Barclays Group media analyst Kannan Venkateshwar downgraded his ratings on Comcast and Charter Monday in the wake of disappointing Q2 broadband performance, adding that the rapid growth of fixed wireless service from telcos may end up being more of a threat than cable operators think.

Barclays lowered the rating on Comcast to “Equal Weight” from “Overweight” and on Charter to “Underweight” from “Equal Weight,” citing their poor Q2 performance. In addition to non-existent broadband growth in Q2, video subscriber losses at both companies rose significantly during the period -- to 521,000 and 266,000 respectively -- reigniting fears of accelerated cord-cutting for traditional cable. While mobile subscriber growth for both Comcast and Charter exceeded analysts’ consensus estimates for the period, Venkateshwar split from his peers, doubting that wireless will be able to take up the slack. 

Broadband Forecasts Lowered Again

Venkateshwar noted that he now expects Comcast to add about 300,000 broadband customers this year, down from 1.4 million in 2021, and Charter to add about 200,000, down from 1.2 million additions in 2021. He said the debate has shifted to whether or not cable broadband subscribers will actually decline in 2023 and beyond.

The broadband slowdown has weighed on cable stocks for months. So far this year, Comcast stock is down 24%, Charter down 34%, Altice USA fell 35% and Cable One is down 22%. The sector probably will fall even further after Altice USA reports Q2 results on August 3. 

Most analysts have reduced their forecasts for cable broadband subscriber growth again in light of the Q2 results, with Wells Fargo Securities media analyst Steven Cahall cutting his estimates for Comcast and Charter nearly in half. 

Prior to the Q2 results, Cahall had estimated Comcast would add 688,000 broadband customers in 2022 and another 630,000 in 2023. Now, his estimates call for 298,000 residential additions in 2022 and 300,000 in 2023. For Charter, Cahall had estimated residential broadband growth of 499,000 in 2022 and 549,000 additions in 2023. Those predictions have been revised to 152,000 customer additions in 2022 and 295,000 in 2023. 

Fixed Wireless Threat 

The analysts pointed to the potential threat of fixed wireless -- T-Mobile USA added 560,000 fixed wireless subscribers in Q2, far exceeding consensus expectations -- and Comcast’s and Charter’s seeming indifference to that competition. In conference calls with analysts to discuss Q2 results, both Comcast chairman and CEO Brian Roberts and Charter chairman and CEO Tom Rutledge said they believe fixed wireless isn’t much of a threat. 

Roberts called the fixed wireless access Q2 performance a fluke, as excess capacity created a “temporary opportunity targeted at value-oriented customers.” And while he said FWA isn’t having any “discernible impact” on churn, he did acknowledge it was a factor in Comcast’s flat Q2 performance. Not exactly an admission of a threat, but close, even though he added that performance and capacity restraints will likely limit FWA’s overall penetration.

On the call, Rutledge appeared to dismiss the long-term impact of fixed wireless while admitting that it is “an issue affecting growth at the moment.”  

Rutledge said fixed wireless access’s impact is small when compared to Charter’s overall footprint. He said activity levels were the major driver for subscriber losses. And he said that there are other economic factors at play, including low housing occupancy and new construction because of supply chain issues.

“And so we're pretty optimistic, relatively speaking, that as the post-pandemic market activity levels return and normalize, that our share of broadband growth will rise,” Rutledge said on the call. 

Also: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead  

But Venkateshwar warned that fixed wireless could become a factor very quickly, adding that if T-Mobile meets its guidance of 500,000-plus additions each quarter, it will be larger than Altice USA (the fourth largest cable operator in the country) by the end of next year.

Also: Broadband Slowdown Hasn’t Hit Bottom Yet, Analyst Says 

“It is tough to see this not impacting cable structurally when cable [broadband] net adds overall have been [about] 3 million in normal years and T-Mobile and Verizon alone could add 2 million to 2.5 million FWA subs a year,” Venkateshwar wrote. “This is even before the existing DSL base converts to fiber driven by government funding and AT&T’s fiber expansion, which we estimate will result in an additional 20% of cable footprint having fiber overlap.” 

Blame Game

Cable operators have mainly blamed the broadband growth slowdown on lower household moves, an excuse that the Barclays analyst is not buying.

“[T]his is a market share argument and it is not clear why this would drag growth down for the industry as a whole,” Venkateshwar said of slower housing moves. “While cable has gained share vs DSL over time and therefore lower moves would impact growth rates, it is mathematically impossible to get to negative growth as seen last quarter, purely on account of lower move activity. In addition, the decline in move activity is not new and has been going on for years and tends to worsen during recessions. Even if move activity recovers, there are new elements that are likely to reduce cable’s share of gross adds given fiber and FWA entrants.”

Going Mobile 

Other analysts have seemed to side, partly, with cable operators' view on fixed wireless access. In a research note Friday, MoffettNathanson senior analyst Craig Moffett said that while investors will likely focus on broadband performance for a while going forward, they will eventually come around to the thesis that wireless is the new growth engine for cable. According to Moffett, if video was Act I for cable operators and broadband was Act II, wireless is poised to be the industry’s third Act..

Charter added 340,000 wireless customers in Q2, ending the period with 4.3 million customers. Mobile now accounts for 5.5% of Charter’s total revenue. Though the segment isn’t profitable yet, once Charter’s CBRS offload initiatives are completed in the next few years, it will be more profitable than most could imagine, according to Moffett.

The same holds true for Comcast. The largest cable operator in the country added 317,000 wireless customers in Q2, ending with 4.6 million customers. Wireless makes up about 4.9% of Comcast’s total cable revenue and is growing at a 30% annual rate.

“[W]e believe wireless growth remains underappreciated,” Moffett wrote. 

Wells Fargo Securities' Cahall said the jury was still out on mobile valuations, and while unit economics are positive, they don’t yet exceed the cost of service. On the other hand, increased capital spending on wireless could make operators less  reliant on MVNO partnerships and more competitive with telcos. 

“Add it all up, and it's a very logical strategy, but we think the value is too uncertain at flattish adjusted EBITDA margins to offset the [broadband and capex] challenges,” Cahall wrote.

Venkateshwar also was impressed by cable’s wireless performance, but he added that any war between cable wireless and telco FWA will be won by the telcos. 

“Telecom operators have their own issues but their narrative around new revenue sources like FWA is more feasible, at least over the short term, because it is backed by significant capital investments in a fixed cost infrastructure that should provide operating leverage over time,” Venkateshwar wrote. “Cable companies on the other hand have no plans to invest in a full infrastructure based offering, but still believe they can do better with an MVNO model than operators elsewhere in the world have managed. This strategy makes sense to test out the market and launch a service, but to anchor [a] long term strategic pivot of the scale that cable companies are attempting on someone else’s network is not viable in our view.” ■

Analysts have been waiting for the other broadband shoe to drop for months after most cable companies missed broadband subscriber growth targets in Q1, and they got it Thursday after Comcast, the largest cable operator in the land, reported zero broadband additions for Q2, a bit earlier than expected. Now, as cable pundits consider dropping their growth estimates for cable’s cash cow yet again, the big question for at least one analyst is whether the drop-off is due to saturation or share loss.

Just what caused the largest cable operator in the country to have precisely 0 broadband customer growth will matter for the rest of the industry because cable can rebound from saturation, but share loss is another thing entirely.

Also: Broadband Slowdown Forces Some Analysts To Go Negative on Cable Sector  

In a research note Thursday, MoffettNathanson senior analyst Craig Moffett wrote that at the moment it appears that the overall broadband slowdown is a combination of encroaching saturation and sluggish new household formation instead of share loss. And, in his note, he stressed that the former is much better than the latter. 

“If the problem is saturation, then we should be slowing towards zero (or, more precisely, towards the rate of new household formation),” Moffett wrote. “If the problem is share loss, well, then let your imagination run wild. There’s no floor. And if the problem is saturation, then pricing power isn’t jeopardized. If the problem is share loss, broadband ARPU is at risk.”

Also: Most Eyes Should Be on Comcast Q2 Broadband Performance 

Comcast managed to grow broadband ARPU in Q2 by about 3.6%, not great but respectable, given that it lost 10,000 residential and gained 10,000 business high-speed data customers in the period. ▪️

The Waiting Is the Hardest Part

Most analysts have been waiting for this day ever since Comcast reported 262,000 broadband additions in Q1 -- a number that beat most estimates but was fueled by a large portion of customers on free plans that converted to paying plans. Absent those customers, Comcast would have added about 175,000 broadband customers in that period, well behind some estimates of 180,000 to 225,000 additions.  

Prior to Thursday, most analysts were expecting broadband additions to fall off considerably, a factor of seasonality -- Q2 is when students and snow birds cancel service for the summer -- and other macroeconomic trends. But many analysts expected losses to come from other cable operators -- consensus was for Comcast to add about 84,000 high-speed internet customers in the quarter -- not the largest one. Now, some are changing their minds.

Also: Has Cable Broadband Hit the Wall? 

