Media networks, starved for new sources of advertising revenue, may find a wellspring of opportunity in the form of sports gambling ads, according to Morgan Stanley media analyst Ben Swinburne.

TV networks such as ESPN, Fox, CBS and NBC are expected to be the biggest beneficiaries, Swinburne wrote in a recent deep dive into sports betting. Fox, especially after it sells certain assets to either The Walt Disney Co. or Comcast and concentrates on live sports and news, could see healthy ad revenue gains, as could CBS, he added.

According to Swinburne’s estimates, the post-deal “New” Fox might generate a 2.1% lift in ad revenue accountable to sports betting this year, with CBS experiencing a 1.5% gain. In a more bullish scenario — where overall sports betting revenue rises more aggressively — Fox’s increase grows to 4.1%, with CBS adding 3.1%.

Swinburne conservatively estimated that legal U.S. sports betting revenue will reach $5 billion by 2025 — or $10 billion in a “bull” case scenario. About 20% of that haul will be devoted to TV advertising spent to lure gamblers.

Seeing the Light on Gambling Ads

Sports betting in the United States has resided mainly in the shadows, but it moved into the light earlier this year when the Supreme Court invalidated the Professional and Amateur Sports Protection Act. PASPA prevented states from allowing legal sports betting outside of horse racing and lotteries, but now each state has the right to pass its own laws legitimizing the practice.

Some leagues, such as the National Football League, have frowned upon legalizing betting for their respective sports, but some states such as New Jersey have already given the green light. Others are sure to follow: Swinburne estimated that 31 states will legalize sports betting by 2023.

Swinburne’s base case estimates predict that paid media will attract about $1 billion in sports betting advertising in 2025 — his bull case puts that figure at about $1.5 billion. Of those totals, TV sports betting advertising is expected to account for about 75%.

Related: Sports Sites Encouraged By Betting Ruling

Other analysts were less optimistic. Pivotal Research Group advertising analyst Brian Wieser said new ad categories are likely to emerge in the wake of the Supreme Court ruling, but he was uncertain of the overall impact.

“It is hard to tell if growth from those categories offsets softness from more mature brands who are either looking to reduce spending broadly or are shifting away from paid media for their marketing activities,” Wieser wrote in a note to clients.

There is ample evidence that TV will be a big beneficiary of sports gambling. In 2015, fantasy sports companies FanDuel and DraftKings spent huge amounts of money to advertise their services, which some considered to be loosely disguised gambling. Both companies pulled their campaigns after several state attorneys general threatened to bring action against them.

Almost immediately after the Supreme Court ruling, DraftKings said it would offer sports betting, and with such legalized gambling expected to become the rule in most states, others are expected to follow suit, and turn to advertising to differentiate themselves.

According to Kantar, FanDuel and DraftKings spent a combined $400 million on ads in 2015, with about 80% of that figure devoted to TV spots. For the second half of that year, FanDuel and DraftKings represented 2% of total domestic TV ad revenue for the networks that carried sports — ESPN, TBS/TNT, ABC, CBS, NBC and Fox — and was largely responsible for the acceleration in TV ad revenue for that year.

Direct sports betting advertising won’t be the only windfall for networks — it could also bring a ratings lift.

Swinburne cited Nielsen data that found adults who bet on the NFL watched 19 more games in the 2015 regular season than adults who didn’t bet at all. And casinos and online betting sites could partner with media companies to improve their competitive positioning. Swinburne pointed to Sky Betting & Gaming, a British online gaming company that improved it share of the U.K. market from 6% to 12% after partnering with Sky TV.

Separately, National Research Group said earlier this year that 79% of current and potential gamblers said they would watch more live TV sports, with 63% saying they would watch a greater variety of sports and 60% saying they would watch sports they didn’t watch before.

TV production, long hoped to be the antidote for falling ratings and affiliate fees at cable networks, is expected to grow strongly in the next several years, fueled by an unlikely ally — subscription video-on-demand providers.

SVOD companies such as Netflix, Amazon and Hulu are expected to significantly increase their spending on content this year. According to Morgan Stanley media analyst Ben Swinburne, SVOD firms will spend $15 billion in 2017, up from less than $4 billion in 2012 and led by Netflix ($6 billion), Amazon ($4 billion) and Hulu ($3 billion).

