significantly
estimates undervalued (as was the case at Scripps Networks a few years ago), and while ID has
made significant progress in ratings and distribution, it is not yet at the level that we
believe warrants a meaningful increase in affiliate fees. It’s also worth nothing that
TLC has made significant traction in the female demographic since the last round of
negotiations and now ranks number two in females 18-49 after the USA network,
implying that some upside to affiliate growth is still possible despite what we expect
will be intense negotiations.
Figure 120: Affiliate Fees at Larger Networks Expected to Grow Modestly in Near Term
Affiliate Revenue Per Avg Sub /Month

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2007 2008 2009 2010
Discovery Channel TLC Animal Planet
While we expect steady growth until deals come up for renewal down the line, it is
worth mentioning that some renewals (and related affiliate increases) could come
146
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
sooner than planned as DISCA is in the process of negotiating for its networks to be
carried on TV Everywhere platforms, which could drive some upside to our
estimates. We believe that many cable operators are eager to improve their TV
Everywhere platforms in an effort to improve the value proposition to consumers and
help protect subscriber bases. TV Everywhere will also make it easier for more
consumers to watch DISCA content (and DISCA will get credit as Nielsen is
including ratings up to three days after the original airing in its data), which may
bode well for DISCA on both the distribution and advertising fronts. Longer term,
there has been some talk recently about cable operators petitioning the FCC to
prevent networks from bundling their channels with cable providers during
negotiations, but at this point, we don’t believe this movement has much traction and
don’t expect the FCC to intervene in the negotiation process in the near term.
Recent Netflix deal highlights value of content in online marketplace

So far, consumers have relatively limited access to full episodes of Discovery
Discovery has numerous well programming online – with some short form programming available on its branded
known brands with distinctive websites, as Discovery has not yet entered into TV Everywhere deals with the bulk
programming that is owned by of cable providers. Discovery has been actively exploring making its content
the company, creating an
available online under terms that the company believes will not cannibalize its
opportunity to leverage its
content in the digital
networks and recently entered into a two year streaming deal with Netflix to replace
marketplace. a prior deal that was much more limited in scope of programming. While financial
terms of the deal have not yet been disclosed, Discovery has commented that it has
the option to extend the agreement at the end of the term and that streamed content
includes programming that is not currently on air and generally originally aired at
least 18 months ago, providing some protection for its current on-air offerings. Also,
Discovery has the option to change the programming available to stream, so if, for
example, Discovery determines that streaming is somehow hurting the ratings for
current seasons of some its shows it can alter the programming that Netflix streams,
and the programming on Netflix will be branded as Discovery content, helping
viewers associate Discovery networks with programming that they enjoy. While we
haven't yet included any impact in our estimates from this deal, we would highlight
that CBS sold roughly 7% of its older library content for an estimated $200M. While
Discovery will likely not receive as much as CBS did for its library content, the
impact from affiliate deals will be meaningful for the company down the line, as the
deal with Netflix was not exclusive and Discovery could do other content deals down
the line if the Netflix agreement goes well, creating a new, high-margin revenue
stream for its US business, in our view.
OWN Interest Remains an Overhang

In 2009, Discovery announced a joint venture with Oprah Winfrey’s Harp, Inc., to
launch the Oprah Winfrey network, a lifestyle channel focused on self improvement
and discovery, in January 2011. DISCA accounts for the venture as a variable
interest entity and as it has a 50% stake and accounts for the investment using the
equity method, results are included below the line. As part of the partnership,
DISCA contributed its Discovery Health Network, which was then rebranded into
OWN, and Harp contributed the Oprah.com website and licenses for various content,
including the library of Oprah shows. DISCA also committed to funding for OWN
and so far has contributed $242 million to the network and expects to recoup the
funding from OWN in the coming years, when OWN is on more stable footing.
Initial cash distributions will go to DISCA to cover its initial investment and then
profits are shared equally between the partners (as are losses).
147
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Also, the terms of the agreement include a put under which DISCA can be required
to purchase Harp’s interest in OWN every two and a half years starting in 2016 for a
price that is a “fair market value” up to a maximum put amount, which ranges from
$100M on the first put date to $400M on the fourth exercise date (in 2022).
Early results for OWN were softer than anticipated

The launch of OWN received a lot of publicity as many were speculating about
Oprah’s next move after leaving her syndicated talk show. When OWN launched, it
reached 75M homes and is now in roughly 80M homes, which DISCA believes is
likely near its full distribution as it will likely remain on a digital tier. OWN faced
some challenges out of the gate, as its programming did not yet feature Oprah
Winfrey because her syndicated program was still on the air until May 2011, and
OWN could not broadcast the Oprah show library until the syndicated show ended as
well. Instead, the network aired some syndicated programming, as well as some new
shows, including Ask Oprah’s All Stars (featuring familiar guests from Oprah’s show
such as Dr. Phil and Dr. Oz) and Our America with Lisa Ling, which despite
receiving promotion on Oprah’s syndicated talk show, did not achieve the ratings
success that Discovery had originally planned, with ratings down since the launch in
January, and no meaningful improvement recently as 3Q viewership among 25-54
audiences in primetime is still down well over 10%.
To help combat ratings weakness, DISCA has worked to improve the programming
at OWN and in addition to new programming beginning in Q4 that features Oprah, it
also announced that Oprah will take over as CEO and chief creative officer and she is
working with many members of her former team at Harp to create additional
compelling content for OWN. For example, OWN has purchased the rights to air re-
runs of Undercover Boss, a program that currently airs on CBS, to help attract
viewers to the channel, and we'd expect other content deals and announcements for
new shows in the coming months as they work to round out the offering on the
network.
Figure 121: New Programming Upcoming Featuring Oprah Could Provide a Boost to Ratings
Target Demographic 25-54, particularly women
Households: 80M
Top Shows: Oprah's Lifeclass - premieres 10/10/2011
Oprah's Next Chapter - premieres January 2012
The Rosie Show - premieres October 10/10/11
Ask Oprah's All Stars
Dr. Phil
Our America with Lisa Ling
Anna and Kristina's Grocery Bag
Cristina Ferrare's Big Bowl of Love
So far, OWN is operating at a loss, which is consistent with the launch of a new
network. Networks can take up to two to three years to reach profitability, and
Discovery believes OWN will reach profitability in a standard amount of time.
Obviously, the success of the new programming will be a significant factor in OWN
reaching profitability sooner rather than later, and through 2013 we are
conservatively estimating that OWN continues to operate at a loss but are optimistic
148
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
about the new programming featuring Oprah and believe that given her track record
and popularity, the network could become a more meaningful contributor to DISCA
results down the line.
Figure 122: Distribution is a International Expansion Should Support Healthy Growth

Larger Portion of International
Revenue Discovery has an extensive portfolio of international network assets across the globe
with a presence in over 210 countries, often with numerous networks in each market
Other
5%
(Discovery averages six networks in each of its international markets). We believe
Advertising
that some of Discovery’s success so far overseas is the result of the type of
34%
programming on its networks, which tends to be nonfiction and transfer better to new
markets. Also, management has been very deliberate over time with its strategy and
owns nearly all of its programming and footage, giving it the opportunity to exploit
programming any way it likes in new markets and helping to build a solid library to
Distribution export to new markets.
61%
Figure 123: International Ad International revenues are mainly derived from distribution fees charged to cable
Revenues ($ in millions) operators (~61% of 2010 International revenue), and advertising on the networks and
$600
related websites is a smaller portion of the International segment. Operations are
also fairly well diversified around the globe, with nearly 40% derived from the more
$500 established cable markets of Western Europe, while the remainder are spread across
markets with faster growth prospects.
$400
$300 Figure 124: Developing Markets Are a Meaningful Portion of International Results
Other
$200 3% Asia-Pacific
14%
$100
$0 Latin America
27%
2008 2009 2010 2011E
Source: Company reports and J.P. Morgan

estimates
Western Europe
38%
CEEMEA
18%
International results proved resilient during the last recession

International ad revenue and margins have grown steadily in recent years, with
Discovery benefiting from increased pay TV penetration in many of its markets,
improved programming, including the launch of TLC in 2011 overseas, and strong
advertising trends in many international markets. Even during the worst year of the
recent recession in 2009, Discovery’s international advertising revenues increased
2%, implying that Discovery has enough diversification outside of Europe and
markets that were hit the hardest during the recession to post positive growth and
149
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
OIBDA margins and giving us confidence in the outlook for 2012 even if the ad
market does slow a bit.
Figure 125: International Revenue and Margins Have Increased Steadily
International Networks Revenue International Networks Adjusted OIBDA Margin

$800 50%
$760
$713 $716 43.6%
45%
$700
39.3%
40%
$600
35% 33.4%
$500 30%
$422
$400 25%
$336 $344
20%
$300
15%
$200
10%
$100 5%
0%
$0
2008 2009 2010
2008 2009 2010
Distribution Advertising Adjusted OIBDA Margin
Pay TV Penetration Is the Near Term Growth Driver

Even in a slowing economy, we believe the outlook for DISCA’s international
business is very solid. We believe the bulk of growth in international results will
likely come from higher revenue driven by increased cable penetration in global
markets. Longer term, once more of its markets reach a critical mass of cable subs,
we expect affiliate negotiations to become a more significant component of
Discovery; however, at this point we believe that DISCA’s priority is growing its
brands and reach in as many countries as possible through higher penetration, so it
doesn’t make sense for the company to push for higher sub fees and potentially stunt
that growth.
As noted above, we expect the faster growth to likely come from less developed
cable markets outside of Western Europe (with growth in Western Europe driven by
ratings improvement and ad growth). When we evaluate DISCA’s main regions
outside of Western Europe – Asia/Pacific, Latin America and Central and Eastern
Europe/Middle East/Africa, we note that cable penetration is expected to grow at
rapid rates in those markets in the next five years, with some of DISCA’s key
markets of focus, such as Brazil and India growing at even faster CAGR of 12% and
5%, respectively, during the same period.
Figure 126: Pay TV Growth is Meaningful in Many of DISCA’s International Markets

% change y/y 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Asia-Pacific (CAGR 6.8%) 9.9% 9.4% 9.2% 10.4% 8.4% 6.7% 5.1% 5.3% 4.9% 4.3% 4.2%
Western Europe (CAGR 4.7%) 9.8% 7.2% 7.9% 8.1% 5.9% 4.5% 3.1% 3.3% 2.6% 2.2% 2.2%
CEEMEA (CAGR 7.3%) 4.4% 9.2% 12.5% 15.7% 8.9% 6.2% 5.6% 4.3% 4.2% 3.8% 3.2%
Latin America (CAGR 10.7%) 9.3% 9.2% 11.9% 13.5% 9.6% 17.9% 11.3% 9.7% 9.4% 8.4% 6.9%
Source: J.P. Morgan estimates, Company data, SNL/Kagan
150
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
This fact, combined with the expectation for continued healthy Pay TV ad growth in
many of these markets, should bode well for DISCA’s international revenue growth
prospects.
Figure 127: Ad Spending in Emerging Markets Should Remain Strong in Coming Years (% change year over year)
Region 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Asia-Pacific 17.8% 52.7% 16.7% 30.2% 6.1% 25.3% 19.9% 17.4% 18.0% 17.3% 17.1%
Europe 20.8% 5.9% 10.6% 5.9% -0.1% 18.2% 7.5% 9.0% 7.3% 6.7% 5.9%
Latin America 26.6% 1.4% -11.8% 14.7% 19.9% 19.9% 15.0% 19.9% 19.1% 20.0% 20.1%
Middle East & Africa NM NM 34.3% 25.0% 19.1% 40.9% 14.8% 18.6% 16.6% 14.1% 12.6%
Source: Company reports and J.P. Morgan estimates, MAGNA.
TLC rollout and programming investments should help further develop

international brands
So far, DISCA has been very successful expanding the Discovery Channel overseas
and has found that its content is very easily transferred to new markets and cultures.
Animal Planet is also present in many international markets, although management
conceded that the content overseas is a bit different than its US brand and it is in the
process of making investments to improve its Animal Planet offering overseas.
Probably the biggest driver of international results on the programming side in the
near term will be the rollout of TLC. DISCA began introducing TLC into its
international markets by switching underperforming networks that it owns to the
TLC brand. The transition has gone well so far and lets DISCA tap into a female
audience (and related advertiser base) that much of its programming wasn’t
appealing to in the past. TLC has approximately 80M subscribers in international
markets (DISCA expects TLC to get to 100M by the end of 2011). While TLC has
been launched in the majority of homes overseas that DISCA planned for this year,
Discovery is still in the early stages of transitioning and marketing the new TLC
network in many markets, implying that we could see a boost from TLC
programming in international results for the next few quarters.
Despite investments in some localized content and switching networks to TLC,