“We expected Charter to post negative growth in consumer broadband in 2Q22 but had expected a slightly better result at Comcast largely because Comcast has more levers to pull with respect to its product set (Flex, Peacock, TV etc.) but despite all this, Comcast performance may not really be that different from Charter after all,” wrote Barclays Group media analyst Kannan Venkateshwar in a note to clients Thursday, adding that Comcast “seems to be seeing negative growth thus far in 3Q as well, although it expects some seasonal improvement in August and September.”

That will likely cause analysts across the board to shift their estimates for overall cable broadband subscriber growth downward. Charter is scheduled to report Q2 earnings tomorrow (July 29), so depending on those numbers, predictions may have to be rejiggered again. 

Also: Cable Broadband Slowdown to Continue in Q1 and Beyond, Analysts Say 

Movin’ On Up [Not]

Comcast tried to downplay the lack of broadband growth on a call with analysts, stressing that it has added about 800,000 high-speed internet customers in the last 12 months and 3 million in the last two years. But that included the pandemic, when most Americans needed high-speed connections to work, school and play from home and many were receiving government subsidies for service. As those requirements were lifted, some decided they didn’t need cable broadband, or perhaps found a lower cost alternative. 

Comcast’s flat growth comes a day after T-Mobile said it added 565,000 fixed wireless access customers in Q2, soundly beating even the most optimistic analyst estimates. Fixed Wireless Access (FWA) has been feared to be a major threat to cable wireline broadband,  but Comcast execs said FWA wasn’t a factor in Q2 results.

Comcast chairman and CEO Brian Roberts said during a conference call with analysts that although fixed wireless is a new competitor targeted mainly at price-conscious consumers, it has had “no discernible impact” on churn, but its early growth appeared to be another contributor to lower overall connect activity. Instead, Roberts blamed the flat growth on three factors -- a slowdown in housing moves (Q2 was 12% below 2019), the reversal of some pandemic trends -- the surge in lower income households getting broadband has waned -- and competition. 

Roberts vowed to turn around the broadband product, adding that Comcast is confident it can return to residential growth and is expanding its footprint, accelerating edge-outs, “playing offense when it comes to government subsidies,” aggressively competing for market share and increasing the value of the broadband product by bundling it with mobile service and its Flex offering. 

Also: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead  

“We are in a unique environment with some headwinds,” Roberts said of the cable business. “But move activity should return to some level of normalcy, mobile substitution will eventually  stabilize and we believe fixed wireless has inherent performance and capacity limitations that sharply limit the number of people on a network using a given amount of spectrum, which should provide a natural cap on their overall industry penetration.”   

Other Than That… 

Despite the less than expected broadband performance, the rest of Comcast’s businesses appear to be doing well. Theme Parks cash flow nearly tripled in the period, its highest quarterly cash flow growth in that segment ever, movie studio revenue was up 33% driven by strong theatrical releases, wireless subscriber additions at 317,000 was the best Q2 ever for that segment. Even Sky, Comcast’s European satellite unit, saw cash flow rise 54% in the period. But for investors, that didn’t seem to make a difference.

“With full acknowledgement that the broadband debate isn’t just the most important debate right now, but in fact is the only debate right now, it is worth noting that everything else in Comcast’s report was very strong,” Moffett wrote, adding that the overall takeaway is “almost certainly going to be negative.

“Broadband subscriber growth is all that matters,” he continued. “And even if our ‘saturation rather than share loss’ thesis is correct, there is a risk that by the time the evidence of causality becomes a little clearer, competitive share losses to fiber actually will have begun to accelerate… even if the growth rate of FWA has by then abated.”

Moffett noted that although housing moves is a common excuse for the slowdown, Comcast was less dismissive of fixed wireless than it has been in the past, and seems to be committed to growing the footprint. 

“None of this is likely to shift sentiment, which, in the face of slower broadband growth, remains rather dour indeed,” Moffett wrote. ■ 

AT&T shares continued their slide on Friday after Barclays Group media and telecom analyst Kannan Venkateshwar lowered his rating on the stock, claiming that management’s decision to reduce free cash flow guidance could call the company’s credibility into question.

AT&T shares fell for the second day in a row, dipping as low as $18.30 per share, down 3.3% or 62 cents each. In the past three weeks the stock has fallen about 13% from $21.03 on July 1. 

AT&T said on Thursday that it expected to report full year free cash flow guidance of about $14 billion, instead of the $16 billion it had previously predicted, mainly due to heavier investment for growth. But Venkateshwar, in a research note Friday, wasn’t buying it.

The analyst, who lowered his rating on the shares from “overweight” to “equal weight,” pointed to the fact that AT&T’s full-year mobility EBITDA growth guidance hadn’t changed despite higher and unit pricing growth and an increase in service revenue growth guidance of between $700 million and $800 million for the year. In addition, Venkateshwar wrote that forward commentary regarding 2023 cash flow was “squishy” and could make visibility worse if the economy were thrown into a recession. 

“This backdrop isn't helpful when the biggest pushback against AT&T has been execution credibility and now the company has cut guidance within 4 months of giving it,” Venkateshwar wrote. “Overall therefore, after a couple of years of trying to change the narrative, AT&T seems to be back in the same place that it started with respect to concerns about its dividend sustainability and management credibility.” ■

With Verizon set to launch its Plus Play bundle of digital subscriptions later this year, Barclay’s Group media analyst Kannan Venkateshwar believes that depending on the structure, the growing trend of bundling streaming services to attract new subscribers could serve as a gateway to the industry’s true direction: an aggregation model similar to what Google did with search, Netflix did with TV networks and Spotify did with recorded music only a few years ago.

With streaming subscriber growth on the fritz over the past few quarters, investors and analysts are understandably paying close attention to how bundling could change the dynamic in the industry. While others have tried bundling services -- Disney has grouped its Disney Plus, Hulu and ESPN Plus streaming services in a $13.99 monthly package ($19.99 ad-free) with relatively strong success. what makes Verizon’s Plus Play different is its decision to pair video with sports news sites like The Athletic, fitness programming from Peloton, music, weight management via WW International and language services from Duolingo. Already other streamers like Discovery Plus, AMC Plus, Disney Plus, A+E Networks and others have signed up to Plus Play, with HBO Max agreeing in April to be available through the service.  

There are Bundles, and Then There’s Bundling

“Bundles are more than the sum of its components,” Venkateshwar wrote, adding that consumers see bundles as separate products with a value all their own.   

“In our opinion, the implications of this are not appreciated enough by media management teams because if they were, fragmentation of content in forms seen over the last few years would not have been enabled by media companies and distributors,” he wrote.

In that vein, the analyst said that more important will be how bundles are constructed, adding that the old way of simply offering fewer channels for a lower price won’t cut it anymore. In fact, he added that in many cases, smaller bundles could be worth more than their fatter counterparts. 

“In our opinion, the nature of bundles as independent products also implies that a 20-channel bundle is not necessarily half as valuable as a 40-channel bundle,” Venkateshwar wrote. “In fact, the smaller bundle could even be perceived as being of more value than the bigger bundle, based on factors such as content mix, nature of experience, and convenience (e.g. full stacking, offline viewership, etc.)”

And he continued that if streamers follow that recipe, it could be bad news for traditional distributors. 

“This is also why a bundled offering of streaming services could accelerate the pace of cord cutting in legacy pay TV bundles, especially if the streaming bundle is offered by an aggregator that eases content discovery,” he wrote.

While Verizon hasn’t yet mapped out what the Plus Play bundle will look like exactly, Venkateshwar predicted it would be a mixed price bundle, where the underlying services will be available individually but potentially more expensive on a retail basis, much like the Disney model for its Disney Plus-Hulu-ESPN Plus bundle. He expects HBO Max and Discovery Plus, which parent Warner Bros. Discovery has indicated will eventually be bundled together, to look the same at least initially. 

Advertising Changes Everything

But Venkateshwar said the dynamic changes again once advertising is added to the streaming mix, especially around the ad-time allocated to distributors. Every major streamer has said it will offer an ad-supported version if they haven’t already, with Disney Plus and Netflix targeting year-end for their respective launches. So-called Free Ad-Supported Television (FAST) services like Tubi and Pluto TV have managed to attract a large swath of consumers -- they have 51 million and 68 million active monthly users, respectively -- another catalyst for other providers to join the fray. 

According to Venkateshwar, while it is possible that streamers will offer distributors the standard 2 minutes of ad inventory each hour in addition to their affiliate fees, similar to linear bundles, some streamers like Hulu and Tubi share ad revenue with their content partners, which may have constraints. Other streamers with fixed cost agreements like Netflix and Disney Plus would have more flexibility and better margins on the advertising side, he wrote. 

“Distributors in the streaming world are also likely to have a more integral role in ad measurement and delivery than in the legacy cable network world,” Venkateshwar wrote. “As a result, compared to the legacy cable bundle world where distributors got the arguably the worst spots (typically at the 26th and 56th minute every hour, when viewership typically dips), distributors may get more leverage in a streaming world.”

Aggregation is the Thing

While Venkateshwar believes that bundling streaming services is all well and good, the real value lies in aggregation. While Verizon will probably bundle streaming video, Peloton, music and gaming under one low, low price, the real driver of value is its wireless service. According to Venkateshwar’s thinking, bundling is more about convenience and adding value to another core service, while aggregation is about the core offering and driving more engagement.

