After a week of earnings reports that sent the media sector stocks tumbling, analysts took a beat to see what they’ve learned.
Based on the numbers reported by the companies that own networks, Michael Nathanson of MoffettNathanson Research figures that national advertising finished down 2.7% in the second quarter, which he terms the worst non-recessionary, non-Olympic drop on record.
Broadcast network advertising was down 2.9%—worse than expected—and cable was down 2.6%, a bit better than expected.
Nathanson doesn’t see things improving much in the short term. “Until ratings trends improve—and easier 3Q comps materialize—the lack of ratings points will likely keep reported national advertising in the zero to negative range."
The weakness in ad spending was largely known before last week. But worries about the pay TV bundle unraveling and threatening what had appeared to be strong, predictable growth in distribution revenues intensified during the earnings calls.
“Cord-cutting is real, and perhaps the silver lining is the market is now fully aware,” said Ben Swinburne of Morgan Stanley. But he cautioned that “we are not calling this the bottom.” Finding the bottom would require conviction in estimates of future earnings and a sense that valuations have troughed. “Neither box can be checked,” he said.
Swinburne said that Disney cutting guidance at its cable segment was particularly impactful. He notes that the long-term contracts that networks have with sports leagues—seen as moderating rising costs in good times—can become millstones if subscribers and subscriber revenue falls. “The entire cost structure of the cable network business is not variable with subs,” Swinburne said.
Swinburne added that “the distributors are increasingly desperate. We think skinny bundles are gaining share, and that 1-2% pay-TV subscriber declines may become 2-3% cable network subscriber declines. Moreover, every MVPD is focusing more on building bundles that leave some networks out.”
While changing consumption patterns have been driving cord-cutting so far, business decisions by distributors could accelerate the trend. “We are particularly concerned that on top of consumers moving away from the bundle, albeit slowly, that distributors are going to become much more aggressive pushing back on content costs and the persistent ratings erosion and proliferation of content on alternate platforms is increasing the risk of a major network group getting dropped completely by a major distributor,” Swinburne said.
As the market for media stocks fell, Swinburne said some companies were sold off more than their results, outlook and strategic positions would suggest. Those included Comcast, AMC Networks and Discovery Networks.
Viacom, which reported a big drop in ad revenues on Thursday, was not on that list. Analyst Marci Ryvicker of Wells Fargo, who has been recommending Viacom, now says she can no longer justify giving an outperform rating to the company. “Underlying trends continue to be not just challenged, but significantly challenged despite new initiatives,” Ryvicker said in a new report. “We want to believe management when they say 2016 will get better—and we're modeling it that way with domestic ad flattish year over year. But, given rating trends and no real uplift from new initiatives yet, we fear that even this might be too optimistic.”
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