DISCA has been very adept at managing costs and OIBDA margins have steadily
increased in recent years. We expect margins to reach 46% in 2011, nearly 300bps
of improvement from the prior year. Longer term, we believe margins will likely
continue expanding into the 50% range but will likely remain below US margins
(which we expect to approach 60%+) given the scale of DISCA’s international
business versus the US. Compared to its peers, DISCA’s international business is
much more profitable, again due in large part, we believe, to its ability to repurpose
content developed in the US on its international channels and to a skilled and
disciplined management team.
In addition to benefiting from a secular growth story in pay TV and advertising

overseas, online content players are increasingly expanding outside the US and to
date DISCA has not yet done any content deals with digital streaming companies
overseas. While we expect many online content companies to move in the near term
towards acquiring film rights in international markets, we expect quality TV
programming will be in demand as well down the line and could provide another
high margin revenue stream for DISCA.
151
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Healthy Balance Sheet Gives DISCA Flexibility to Pursue

Growth Areas and Return Capital to Shareholders
Discovery ended 2Q with roughly $4.2 billion in debt, or leverage of approximately
1.7x adjusted OIBDA.
Figure 128: Debt Maturities
$1,400.0
$1,200.0
$1,000.0
$800.0
$600.0
$400.0
$200.0
$0.0
3.70% Senior Notes 5.625% Senior 5.05% Senior Notes 4.375% Senior 6.35% Senior Notes Capital lease and
due June 2015 Notes due August due June 2020 Notes due June due June 2040 other obligations
2019 2021
Discovery has no meaningful upcoming maturities, with its next large payment
required related to its $850 million notes due 2015. In addition to generating
significant free cash flow (estimated at over $1 billion in 2011), Discovery also has
access to $1 billion under its revolving credit facility, giving us comfort in the
company’s ability to make its upcoming payments and continue investing in growth
overseas and returning capital to shareholders. Management has they are
comfortable with leverage at these levels and would consider increasing leverage to
pursue an attractive transaction.
152
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 129: No Meaningful Near Term Maturities Give DISCA Considerable Flexibility
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Repurchases Should Continue at a Healthy Pace

Discovery has been aggressively repurchasing shares recently and announced another
$1 billion repurchase authorization when it released 2Q, 11 earnings. Under its prior
$1 billion authorization, Discovery has spent $609 million (through August 3, 2011),
repurchasing 16.8 million shares at an average price of $36, leaving 1.391 billion left
to continue repurchasing shares. Discovery picked up its pace of repurchases in Q3
(spending $127M in the first month of the quarter alone) and we expect Discovery
will complete its prior authorization by Q4, 11/early Q1, 12, and begin its new
authorization at that point. With expected repurchases averaging over $200 million
per quarter for the remainder of 2011 and with another authorization already in place,
we expect Discovery’s aggressive repurchase program to provide some support for
the stock in this challenging market.
Financial Outlook
Q3 Should Benefit from Continued Strength in the Ad Market
US outlook still positive as ad market has held in well, International business
remains robust
We expect US revenue to increase 5.8% in the quarter, with the bulk of growth
driven by advertising revenue, which we estimate to increase 8.5%. Media
companies have stated that scatter remained very healthy through Q3, up in the
double digits on average versus the prior year, which when combined with a solid
upfront should support high single digit advertising growth through the back half of
the year, even after taking into account somewhat mixed ratings. We expect
distribution revenue to increase 3.1% off of tough comps from the prior year and no
new affiliate deals; however, there could be some upside to our estimate (for both Q3
and Q4) as the impact from DISCA’s Netflix deal should benefit distribution revenue
and is not currently included in our estimates as no financial terms have been
disclosed. We expect US margins to contract in the quarter to approximately 57.3%
from 59.1% as DISCA invests in new programming, which should weigh on
153
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
consolidated margins until Q4 (management guided to consolidated Q3 margin

growth in the mid-single digit range, which is just below our estimates). Again, one
area of potential upside in the quarter (and full-year) is the impact from DISCA's
recent NFLX deal, which will begin to impact results in Q3 and should help margins
modestly as we believe there are little costs associated with this type of content deal.
International growth should continue at a robust pace, with advertising up 18% and
distribution revenue up approximately 20% as DISCA benefits from increased pay
TV penetration and a healthy ad market in most parts of the globe. Also, the launch
of TLC overseas is expected to benefit 3Q and likely the next few quarters as its new
programming is rolled out and Discovery can leverage the new female focused
content. International OIBDA margins should continue their steady climb and we
expect expansion of roughly 180bps to 44.6% in Q3.
We expect consolidated revenue to increase 10% in the quarter, while margins

should drop slightly, reflective of increased programming costs in the US. We
Discovery’s recent content deal
with Netflix will likely drive better
expect consolidated OIBDA to increase 7.5% to nearly $449.5M, just above
than expected Q3 results. management guidance for mid-single digit OIBDA growth. Interest should increase
in the quarter given the issuance of $650M in notes at the end of 2Q, but the modest
increase in interest should be more than offset by aggressive share repurchases,
which should help contribute to adjusted diluted EPS growth of 38% to $0.55. Our
estimate is just above consensus of $0.54. It is also important to note that our
estimates (and Street estimates, as far as we can tell) do not include the impact from
Discovery's recent content deal with Netflix, which we believe will likely result in
meaningful upside to Q3 affiliate revenues and should be high margin.
154
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 130: Continued Strength in Scatter and International Should Benefit Q3

3Q10 3Q11E Comments
Revenue:
Total US Networks 585.0 619.0 Advertising +8.5% as scatter remains
% change 5.8% very strong, Distribution +3.1% on
tougher comps
Total International Networks 304.0 359.8 Advertising +18% , Distribution +20% as
% change 18.3% Pay TV penetration increases and global
ad market remains steady
Education & Other 38.0 40.1
% change 5.5%
Corporate and inter-segment eliminations (1.0) -
Total Revenue 926.0 1,018.9
% change 10.0%
Adjusted OIBDA:
US Networks 346.0 354.9 US margins contracting on increased
margin 59.1% 57.3% programming investments, OIBDA should
increase in the double-digits again by Q4
International Networks 130.0 160.4 International margins are expected to
margin 42.8% 44.6% steadily increase through the remainder
of 2011
Other 1.0 0.9
margin 2.6% 2.2%
Corporate and inter-segment eliminations (59.0) (66.7)
Total Adjusted OIBDA 418.0 449.5
margin 45.1% 44.1%
Adjusted Diluted EPS $0.39 $0.55 Assumes roughly $250M spent

% change 38.4% repurchasing shares in the quarter
2011 should continue to benefit from healthy ad trends

Despite heightened economic concerns and some uncertainty in the ad market, we
expect DISCA's 2011 results to show nice growth from 2010. US networks revenue
growth is estimated to approximate 6.8%, with healthy advertising growth of 9.2%
(reflecting a solid upfront and continued strength in scatter expected through the back
half of the year) and only modest margin contraction of 30bps driven in part by
heightened programming investments. International results should remain very
strong through Q4, benefiting from the international rollout of TLC as well as a
favorable overall ad market and continued pay TV penetration. We expect
international OIBDA margins to expand another 240 bps in 2011 to 46.0%.
On a consolidated basis, we expect 2011 ad revenue to increase 12.8% and

distribution revenue to increase 9.5%. Consolidated OIBDA margins should expand
roughly 50bps to 45.6% as DISCA continues to benefit from growth overseas. We
expect aggressive share repurchases to continue through Q4, particularly as DISCA
just announced another $1billion repurchase program before it even finished its
current program. Solid operating results and continued repurchases should drive
very healthy adjusted EPS growth of nearly 40% to $2.38, which is just above
current consensus of $2.37.
155
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
2012 faces a more difficult ad market, but steady affiliate fees and international
exposure should support positive outlook
We expect 2012 growth to temper a bit as economic concerns will likely weigh on
the global advertising market. We expect consolidated advertising revenues to
increase 8.8% in 2012, while the impact to distribution revenue more modest with
7.4% growth. Despite our expectation for modestly slower revenue growth, we
expect DISCA's favorable international exposure, steady distribution revenue stream,
good expense control (programming expense growth has averaged 6%-7% in recent
years) and continued share repurchases should help boost the bottom line and
insulate the company somewhat, helping it maintain solid 18% EPS growth to $2.80.
We expect US revenue growth to soften to 5.7% from 6.8% in 2011, mainly on more
caution in the ad market and our expectation for a cooler scatter market.
Management has historically done a good job protecting margins when revenue
softens and we expect US margins to remain relatively flat in 2012, as any upside
from revenue growth is likely reinvested in programming and the networks ahead of
affiliate deals that are up for renewal beginning at the end of 2012.
International growth will also likely be impacted by a softer ad market, although we

believe the slowdown in revenue growth will likely only be modest at this point
given continued upside expected from pay TV penetration and DISCA’s broad
geographic exposure. We look for international revenue growth of 11.4% and nearly
250bps of OIBDA margin expansion to 48.5%.
Figure 131: Longer Term Outlook Implies Some Softening in 2012 Growth
2010 2011E 2012E Comments
Revenue:
Total US Networks 2,363.0 2,523.1 2,667.0 We expect 2012 ad growth to slow a bit to 6% and distribution
% change 8.9% 6.8% 5.7% revenue to remain near historical levels of 5.8%. Next affiliate deals
up in 2012.
Total International Networks 1,251.0 1,475.9 1,643.7 We expect international growth to temper a bit in 2012 as the global
% change 10.6% 18.0% 11.4% economy and ad market remain mixed
Education & Other 153.0 168.0 176.1

% change 3.4% 9.8% 4.8%
Corporate and inter-segment eliminations 6.0 - -
Total Revenue 3,773.0 4,166.9 4,486.9
% change 9.1% 10.4% 7.7%
Adjusted OIBDA:
US Networks 1,365.0 1,450.3 1,530.5 Programming costs will likely temper margin expansion in the US in
margin 57.8% 57.5% 57.4% 2011 and don't expect meaningful margin expansion near term unless
the ad market strengthens
International Networks 545.0 679.1 796.5 Margins should continue to grow as pay TV penetration increases in
margin 43.6% 46.0% 48.5% many developing markets and DISCA slowly earns more high-margin
ad dollars
Other 15.0 22.4 24.3
margin 9.8% 13.3% 13.8%
Corporate and inter-segment eliminations (226.0) (251.9) (268.2)
Total Adjusted OIBDA 1,699.0 1,899.8 2,083.1
margin 45.0% 45.6% 46.4%
We expect share repurchases to remain a priority and estimate
Adjusted Diluted EPS $1.71 $2.38 $2.80 $700M spent in 2012, which is below 2011 estimated levels, implying
% change 75.2% 39.7% 17.5% some upside to estimates if DISCA accelerates its repurchase
program.
156
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Valuation
Our December 2012 price target of $43 is based on Discovery trading at
approximately a 13.1x forward EPS, roughly in line with its current forward
multiple. Discovery shares have performed roughly in-line with the S&P this year
and are down 9% year-to-date. Despite this pullback, Discovery has maintained its
healthy premium to its most direct cable peers at 13.5x forward EPS, while VIA/B
and SNI trade at 9.4x and 11.4x, respectively.
Figure 132: DISCA Trades at a Premium Valuation to Its Entertainment Peers

FCF
Diversified Media
TIME WARNER O TWX 30.94 33,535.9 15,021.0 6,699.9 7,129.1 2.76 3.13 7.2 6.8 11.2 9.9 0.7 11.4 10.0 8.8% 3.0%
VIACOM O VIA.B 39.17 22,824.4 6,399.0 4,047.6 4,289.7 3.61 4.17 7.2 6.8 10.9 9.4 0.6 9.3 8.2 10.7% 2.6%
CBS (e) O CBS 20.85 14,303.1 4,650.0 3,014.0 3,363.0 1.82 2.20 6.3 5.6 11.5 9.5 0.5 7.1 5.9 14.1% 1.9%
Average: 7.1x 6.6x 11.6x 10.1x 0.8x 11.0x 9.0x 11.2% 2.2%
Cable Networks
Average: 8.7x 7.9x 14.6x 12.5x 0.7x 15.8x 13.2x 9.5% 2.1%
Cinema
CINEMARK (e) O CNK 18.87 2,136.3 1,157.0 519.8 557.3 1.32 1.63 6.3 5.9 14.3 11.6 0.5 12.0 9.9 8.3% 4.5%
(e)
Average: 6.8x 6.3x 21.7x 13.6x 0.3x 10.3x 9.1x 10.1% 5.6%
S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Source: J.P. Morgan estimates, Bloomberg, Capital
We believe Discovery deserves a premium valuation to peers, but don’t

anticipate any near term catalyst to increase the valuation gap
Discovery currently trades at a premium to its closest peers, Viacom and SNI, on
most metrics as noted above and in the figure above. While we have a favorable
view of cable networks overall and particularly Discovery’s well run group of assets
and vast international exposure, we believe that at current levels Discovery's
premium valuation already reflects its advantages versus its peers and looking ahead
do not anticipate any catalysts that should drive a larger gap between DISCA and its
peers, particularly in a more cautious advertising environment.
When we broaden our analysis to include other valuation metrics, as well as