In that scenario, for example, Amazon could embed its Amazon Fire Operating System into TV brands and bundle streaming services with Amazon Prime, giving consumers the benefit of lower pricing, enhanced content discovery and a potential link to the online shopping service. Google could do the same with Android TV and Apple with Apple TV Plus. 

That could be a scary scenario for cable networks, because the best aggregators make underlying applications irrelevant, like Google did with Yahoo, Spotify did with record albums and Netflix did with TV networks, the analyst wrote.

“... now Android TV and other [operating systems] may make Netflix less relevant as a standalone brand,” Venkateshwar wrote, adding that this will force streaming services to work harder to establish their brands. While Disney appears to be the leader on that front, the impact of other brands like Peacock, Pluto TV, Tubi or even Apple TV Plus is less clear.

While it seems like only the huge tech players will come out on top of the aggregator heap, the analyst was somewhat encouraged by Comcast’s mix of assets -- broadband-only service Flex, Peacock, a scaled ad team, strong content base and distribution scale. But he worried that the slow pace of its Flex product rollout in its own footprint could indicate it’s not quite ready to match up with the tech giants. 

“Overall, while bundling is easy to do, it is quite anachronistic given content distribution technologies today,” Venkateshwar wrote. “We believe the real value of bundling will be realized by aggregation, which is still in its very early phases. As this model evolves, content discovery for TV shows may not be very different than, say, Google search, even if the process is more passive for consumers.” ■ 

Netflix, just weeks after telling the world that it would add about 2.5 million new subscribers in Q1 -- guidance that sent its stock down more than 25% in January -- is on a pace to nearly double that mark, according to Barclays Global media analyst Kannan Venkateshwar. 

Netflix watched its stock tank in January after reporting disappointing Q4 results and issuing guidance for Q1 subscriber additions that were well below past performance.  Adding to the concern was that Netflix traditionally adds a large portion of its full-year customers in Q1, so the falloff was seen as a signal that slower growth would at least be a year-long phenomenon. 

Netflix stock fell from $508.25 per share to $397.50 on January 21, and the shares have been on a roller coaster ride ever since, rebounding to $457.13 each on February 1 after a hedge fund and founder and co-CEO Reed Hastings purchased large blocks of shares. But that boost turned out to be temporary, as the stock was priced at $367.46 in early trading Thursday. 

In a research report March 3, Venkateshwar wrote that after analyzing data from several different sources -- including app downloads, Daily Active Users (DAUs), Monthly Active Users (MAUs) and credit card data -- the short-term picture could be brighter.

In his note, Venkateshwar acknowledged that no single data source was accurate enough to use as a single basis for quarterly trends, but taking the average came closest to mimicking actual performance. 

“Based on this method, Netflix appears to be trending at ~4 million subs in Q1, better than company guidance,” Venkateshwar wrote. “Performance in line with this could be a bit of relief relative to [the] company’s low guide of 2.5 million, but would still imply full year performance of 16 million, lower than present consensus estimates of ~18 million (Barclays at 14 million).”

January engagement growth was better than February, as DAUs and downloads slowed in many countries. But the Asia-Pacific region was quite strong, which gave the analyst some hope that Q1 will be better than expected. 

And though Netflix's release slate was weaker during the first two months of the year, in March it appears to be picking up, largely on the back of a greater number of movie titles than in the prior year, the analyst wrote. 

Also: Wolk: Movies May Be The Answer to Netflix’s Problems After All 

At the same time, Venkateshwar noted that rival streaming services like HBO Max and Peacock are showing added signs of strength, while Disney Plus remains volatile. 

The analyst wrote that while Disney Plus downloads and MAU numbers were up sequentially in January, they showed some weakness in February. Engagement growth at its Star Plus content hub, which launched in February 2021 in Canada, Western Europe and parts of Asia, also appeared to slow sequentially, he wrote.

According to Venkateshwar, HBO Max downloads in December by 2% over the previous month, with January up 13% and February rising14%. At Peacock, December downloads were down 11% compared to the prior month, rising 6% in January and 86% in February. At Disney Plus, excluding its Hotstar service in India, month-over-month downloads were up 1% in December, 20% in January and down 27% in February. 

The analysts attributed HBO Max’s performance to a string of strong original releases like Euphoria, The Gilded Age and Station Eleven, while Peacock’s growth was likely driven by the Olympics. 

As the number of streaming video services has increased significantly over the past few years, Barclays media analyst Kannan Venkateshwar believes it may be time for a shakeout in the business, with participants faced with the dilemma to either double down on content investment or sell off assets.

Since 2006, when Amazon launched Unbox, which became Amazon Prime Video, the number of major players in the streaming video business has ballooned from three (Netflix and Hulu are the other pioneers) to more than 50 services. And though fragmented, the streaming business continues to be dominated by the Big Three and those backed by major content players — like Disney Plus, Peacock, Paramount Plus, HBO Max, Apple TV Plus, AMC Plus, Discovery Plus, Tubi, Pluto TV — and lesser known names like BritBox and Docurama. 

So it is only natural that streaming — like cable distribution and content creation before it — is ripe for consolidation. And as subscriber growth has begun to slow early in the life cycle of those streaming services, Venkateshwar wrote that companies have some big decisions to make beginning this year. 

“In our view, 2022 is likely to force new entrants to either commit to a significant step up in investment or to think about reversing course and selling off assets or entire companies,” Venkateshwar wrote, noting that Discovery and WarnerMedia have set the ball rolling with their pending merger, which some expect will be completed by April.  The analyst noted that with the WarnerMedia deal, Discovery has committed to a significant investment cycle for many years to come, and he added that he doesn’t believe they’re done yet. 

“[W]e suspect that it may still need to enhance its content portfolio with more deals in the future to localize its offerings,” he wrote.

Just like broadband before it, video streamers are beginning to see their subscriber growth slow significantly. Even Disney Plus, which leads the pack with about 100 million global subscribers, reported 2.1 million additions in Q3, about half the 4 million most analysts expected. 

On the greater investment front, Disney has committed to beef up its content spend beyond the $8 billion to $9 billion it planned to dole out in fiscal 2024, and ViacomCBS has also increased its content investment. But Venkateshwar thinks ViacomCBS may have a tougher row to hoe because of its reliance on licensing revenue and its relatively small cash flow ($1.5 billion annually).

Also: With Disney Leading In DTC Content, Analyst Sees Mergers Ahead 

“We believe the best outcome for [ViacomCBS] is likely to be a sale of the different parts of the company to the most appropriate buyers which could catalyze a much higher value for the enterprise than is likely to be possible with streaming,” Venkateshwar wrote. 

The analyst believes that Paramount studios would be more valuable in other hands and had the same idea for Comcast’s NBCUniversal content business. Other analysts have called for Comcast to spin off its content unit, unlocking value and giving it a new currency to beef up its portfolio through M&A. Venkateshwar pointed to the tepid response to its Peacock streaming service as proof that a deal needs to be done. 

Peacock had about 54 million sign ups and more than 20 million active accounts in Q2. NBCUniversal did not reveal actual figures for the service in Q3, but CEO Jeff Shell told analysts on an earnings conference call in October that the service added “a few million” more customers in the period. 

In his report, Venkateshwar noted that the need to beef up Peacock’s programming investment comes at a time when Comcast will need to increase spending for its core distribution business, as broadband subscriber growth slows and convergence opportunities emerge. Venkateshwar added that although Peacock may hold on longer than others because of its parent company’s strong balance sheet, it may never gain the scale needed to “move the needle enough.”  

While other streamers will be faced with similar dilemmas, Venkateshwar believes that Fox’s Tubi, because of the sheer volume of content the ad-supported VOD player controls, is in an enviable position. 

In an earlier note, Venkateshwar wrote that he thinks Tubi will be among the few survivors in the AVOD space because of its content library -- about 28,500 movie titles alone, more than any other AVOD provider. While the remaining 13 AVOD services have about 72,000 movie titles, there is a huge amount of content overlap between the services, so much so that offerings like Pluto TV, Roku, IMDBTV and even Peacock to an extent, are more like a subset of Tubi, he wrote. 

“In other words, Tubi is effectively a super aggregator of the other major AVOD services which raises the question of why consumers and advertisers need to engage with so many services when there is so much content overlap,” Venkateshwar wrote. “We are surprised that more companies haven’t taken advantage of this shared cost model which has effectively made Tubi an aggregator on a scale bigger than any other service. Given this backdrop, we believe 2022 could be the last year for some companies like ViacomCBS to experiment with streaming and if this prognostication does prove accurate, then it is likely to lead to a further round of M&A across media assets.”

While the media industry is no stranger to consolidation M&A and deep-pocketed tech companies have expressed interest in content in the past, the Barclays analyst added that it isn’t a given that the floodgates will be opened in 2022. Venkateshwar wrote that regulatory scrutiny is likely to slow the pace of deals, as well as lofty valuations for assets. 

Also: Netflix Video Gaming: Pros, Cons and Concerns 

“Also, with Discovery and Disney both in the midst of their own investment cycle, the biggest balance sheets are likely to be unavailable for M&A,” Venkateshwar wrote, adding that Netflix could look to beef up its position in the video gaming space. 

