A leading investment company has cut its earnings forecasts for most big media companies, but offers four suggestions for how the industry can help itself.
1. Close Networks
The first “self-help” suggestion in new report from Credit Suisse is that cable network owners should restructure or close underperforming networks.
“With ratings for some ‘generalist’ cable networks down cumulatively 40-50% over the last three years, we are surprised to see so little rationalization across the industry,” the report says. “As consumption slowly changes from grazing channels to (binge-) watching specific shows, the raison d'être of many cable networks will inevitably diminish – and we believe investors will reward those network groups who realize this and restructure or close underperforming networks in order to concentrate investment on a smaller, more focused, portfolio.”
2. Slow SVOD
Credit Suisse also suggests that content owners extend the amount of time between when shows are originally broadcast to when they can be streamed by subscription on demand players.
“The root cause of the disruption the industry is seeing today is the migration of consumption from the traditional ecosystem to the online video ecosystem. The decision taken five years ago by the big content owners to license their content to Netflix, and subsequently to Hulu and Amazon, undoubtedly contributed to this migration,” the report says. “If the industry wants to see disruption slow down, it should extend the period of exclusivity enjoyed by linear networks, in our view.”
3. Go Direct to Consumer
Credit Suisse says that content owners can earn material incremental profits by repackaging programming and selling it direct to consumers with the right pricing, marketing and windowing.
“This opportunity is still significantly underexploited by many in the industry,” the report says. “Tapping into the growth opportunity in the online video ecosystem would allow content owners to mitigate any pressure they may see in their existing businesses.”
4. Push Targeted Advertising
Credit Suisse says that it agrees that some shows are getting bigger audiences than the ratings suggest. While ratings will be difficult to fix, networks and distributors should work together on targeted advertising on linear TV.
“Partnering with MVPDs to provide [networks’] advertising clients with tools including dynamic adinsertion and with data which enhances the effectiveness of campaigns on linear platforms would also go a long way towards slowing down the migration of ad dollars to digital,” the report says.
Overall, the report acknowledges the factors that have led to sharp declines in media stocks over the past few weeks. But it argues that the industry is more resilient to disruption than many investors believe.
Credit Suisse says it is now estimating that domestic TV advertising for the big seven media companies will drop 3.7% in 2015. But the second half will be better than the first, when ad revenues were down 6%. The investment company expects 10% ad growth in 2016, thanks in part to the Olympics and presidential elections.
Credit Suisse also believes that the pay TV universe will shrink 1% a year over the long term, but that means that for the next five years, more than 80% of U.S. households will get the big cable bundle. “Disruption to the traditional video ecosystem is picking up, but we would caution that consumer habits often change much slower than analysts and portfolio managers assume,” the report says.
Among the media companies, Credit Suisse says it favors owners of the strongest content (sports, movies, original dramas, original comedies) over distributors. “Time Warner and CBS remain our top picks,” Credit Suisse says.
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