EFTA01385484

3 January 2018 HY Corporate Credit l-lY Multi Sector.Media, Cable & Satellite Cable / Pay-TV: Market Weight Relative to the DB Index The alarm bells around the maturation of the Pay-TV industry have been going off for years. Despite clear headwinds that have undoubtedly had negative impacts on cash generation, management throughout the industry has done well in not only weathering the storm, but positioning their respective companies for the future. For the wired cable companies, the natural business pivot has been focusing on generating a higher mix of revenue from broadband and venturing into commercial, which just so happens to have a materially better margin and cash flow profile than the historical linear TV business. For DBS, the challenge of reinventing itself has been much more difficult considering it doesn't have an HSD offering into the household. While DTV got acquired and integrated into a large platform at AT&T that has inevitably helped its relevance and extended its lifespan, both DTV and DISH saw the writing on the wall early and instead of trying to exclusively protect its legacy subscriber base, which is a given, they created two of the industry's best OTT products. In addition to fighting top-line difficulties, margins have also been under pressure as content and programming costs have been increasing at high- single digit I low-double digit rates for the better part of a decade. The response from operators has varied, but recent approaches can all be filed as incrementally emboldened compared to even just five years ago prior to the Pay-TV market cracking. Certain operators have resorted to going dark on channels during negotiations. Others have completely eliminated certain programming altogether and substituted with more attractively priced alternatives. Then there are those providers like WaveDivision who simply pass the cost of programming through to customers. The integration of OTT products into the platform is more prevalent and actually lowers churn as the complementary features and all-in-one place for access produces a more seamless, enjoyable experience particularly via a cross-catalog guide. While the OTT marketplace has gained market share and inspired certain demographics to cut the cord and will continue to do so over time, we believe the worries over linear TV trends are a bit too draconian. For example, in its 3Q17 Video Trends Report, TiVo points out that the number of respondents in its survey that have cut cable within the previous 12 months declined for the first quarter since 3Q16. It could just be an outlier, but after trending up 3% y/y for the past year, it could also present a data point that supports the notion that the biggest wave of cord cutting are the first movers, which is now entering its own maturity stage. Should that trend continue declining, that presents an even longer tail for linear TV which we believe would help the DBS business most given they're more levered to that segment. Deutsche Bank Securities Inc. The reports of the Seth of linear video will prove to be - as Mark Twain would have saki - weedy weggerated We still expect declines but we see linear video decreasing at • modenste rate with some carders such as DISH and ATT offsetting some of these losses with lower-ARPU OTT video adds - partially lessening the Mow. In terms of cord shaving/cutting, host quarter we actually sew the bend of cord cutting decline fir the first dine 6) recent history. It is too toady to at this • sustainable bond though It might be able to oiler some support to the nodan that the raging concerns own linear video might prow overdone The blow worry for us remains content pricing, which continues to ina•as• at a pace that seems impossible to ofhetkodre video business. Page 211 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0086770 SDNY_GM_00232954 EFTA01385484