Netflix launched a handful of mobile games in November — Stranger Things: 1984 (BonusXP), Stranger Things 3: The Game (BonusXP), Shooting Hoops (Frosty Pop), Card Blast (Amuzo & Rogue Games), and Teeter Up (Frosty Pop) — and more are expected to be released in the future. ■

After a two-year run where stocks in the sector nearly tripled, riding a wave of unprecedented broadband growth, cable shares wiped out in 2021 amid fears that the slowdown in high-speed internet customer growth will be worse than even the most pessimistic analysts expect.   

Only one cable distribution stock appreciated during 2021 — WideOpenWest — and that was mainly due to its M&A activity. WOW shares nearly doubled to $20.87 on Dec. 21 from $10.67 on Dec. 31, 2020, fueled by its decision to sell off systems in two separate deals with Atlantic Broadband and Astound Broadband that brought in a combined $1.8 billion. While those deals and some private transactions helped to boost overall valuations for the sector, it had little effect on other publicly traded stocks, which have been rocked by concern that the inevitable slowdown in broadband growth would be worse than originally expected

Cable companies saw unprecedented broadband growth in 2020, fueled by the pandemic and stay-at-home orders that forced Americans to work, play and go to school from home. But in 2021, as students began to return to class and workers to their offices, that growth began to slow. In Q3, broadband subscriber additions were  well below expectations and fueled concerns that Q4 growth could be even weaker.

That all had an effect on cable distribution stocks, which despite WOW’s dizzying rise, fell a collective 17.5% in 2021. Altice USA was the biggest decliner, dropping 52.1% for the year after reporting a loss of broadband customers in Q3 and hinting that Q4 could be negative as well. Altice was followed by Cable One, which saw its stock drop 22.2% in 2021 after five years of double-digit increases. Rounding out the sector was Comcast, down 5.6% for the year and Charter Communications, down 2.6%. 

Media Struggling Overall

While doom and gloom has enveloped the cable business, no sector in the media business was spared. Telco and satellite stocks dropped nearly 8% for the year despite speculation that AT&T, T-Mobile and Verizon Communications would begin to chip away at cable’s broadband lead with increased investment in fiber networks. Dish Network, which pushed the launch of its first wireless market to early 2022, fared the best, dipping less than 1% for the year to $32.04 per share from $32.34 each on December 31, 2020.

Programming stocks, which were boosted earlier in the year by direct-to-consumer offerings, felt the pain later in the year as their subscriber rolls began to soften. Like distributors, programmers saw only one stock rise for the year -- Fox Corp., which increased about 28% from $28.77 per share to $36.90 each. But that still wasn’t enough to offset declines at other programmers, with the sector down about 11.6% for the year.    

MoffettNathanson principal and senior analyst Craig Moffett has called the concern that the telcos’ attack on cable broadband will lead to an equally bloody cable advance on wireless, the Convergence Apocalypse. But he sees the risks posed to both sectors as asymmetric, adding that cable is in a superior position on nearly every dimension. 

In a handful of reports Moffett showed that not only does cable have better mobie virtual network operator (MVNO) economics — its margins should hold even after substantial price cuts — but its coverage is better because its wireless service can be bundled with broadband virtually everywhere.  

“By contrast, Verizon can bundle their national wireless service with fiber in only 11% of the country,” Moffett wrote. “AT&T can bundle their national wireless service with fiber in only 13% of the country. Tying a national service to a tiny wireline footprint would be a nonsensical strategy.” 

Also: Fear of, Desire For M&A Drives Cable Stocks in Q2 

Moffett isn’t suggesting that the broadband slowdown won’t happen. He just believes it won't be as bad as some are predicting. 

“The forces arguing for a slowdown aren’t going away, and any serious forecast has to assume steady deceleration,” Moffett wrote. “But it is possible to be too pessimistic.”

Ready for the Downturn

He noted that cable operators have been preparing for the slowdown for years, and they are steadily expanding their networks through edge-outs and other means to increase the number of homes they can market for service. 

For example, he pointed to Charter, which is growing its homes passed by about 2%, or 1 million homes per year. About 600,000 of those additional homes are via edge-outs, and Moffett estimated that assuming reasonable penetration rates, that alone could mean an additional 500,000 net additions per year.    

“And that’s before their footprint expansion from RDOF [the Rural Digital Opportunity Fund], the rural subsidy program that will add yet another million homes passed to their footprint over the next five years,” Moffett wrote. 

Barclays Group media analyst Kannan Venkateshwar wasn’t so sure. In a Dec. 20 note to clients, Venkateshwar wrote that he sees telcos having a broadband advantage over cable next year. He estimated that Comcast and Charter, the two largest cable companies in the country, could each add less than 1 million broadband customers each in 2022, their lowest growth levels ever.

While telcos could account for the bulk of 2022 broadband growth with a combination of fixed wireline and fixed wireless offerings, Venkateshwar noted that if the cable-telco broadband gap widens in 2022, cable operators are not likely to take that switch sitting down and could step up pricing discounts to attract share.

Also: Rutledge Says Cable Mobile Service Pricing Could Drop Further 

That could be risky, though, because Venkateshwar noted that the marginal costs for delivering fixed wireless is a lot lower for telcos.

“Therefore, telecom companies will be more incentivized to price fixed broadband at attractive levels instead of re-pricing their wireless back books to compete with cable,” Venkateshwar wrote. “We also believe cable companies have fewer degrees of freedom on wireless because of a locked-in variable cost structure which limits their ability to respond to handset promotions from wireless operators.”

But he added that might depend on the size of the volume based wholesale pricing stepdown embedded in the cable companies’ MVNO agreements. Both Charter and Comcast recently restructured those agreements with Verizon. 

“If cable companies have more operating leverage than usual MVNO deals because of their recent wholesale deal modification with Verizon, then the competitive backdrop for both wireless and wireline broadband could get equally bad,” Venkateshwar wrote.

Also: Metaverse or Meh-taverse?

On the technology side, the so-called FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — did well, with the sector up a collective 16.8%. Apple had the largest percentage gain (31.2%), followed by Facebook (now Meta), up 22.3%; Netflix (11.9%) and Amazon (4.6%). ■ 

The slowdown in Disney Plus subscriber growth has helped push the stock down by more than 7% over the past month, and two influential analysts said the entertainment giant will likely have to dig deep and spend more on content to get itself back on track. 

Shares in The Walt Disney Co. closed at $171.18 on Oct. 19, up 4 cents from the day before, but the stock has been on a downward slope since Sept. 17, when it closed at $183.47 per share, just before CEO Bob Chapek said at the Goldman Sachs Communacopia conference that Disney Plus additions would be in the “low single-digit millions” in fiscal Q4, which ends Sept. 30. That marked a big fall off from previous quarters — it added 12.4 million in fiscal Q3 and 21.2 million in fiscal Q1 — and spooked investors who saw it as a sign that the subscriber growth train was grinding down.       

Disney Plus launched in November 2019 and quickly became the gold standard for streamers, signing on 10 million users in its first day and passing 100 million paid customers just 18 months into its existence. Analysts and Disney executives all cheered at the astounding success of the product, especially since Disney didn’t seem to be spending a whole lot on additional content to attract that audience. Two years after that much-ballyhooed launch, the Disney Plus juggernaut has started to hit the brakes, adding about 42.3 million global subscribers over the past three quarters, compared to 57.5 million additions in the same period in 2020. That led some analysts to rethink their outlook on Disney as the entertainment giant searches for ways to boost growth.

In fiscal Q4, MoffettNathanson media analyst Michael Nathanson estimates that Disney Plus will add about 2 million subscribers, its lowest total since its inception. 

In a research note Oct.18, Nathanson, citing independent research from HarrisX, wrote that one reason for the subscriber slowdown could be the service’s poor adoption rates with older viewers. Citing a HarrisX poll that asked consumers by age group which service — Netflix, Amazon Prime Video, Hulu or Disney Plus — they or someone in their household used to stream content, Disney Plus logged the lowest viewership with customers older than 55. It tallied just 18% of respondents, compared to 66% for Netflix and 56% for Amazon Prime Video. Hulu, which is controlled by Disney, was also on the low end when it comes to older viewers, with 26% of consumers over 55 years old saying that they use the service.

That is most likely due to the type of content available on the various services. Disney Plus caters to homes with small children, as well as Star Wars and Marvel fans. 

“We think that Disney needs to both invest in more original scripted general entertainment content at Hulu and Disney Plus while marketing Disney Plus in a bundle to older households,” Nathanson wrote.

Disney has held to its forecasts that it expects to have between 230 million and 260 million Disney Plus subscribers globally by 2024. But to reach that target, the company will have to add about 37.3 million new customers per year, a figure that Nathanson wrote could be difficult, but not impossible, to achieve. 

Nathanson predicted Disney Plus would have about 245 million global subscribers by the end of fiscal 2024. But a lot of that will depend on how successful the service is in attracting customers outside the U.S. To date, between 30% and 40% of Disney Plus’s annual subscriber growth has come from Disney‘s Hotstar Plus service in India. According to Nathanson’s estimates, Hotstar Plus will account for about 47% of total Disney Plus subscribers by 2024.