DISCA’s peak and trough levels in the past three years, we believe that unless
DISCA can begin to approach its peak-type multiple levels again, there is likely not
meaningful upside from current levels. In addition to our view of limited positive
catalysts for DISCA in particular, we believe that a skittish overall near-term view of
the ad market will likely prevent DISCA from reaching the peak-levels it achieved
coming out of the last recession.
157
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 133: Variety of Valuation Metrics Imply DISCA Is Fairly Valued

Implied
Valuation Metric Multiple Share Price
Historical Average P/E 18.0x $60
Peer Group Average P/E 10.4x $34
S&P P/E 10.9x $36
Trough P/E 10.5x $35
Peak P/E 22.9x $76
Historical Average EV/EBITDA 10.2x $35
Trough EV/EBITDA 7.5x $24
Peak EV/EBITDA 12.3x $45
Source: J.P. Morgan estimates, Bloomberg, CapitalIQ
Also, we believe it’s important to note that while DISCA is trading at a premium to
peers on a P/E basis (which we use to derive our price target), after adjusting for
expected earnings growth, DISCA is actually trading in line with SNI at 0.8xPE/G
and just above Viacom at 0.5x, giving us additional comfort in our Neutral
viewpoint.
Figure 134: DISCA Has Historically Traded at a Premium to Peers – Particularly Viacom
Source: J.P. Morgan estimates, Capital IQ
Beyond peer analysis - DISCA is trading in line with its historical S&P premium
Since the recession ended in 2009, Discovery has been trading at an average
premium to the S&P of ~35%, and today trades at roughly a 25% premium. Given
DISCA’s solid international growth story, we think this level of market premium is
warranted, but again reiterate that meaningful upside potential to its multiple is not
likely due to limited catalysts and caution that there is likely some downside risk to
valuation if the ad market weakens, as during the last recession DISCA traded
roughly in line with the overall market.
158
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 135: DISCA Historically Traded at a Premium to the S&P after the Recession
25
20
15
10
DISCA Fwd P/E S&P 500 Fwd P/E DISCA Average Fwd P/E Linear (DISCA Average Fwd P/E)
Source: J.P. Morgan estimates, CapitalIQ
Management
Discovery has a management team with extensive experience with both Discovery
and other media and cable network companies. We also believe that management is
well regarded by investors and viewed as good operators. Discovery recently
announced that its CFO, Brad Singer, has decided to leave the company when his
contract ends at the end of March 2012. Thus far, Discovery has not named a
successor, but given the amount of time between now and Mr. Singer’s departure and
our comfort with management overall, we are confident that management has time to
attract a good candidate and complete a relatively smooth transition.
Senior management includes:
John S. Hendricks – Founder, Chairman, and common stock director

Mr. Hendricks is the founder of Discovery Communications, Inc., and has served as
the company’s Chairman since September 1982. He served as the company’s Chief
Executive Officer from September 1982 to June 2004 and as the Interim Chief
Executive Officer from December 2006 to January 2007. Mr. Hendricks previously
founded and served as president of the American Association of University
Consultants (AAUC), a private consulting organization with a focus on television
distribution, marketing, and fundraising for educational programs and services.
David M. Zaslav – President, Chief Executive Officer, and common stock

director
Mr. Zaslav has served as the company’s Chief Executive Officer since January 2007.
Prior to joining the company, Mr. Zaslav served as Executive Vice President of NBC
and President of NBC Cable from October 1999 to May 2006, followed by a brief
period as President, Cable & Domestic Television and New Media Distribution, of
NBC Universal, Inc. from May 2006 to December 2006.
159
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Bradley E. Singer – Senior Executive Vice President, Chief Financial Officer

Mr. Singer has served as the company’s Senior Executive Vice President, Chief
Financial Officer since July 2008. Prior to joining the company, Mr. Singer served
as American Tower Corporation’s Chief Financial Officer and Treasurer from
December 2001 to June 2008. Mr. Singer has also worked for Goldman Sachs as an
investment banker focusing on the telecommunications, media, and entertainment
industries.
Peter Liguori – Senior Executive Vice President, Chief Operating Officer

Mr. Liguori has served as the company’s Senior Executive Vice President, Chief
Operating Officer since January 2010. Prior to joining the company, Mr. Liguori
served as President, Entertainment at Fox Broadcasting Company. His other
previous roles include President and Chief Executive Officer of News Corp.’s FX
Networks (1998 to 2005), Senior Vice President, Marketing for a new joint venture
at Fox/Liberty Networks (1996 to 1998), and Vice President, Consumer Marketing at
HBO. Prior to HBO, Mr. Liguori worked in advertising and Ogilvy & Mather and
Saatchi & Saatchi.
Mark G. Hollinger – President and Chief Executive Officer of Discovery

Networks International
Mr. Hollinger has served at Discovery for 20 years and as President and Chief
Executive Officer of Discovery Networks International since December 2009. His
previous roles at the company include General Counsel (1996 to January 2008),
President of Global Businesses and Operations (February 2007 to January 2008),
Senior Executive Vice President, Corporate Operations (January 2003 through
December 2009), and Chief Operating Officer (January 2008 to December 2009).
Discovery’s Board of Director’s has 11 members, of which 7 are independent. The

Board is comprised of the following individuals:
Figure 136: Board Summary

Robert R. Beck Independent
Robert R. Bennett Not Independent
Paul A. Gould Independent
John S. Hendricks Not Independent
Lawrence S. Kramer Independent
John C. Malone Not Independent
Robert J. Miron Independent
Steven J. Miron Independent
M. LaVoy Robison Independent
J. David Wargo Independent
David M. Zaslav Not Independent
160
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Share Structure
Multi-class share structure gives most institutional holders limited voting rights
Discovery has three classes of common shares and preferred shares outstanding with
the following rights:
Figure 137: Class B Shareholders Control Significant Voting Power

Share Class Votes per Share Shares Outstanding Total Votes % of Votes
Class A 1 141 141 50%
Class B 10 7 66 23%
Class C 0 126 0 0%
Series A & C Converts 0.55 136 75 27%
Total 410 282
Source: Company reports; note that A and C votes per share are based on data from 2011 proxy statement
Class A common shares are widely traded under the ticker DISCA and ownership is
dispersed among well known institutions as detailed below, while Discovery’s Class
C common shares trade under the ticker DISCK and have no voting rights.
Figure 138: Top Institutional Shareholders – Class A Shares

Holder Amount % of DISCA Out
Fidelity Management & Research 22.7 16.1%
State Street Corp. 8.9 6.3%
Vanguard Group Inc. 8.0 5.7%
Blackrock Institutional Trust 7.5 5.3%
T. Rowe Price Associates 6.8 4.8%
UBS Global Asset Management 4.5 3.2%
DSM Capital Partners 3.7 2.6%
Manning & Napier Advisors, Inc. 3.3 2.3%
Blackrock Fund Advisors 3.0 2.1%
Northern Trust Corporation 2.7 1.9%
Total Ownership by Top 10 71.1 50.4%
Source: J.P. Morgan estimates, Bloomberg, Share data as of Q2, 11
Figure 139: Top Institutional Shareholders - Class C Shares (in millions)

Holder Amount % of DISCK Out
T. Rowe Price Associates 17.1 13.5%
Harris Associates LP 13.7 10.9%
Neuberger Berman LLC 7.5 5.9%
John C. Malone 4.8 3.8%
TimesSquare Capital Management 4.2 3.3%
First Manhattan Co. Asset Management 3.5 2.8%
Columbia Wanger Asset Management 3.1 2.5%
Omega Advisors 3.1 2.4%
Tiger Global Management LLC 2.8 2.2%
Vanguard Group Inc. 2.5 2.0%
Total Ownership by Top 10 62.3 49.5%
Source: J.P. Morgan estimates, Bloomberg, Share data as of Q2, 11
161
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
The majority of Discovery's Class B shares are owned by John Malone, who is a
board member and has a long history with the company as he was the CEO before
the company went public in 2008. By controlling the majority of the super-voting
shares, as well as some of the other common shares, Mr. Malone controls roughly
25% of the vote and has influence over major decisions at the company. The other
John Malone and
Advance/Newhouse control over
significant investor in Discovery is Advance/Newhouse, which has an investment in
50% of Discovery's voting Discovery’s preferred A and C shares. The A preferred shares are entitled to one
power. vote each, while the C are non-voting shares. For accounting purposes the A and C
shares are included in shares outstanding as they can currently be converted, so if
Advance/Newhouse converted to common shares there would be no meaningful
financial impact. Through its preferred stake and other ownership,
Advance/Newhouse controls roughly 27% of Discovery's voting power, giving it and
Mr. Malone a majority of voting power.
162
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Company Financials
Disney
Table 21: Disney Income Statement ($ in millions except per share data)
1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2010 2011E 2012E 2013E
REVENUES
Cable Networks $3,068 $2,826 $3,516 $3,358 $3,258 $3,002 $3,749 $3,590 $11,475 $12,768 $13,601 $14,593
% change 15.6% 17.2% 7.2% 7.3% 6.2% 6.2% 6.6% 6.9% 8.7% 11.3% 6.5% 7.3%
Broadcasting $1,577 $1,496 $1,433 $1,245 $1,551 $1,521 $1,462 $1,356 $5,687 $5,751 $5,890 $6,152
% change 3.7% 4.5% -1.1% -3.1% -1.6% 1.6% 2.1% 8.9% 0.6% 1.1% 2.4% 4.4%
Parks & Resorts 2,868 2,630 3,170 2,939 3,063 2,759 3,365 3,098 10,761 11,607 12,286 13,026
% change 7.7% 7.4% 12.0% 4.3% 6.8% 4.9% 6.1% 5.4% 0.9% 7.9% 5.8% 6.0%
Studio Entertainment 1,932.0 1,340.0 1,620.0 1,480.9 1,828.6 1,231.4 1,461.2 1,412.5 6,701.0 6,372.9 5,933.7 6,160.7
% change -0.2% -12.8% -1.2% -6.9% -5.4% -8.1% -9.8% -4.6% 9.2% -4.9% -6.9% 3.8%
Consumer Products 922.0 626.0 685.0 803.0 886.0 641.7 644.9 769.5 2,678.0 3,036.0 2,942.1 3,089.2
% change 23.6% 5.0% 13.0% 10.0% -3.9% 2.5% -5.9% -4.2% 10.4% 13.4% -3.1% 5.0%
Interactive Media 349.0 159.0 251.0 216.2 366.5 174.9 251.0 227.0 761.0 975.2 1,019.4 1,070.3
% change 57.9% 2.6% 27.4% 15.0% 5.0% 10.0% 0.0% 5.0% 6.9% 28.1% 4.5% 5.0%
Total Revenue $ 10,716 $ 9,077 $ 10,675 $ 10,042 $ 10,953 $ 9,330 $ 10,934 $ 10,453 $ 38,063 $ 40,510 $ 41,671 $ 44,092
% change 10.0% 5.8% 6.7% 3.1% 2.2% 2.8% 2.4% 4.1% 5.3% 6.4% 2.9% 5.8%
OPERATING INCOME
Cable Networks 771 1,357 1,844 1,259 831 1,453 1,980 1,364 4,473 5,231 5,628 6,129
% change 41.7% 14.7% 10.0% 17.7% 7.8% 7.1% 7.4% 8.3% 5.0% 17.0% 7.6% 8.9%
% of cable revenue 25.1% 48.0% 52.4% 37.5% 25.5% 48.4% 52.8% 38.0% 39.0% 41.0% 41.4% 42.0%
Broadcasting 295 167 250 129 264 175 256 183 659 841 878 960
% change 63.9% 35.8% 19.6% -11.9% -10.6% 4.7% 2.4% 41.3% 30.5% 27.7% 4.3% 9.4%
% of broadcast revenue 18.7% 11.2% 17.4% 10.4% 17.0% 11.5% 17.5% 13.5% 11.6% 14.6% 14.9% 15.6%
Parks & Resorts 468 145 519 338 495 164 568 370 1,318 1,470 1,597 1,828
% change 24.8% -3.3% 8.8% 6.9% 5.8% 13.4% 9.4% 9.4% -7.1% 11.5% 8.6% 14.5%
segment margin 16.3% 5.5% 16.4% 11.5% 16.2% 6.0% 16.9% 11.9% 12.2% 12.7% 13.0% 14.0%
Studio Entertainment 375 77 49 115 356 31 3 127 693 616 517 644
% change 54.3% -65.5% -60.2% 10.3% -5.0% -59.5% -93.8% 10.4% 296.0% -11.1% -16.0% 24.5%
segment margin 19.4% 5.7% 3.0% 7.7% 19.5% 2.5% 0.2% 9.0% 10.3% 9.7% 8.7% 10.5%
Consumer Products 312 142 155 223 302 155 136 213 677 832 805 859
% change 28.4% 6.8% 32.5% 21.0% -3.3% 8.9% -12.2% -4.4% 11.2% 22.9% -3.2% 6.6%
segment margin 33.8% 22.7% 22.6% 27.7% 34.0% 24.1% 21.1% 27.7% 25.3% 27.4% 27.4% 27.8%
Interactive Media (13) (115) (86) (80) (80) (80) (20) (20) (234) (294) (200) -
Corporate (expense) (112) (122) (101) (124) (118) (128) (106) (130) (420) (459) (482) (506)
% change 60.0% 34.1% -15.1% -10.0% 5.0% 5.0% 5.0% 5.0% 5.5% 9.3% 5.0% 5.0%
Restructuring Charges (12.0) - (34.0) - - - - - (270.0) (46.0) - -
Total Operating Income $ 2,084.0 $ 1,651.0 $ 2,596.0 $ 1,859.9 $ 2,050.1 $ 1,770.3 $ 2,816.4 $ 2,106.0 $ 6,896.0 $ 8,190.9 $ 8,742.8 $ 9,913.4
% change 48.9% 3.5% 9.0% 22.3% -1.6% 7.2% 8.5% 13.2% 19.3% 18.8% 6.7% 13.4%
% of revenue 19.4% 18.2% 24.3% 18.5% 8.0% 19.0% 25.8% 20.1% 18.1% 20.2% 21.0% 22.5%
Income Before Tax and Minority Interest $2,064 $1,568 $2,508 $1,765 $1,965 $1,690 $2,736 $2,026 $6,627 $7,905 $8,418 $9,588
Income Taxes (730) (558) (845) (618) (698) (592) (958) (699) (2,314) (2,751) (2,946) (3,356)
Tax rate 35.4% 35.6% 33.7% 35.0% 35.5% 35.0% 35.0% 34.5% 34.9% 34.8% 35.0% 35.0%
Net Income before minority interests 1,334.0 1,010.0 1,663.0 1,147.2 1,267.5 1,098.7 1,778.6 1,327.1 4,313.0 5,154.2 5,471.9 6,232.4
Minority Interest (32) (68) (187) (138) (32) (68) (187) (138) (350) (425) (446) (468)
Recurring Net Income from Continuing Ops before
$1,302 1x Items$942 $1,476 $1,010 $1,235 $1,031 $1,592 $1,190 $3,963 $4,730 $5,026 $5,764
% change 53.9% -1.2% 10.9% 20.9% -5.1% 9.4% 7.8% 0.0% 19.8% 19.3% 6.3% 14.7%
% of revenue 12.2% 10.4% 13.8% 10.1% 11.3% 11.0% 14.6% 11.4% 10.4% 11.7% 12.1% 13.1%
Avg Diluted Shares Outstanding 1,927 1,934 1,912 1,882 1,873 1,865 1,857 1,848 1,948 1,914 1,861 1,833
Diluted EPS, recurring $0.68 $0.49 $0.77 $0.54 $0.66 $0.55 $0.86 $0.64 $2.03 $2.48 $2.70 $3.15
% change 53.5% 0.8% 14.7% 24.7% -3.4% 13.5% 11.0% 0.0% 12.7% 22.0% 9.0% 16.5%
163
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 22: Disney Balance Sheet