Some See Structural Issues

But though Nathanson is optimistic that Disney Plus will reach its targets, other analysts aren’t so sure. On Tuesday, Barclays Group media analyst Kannan Venkateshwar lowered his rating on Disney to “Equal Weight” from “Overweight,” adding in a research note that the slowdown in subscribers is happening even as Disney has launched new franchise titles and  day-and-date movie releases and Star Plus sports content in Europe and Latin America..

“Part of this slowdown could be a function of growth pull forward into 2020 and promo roll-offs, but we believe it could be due to structural factors capping growth,” Venkateshwar wrote. “In order to get to its long term streaming sub guide, Disney needs to more than double its current pace of growth to at least the same level as Netflix. We believe this may be tough to do.”

According to Venkateshwar, Disney Plus has been adding about 2.5 million domestic subscribers — not including Hotstar Plus — every quarter for the past three quarters. To reach the 230 million goal, he predicts Disney Plus would have to more than double that pace to around 7 million subscribers globally (not including Hotstar +) per quarter. 

The Barclays analyst pointed to Disney’s industry-low streaming content -- 1,343 titles compared to 7,972 titles for Amazon Prime. And though Disney has stepped up its game to release at least one piece of new content each week, it often isn’t compelling enough to attract new customers.   

“In our opinion, the problem Disney faces is that of low engagement, as there are barely enough shows to keep audiences interested in the service,” Venkateshwar wrote. “While the company appears to be targeting one new piece of content a week, not every piece of content has the same franchise value or visibility which means the releases that actually drive origination or engagement have a much lower frequency.”

Adding more content could help subscribers growth, but Venkateshwar notes that Disney’s content structure — currently focused on theatrical releases of franchise movies ± may make that harder.

“In a streaming-first world, the proliferation of content and streaming services means that continuous engagement needs significantly more volume of content,” Venkateshwar wrote. He added that serialized franchise content across theatrical and streaming platforms becomes a problem because the timing shift of one title creates a ripple effect on the release schedule of other titles across other platforms. 

A Changing Content Game

The content game also is changing, Venkateshwar wrote, as other players like Apple, Amazon and HBO spend as much or more on content as Disney. And Netflix added another wrinkle with its entrance into video games and local production facilities — which Disney does not have — around the globe.  

“This is why it is likely to get tougher for Disney Plus to get both price and volume,” he wrote.

In his note, Venkateshwar noted that even Hotstar‘s growth could be impacted, because it relies heavily on the rights to televised cricket matches, which reset next year. 

“Recent M&A in the market may result in either more pressure on rights costs or a loss of these rights,” Venkateshwar wrote, adding that he expects Disney Plus to end 2024 with about 200 million subscribers.  

While the rest of the entertainment world tries to get its head around the idea that Lebron James could sell his one-year-old production company, The SpringHill Company, for $750 million and Reese Witherspoon is considering unloading her Hello Sunshine production company for about $1 billion, Barclays media analyst Kannan Venkateshwar wrote Friday that streaming distribution has turned the way companies value programming on its ear.

James reportedly started SpringHill with a $100 million investment and has been fielding interest from several possible suitors, including Nike, according to The Information. Best known for the just-released Space Jam: A New Legacy film and the HBO series The Shop (it also owns a small marketing arm) a $750 million sales price represents a more than robust premium, even for an NBA legend. 

Academy-Award-winning actress Witherspoon’s Hello Sunshine has produced the hit HBO series Big Little Lies, Little Fires Everywhere for Hulu and The Morning Show for Apple TV Plus. According to a report in the Wall Street Journal, Hello Sunshine is working with investment bankers to determine its options, and there is no guarantee a sale will take place. No revenue figures were available, but other reports have said the production company is expected to turn its first profit this year. AT&T is part owner of Hello Sunshine, through its Otter Media unit.

But whether a sale happens or not, the lofty valuations placed on these assets seems to fly in the face of tradition. It used to be that a company had to accumulate a big library, establish a proven track record of hits and have a management team that could practically foretell the future before attracting Lotto-type valuations. Now, in the streaming era, that model is quickly becoming obsolete.

In his research report, Venkateshwar notes that every content library is valued differently, and rightly so. Volume alone doesn’t determine value, but the analyst said another factor -- distribution channels -- also is rising in the mix. But Venkateshwar added it isn’t the number of distribution channels available to a piece of content that determines its value, but the type of distribution. 

“Unlike legacy channels for content distribution which were purely focused on content alone, today, the consumer value proposition of a given content distribution channel may actually have nothing to do with content,” Venkateshwar wrote. “In fact, the value of content may ironically be higher in channels where content is only a secondary offering, unlike the past where the more focused a distribution channel was on content, the more it could charge (theatrical, TV bundle etc.).”

He used Amazon’s Prime Video offering as an example. While Prime Video has a lot of content -- which should increase after Amazon agreed in May to buy movie studio MGM at a price ($8.5 billion) some have estimated is 37 times its annualized cash flow -- it’s main function is to serve as a complement to the Amazon Prime service, which offers customers free shipping on their Amazon retail orders. According to Venkateshwar, the real value of the video offering is in its ability to increase the value of the platform as a whole.

“Other emerging content distributors like Apple are also more oriented to use content to enhance the value of their broader platforms rather than as an end in itself,” Venkateshwar wrote, adding that the same holds true for audio, which has taken advantage of new distribution channels like Peloton, Fortnite and Tik Tok which is becoming an increasingly important driver for music labels.

“However, not every new distribution channel is a platform and therefore most new streaming services will have to justify the economics of a given piece of content or a library based on its ability to drive subscriber growth, engagement or pricing power. This is why it may make more sense for Netflix to spend $8 billion-plus on creating more local language programming across its footprint rather than buying a company like MGM.”

Specific windows for theatrical, pay per view, premium, cable and broadcast content were also a key factor in the way programming was valued previously. But streaming threw theatrical windowing, well, out the window as distributors either ignored them totally, like Netflix, or created a new day-and-date release strategy for movies like Disney Plus.

While Venkateshwar wrote that the new strategy could be good for consumers, who can switch between distributors for specific content without penalty, it ultimately will hurt lifetime valuations for that content.

The analyst pointed to Disney’s latest day-and-date release, Black Widow.  While that film had a strong opening box office weekend of $80 million in North America and generated more than $60 million for Disney Plus, the drop off in box office after opening day (40%) was significantly greater for Black Widow than any other Marvel film, Venkateshwar said. 

“Therefore, what will be interesting to watch is the overall collection for Black Widow across its entire theatrical and Disney Plus run and its impact on Disney Plus sub growth once the movie hits the normal subscription window (although Disney may not make these numbers available),” Venkateshwar wrote.

The elimination of multiple windows also could affect the cultural import of certain content, the analyst said, wondering aloud if Star Wars would have been as culturally significant over the past several decades if it had been released exclusively on Netflix rather than in theaters. Venkateshwar argues that marketing plays a huge role in not only promoting films but letting potential viewers cut through the clutter to discover programming they want to watch. 

“A movie release tends to be akin to a high-profile new product launch, with franchise movies spending $100 million-plus on marketing alone,” Venkateshwar wrote. “Netflix’s movie releases, on the other hand, rely significantly on its own content discovery algorithms. While the latter may be more efficient in the short term, it limits the duration of cultural relevance of a given piece of content, especially in a world with significant content clutter. This is why we believe Netflix’s strategy of shunning theatrical windows may drive a lower return on investment for its franchises than, say, Disney.”

Venkateshwar goes on to consider ad-supported streaming (best to monetize library content) and the benefits of binge-watching (which highlights the value of original programming), but it all boils down to the fact that valuing content is hard. And you can’t point to one deal or even a series of deals as a blueprint for the rest of the business. So Lebron James and Reese Witherspoon may indeed have hit the content lottery with their respective content endeavors, or maybe not. Amazon may be spending too much on MGM -- there is still the question of regulatory approval -- or it may end up being considered a bargain 10 years down the road. Venkateshwar pointed to how many analysts thought Disney paid way too much for Pixar and Marvel back in the day. 

The key, he wrote, is being willing to continually reinvest in what you buy, no matter the price. Buying a studio or a production company or what have you has to be the start of the investment cycle, not the end.  

“In hindsight, however, the last decade of Disney’s growth including its streaming pivot and therefore its valuation has largely been fueled by these anchor assets,” Venkateshwar wrote of Pixar and Marvel  “Valuation context, in other words, is a function of the post-deal strategic path of these assets more than a point in time estimate of asset value of a given studio.”

Cable operators are poised to report another strong year of broadband subscriber growth in 2021 on the heels of last year’s record-breaking increases, but Barclays media analyst Kannan Venkateshwar warned that growth could slow substantially in 2022.

In a report Thursday, Venkateshwar noted that the momentum from 2020 — where cable operators added 4 million broadband customers — should continue into this year as the impact from stimulus programs to boost household income and government broadband subsidy efforts should keep churn low. But he added those programs also could have masked underlying problems that could resurface as some of the projects disappear. 

In his report, Venkateshwar noted that assuming those stimulus programs accounted for a 10-basis-point reduction in non-pay churn implies growth this year would be lower than in 2019 for the top three cable operators — Comcast, Charter Communications and Altice USA — absent that factor. Then there is the impact of such programs on broadband penetration. 

Venkateshwar estimated that as many as 700,000 broadband additions in 2020 came from stimulus and subsidies, and it is unclear how much of that growth will stick around for the long term. Add planned fiber and fixed wireless broadband rollouts from several telcos, an increased focus on network quality and the need for higher uplink speeds and “these factors could imply that 2021 broadband growth will remain unusually strong but may reverse next year,” Venkateshwar wrote.

The Barclays analyst estimated that Comcast, which added about 2 million broadband customers in 2020, will slip to 1.4 million additions in 2021 and 1.1 million in 2022. Charter, which led the top operators with 2.1 million broadband additions in 2020, will add 1.3 million in 2021 and 1.0 million in 2022, according to Venkateshwar. Highly penetrated Altice USA added 172,000 broadband customers in 2020 and is expected to add 84,000 in 2021 and 65,000 in 2022. 

Other analysts have predicted a similar falloff in cable broadband growth. Last month, Sanford C. Bernstein media analyst Peter Supino predicted total cable broadband additions would slow to 2.9 million in 2021,  2.2 million in 2022 and 2 million by 2023. 

Cable operators have warned investors not to expect the same levels of growth experienced during the height of the pandemic, and other factors like bundling broadband with wireless service could help boost subscriber levels. In addition, operators are continuously expanding their footprints into more rural markets through edge-outs and other programs, which could also mitigate any slowdown.  

Discovery and ViacomCBS shares dipped about 3% in early trading Tuesday after Barclays Research media analyst Kannan Venkateshwar lowered his ratings on the stocks to “Underweight,” claiming the expected gains from the companies’ streaming endeavors are already baked into the share price. 

ViacomCBS shares were down as much as 4.3% ($1.95 each) to $43.34 per share in early trading Jan. 19, while Discovery dipped about 2.9% ($1.07 cents each) to $35.69 earlier in the day. The stocks began to rise slightly as the morning progressed -- Discovery finished the day at $36.15 per share, down 1.7% (61 cents), while ViacomCBS closed at $43.75, down 3.4%, or $1.55 each.  

Discovery launched its much-anticipated Discovery Plus streaming product on Jan. 4, and ViacomCBS said it would debut its latest online endeavor-- Paramount Plus -- on March 4.  Both stocks have risen substantially over the past three months -- Discovery shares were up 76% prior to Tuesday and ViacomCBS was up 66%. In a research note. Venkateshwar said any expected gains from the new products have already been realized.

Venkateshwar attributed the earlier gains to better near-term visibility regarding fundamentals, events like Discovery’s recent Investor Day and changing investor perspectives regarding the success of the growing number of streaming services. 

“However, we believe these catalysts are more than adequately priced in at present levels,” Venkateshwar wrote. 

The analyst continued that both stocks are trading around 6% of their unlevered free cash flow yields and are trading at multi-year highs on 1-year forward EV / EBITDA while some financial estimates have been lowered. He noted that 2021 free cash flow estimates have come down 10% for Discovery and by 18% at ViacomCBS. 

“While we understand the optimism around streaming, neither Discovery Plus nor Paramount Plus is a new product and have been available for many years under different brands, with limited success,” Venkateshwar wrote. 

He added that while Disney Plus is not likely to erode its parent’s linear subscriber base, that may not be the case for smaller programmers like Discovery and ViacomCBS. 

“We believe that as legacy media companies rely more on ISPs for distribution, these data service providers will be more incentivized to drop legacy bundles in favor of streaming bundles due to more accretive economics,” Venkateshwar wrote. “In addition, we believe streaming distribution models presently being tried are not static and are likely to put subscale services at a disadvantage post their promotional periods. This is why this could be the last year that media companies can try and change the streaming narrative, given declining cash flows, especially in the case of ViacomCBS. Lastly, even if we assume significant acceleration in growth in the coming five years for both services and use Netflix’s multiple to value streaming at Discovery and ViacomCBS, there isn’t much upside vs present stock levels. Therefore, we find the optimism around some of these streaming launches like Discovery Plus to be premature.”

After meetings with studio and distribution executives in Los Angeles last week, Barclays media analyst Kannan Venkateshwar said he is confident that more consolidation will come in the wake of The Walt Disney Co.’s pending $66.1 billion purchase of Fox.

In a note to clients, the analyst said he sensed heightened urgency in the media industry to scale up, adding that any consolidation could include both horizontal and vertical deals. He added that he expected any objections to the deal from peers to be low, “especially given that other permutations could be in the pipeline.”

Smaller studios like the deal, he continued, because it could mean that overall movie slates would shrink, opening release windows for smaller companies. On the TV side, the analyst added that production volumes are expected to grow for the foreseeable future.

Venkateshwar added that despite some reports to the contrary, most studios see the media strategies of tech giants like Facebook and Apple to be “incoherent.”

“This perception also appears to be causing some reluctance among media executives in licensing content to some tech platforms as lack of a coherent distribution strategy in the first window can suppress the lifetime value of content,” Venkateshwar wrote. “It was also interesting that talent managers view Netflix’s film strategy to be confusing as artists still want their movies to be seen on big screens.”

The analyst continued that those selling content feel there are only about 10 serious buyers of their product – the four broadcast networks, the top 5 cable channels and Netflix and Amazon. And while the value of domestic syndication seems to be waning, the executives did see increased opportunities internationally.

Dish network chairman and CEO Charlie Ergen has managed to gain Wall Street favor by snapping up wireless spectrum at bargain prices over the past several years. But Ergen saw sentiment begin to change last week after it became clearer that not only will he not sell his spectrum to the highest bidder, he may actually be serious about building his own wireless network with it.

That has forced analysts who have been following the stock for years to take a hard — even a harsh — look at Dish. If the satellite-TV company isn’t going to sell its spectrum to the highest bidder, which at one point was valued upwards of $40 billion, and instead is going to possibly spend billions to build out a competing wireless network, what’s the point in owning the stock?

Dish shares have been on a roller-coaster ride for the past few years: they rose 26% in 2014, declined 22% in 2015, were flat in 2016 and are up about 4% so far this year. The stock closed at $60.38 on May 3, down 7% from its $65 price on April 27.

Dish bought even more spectrum in the recently closed 600-Megahertz federal auction, bidding about $6 billion on licenses it said could help it build a national network around 5G technology and the Internet of Things.

PUTTING DISH ON ‘HOLD’
Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak lowered his rating on the stock to “hold” from “buy” as other analysts expressed caution, adding that with a core business short on fundamentals, it’s getting harder to see the light at the end of Dish’s darkening tunnel.

Wlodarczak wasn’t as down on the company as some other analysts, basing his downgrade on the increasingly unlikely view Dish will be able to sell spectrum in the near term.

“In our view, the most logical partner/acquisition candidates may be off the table for at least the balance of ’17,” Wlodarczak wrote. “This would likely leave players that are more partners in building out Dish spectrum, which it is a more uncertain outlook than expected by the market, in our view.”

Dish has to build out its wireless network to 70% of the country by 2020. The company has said in the past that it would only do so with a partner, but last week Ergen said Dish has the balance sheet capacity to create the network on its own.

Dish is talking to vendors and could begin building the network late next year, Ergen added.

“We have a tremendous set of assets at Dish,” Ergen said on the company’s earnings conference call. “And it’s our job as management to put those assets to work in the most economic long-term model that makes sense for our shareholders and for our customers. And that’s what we’ll do.”

Wlodarczak wasn’t ready to write Ergen off just yet, adding in his note that he didn’t slap a “sell” rating on the stock because he continues to believe in “Ergen’s ability to create substantial value via his valuable spectrum holdings, and ultimately that his spectrum holdings are worth more than is implied by the market currently.”

Others weren’t so optimistic. Barclays analyst Kannan Venkateshwar wrote in a research note that while he had expected Dish to go down the buildout path, “the mere consideration of an organic path for spectrum build-out is likely to be perceived negatively by most investors. In our view, this is because Dish’s equity valuation is largely a thought experiment rather than anchored in any fundamentals.”

Telsey Advisory Group media analyst Tom Eagan wrote, “Dish’s business model is proving increasingly unsustainable,” adding that its potential list of partners is diminishing.

It doesn’t help that the core business — satellite TV — is in steep decline. Dish lost about 320,000 satellite customers in the first quarter and its over-the-top Sling TV business, once growing enough to take up the slack, is slowing. Dish doesn’t release Sling TV subscriber figures but some analysts estimate it added about 177,000 customers in the first quarter, slightly above the 169,000 additions in the prior year, but down from the 273,000 additions in the fourth quarter.

The descent of Dish’s core satellite business has been rapid. Dish ended the March quarter with 12.3 million satellite- TV subscribers, or about 1 million less than in Q1 2016. At the same time, its Sling TV over-the-top service has added about 700,000 customers, according to MoffettNathanson principal and senior analyst Craig Moffett.

SLINGING LESS REVENUE
While Sling customers are cheaper to maintain — Moffett estimated that subscriber acquisition costs for satellite- TV customers are about $850 each, while Sling TV SAC is about $50 — they also generate much less revenue. Sling TV charges between $20 and $40 per month for its service, while overall satellite-TV ARPU is about $90 per month.