$ in million
ASSETS
Current Assets:
Cash & Equivalents 3,039 3,094 3,519 4,732 3,395 3,172 3,828 4,986 2,722 4,732 4,986 5,078
Receivables 7,028 6,075 6,212 6,278 7,448 5,598 6,560 6,547 5,784 6,278 6,547 6,595
Inventories 1,416 1,453 1,542 1,468 1,596 1,493 1,630 1,571 1,442 1,468 1,571 1,620
Television Costs 833 878 693 776 867 840 851 847 678 776 847 824
Deferred Income taxes 1,052 1,051 1,051 1,051 1,051 1,051 1,051 1,051 1,018 1,051 1,051 1,051
Other current Assets 626 669 626 626 626 626 626 626 581 626 626 626
Total Current Assets $13,994 $13,220 $13,643 $14,931 $14,984 $12,780 $14,546 $15,628 $12,225 $14,931 $15,628 $15,794
Film & Television Costs 4,636 4,609 4,312 4,605 4,381 4,665 4,374 4,596 4,774 4,605 4,596 5,414
Investments 2,491 2,499 2,505 2,505 2,505 2,505 2,505 2,505 2,513 2,505 2,505 2,505
Park, Resorts & Other Property, at cost 18,486 18,898 19,207 18,942 19,084 18,810 18,405 18,050 17,806 18,942 18,050 16,494
Attractions, Building & Equipment 32,966 34,832 35,222 35,437 36,061 36,275 36,364 36,510 32,875 35,437 36,510 36,936
Accumulated Depreciation (18,601) (19,156) (19,591) (20,071) (20,553) (21,042) (21,535) (22,036) (18,373) (20,071) (22,036) (24,018)
Projects in Progress 3,001 2,086 2,440 2,440 2,440 2,440 2,440 2,440 2,180 2,440 2,440 2,440
Land 1,120 1,136 1,136 1,136 1,136 1,136 1,136 1,136 1,124 1,136 1,136 1,136
Intangible Assets, net 5,193 5,139 5,094 5,094 5,094 5,094 5,094 5,094 5,081 5,094 5,094 5,094
Goodwill 24,121 24,127 24,136 24,136 24,136 24,136 24,136 24,136 24,100 24,136 24,136 24,136
Other Assets 2,029 2,096 2,208 2,208 2,208 2,208 2,208 2,208 2,707 2,208 2,208 2,208
Total Assets $70,950 $70,588 $71,105 $72,421 $72,392 $70,198 $71,268 $72,217 $69,206 $72,421 $72,217 $71,645
LIABILTIES & SHAREHOLDERS' EQUITY

Current Liabilities
Accounts Payable & other Accured Liabilites 7,118 5,150 5,602 5,984 5,915 6,065 5,686 6,026 6,109 5,984 6,026 6,704
Current Portion of Borrowings 2,822 4,084 4,062 4,062 4,062 4,062 4,062 4,062 2,350 4,062 4,062 4,062
Unearned Royalties & other Advances 2,807 3,569 3,102 3,029 3,416 3,026 3,358 3,253 2,541 3,029 3,253 3,065
Total Current Liabilities $12,747 $12,803 $12,766 $13,075 $13,393 $13,153 $13,105 $13,341 $11,000 $13,075 $13,341 $13,831
Borrowings 9,933 8,688 9,176 11,026 10,276 9,026 9,026 9,026 10,130 11,026 9,026 6,026
Deferred Income Taxes 2,577 2,841 2,905 2,905 2,905 2,905 2,905 2,905 2,630 2,905 2,905 2,905
Other long-term Liabilities 5,954 5,944 5,336 5,875 6,276 5,570 6,685 7,396 6,104 5,875 7,396 9,344
Shareholders Equity 62,257 63,915 65,638 63,223 63,224 63,225 63,226 63,227 61,182 63,223 63,227 63,223
Common Stock 29,271 29,938 30,159 30,159 30,159 30,159 30,159 30,159 28,736 30,159 30,159 30,159
Retained Earnings 34,873 35,814 37,288 34,873 34,874 34,875 34,876 34,877 34,327 34,873 34,877 34,873
Accumulated other comprehensive Losses (1,887) (1,837) (1,809) (1,809) (1,809) (1,809) (1,809) (1,809) (1,881) (1,809) (1,809) (1,809)
Treasury Stock (24,460) (25,265) (26,692) (25,659) (25,658) (25,657) (25,656) (25,655) (23,663) (25,659) (25,655) (25,659)
Minority Interests 1,942 1,662 1,976 1,976 1,976 1,976 1,976 1,976 1,823 1,976 1,976 1,976
Shareholders Equity $39,739 $40,312 $40,922 $39,540 $39,542 $39,544 $39,546 $39,548 $39,342 $39,540 $39,548 $39,540
Total Liabiities & Stockholders' Equity $70,950 $70,588 $71,105 $72,421 $72,392 $70,198 $71,268 $72,217 $69,206 $72,421 $72,217 $71,645
164
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 23: Disney Statement of Cash Flows