That reduction in SAC (Moffett estimated that including Sling TV, blended SAC is about $539 per subscriber) and reduced gross customer additions (at 369,000, down from 496,000 in the previous year) helped Dish tick up cash flow slightly (0.1%) in the quarter, but sent revenue down 3.8%, its worst quarterly showing ever — and a possible indicator of worse times to come.

Moffett wrote that in the fourth quarter, Dish revenue was declining at a rate of about 1.4% per year. Six months earlier, it was growing. “Shrinking gross additions in order to sustain EBITDA works for a little while,” Moffett added, “but only for a little while.”

In the past, analysts and Dish itself shrugged off the satellite declines, adding that satellite TV was a maturing business and the real growth was in over-the-top services like Sling TV.

Dish isn’t the only one that feels that way — AT&T’s DirecTV has seen its core satellite growth slow and has been encouraging price conscious satellite customers to switch to its OTT product, DirecTV Now.

But with Dish, there was always the added cushion of spectrum. If times got too rough, they could always sell out to one of the many bandwidth hungry incumbents such as Verizon, AT&T, Sprint or T-Mobile.

Now that cushion has deflated, at least for the time being.

The battle for sports rights could heat up considerably this year as digital distribution becomes an increasingly viable option for professional leagues, according to Barclays media analyst Kannan Venkateshwar.

The first test of that theory could come with the upcoming renewal of broadcast rights for Thursday Night Football in 2018, the somewhat ratings-challenged National Football League offering that was split last season between CBS, NBC and the league’s own NFL Network. Venkateshwar believes that the emergence of digital TV providers and the possibility that the league might go direct to consumer with the games could drive up prices and affect other sports deals.

HOW LONG ON SIDELINES?
He’s not alone. Pivotal Research Group senior research analyst-advertising Brian Wieser also sees an opening in the sports fray for virtual MVPDs, but he thinks they’ll wait on the sidelines for now.

“I think the vMVPDs could very well become players in sports, but it seems likely they’ll want more scale before they do anything unique,” Wieser said. “However, the streaming SVOD services — which do have scale — are probably less likely to do anything, as sports is still mostly consumed live.”

There’s a potential wild card, Weiser said: Any service provider that might want to jump into the sports-rights arena merely has to write a check, and most have ample cash on hand.

“But I think it’s unlikely this would occur, as most of them seem to be relatively disciplined,” Wieser added.

Thursday Night Football would appear ripe for vMVPDs mainly because of ratings shortfalls last year that were blamed on poor matchups and competition with news networks during a contentious election year.

But if vMVPDs choose to wait, a lot of opportunities lie ahead over the next decade. Among the sports-rights contracts set to roll off are NBC Sports Group’s deal with the National Hockey League (2020); ESPN’s Monday Night Football deal (2021); ESPN, Fox and Turner’s agreement with Major League Baseball (2021); Sunday NFL games for CBS, Fox and NBC (2022); and DirecTV’s NFL Sunday Ticket deal (2022).

MoffettNathanson senior analyst Michael Nathanson said in a report that Amazon could be a digital participant in those deals, but vMVPDs could test the waters earlier, perhaps with Twitter’s expiring NFL streaming rights or Thursday Night Football.

Venkateshwar likened the possible entry of digital bidders to the emergence of Fox in the mid-1990s for NFL broadcast rights, followed by cable networks like ESPN and TNT bidding for major sports, events that helped drive rights fees into the stratosphere.

According to Venkateshwar, sports-league revenue has risen at a 7.5% annual clip for the NFL between 2010 and 2015, fueled by a 12.3% hike in rights fees. Other leagues have seem similar gains, with Major League Baseball rights fees climbing 15%, the National Basketball Association up 3.5% annually and even the NHL up 18.3% in the same time frame.

STREAMS COULD FLOW
Digital bidders are likely to serve more as spoilers in early rights negotiations, helping to drive up prices for the ultimate winners. But as technology improves — current live-streaming capacity can’t handle a major sports event like the Super Bowl, but could handle smaller, more targeted events on Twitter or Facebook — so do the opportunities.

“This could be one of the major considerations for leagues in the coming years given that the quality of experience is a major factor in their distribution decisions,” Venkateshwar wrote.

As Wall Street still waits for more consolidation among video distributors, many such companies are eyeing deals to buy content assets that they had jettisoned just a few years ago to unlock hidden value.

So-called vertical integration, the marriage of distribution and content under one corporate roof — owning the pipe and the water — has always looked better on paper than in practice. For pay TV providers, owning a large block of the content they make available to customers would seem to lead to lower programming costs and greater exclusivity.

But operators found out the hard way several years ago that isn’t necessarily the case. As the industry grew, Federal Communications Commission programming- access rules made it virtually impossible to have truly exclusive content. With that need to make carriage deals as arm’s-length transactions, limiting any possibility for deep discounts, there was little value in keeping programming and distribution together.

Several companies cut the vertical cord by spinning off content assets over the past two decades, including AT&T and Liberty Media in 2001; Cablevision Systems (now Altice USA) with both MSG Networks (2010) and AMC Networks (2011); Viacom and CBS in 2006; and Time Warner Inc. and Time Warner Cable in 2009.

The rationale behind each split was varied, but the transactions shared a common theme: Unlocking the value of content that was hidden inside what was, at the time, a lower-growth distribution business.

As the industry moves toward an over-the-top model, where mobility and slimmed-down content packages rule the day, some believe that putting those assets together makes more sense.

Viacom and CBS will probably be the first to inch toward reconciliation, as both have put together committees of independent directors to look into a combination, with the blessing of largest shareholder National Amusements. Some analysts see that as more of a horizontal move, as CBS and Viacom both produce programming. Nonetheless, some are beginning to warm up to the idea of putting distribution and content together again.

CONSOLIDATION’S NEXT PHASE

The change of heart comes just as phase one of a continued consolidation wave among distributors winds down. In the wake of megadeals like Charter Communications’s acquisitions of Time Warner Cable and Bright House Networks; AT&T’s purchase of DirecTV; Altice USA’s purchases of Suddenlink Communications and Cablevision Systems; and even Comcast’s abandoned attempt to buy TWC, the thought is that the industry will now turn its M&A attention toward content.

The big difference is Internet video, which has changed attitudes toward vertical integration, Barclays analysts Kannan Venkateshwar and Amir Rozwadowski noted in a recent report.

“In our opinion, distributors have the ability to subsume all content under their aggregation umbrellas, which makes the whole concept of cable networks irrelevant,” the Barclays analysts wrote.

There have already been a smattering of content/distribution deals: Verizon Communications purchased a 24.6% stake in digital content producer AwesomenessTV in April, and Comcast purchased DreamWorks Animation for $3.8 billion in TV in August, to name two.

Technology platforms that help further monetize video also have been a focus with Comcast’s purchases of Visible World and investments in BuzzFeed and Vox Media, and Verizon’s AOL and Yahoo buys. Others could follow suit.

“We would not be surprised if other distributors were to potentially embrace larger opportunities in the content arena over time,” Venkateshwar and Rozwadowski wrote.

There appears to be no shortage of candidates. Speculation has been high that AT&T, fresh off its $48.5 billion purchase of DirecTV last year, is on the hunt for more content.

Not everyone is convinced that vertical integration is making a comeback, though. Telsey Advisory Group media analyst Tom Eagan said that while there could be a few horizontal deals on the horizon — Viacom and CBS being the prime example — he doesn’t expect to see any moves toward vertical integration.

“I think there has definitely been some MVPD horizontal integration, and there’s definitely been some content integration, i.e. Lionsgate and Starz. But we haven’t seen any vertical integration since Comcast-NBC,” Eagan said.

CONFLICTS ARISE

Even Comcast’s 2011 purchase of NBCUniversal — vertical integration’s shining star — now has a slight tarnish because Comcast is conflicted in certain transactions, Eagan noted. For instance, increased retransmission-consent fees benefit the content side of the business, but could hurt the operation’s cable portion.

“There’s more of an internal conflict,” Eagan said.

Comcast has claimed that retrans fees from NBC went from $0 when it bought the broadcast network in 2011 to an expected $800 million this year.

MoffettNathanson principal and senior analyst Craig Moffett also doubted the chances for a vertical-integration wave. In an email, he said the economic theory behind the vertical-integration concept is guaranteed supply or guaranteed distribution. Neither notion applies to media, he said.

“What’s left is mostly just exclusivity, and unless you believe that the program-access rules are going to sunset, exclusivity is illegal,” Moffett wrote. “I get the appeal on a superficial level, and I even get the grass is always greener argument, but the historical evidence for real synergy between content and distribution is extremely thin. If the program access rules do sunset, however, then it’s a completely different ballgame.”

Eagan was also skeptical of the earlier idea that that content companies would seek to combine in an effort to battle larger distributors, such as Charter Communications, which more than quadrupled its size after purchasing Time Warner Cable and Bright House Networks.

“The old-media model was getting beachfronts,” Eagan said. “Every new cable-network channel was a new beachfront to growing higher ad fees and more affiliate revenue. That’s not the game anymore. If you don’t have great content, it doesn’t matter if you have another beachfront.”