$ in millions
OPERATING ACTIVITIES
Net income 1,334 1,010 1,663 1,147 1,267 1,099 1,779 1,327 4,313 5,154 5,472 6,232
Depreciation and amortization 447 456 476 482 488 493 501 499 1,713 1,861 1,982 2,076
Gains on Sale of Equity Investments & Business (75) - - - - - - - (118) (75) - -
Deferred income taxes (61) 256 12 - - - - - 133 207 - -
Equity in the income of investees (156) (123) (184) (123) (139) (162) (90) (147) (440) (586) (538) (554)
Cash distributions received from equity investees 170 125 168 123 170 125 168 123 473 586 586 554
Net change in film and television costs 94 (278) 400 207 94 (278) 400 207 238 423 423 -
Equity based compensation 128 119 106 131 128 119 106 131 522 484 484 484
Restructuring and impairment charges 12 (12) 10 - - - - - 132 10 - -
Other 84 (161) 38 (142) 88 (169) 40 (149) (122) (181) (190) (190)
Changes in operating assets and liabilities (858) 557 (867) 234 (1,072) 1,741 (1,158) 313 (266) (934) (177) (177)
Receivables (1,313) 1,292 (511) (66) (1,170) 1,850 (962) 13 (686) (598) (269) (269)
Inventories 13 (43) (75) 74 (128) 103 (137) 60 (127) (31) (103) (103)
Other assets 58 (30) 31 (83) (91) 27 (11) 4 42 (24) (72) (72)
Accounts payable and other accrued liabilities (290) 292 (841) 382 (69) 150 (379) 340 649 (457) 42 42
Income taxes 674 (954) 529 (73) 387 (390) 332 (104) (144) 176 224 224
Cash provided by operations 1,119 1,949 1,822 2,060 1,026 2,968 1,746 2,304 6,578 6,950 8,043 8,427
INVESTING ACTIVITIES
Investments in parks, resorts and other property (1,213) (632) (716) (697) (1,112) (707) (590) (646) (2,110) (3,258) (3,055) (2,503)
Acquisitions (163) (8) (1) - - - - - (2,493) (172) - -
Dispositions 556 10 (2) - - - - - 170 564 - -
Other (61) (45) 108 - - - - - (90) 2 - -
Cash used by investing activities (881) (675) (611) (697) (1,112) (707) (590) (646) (4,523) (2,864) (3,055) (2,503)
FINANCING ACTIVITIES
Commercial paper borrowings, net 496 (26) 150 - - - - - 1,190 620 - -
Borrowings - - 500 1,850 - - - - - 2,350 - 5,000
Reduction of borrowings (42) (31) (235) - (750) (1,250) - - (1,371) (308) (2,000) (8,000)
Repurchases of common stock (797) (805) (1,427) (2,000) (500) (500) (500) (500) (2,669) (5,029) (2,000) (2,000)
Dividends - (756) - - - (734) - - (653) (756) (734) (832)
Other, Exercises of stock options 442 312 187 - - - - - 753 941 - -
Cash used by financing activities 99 (1,306) (825) (150) (1,250) (2,484) (500) (500) (2,750) (2,182) (4,734) (5,832)
(Decrease)/increase in cash and cash equivalents 337 (32) 386 1,213 (1,337) (224) 656 1,158 (695) 1,904 254 92
FX & Cash & equivalents from initial consolidation of Euro &(20)
HK Parks 87 39 - - - - - - 106 - -
Cash and cash equivalents, beginning of period 2,722 3,039 3,094 3,519 4,732 3,395 3,172 3,828 3,417 2,722 4,732 4,986
Cash and cash equivalents, end of period 3,039 3,094 3,519 4,732 3,395 3,172 3,828 4,986 2,722 4,732 4,986 5,078
165
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Time Warner
Figure 140: Time Warner Income Statement ($ in millions except per share data)
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11E 4Q11E 2010 2011E 2012E 2013E
Income Statememt
Revenue
Networks $2,958.0 $3,170.0 $3,004.0 $3,348.0 $3,496.0 $3,451.0 $3,226.5 $3,580.8 $12,480.0 $13,754.3 $14,724.1 $15,992.0
% change 9.3% 11.0% 9.0% 14.0% 18.2% 8.9% 7.4% 7.0% 10.9% 10.2% 7.1% 8.6%
% of total revenue 46.8% 49.7% 47.1% 42.9% 52.3% 49.1% 46.6% 44.0% 46.4% 47.8% 49.5% 51.3%
Filmed Entertainment 2,694.0 2,516.0 2,776.0 3,636.0 2,604.0 2,847.0 3,184.8 3,804.2 11,622.0 12,440.0 12,531.4 12,687.2
% change 2.3% 7.8% -0.1% 9.5% -3.3% 13.2% 14.7% 4.6% 5.0% 7.0% 0.7% 1.2%
% of total revenue 42.6% 39.5% 43.5% 46.5% 39.0% 40.5% 46.0% 46.7% 43.2% 43.2% 42.1% 40.7%
Publishing 799.0 919.0 901.0 1,056.0 798.0 946.0 907.0 1,050.2 3,675.0 3,701.1 3,710.7 3,753.1
% change -0.9% 0.4% -1.4% -4.1% -0.1% 2.9% 0.7% -0.6% -1.6% 0.7% 0.3% 1.1%
% of total revenue 12.6% 14.4% 14.1% 13.5% 11.9% 13.5% 13.1% 12.9% 13.7% 12.9% 12.5% 12.1%
Intersegment Revenues 129.0 228.0 304.0 228.0 215.0 214.0 397.1 290.2 889.0 1,116.3 1,198.7 1,288.5
% change -13.4% 24.6% 62.6% 54.1% 66.7% -6.1% 30.6% 27.3% 33.3% 25.6% 7.4% 7.5%
Networks 17.0 22.0 24.0 26.0 21.0 22.0 24.0 26.0 89.0 93.0 93.0 93.0
% change -15.0% -8.3% 26.3% 0.0% 23.5% 0.0% 0.0% 0.0% 0.0% 4.5% 0.0% 0.0%
Filmed Entertainment 109.0 203.0 277.0 189.0 183.0 179.0 360.1 207.9 778.0 930.0 1,012.4 1,102.1
% change -13.5% 31.0% 66.9% 60.2% 67.9% -11.8% 30.0% 10.0% 37.7% 19.5% 8.9% 8.9%
Publishing 3.0 3.0 3.0 13.0 11.0 13.0 13.0 56.3 22.0 93.3 93.3 93.3
% change 0.0% -25.0% 50.0% 225.0% 266.7% 333.3% 333.3% 333.3% 69.2% 324.2% 0.0% 0.0%
Total Revenue $ 6,322.0 $ 6,377.0 $ 6,377.0 $ 7,812.0 $ 6,683.0 $ 7,030.0 $ 6,921.2 $ 8,144.9 $ 26,888.0 $ 28,779.0 $ 29,767.4 $ 31,143.8
% change 5.4% 7.7% 1.8% 8.3% 5.7% 10.2% 8.5% 4.3% -3.4% 7.0% 3.4% 4.6%
Operating Income
Networks 1,201 981 1,138 904 1,162 1,024 1,135 1,103 4,224 4,424 4,867 5,401
% change 28.3% 14.3% 23.2% 20.2% -3.2% 4.4% -0.2% 22.0% 21.7% 4.7% 10.0% 11.0%
% of segment revenue 40.6% 30.9% 37.9% 27.0% 33.2% 29.7% 35.2% 30.8% 33.8% 32.2% 33.1% 33.8%
% of total revenue 19.0% 15.4% 17.8% 11.6% 17.4% 14.6% 16.4% 13.5% 15.7% 15.4% 16.3% 17.3%
Filmed entertainment 307 173 200 427 158 154 444 445 1,107 1,201 1,245 1,284
% change 43.5% 21.0% -31.3% -2.1% -48.5% -11.0% 122.1% 4.1% 2.1% 8.5% 3.7% 3.1%
% of total revenue 4.9% 2.7% 3.1% 5.5% 2.4% 2.2% 6.4% 5.5% 4.1% 4.2% 4.2% 4.1%
Publishing 50 153 141 171 63 169 132 178 515 542 512 507
% change NM 50.0% 45.4% 116.5% 26.0% 10.5% -6.5% 4.0% 109.3% 5.2% -5.5% -0.9%
% of total revenue 0.8% 2.4% 2.2% 2.2% 0.9% 2.4% 1.9% 2.2% 1.9% 1.9% 1.7% 1.6%
Corporate (108.0) (90.0) (86.0) (90.0) (93.0) (86.0) (86.0) (90.0) (374) (355) (373) (391)
% change 14.9% 2.3% 0.0% -7.2% -13.9% -4.4% 0.0% 0.0% -2.5% 5.1% -5.0% -5.0%
Intersegment eliminations 13.0 (23.0) (46.0) 12.0 (20.0) 5.0 (59.8) 13.2 (44) (62) (63) (10)
% change 64.3% NM -65.7% NM NM 30.0% 10.0% NM -40.0% -2.7% NM
Reported total operating income 1,463 1,194 1,347 1,424 1,270 1,266 1,566 1,648 5,428 5,750 6,188 6,790
% change 42.9% 19.3% 8.6% 18.2% -13.2% 6.0% 16.2% 15.7% 21.4% 5.9% 7.6% 9.7%
% of total revenue 23.1% 18.7% 21.1% 18.2% 19.0% 18.0% 22.6% 20.2% 20.2% 20.0% 20.8% 21.8%
Adjustments
Asset impairments - - (9.0) (11.0) - (11.0) (20) (11)
Gain on operating assets 59.0 - - 11.0 3.0 2.0 70 5
Other (11.0) (8.0) (2.0) (1.0) (8.0) (4.0) (22) (12)
Impact on Operating Income 48.0 (8.0) (11.0) (1.0) (5.0) (13.0) - - 28 (18) - -
Total Adjusted operating income 1,415 1,202 1,358 1,425 1,275 1,279 1,566 1,648 5,400 5,768 6,188 6,790
% of total revenue 22.4% 18.8% 21.3% 18.2% 19.1% 18.2% 22.6% 20.2% 20.1% 20.0% 20.8% 21.8%
Interest Income 25.0 26.0 23.0 25.0 37.0 20.0 16.3 15.8 99 89 43 50
% change -28.6% -29.7% -25.8% -28.6% 48.0% -23.1% -29.1% -36.8% -28.3% -10.0% -51.4% 15.5%
Interest expense (321.0) (326.0) (322.0) (308.0) (311.0) (334.0) (336.9) (338.8) (1,277) (1,321) (1,355) (1,300)
% change -7.8% -2.4% -2.4% 5.5% -3.1% 2.5% 4.6% 10.0% 2.1% -3.4% -2.6% 4.1%
Interest expense, net (296.0) (300.0) (299.0) (283.0) (274.0) (314.0) (320.6) (323.0) (1,178.0) (1,231.6) (1,311.8) (1,250.0)
-1.0% -4.5% -6.5% 4.7%
Investment gains (losses), net (3.0) 3.0 2.0 30.0 4.0 (7.0) - - 32 (3) -
Premiums paid and transaction costs incurred in connection with debt
(55.0)
redemption (14.0) (295.0) - - - - - (364) - -
Loss on equity method investees - (3.0) (19.0) 28.0 (18.0) 8.0 - - 6 (10) -
Losses on accounts receivable securitization programs - - - - - - - - - - -
Other 5.0 (3.0) 5.0 (12.0) - (3.0) - - (5) (3) -
Total Other (loss) profit , net (53.0) (17.0) (307.0) 46.0 (14.0) (2.0) - - (331) (16) (24) (23)
% change 140.9% NM 687.2% NM -73.6% -88.2% -100.0% -100.0% -394.0% 95.2% -50.0% 5.0%
Income before income taxes 1,114.0 877.0 741.0 1,187.0 982.0 950.0 1,245.0 1,325.3 3,919.0 4,502.2 4,852.0 5,517.6
21.1% 14.9% 7.8% 13.7%
Income tax provision (389.0) (317.0) (221.0) (421.0) (331.0) (313.0) (435.7) (450.6) (1,348) (1,530) (1,650) (1,876)
Tax rate 34.9% 36.1% 29.8% 35.5% 33.7% 32.9% 35.0% 34.0% 34.4% 34.0% 34.0% 34.0%
Net income 725.0 560.0 520.0 766.0 651.0 637.0 809.2 874.7 2,571.0 2,971.9 3,202.3 3,641.6
Less: Net loss attributable to noncontrolling interests - 2.0 2.0 3.0 2.0 1.0 - - 7 3
Less: Discontinued operations, net of tax - - - - - - - - - - - -
Net income attributable to Time Warner Inc. shareholders 725.0 562.0 522.0 769.0 653.0 638.0 809.2 874.7 2,578.0 2,974.9 3,202.3 3,641.6
% change 9.8% 7.3% -21.1% 21.9% -9.9% 13.5% 55.0% 13.7% 4.1% 15.4% 7.6% 13.7%
% of total revenue 11.5% 8.8% 8.2% 9.8% 9.8% 9.1% 11.7% 10.7% 9.6% 10.3% 10.8% 11.7%
Adjusted Basic EPS $0.62 $0.51 $0.63 $0.67 $0.59 $0.61 $0.77 $0.84 $2.43 $2.81 $3.19 $3.68
% change 13.6% 13.4% 3.9% 16.2% -4.6% 18.8% 22.1% 26.4% 11.8% 15.5% 13.6% 15.2%
Adjusted Diluted EPS $0.61 $0.50 $0.62 $0.66 $0.58 $0.60 $0.76 $0.83 $2.40 $2.76 $3.13 $3.61
% change 12.4% 12.6% 3.5% 15.5% -5.0% 18.6% 21.8% 26.1% 11.1% 15.1% 13.5% 15.2%
Total Adjusted EBITDA 1,647 1,438 1,580 1,673 1,506 1,509 1,785 1,900 6,338 6,700 7,129 7,716
% change 29.4% 13.1% 2.7% 12.9% -8.6% 4.9% 12.9% 13.6% 13.9% 5.7% 6.4% 8.2%
% of total revenue 26.1% 22.5% 24.8% 21.4% 22.5% 21.5% 25.8% 23.3% 23.6% 23.3% 23.9% 24.8%
Source: Company reports; J.P. Morgan estimates
166
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 141: TWX Balance Sheet ($ in millions except per share data)
Balance Sheet 2010 2011 2012E
Current assets
Cash and equivalents 3,663 3,298 1,805
Restricted Cash - - -
Receivables, net of alowances 6,413 6,679 7,004
Inventories 1,920 1,955 2,050
Deferred income taxes 581 529 555
Prepaid expenses and other current assets 561 529 555
Current assets of discontinued operations - - -
Total current assets 13,138 12,990 11,970
Noncurrent inventories and film costs 5,985 6,190 6,492

Investments, including available-for-sale securities 1,796 1,998 1,998
Property, plant and equipment, net 3,874 3,898 3,709
Intangible assets subject to amortization, net 2,492 2,388 2,388
Intangible assets not subject to amortization 7,827 7,834 7,834
Goodwill 29,994 30,080 30,080
Other assets 1,418 1,690 1,690
Noncurrent assets of discontinued operations - - -
Total assets 66,524 67,068 66,161
Liabilities and Equity
Accounts payable and accrued liabilities 7,733 7,656 8,030

Deferred revenue 884 937 982
Debt due within one year 26 29 29
Other current liabilities - - -
Total current liabilities 8,643 8,622 9,041
Total Working Capital 832 1,071 1,124
Long-term debt 16,523 18,512 18,512

Mandatorily redeemable preferred membership units issued by a subsidiary
- - -
Deferred income taxes 1,950 2,769 2,904
Deferred revenue 296 310 325
Minority Interest - - -
Other noncurrent liabilities 6,167 6,081 6,081
Noncurrent liabilities of discontinued operations - - -
Total non-current liabilities 24,936 27,672 27,822
Equity
Common stock, $0.01 par value 16 -
Paid-in-capital 157,146 -
Treasury stock, at cost (29,033) -
Accumulated other comprehensive loss, net (632) -
Accumulated deficit (94,557) -
Total Time Warner Inc. shareholders’ equity 32,940 30,775 29,298
Noncontrolling interests 5 - -
Total equity 32,945 30,774 29,298
Total liabilities and equity 66,524 67,068 66,161
167
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 142: TWX Cash Flow Statement ($ in millions except per share data)
Statement of Cash Flows 2010 2011E 2012E
Operating Activities
Net income 2,571 2,972 3,202
Less Discontinued Operations - - -
Net income (loss) from continuing operations 2,571 2,972 3,202
Depreciation and amortization 938 913 908
Amortization of film and television costs 6,663 3,832 -
Asset impairments 20 11 -
(Gain) loss on investments and other assets, net (6) 5 -
Equity in losses of investee companies, net of cash distributions 38 40 -
Equity-based compensation 199 147 -
Deferred income taxes 89 370 135
Receivables (676) 18 15
Inventories and film costs (6,921) (4,924) (302)
Accounts payable and other liabilities 104 - -
Other changes 295 320 (54)
Cash provided by operations from continuing operations 3,314 3,704 3,905
Investing Activities
Investments in available-for-sale securities (16) (3) -
Investments and acquisitions, net of cash acquired (919) (280) -
Capital expenditures (631) (773) (719)
Investment proceeds from available-for-sale securities - 8 -
Dividends received from investee - - -
Other investment proceeds 130 22 -
Cash used by investing activities from continuing operations(1,436) (1,026) (719)
Financing Activities
Borrowings 5,243 2,023 -
Debt repayments (4,910) (45) -
Proceeds from exercise of stock options 121 160 -
Excess tax benefit on stock options 7 17 -
Principal payments on capital leases (14) (5) -
Repurchases of common stock (2,016) (3,926) (3,400)
Dividends paid (971) (1,186) (1,278)
Other financing activities (384) (81) -
Principal payments on capital leases - - -
Debt repayments - - -
Repayments - - -
Cash used by financing activities from continuing operations(2,924) (3,043) (4,678)
Cash provided (used) by continuing operations (1,046) (365) (1,493)
168
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Viacom
Table 24: Viacom Income Statement ($ in millions except per share data)
Fiscal Year 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2010 2011E 2012E 2013E
Revenues
Media Networks 2,380 2,082 2,391 2,269 2,575 2,208 2,453 2,411 8,331 9,122 9,648 10,281
% change 5.6% 10.5% 15.8% 6.6% 8.2% 6.1% 2.6% 6.2% 5.5% 9.5% 5.8% 6.6%
% of total revenue 62.2% 63.7% 63.5% 59.8% 62.0% 64.5% 63.6% 64.9% 62.4% 62.2% 63.7% 65.0%
Advertising 1,393 1,076 1,275 1,248 1,521 1,129 1,337 1,309 4,553 4,992 5,295 5,598
% change 7.0% 12.1% 13.6% 6.8% 9.2% 4.9% 4.9% 4.9% 2.3% 9.6% 6.1% 5.7%
Affiliate Fees 814 851 971 869 882 921 968 945 3,138 3,505 3,716 4,023
% change 9.9% 8.7% 19.1% 8.8% 8.3% 8.2% -0.3% 8.8% 11.0% 11.7% 6.0% 8.3%
Ancillary 173 155 145 152 173 158 148 157 640 625 637 660
% change -18.0% 9.9% 13.3% -5.0% 0.0% 2.2% 2.4% 3.3% 2.6% -2.3% 1.9% 3.7%
Filmed Entertainment 1,497 1,226 1,407 1,554 1,630 1,255 1,436 1,334 5,153 5,684 5,654 5,698
% change -16.4% 38.4% 13.0% 26.3% 8.9% 2.4% 2.0% -14.2% -6.3% 10.3% -0.5% 0.8%
% of total revenue 39.1% 37.5% 37.4% 41.0% 39.2% 36.7% 37.2% 35.9% 38.6% 38.8% 37.3% 36.0%
Theatrical 416 401 588 647 458 371 604 453 1,376 2,052 1,886 1,981
% change 347.3% 50.2% -8.7% 73.9% 10.0% -7.4% 2.8% -30.0% -12.8% 49.1% -8.1% 5.0%
Home Entertainment 638 410 331 437 734 431 298 425 2,096 1,816 1,888 1,842
% change -44.3% 38.0% 33.5% 7.6% 15.1% 5.1% -9.9% -2.7% -11.8% -13.4% 4.0% -2.4%
TV License Fees 274 336 416 381 260 370 458 362 1,383 1,407 1,450 1,424
% change -38.4% 29.7% 35.5% 2.5% -5.0% 10.0% 10.0% -5.0% 7.3% 1.8% 3.0% -1.8%
Ancillary Entertainment 169 79 72 89 177 83 76 94 298 409 430 451
% change 56.5% 25.4% 56.5% 10.0% 5.0% 5.0% 5.0% 5.0% 16.9% 37.3% 5.0% 5.0%
Total Revenue 3,828 3,267 3,766 3,795 4,156 3,422 3,857 3,716 13,356 14,656 15,151 15,828
% change -4.8% 19.6% 15.0% 14.0% 8.6% 4.7% 2.4% -2.1% 0.9% 9.7% 3.4% 4.5%
ADJ OPERATING INCOME (ex. Stock comp)

Media Networks 1,051 806 1,033 940 1,172 873 1,030 1,017 3,381 3,830 4,091 4,476
% change 7.0% 12.7% 27.4% 7.6% 11.5% 8.3% -0.3% 8.2% 6.5% 13.3% 6.8% 9.4%
Filmed Entertainment 68 39 49 153 68 70 113 60 340 309 310 315
% change -77.5% NM -29.0% 193.4% -0.5% 78.9% 130.5% -60.8% 962.5% -9.2% 0.5% 1.7%
Segment Adj Operating Income 1,119 845 1,082 1,092 1,239 942 1,142 1,077 3,721 4,138 4,401 4,792
% change -12.9% 33.7% 23.0% 18.1% 10.7% 11.5% 5.6% -1.4% 16.1% 11.2% 6.3% 8.9%
Corporate expenses (49) (53) (58) (57) (51) (56) (61) (60) (202) (217) (228) (237)
Equity based comp (30) (33) (30) (35) (32) (35) (32) (37) (111) (128) (134) (141)
Adjusted Operating Income 1,040 760 995 1,000 1,156 852 1,050 980 3,408 3,795 4,039 4,414
% change -13.4% 37.2% 21.9% 19.5% 11.2% 12.1% 5.5% -2.0% 16.6% 11.4% 6.4% 9.3%
Restructurings/impairments - - (14) - - - - - (60) (14) - -
Operating Income 1,040 760 981 1,000 1,156 852 1,050 980 3,348 3,781 4,039 4,414
% change -8.9% 37.2% 20.2% 19.5% 11.2% 12.1% 7.0% -2.0% 37.4% 12.9% 6.8% 9.3%
EBITDA 1,111 827 1,046 1,064 1,219 915 1,113 1,042 3,656 4,048 4,290 4,658
% change -9.5% 31.5% 17.4% 17.0% 9.8% 10.7% 6.4% -2.1% 30.5% 10.7% 6.0% 8.6%
Interest Expense, net (104) (102) (104) (104) (104) (114) (114) (114) (425) (414) (446) (456)
Equity in net earnings (losses) of investee companies
24 15 12 (10) 10 10 10 10 (87) 41 40 40
Loss on extinguishment of debt - (87) - - - - - - - (87) - -
Other items, net - (7) 10 - - - - - 2 3 - -
Net earnings before tax 960 579 899 886 1,062 748 946 876 2,838 3,324 3,633 3,998
Provision for income taxes (331) (197) (310) (306) (361) (254) (322) (298) (962) (1,144) (1,235) (1,359)
% tax rate 34.5% 34.0% 34.5% 34.5% 34.0% 34.0% 34.0% 34.0% 33.9% 34.4% 34.0% 34.0%
Minority interests, net (9) (6) (15) (5) (10) (7) (17) (6) 23 (35) (39) (42)
Net earnings from continuing operations 620 376 574 576 691 487 608 573 1,899 2,146 2,359 2,596
Discont'd operations, net of tax (10) - - - - - - - (351) (10) - -
Net earnings attributable to Viacom 610 376 574 576 691 487 608 573 1,548 2,136 2,359 2,596
% change -12.1% 53.5% 36.7% 204.6% 13.3% 29.6% 5.9% -0.5% 42.0% 38.0% 10.5% 10.0%
Wtd avg shares - Diluted 608.0 601.1 591.6 578.0 574.0 570.8 562.4 554.0 610.4 594.7 565.3 540.9
GAAP EPS (continuing operations) $ 1.02 $ 0.63 $ 0.97 $ 1.00 $ 1.20 $ 0.85 $ 1.08 $ 1.03 $ 3.11 $ 3.61 $ 4.17 $ 4.80
% change -14.2% 49.5% 37.3% 24.8% 18.1% 36.4% 11.4% 3.8% 63.1% 16.0% 15.6% 15.0%
169
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 25: Viacom Balance Sheet

$ in millions
ASSETS
Current Assets:
Cash and Cash Equivalents 911 1,555 955 651 226 1,295 801 1,294 837 651 1,294 1,414
Receivables 2,652 2,399 2,726 2,445 2,935 2,434 2,700 2,436 2,417 2,445 2,436 2,562
Inventory 844 827 803 873 914 856 810 845 861 873 845 889
Deferred Tax Assetes, Net 73 74 68 68 68 68 68 68 77 68 68 68
Prepaid and other assets 272 335 329 328 361 311 339 327 281 328 327 344
Assets held for sale - - - - - - - - 76 - - -
Total Current Assets 4,752 5,190 4,881 4,365 4,505 4,963 4,718 4,969 4,549 4,365 4,969 5,277
- - - -
PPE, Net 1,073 1,055 1,040 1,010 976 943 910 879 1,102 1,010 879 754
Inventory 4,105 4,082 4,076 4,410 4,744 3,966 4,383 4,272 4,145 4,410 4,272 4,485
Goodwill 11,047 11,072 11,075 11,075 11,075 11,075 11,075 11,075 11,035 11,075 11,075 11,075
Intangibles 450 438 420 420 420 420 420 420 467 420 420 420
Deferred Tax Assets, Net 156 - - -
Other Assets 779 778 818 818 818 818 818 818 568 818 818 818
Assets held for sale 74 - - -
Total Assets 22,429 22,615 22,310 22,098 22,539 22,185 22,324 22,433 22,096 22,098 22,433 22,829
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts Payable 321 299 315 306 353 291 322 310 210 306 310 328
Accrued Expenses 1,012 1,044 1,153 1,129 1,234 1,044 1,163 1,116 1,000 1,129 1,116 1,177
Participations, Residuals & Royalties 1,180 1,087 1,099 1,187 1,294 1,068 1,184 1,155 1,059 1,187 1,155 1,212
Program Rights 443 431 422 452 498 413 455 444 390 452 444 466
Deferred revenue 275 266 217 266 292 239 258 257 256 266 257 269
Current Portion of debt 31 222 26 26 26 26 26 26 31 26 26 26
Other Current Liabilities 487 488 348 348 348 348 348 348 435 348 348 348
Liabilities held for sale - - - - - - - - 117 - - -
Total Current Liabilities 3,749 3,837 3,580 3,713 4,044 3,430 3,756 3,656 3,498 3,713 3,656 3,827
LT Debt 6,722 6,935 6,928 6,928 6,928 7,428 7,428 7,928 6,721 6,928 7,928 7,928
Participations, Residuals & Royalties 418 468 501 501 501 501 501 501 453 501 501 501
Program Rights 620 589 579 667 698 580 643 632 691 667 632 660
Deferred Tax Liabilities, Net - 17 99 99 99 99 99 99 - 99 99 99
Other Liabilities 1,337 1,304 1,317 1,317 1,317 1,317 1,317 1,317 1,343 1,317 1,317 1,317
Other Liabilities of Disc. Ops. - - - - - - - - - - - -
Minority Interests 133 132 152 152 152 152 152 152 131 152 152 152
Stockholders' Equity 9,450 9,333 9,154 8,720 8,800 8,679 8,427 8,148 9,259 8,720 8,148 8,345
Total Liabiities & Stockholders' Equity 22,429 22,615 22,310 22,098 22,539 22,185 22,324 22,433 22,096 22,098 22,433 22,829
170
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Table 26: Viacom Statement of Cash Flows