Still, AT&T is reportedly in the hunt for more content, and has kicked the tires on several media properties over the past year, including Starz (which was purchased by Lionsgate in June for $4.4 billion) and Yahoo (purchased by Verizon in July for $4.8 billion). According to a Bloomberg News report, AT&T CEO Randall Stephenson has a list of 40 to 45 companies that he constantly monitors, including peers and potential targets, as he plans his next move.

Adding more content seems to fit in with AT&T’s mobility strategy, which is further proffered by its planned launch of a new over-the-top service, DirecTV Now, later this year. DirecTV Now will have more than 100 live and on-demand channels targeted at younger viewers. AT&T has signed several content carriage deals in the past few months to fuel the service, including with NBCU, Disney, Discovery Communications, A+E Networks, Turner Broadcasting System and Scripps Networks.

MOBILE MOVES

Both AT&T and Verizon have been active in the deal market and see mobility as the future of the distribution business. While Verizon has focused more on digital assets for its mobile go90 service, AT&T could take a more traditional route, with some analysts predicting that Time Warner Inc. could end up in its crosshairs.

Time Warner and AT&T officials declined to comment.

Time Warner has arguably been in play since 21st Century Fox abandoned its unsolicited $80 billion offer for the programmer in 2014. Since then, Time Warner has launched HBO Now, a standalone OTT product for its flagship premium channel HBO, and set an Oct. 19 launch date for FilmStruck, with the Criterion Collection.

But along with cable networks like TBS, TNT, CNN and Cartoon Network, Time Warner also creates a large number or movies and television shows through its Warner Bros. Studios arm. Warner Bros. Television Group produces such cable and broadcast TV hits as The Big Bang Theory, The Flash, Gotham, Rizzoli & Isles, Shameless, Supergirl and Westworld.

Time Warner would attract a high price — Venkateshwar has estimated that a deal could be done for about $97 billion, including assumed debt — which could limit the players willing to make a bid.

Perhaps fueling the deal speculation is the relative sluggishness of content stocks over the past year, as uncertainty around OTT, skinny bundles and declining subscribers have sent some investors for the exits. Disney, which had its stock price rise fourfold between 2010 and early August 2015 from about $31 to $121.69, saw a 20% decline later that month, after it was revealed that its flagship ESPN network had lost about 7 million subscribers over the past few years. While Disney stock over the long haul is up by about three times its 2010 levels, it hasn’t fully recovered from the August 2015 dropoff. Shares were at $92.59 on Oct. 4.

Other content stocks have fared the same: 21st Century Fox, Discovery Communications, and Viacom are all down in the double-digit percentages from last August.

At the same time, distribution stocks — bolstered by continued broadband growth, consolidation speculation and a resurgence in video subscribers — have been on the rise.

Granted, consolidation has reduced the number of publicly traded distributors from six to four with the acquisitions of Time Warner Cable and DirecTV. But the four that remain are up a collective 30% since August 2015, driven by Charter’s consolidation-spurred 28% rise and a 5% gain at Comcast, currently the only vertically integrated cable operator.

Comcast first announced its plans to purchase a 51% stake in NBCUniversal — including the NBC broadcast network and 16 cable channels such as USA Network, Syfy and Bravo — in 2009. In 2013 it went all in, buying the remaining stake in the programmer from General Electric for about $16 billion.

In the past five years, Comcast has managed to rejuvenate NBCU’s content business, with the broadcaster atop the current TV-season ratings among 18-to-49-year-olds for the third straight year and cash flow nearly doubling from $3.7 billion in 2010 to $6.4 billion in 2015. The content side has also helped fuel Comcast Cable’s on-demand efforts.

Nowhere is that more evident than in Comcast’s August airing of the 2016 Summer Olympic Games from Rio de Janiero, where it offered more than 7,000 hours of content through live broadcasts on NBC and 11 cable channels; on-demand, through its X1 platform; and streamed online. Though overall ratings were down for the 2016 Olympics, Comcast still made about $250 million from the Games.

The Barclays analysts see even more synergies for Comcast as the nation’s largest cable operator moves into the wireless business. Comcast has activated an MVNO agreement with Verizon that would allow it to resell that carrier’s wireless service under its own brand, and has said it expects to launch a product next year.

BOON FOR WIRELESS?

Venkateshwar and Rozwadowski believe that wireless, with its heavy video component, could make content ownership even more important.

“Over the last few years, however, with mobile broadband, smartphones, Internet video streaming, and e-commerce becoming mainstream, as well as consumers and advertisers starting to look across platforms for content, the ecosystem finally is at a place where cross-platform monetization is more achievable,” the analysts wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said it makes sense for Comcast to continue to dip into the content trough, but doubted other distributors would make the plunge.

“It may make sense for Comcast to bolster its existing NBC operations to do deals and potentially realize substantial synergies,” Wlodarczak said. But Comcast and Charter might do better to set their sites on a wireless carrier such as T-Mobile, he argued, adding that such a play would eliminate the telcos’ only advantage over cable and could present huge synergies by allowing the MSOs to offload wireless traffic onto their own WiFi networks.

“The good news for cable is that getting into wireless is a lot easier than the RBOCs getting into cable’s core business, super-fast terrestrial broadband,” Wlodarczak said.

As the pro basketball world descends on the Big Apple, NBA All-Star 2015 begins to hit its stride with a pair of televised games on Friday night.

For the 11th straight year, ESPN will twin grins and profile on its exclusive coverage of the Sprint NBA All-Star Celebrity Game 2015 on Feb. 13 at 7 p.m. (ET) from Madison Square Garden.

Mark Jones and analyst Jon Barry will provide commentary on the proceedings that will feature perennial Celebrity Game MVP and comic Kevin Hart, Anthony Anderson (ABC’s Black-ish), Little League sensation Mo’ne Davis and Brooklyn’s own and Basketball Hall of Famer Chris Mullin.

Sage Steele (NBA Countdown) will host ESPN’s coverage, while Cassidy Hubbarth (NBA Tonight) will serve as the sideline reporter. ESPN Radio and ESPN2’s Mike Greenberg and Mike Golic (Mike & Mike) are the opposing coaches, with Greeney paired with New York Knicks’ star Carmelo Anthony, and the former NFLer joined by the Knicks’ top fan Spike Lee.

TNT will pick up the rock on a much higher level of play from the Barclays Center in Brookly at 9 p.m., with  exclusive live coverage of the BBVA Compass Rising Stars Challenge. This year’s event will feature a new USA vs. World format with some of the league’s top young talent in action, including Minnesota’s Andrew Wiggins, Philadelphia’s Michael Carter-Williams, Milwaukee’s Giannis Antetokounmpo and Orlando’s Victor Oladipo.

The Inside the NBA presented by Kia studio team of Ernie Johnson, Charles Barkley, Kenny Smith and Shaq O’Neal will provide halftime and post-game analysis of what undoubtedly will be some high-flying, high-scoring action live from Hammerstein Ballroom.

Entropic Communications, a set-top and MoCA chipmaker that’s already undergoing a major restructuring, said its board has authorized the company to pursue “a wide range of alternatives” aimed at boosting shareholder value.

Entropic, which hired Barclays for the exercise, did not outline any specific alternatives it will pursue and whether that might include a potential sale of Entropic, but the announcement caused Entropic shares to jump almost 7% in mid-day trading Tuesday.

Entropic said it has not set a timetable on that effort, and won’t disclose more until after its board approves a specific action or otherwise concludes its review.

On Monday, Entropic announced that it and with rival company ViXS Systems settled their litigation and have entered a cross-licensing agreement, a move that seemingly removes any legal-facing hang-ups that might trouble Entropic's pursuit of a sale or another strategic alternative.

Entropic is considering alternatives amid a plan to streamline its R&D and speed up its return to profitability. In June, Entropic announced it would lay off 23% of its global workforce as part of its reorg. It ended the first quarter of 2014 with about 650 employees and expects to reduce that to fewer than 500 in the fourth quarter of 2014. That will follow smaller restructuring last summer that included a 10% layoff.

Entropic, which also competes with Broadcom, announced revised third quarter guidance on Tuesday, and now expects revenues to be $43 million alongside a GAAP loss per share of 28 cents, versus original third quarter guidance of a loss of 24 cents on revenues of $49 million to $51 million. Entropic said the revisions were primarily due to sales softness for its satellite TV outdoor unit (ODU) business, but said it has won some key designs recently to help it take steps toward break-even.

At the end of the second quarter, Entropic had four customers driving more than 10% of revenues: WNC, a supplier into DirecTV (25%); CyberTAN, a subcontractor for Cisco Systems (14%); Actiontec, a supplier to Verizon Communications (14%); and MTI, a supplier of ODU gear to satellite TV companies (11%).

“Our Board of Directors and management are committed to taking the appropriate steps to enhance value for Entropic shareholders and we have determined that undertaking a thorough and deliberative evaluation of strategic alternatives, with the assistance of financial advisors, is in the best interests of the Company and all of our shareholders," Patrick Henry, president and CEO of Entropic, said in a statement. "The entire Entropic team is fully committed to meeting the needs of our OEM customers and service provider partners and we will continue to provide them with industry-leading solutions for connected home entertainment throughout this process."