$ in millions
OPERATINGACTIVITIES
Net earnings (Viacomand noncontrolling interests) 619 382 589 576 691 487 608 573 1,525 2,166 2,359 2,596
Discontinued operations, net of tax 10 - - - - - - - 351 10 - -
Net earnings fromcontinuing operations 629 382 589 576 691 487 608 573 1,876 2,176 2,359 2,596
Depreciation and amortization 71 67 65 63 63 63 63 61 308 266 251 244
Feature film and program amortization 1,141 1,018 1,166 1,261 1,255 1,094 1,253 1,355 4,362 4,586 4,958 5,256
Equity-based compensation 30 33 30 35 32 35 32 37 111 128 134 141
Equity in net (income) losses and distributions frominvestee
(20) companies
(14) (9) - - - - - 105 (43) - -
Deferred income taxes (59) 239 89 - - - - - (178) 269 - -
Decrease in securitization program - - - - - - - - (775) - - -
Operating assets and liabilities, net of acquisitions: 64 95 (495) 296 (312) 198 (98) 204 (227) (40) (8) -
Receivables (200) 194 (317) 281 (490) 502 (266) 264 (37) (42) 10 (127)
Inventory, programrights and participations (1,023) (1,081) (1,073) (1,458) (1,447) (685) (1,404) (1,332) (4,165) (4,635) (4,868) (5,403)
Accounts payable and other current liabilities 264 (99) (178) (33) 152 (251) 150 (59) (190) (46) (9) 79
Deferred revenue - - - 49 26 (53) 19 (1) - 49 (8) 12
Other, net (115) 7 30 1 (33) 50 (28) 12 (32) (77) 1 (17)
Discontinued operations, net (5) (15) - - - - - - 121 (20) - -
Cash provided by operations 713 731 392 774 249 1,242 427 911 1,566 2,610 2,827 2,781
INVESTING ACTIVITIES:
Capital Expenditures (17) (25) (35) (33) (30) (30) (30) (30) (170) (110) (120) (120)
Acquisitions, Net of Cash Acquired (59) - 1 - - - - - (154) (58) - -
Net Cash Flow from Investing Activities (76) (25) (34) (33) (30) (30) (30) (30) (325) (168) (120) (120)
FINANCING ACTIVITIES: - - - -
Borrowings - 982 - - - 500 - 500 698 982 1,000 -
Debt repayments - (582) (194) - - - - - (976) (776) - -
Purchase of treasury (379) (473) (709) (900) (500) (500) (750) (750) - (2,461) (2,500) (2,000)
Dividends paid (182) - (90) (144) (144) (143) (141) (139) (91) (416) (565) (541)
Exercise of stock options - - 109 - - - - - - 109 - -
Other, net (7) 4 (89) - - - - - (80) (92) - -
Net Cash Flow from Financing Activities (568) (69) (961) (1,044) (644) (143) (891) (389) (655) (2,642) (2,065) (2,541)
Effect of Exhange Rate 5 7 3 - - - - - 2 15 - -
Net Increase (Decrease) in Cash and Equivalents 74 644 (600) (304) (425) 1,069 (494) 492 588 (186) 642 120
Cash and Equivalent at Beginning of Year 837 911 1,555 955 651 226 1,295 801 249 837 651 1,293
Cash and Equivalent at End of Year 911 1,555 955 651 226 1,295 801 1,294 837 651 1,293 1,414
171
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Discovery
Figure 143: DISCA Income Statement ($ in millions except per share data)
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11E 4Q11E 2010 2011E 2012E 2013E
Revenue
US Networks 546.0 620.0 585.0 612.0 587.0 660.0 619.0 657.0 2,363.0 2,523.1 2,667.0 2,835.6
% change 4.6% 10.3% 11.4% 9.1% 7.5% 6.5% 5.8% 7.4% 8.9% 6.8% 5.7% 6.3%
% of total revenue 62.8% 64.4% 63.2% 60.3% 61.7% 61.9% 60.8% 58.1% 62.6% 60.5% 59.4% 58.1%
International Networks 283.0 306.0 304.0 358.0 323.0 368.0 359.8 425.1 1,251.0 1,475.9 1,643.7 1,856.2
% change 11.9% 14.6% 10.1% 6.9% 14.1% 20.3% 18.3% 18.7% 10.6% 18.0% 11.4% 12.9%
% of total revenue 32.6% 31.8% 32.8% 35.3% 34.0% 34.5% 35.3% 37.6% 33.2% 35.4% 36.6% 38.1%
Education & Other 37.0 33.0 38.0 45.0 41.0 39.0 40.1 47.9 153.0 168.0 176.1 184.9
% change 2.8% -5.7% 8.6% 7.1% 10.8% 18.2% 5.5% 6.5% 3.4% 9.8% 4.8% 5.0%
% of total revenue 4.3% 3.4% 4.1% 4.4% 4.3% 3.7% 3.9% 4.2% 4.1% 4.0% 3.9% 3.8%
Corporate and inter-segment eliminations 3.0 4.0 (1.0) - - - - - 6.0 - - -
% change -25.0% 300.0% -200.0% -100.0% -100.0% -100.0% -100.0% -100.0% -33.3% -100.0% 0.0% 0.0%
Total Revenue 869.0 963.0 926.0 1,015.0 951.0 1,067.0 1,018.9 1,130.1 3,773.0 4,166.9 4,486.9 4,876.7
% change 6.6% 11.3% 10.6% 7.9% 9.4% 10.8% 10.0% 11.3% 9.1% 10.4% 7.7% 8.7%
Total Revenue ex. Currency 855.4 923.0 935.2 1,021.9 941.5 1,047.3 1,018.9 1,130.1 3,735.6 4,137.7 4,486.9 -
% change 0.7% 2.1% 8.1% 10.2% 10.1% 13.5% 8.9% 10.6% 5.4% 10.8% 8.4% 0.0%
Adjusted OIBDA
US Networks 293.0 379.0 346.0 347.0 334.0 395.0 354.9 366.4 1,365.0 1,450.3 1,530.5 1,628.5
International Networks 122.0 132.0 130.0 161.0 144.0 173.0 160.4 201.7 545.0 679.1 796.5 915.0
Education & Other 5.0 1.0 1.0 8.0 8.0 5.0 0.9 8.5 15.0 22.4 24.3 26.6
Corporate and inter-segment eliminations (55.0) (57.0) (59.0) (55.0) (59.0) (63.0) (66.7) (63.3) (226.0) (251.9) (268.2) (285.6)
% change 14.6% 23.9% 18.0% -8.3% 7.3% 10.5% 13.0% 15.0% 10.8% 11.5% 6.5% 6.5%
Total Adjusted OIBDA 365.0 455.0 418.0 461.0 427.0 510.0 449.5 513.3 1,699.0 1,899.8 2,083.1 2,284.6
% change 9.0% 17.9% 13.9% 15.8% 17.0% 12.1% 7.5% 11.3% 14.3% 11.8% 9.6% 9.7%
Operating Income
US Networks 285.0 372.0 339.0 338.0 456.0 387.0 348.6 360.2 1,334.0 1,551.8 1,505.5 1,602.8
% change 6.3% -33.0% 14.1% 21.6% 60.0% 4.0% 2.8% 6.6% -4.6% 16.3% -3.0% 6.5%
% of total revenue 32.8% 38.6% 36.6% 33.3% 47.9% 36.3% 34.2% 31.9% 35.4% 37.2% 33.6% 32.9%
% change 32.5% 76.6% 27.1% 4.5% 19.6% 31.9% 29.6% 30.3% 28.7% 28.2% 18.6% 15.8%
% of total revenue 11.7% 11.7% 11.7% 13.7% 12.8% 14.0% 13.7% 16.0% 12.2% 14.2% 15.6% 16.7%
Education & Other 4.0 (1.0) (12.0) 7.0 6.0 4.0 (0.6) 7.5 (2.0) 16.9 18.7 21.0
% change -20.0% 0.0% NM 75.0% 50.0% -500.0% -94.8% 6.8% NM NM 11.1% 12.2%
% of segment revenue 10.8% -3.0% -31.6% 15.6% 14.6% 10.3% -1.5% 15.6% -1.3% 10.0% 10.6% 11.4%
% of total revenue 0.5% -0.1% -1.3% 0.7% 0.6% 0.4% -0.1% 0.7% -0.1% 0.4% 0.4% 0.4%
Corporate and inter-segment eliminations (109.0) (112.0) (123.0) (90.0) (77.0) (95.0) (97.2) (76.5) (434.0) (345.7) (293.8) (240.9)
% change 6.9% -7.4% -23.6% -15.9% -29.4% -15.2% -21.0% -15.0% -11.6% -20.4% -15.0% -18.0%
Total operating income 282.0 372.0 312.0 394.0 507.0 445.0 390.8 472.3 1,360.0 1,815.1 1,932.5 2,195.8
% change 13.7% -25.2% 41.2% 27.9% 79.8% 19.6% 25.3% 19.9% 6.8% 33.5% 6.5% 13.6%
% of total revenue 32.5% 38.6% 33.7% 38.8% 53.3% 41.7% 38.4% 41.8% 36.0% 43.6% 43.1% 45.0%
Depreciation and amortization

US Networks 6.0 5.0 5.0 5.0 4.0 4.0 4.3 4.3 21.0 16.5 17.0 17.5
Education & Other 1.0 2.0 2.0 1.0 2.0 1.0 1.5 1.0 6.0 5.5 5.5 5.6
Corporate and inter-segment eliminations 18.0 15.0 15.0 16.0 14.0 15.0 16.0 16.0 64.0 61.0 64.0 64.0
% change -5.3% -25.0% -25.0% -15.8% -22.2% 0.0% 6.7% 0.0% -17.9% -4.7% 4.9% 0.0%
Total D&A 33.0 33.0 32.0 32.0 30.0 32.0 32.3 31.8 130.0 126.0 133.0 137.2
Interest expense, net (58.0) (48.0) (49.0) (48.0) (49.0) (49.0) (52.2) (52.9) (203.0) (203.1) (213.4) (207.6)
Loss on extinguishment of debt - (136.0) - - - - - - (136.0) - - -

Other income (expense), net (4.0) (37.0) (16.0) (29.0) (7.0) 2.0 (2.0) (1.5) (86.0) (8.5) (10.0) (3.0)
Total Other (loss) profit, net (4.0) (173.0) (16.0) (29.0) (7.0) 2.0 (2.0) (1.5) (222.0) (8.5) (10.0) (3.0)
% change -300.0% -2262.5% 1500.0% -825.0% 75.0% -101.2% -87.5% -94.8% NM 96.2% 17.6% -70.0%
Income before income taxes 220.0 151.0 247.0 317.0 451.0 398.0 336.6 417.9 935.0 1,603.5 1,709.1 1,985.2
Provision for income taxes (47.0) (41.0) (83.0) (117.0) (146.0) (144.0) (114.4) (144.2) (288.0) (548.6) (589.6) (684.9)
Effective tax rate 21.4% 27.2% 33.6% 36.9% 32.4% 36.2% 34.0% 34.5% 30.8% 34.2% 34.5% 34.5%
Income from continuing operations 173.0 110.0 164.0 200.0 305.0 254.0 222.1 273.7 647.0 1,054.9 1,119.4 1,300.3
Less net income attributable to noncontrolling interests (4.0) (3.0) (3.0) (6.0) - - - - (16.0) - - -
Less: stock dividends to preferred interests - (1.0) - - - - - - (1.0) - - -
Income from continuing operations available to Discovery Communications,
169.0 106.0
Inc. stockholders
161.0 194.0 305.0 254.0 222.1 273.7 630.0 1,054.9 1,119.4 1,300.3
Non-recurring losses (gains) 2.0 88.4 9.1 3.9 (83.2) 2.6 - - 103.4 (80.6) - -
Adjusted income from continuing operations 171.0 194.4 170.1 197.9 221.8 256.6 222.1 273.7 733.4 974.3 1,119.4 1,300.3
Average basic shares outstanding 425.0 426.0 426.0 422.0 409.0 406.0 402.8 400.3 424.8 404.5 395.6 388.9
Average diluted shares outstanding 429.0 431.0 431.0 428.0 414.0 410.0 406.8 404.3 429.8 408.8 399.6 392.9
Basic EPS $0.40 $0.25 $0.38 $0.46 $0.75 $0.63 $0.55 $0.68 $1.48 $2.61 $2.83 $3.34
% change 41.0% -40.7% 72.3% 23.7% 87.5% 151.4% 45.9% 48.7% 14.8% 75.8% 8.5% 18.1%
Diluted EPS $0.39 $0.25 $0.37 $0.45 $0.74 $0.62 $0.55 $0.68 $1.47 $2.58 $2.80 $3.31
% change 39.7% -41.1% 71.5% 23.1% 87.0% 151.9% 46.2% 49.4% 14.0% 76.0% 8.6% 18.1%
Adjusted Diluted EPS $0.40 $0.45 $0.39 $0.46 $0.54 $0.63 $0.55 $0.68 $1.71 $2.38 $2.80 $3.31
% change 41.3% 441.8% 78.7% 19.6% 34.4% 38.8% 38.4% 46.4% 75.2% 39.7% 17.5% 18.1%
Source: Company reports, J.P. Morgan estimates
172
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 144: DISCA Balance Sheet ($ in millions except per share data)
Balance Sheet 2010 2011E 2012E 2013E
Assets
Current Assets:
Cash and cash equivalents 466.0 1,012.9 1,304.0 1,816.9
Receivables, net 880.0 983.2 1,069.2 1,150.9
Content rights, net 83.0 92.7 100.8 109.5
Deferred income taxes 81.0 68.8 74.9 81.4
Prepaid expenses and other current assets 225.0 209.1 227.4 247.1
Total Current Assets 1,735.0 2,366.6 2,776.3 3,405.9
Noncurrent content rights, net 1,245.0 1,390.0 1,511.7 1,623.9

Property and equipment, net 399.0 345.0 270.3 178.1
Goodwill 6,434.0 6,302.0 6,302.0 6,302.0
Intangible assets, net 605.0 576.3 626.8 681.3
Investments 455.0 853.6 928.4 999.7
Other noncurrent assets 146.0 90.4 98.3 106.9
Total assets 11,019.0 11,924.0 12,513.8 13,297.8
Liabilities and Equity
Current liabilities:
Accounts payable 87.0 101.7 110.6 120.2
Accrued liabilities 393.0 372.9 405.6 440.8
Deferred revenues 114.0 103.8 112.9 122.7
Current portion of stock-based compensation liabilities 118.0 52.0 52.0 52.0
Current portion of long-termdebt 20.0 22.0 - -
Other current liabilities 53.0 31.8 34.6 37.6
Total current liabilities 785.0 684.2 715.6 773.3
Long-termdebt 3,598.0 4,235.0 4,235.0 4,235.0

Deferred income taxes 304.0 339.0 368.7 400.7
Other noncurrent liabilities 99.0 105.9 115.2 125.2
Total liabilities 4,786.0 5,364.1 5,434.5 5,534.2
Commitments and contingencies (Note 13) - - - -
Preferred stock, $0.01 par value 2.0 - - -

Common stock, $0.01 par value 3.0 - - -
Paid-in-capital 6,358.0 - - -
Treasury stock, at cost (105.0) - - -
Retained earnings - - - -
Accumulated other comprehensive loss (33.0) - - -
Total Discovery Communications, Inc. stockholders' equity 6,225.0 6,559.9 7,079.3 7,779.6
Noncontrolling interests 8.0 - - -
Total Equity 6,233.0 6,559.9 7,079.3 7,779.6
Total liabilities and equity 11,019.0 11,924.0 12,513.8 13,297.8
Source: Company reports, J.P. Morgan estimates
173
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Figure 145: DISCA Cash Flow Statement ($ in millions except per share data)
Statement of Cash Flows 2010 2011E 2012E 2013E
Operating Activities
Net Income 669.0 1,054.9 1,119.4 1,300.3
Content expense 715.0 301.0 (121.7) (112.2)
Stock-based compensation expense (benefit) 182.0 49.0 - -
Depreciation and amortization 132.0 124.0 133.0 137.2
Gains on dispositions (9.0) (129.0) - -
Deferred income tax expense (benefit) 11.0 37.0 29.7 32.0
Noncash portion of loss on extinguishment 12.0 - - -
Impairment charges 11.0 48.3 (58.4) (63.0)
Gains on sales of investments - (47.6) (74.8) (71.3)
Other noncash expenses, net 81.0 30.0 - -
Changes in operating assets and liabilities:
Receivables, net (81.0) (106.2) (86.1) (81.7)
Content rights (774.0) (429.7) (8.1) (8.8)
Accounts payable and accrued liabilities (1.0) (53.4) 41.6 44.8
Stock-based compensation liabilities (158.0) (92.0) - -
Income tax receivable - 90.2 (6.0) (6.5)
Other, net (122.0) (50.6) 2.8 3.1
Cash provided by operating activities 668.0 825.9 971.4 1,174.0
Investing Activities
Purchases of property and equipment (49.0) (54.0) (58.3) (61.0)
Business acquisitions, net of cash acquired (38.0) - - -
Investments in and advances to equity investees (127.0) (82.0) - -
Proceeds from dispositions, net 24.0 - - -
Proceeds from sales of investments - - - -
Other investing activities, net - - - -
Cash used in investing activities (190.0) (136.0) (58.3) (61.0)
Financing Activities
Net (repayments of) borrowings from revolver loans - - - -
Borrowings from long term debt, net of discount and issuance costs 2,970.0 641.0 - -
Principal repayments of long-term debt (2,883.0) - (22.0) -
Principal repayments of capital lease obligations (10.0) (13.0) - -
Repurchases of common stock (605.0) (827.0) (600.0) (600.0)
Purchase of noncontrolling interest (148.0) - - -
Cash distributions to noncontrolling interests (31.0) (7.0) - -
Proceeds from stock option exercises 47.0 38.0 - -
Excess tax benefits from stock-based compensation 19.0 17.0 - -
Other financing activities, net - - - -
Cash provided by financing activities (641.0) (151.0) (622.0) (600.0)
Effect of exchange rate changes on cash and cash equivalents 6.0 8.0 - -
Net change in cash and cash equivalents (157.0) 546.9 291.1 512.9
Cash and cash equivalents, beginning of period 623.0 466.0 1,012.9 1,304.0
Cash and cash equivalents, end of period 466.0 1,012.9 1,304.0 1,816.9
174
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures
 Market Maker: JPMS makes a market in the stock of Viacom, Discovery Communications.
 Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Disney, Time
Warner, Viacom, Discovery Communications within the past 12 months.
 Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of
Viacom.
 Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Disney, Time Warner,
Viacom, Discovery Communications.
 Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: Disney, Time Warner, Viacom, Discovery Communications.
 Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Disney, Time Warner, Viacom,
Discovery Communications.
 Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: Disney, Time Warner, Viacom, Discovery Communications.
 Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Disney,
Time Warner, Viacom, Discovery Communications.
 Investment Banking (next 3 months): J.P. Morgan expects to receive, or intend to seek, compensation for investment banking
services in the next three months from Disney, Time Warner, Viacom, Discovery Communications.
 Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Disney, Time Warner, Viacom, Discovery Communications.
Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies
under coverage for at least one year, are available through the search function on J.P. Morgan’s website
https://mm.jpmorgan.com/disclosures.jsp or by calling this U.S. toll-free number (1-800-477-0406).
Disney (DIS) Price Chart
78
N $21 N $30.5
65 Date Rating Share Price Price Target

OW $23 UW $22 UW $30 ($) ($)
52 16-Jan-09 OW 21.46 28.00

OW $28N $23 UW $28 N $35 N $40.5 04-Feb-09 OW 20.62 23.00
03-Apr-09 N 20.21 21.00
Price($) 39
06-May-09 N 25.87 23.00
31-Jul-09 UW 25.12 22.00
26
13-Nov-09 UW 30.44 28.00
08-Feb-10 UW 29.48 30.00
13 10-Feb-10 N 29.48 30.50
12-May-10 N 35.76 35.00
0 18-Jan-11 N 39.39 40.50
Oct Jul Apr Jan Oct Jul Apr
06 07 08 09 09 10 11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Jan 16, 2009.
175
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Time Warner (TWX) Price Chart
N $20 N $32
80
N $11 N $28.5
Date Rating Share Price Price Target
64 ($) ($)
16-Jan-09 N 21.30 12.00
N $12N $24 N $30 N $32 N $34.5
05-Feb-09 N 21.17 11.00
48
Price($) 01-Apr-09 N 19.30 20.00
30-Apr-09 N 21.98 24.00
32 30-Jul-09 N 26.52 28.50
13-Oct-09 N 30.60 32.00
16 10-Dec-09 N 29.22 30.00
15-Apr-10 N 32.87 32.00
01-Oct-10 N 30.65 34.50
0
Oct Jul Apr Jan Oct Jul Apr
06 07 08 09 09 10 11
Initiated coverage Jan 16, 2009.
Viacom (VIAb) Price Chart
85 OW $21OW $30 Date Rating Share Price Price Target

($) ($)
OW $19.5
OW $26 OW $34 OW $43.5 16-Oct-07 OW 40.39 --
68
16-Jan-09 OW 16.26 23.00
OW OW $23
OW $22 OW $33 OW $42.5 OW $48.5 13-Feb-09 OW 16.29 19.50
51 24-Apr-09 OW 19.45 21.00
Price($)
01-May-09 OW 19.24 22.00
34 12-Jun-09 OW 23.56 26.00
09-Sep-09 OW 25.67 30.00
07-Oct-09 OW 28.85 33.00
17
04-Nov-09 OW 28.68 34.00
06-Apr-10 OW 35.01 42.50
0 29-Apr-10 OW 36.00 43.50
Oct Jul Apr Jan Oct Jul Apr 06-Oct-10 OW 36.51 48.50
06 07 08 09 09 10 11
Break in coverage Oct 16, 2007 - Jan 16, 2009.
176
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Discovery Communications (DISCA) Price Chart
75 UW $11 N $23.5 OW $50 Date Rating Share Price Price Target

($) ($)
60 UW $10
N $17.5 OW $35 OW $43.5 28-Aug-07 N 21.69 -
24-Oct-08 UW 12.03 -
N UW N $14 N $26 OW $42 16-Jan-09 UW 14.76 10.00
45
26-Feb-09 UW 14.93 11.00
Price($)
09-Apr-09 N 17.95 14.00
30 05-May-09 N 20.21 17.50
05-Aug-09 N 24.93 23.50
04-Nov-09 N 28.01 26.00
15
15-Jan-10 OW 31.73 35.00
30-Apr-10 OW 38.73 42.00
0 03-Aug-10 OW 38.40 43.50
Oct Jul Apr Jan Oct Jul Apr 19-Oct-10 OW 43.28 50.00
06 07 08 09 09 10 11
Initiated coverage Aug 28, 2007.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,
we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage
universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks
in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each
stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’
coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can
be found on J.P. Morgan’s research website, www.morganmarkets.com.
Coverage Universe: Quadrani, Alexia S: Arbitron (ARB), Cinemark (CNK), Clear Channel Outdoor (CCO), Gannett Company (GCI),
Harte-Hanks, Inc (HHS), Interpublic Group of Companies (IPG), Lamar Advertising Co. (LAMR), National CineMedia, Inc. (NCMI),
New York Times Company (NYT), Omnicom Group (OMC), Regal Entertainment (RGC), Scripps Networks Interactive (SNI), The E.W.
Scripps Company (SSP), The McClatchy Company (MNI), Valassis Communications (VCI), WPP Group (WPP.L)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 47% 42% 11%
IB clients* 51% 44% 33%
JPMS Equity Research Coverage 45% 47% 7%
IB clients* 70% 60% 52%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com .
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues,
which include revenues from, among other business units, Institutional Equities and Investment Banking.
177
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf
Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the
UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and
regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ.
South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan
Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in
Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan
Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245
234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a
participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private
Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock
Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI
Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities
(Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange
Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK.
Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange
Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P.
Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer
by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities
Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities
Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB
Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd
(18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities
Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities
and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of
Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079
and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:
JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai
International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.
Country and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL.
Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of
publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This
report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons
who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be
engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in
their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or
distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written
consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of
the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase
Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of
the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with
the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data
from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear
contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk.
Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the
exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and
consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan
Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau
(kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial
Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from
time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the
securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section
above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and
distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes
of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with
section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written
consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a
178
PRIVATE LIMITED.
(1-212) 622-1896 07 October 2011
public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or
territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a
prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively,
pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The
information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to
the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the
laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities
commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein
or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded
as professional clients as defined under the DFSA rules.
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the
securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised September 30, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P
179

JP Morgan PARA Media - Initiating Entertainment Coverage of DIS - TWX - VI

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

JP Morgan PARA Media - Initiating Entertainment Coverage of DIS - TWX - VI

Uploaded by

Copyright:

Available Formats

This document is being provided for the exclusive use of ASIA SECURITIES at ASIA

 Content is still king in a new media world. A proliferation of backend digital

 Challenges and uncertainties are present. An unsettled global economic

 Attractive valuations, strong balance sheets, robust FCF. Recent pullback in

Equity Ratings and Price Targets

See page 175 for analyst certification and important disclosures.

TV continues to garner outsized share of ad dollars

Ad market appears more resilient now than in 2008/09

Figure 1: Relative Leverage (Net Debt/LTM EBITDA)

Compelling valuations despite macro uncertainty and likely earnings revisions

Figure 2: Media Comparable Valuations Table

S&P 500 Index $ 1,144.03 $ 97.00 $ 105.00 11.8x 10.9x 1.3x

Source: JPMorgan estimates; Factset; First Call

Sizing the key issues across the group

Figure 3: Comparative Snapshot

Figure 4: Company Breakdown Comparison

Advertising 19% 22% 34% 44% 68%

TV Affiliate Fees 22% 28% 24% 48% 29%

Studio Content 20% 41% 36% - -

Theme Parks and Resorts 29% - - - -

Operating Income Source

Cable Networks 60% 52% 92% 100% 100%

Source: JPMorgan estimates; Company reports

Figure 5: Disney Revenue and EBITDA by Segment (F2010)

Source: Source: Company reports

Figure 6: Time Warner Revenue and EBITDA by Segment (2010)

Source: Company reports

Figure 7: Viacom Revenue and EBITDA by Segment (F2010)

Source: Company reports

Figure 8: Discovery Revenue and EBITDA by Segment (2010)

Source: Company reports

Optimistic on Advertising, Although Some Moderation in

Figure 9: Annual Change in US Ad Spend vs. Nominal GDP, 1951-2012E

Recession Ad Spending %chg GDP %chg

Source: BIA; Magna; J.P. Morgan estimates.

National ad spending fell as well in 2009, largely reflecting declining revenues

National likely to continue to outpace local – although a political infusion may

Twin peaks define the market as dollars build in TV and digital

Digital (Internet &

Local TV (ex. Cable) National TV (ex. Cable)

Direct Mail Magazines

Source: J.P. Morgan estimates, MAGNA

Source: J.P. Morgan estimates, TVB

TV Continues to Expand Upfront still commands the market

Television allows for cost-effective reach of advertising to mass audiences,

Content key to driving ad and affiliate revenue growth

The TV buying market

Upfront cancellations typically Figure 12: Upfront Media Cancellation Schedule

Affiliate Fee Growth Engine Should Continue

There is much industry discussion about providers and consumers reaching a

Source: SNL Kagan.

Subscription revenues become increasingly valuable as ad dollars fragment

While some traditional media is getting hurt by the fragmentation of consumption,

A la carte not a near term concern…

…longer term a more defined tier structure may evolve

Source: J.P. Morgan estimates, Disney company reports

Content Owners Maintain Leverage in Digital World

Source: MAGNA Global

Can content owners still maximize revenue on new distribution outlets?

Digital demand for content is increasing

Table 1: Selected Digital Content Distribution Deals

Source: J.P. Morgan.

Figure 17: Outlook for DVD Sales Remains Challenged