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TV production revenue is a welcome addition as affiliate fees and advertising revenue continues to be under pressure, Telsey Advisory Group media analyst Tom Eagan said. “The better media companies are able to harness studio production.”

TV production has long been the decidedly less glamorous cousin of overall studio revenue, Eagan said. But in recent years, as movie budgets have escalated and box-office receipts have dwindled, TV production has gained in stature and sales.

The big content providers rarely break out specific numbers for TV production, but most said it has become a significant, and growing, part of the overall revenue haul.

Supply for Demand
Fueling that growth is the nearly insatiable appetite of broadcast, cable and now SVOD distributors, for scripted programming. Most programmers are clamoring to meet the demand.

In May, AMC Networks announced a deal with Charter Communications where it would develop and co-produce exclusive content for the cable operator within a specific window.

At its first-quarter earnings conference call shortly after the deal was announced, AMC Networks CEO Josh Sapan said he wasn’t sure whether that deal would lead to others like it, but added that it allows for the expansion of its AMC Studios operation.

Sapan has long been a proponent of owning the content the company’s networks air — AMC Studios produces several shows for its networks including The Walking Dead, Turn: Washington’s Spies and Fear the Walking Dead. But AMC is now seeing the studio as a source of revenue for shows outside of its networks.

“It’s a significantly growing part of our top line, and so we think that being a studio and TV producer will make us important for this ecosystem domestically, both satellite, cable, telco and emerging [multichannel video programming distributors],” Sapan said on AMC’s first-quarter earnings call in May.

Others are seeing the light too. Viacom CEO Bob Bakish touted his Paramount TV Studios deal with Netflix for the show 13 Reasons Why, which has become a social media phenomenon.

Viacom launched its Paramount Television production unit in 2014 and has already exceeded its target of one drama and two comedies on-air within three years. The studio is in production for season two of Berlin Station (Epix) and Shooter (USA Network) and for season three of School of Rock (Nickelodeon) and season three and four for Bajillion Dollar Propertie$ (Seeso). It also is currently in production on The Alienist for TNT and Tom Clancy’s Jack Ryan for Amazon. In the summer, shooting begins for Netflix series Maniac and in the fall for Netflix’s The Hunting.

“Having a successful TV production business attached to the studio provides helpful consistency in cash flows, and I believe it is fundamental to the success of the studio,” Bakish said on the call. “And let’s not forget that this is a low capital-intensive business. We see considerable value here going forward.”

The Price for Rights
In a recent research note, Swinburne pointed to Hulu’s purchase of streaming rights with NBC for the 20th Century Fox Television-produced hit This is Us for an estimated record $2 million to $4 million per episode as a sign of the changing times. That deal, he wrote, “highlights the new reality that the largest syndication dollars are now from SVOD, dwarfing what TV networks/stations are paying.”

Netflix, for example, paid an estimated $1.75 million per episode for Gotham and $2 million per episode for The Blacklist in 2014, records at the time.

“For TV studios, digital dollars now dwarf TV pennies,” Swinburne wrote, adding that combined licensing fees for digital and traditional platforms for syndicated shows is now in the $2 million-per-episode range, at or slightly ahead of historical levels.

But traditional TV’s portion of that average is dwindling. Recent off-network syndication deals for Brooklyn Nine-Nine ($500,000 per episode to TBS) and Black-ish ($800,000 per episode to FX and BET) are a fraction of what they were in the past. For example, TNT purchased Hawaii Five-0 from CBS in 2011 for $2 million per episode.

Broadcast networks plan to air more than 100 scripted series next season, Swinburne noted, and the studios behind those shows will most likely generate more revenue from back-end licensing from SVOD companies than from TV networks.

Eagan isn’t so sure that SVOD licensing will surpass TV network revenue, but said it could be close.

“While we saw viewership and ad dollar substitution for licensing, I don’t think you’ll see the same kind of substitution here,” Eagan said. “It’s probably net-net, but it’s still additive. Is it additive for the company itself? Probably yes.”

Cable networks, plagued by sagging ratings and lower affiliate fees as consumers shifted to over-the-top and online viewing options, could be in for a rebound in the calendar fourth quarter. But analysts warn that the volatile political climate — which helped drive news networks to new heights in the just-passed presidential election — could also depress results for general entertainment channels.

Several top cable programmers are expected to release earnings results next week, with most analysts encouraged by the prospects for top names like 21st Century Fox and The Walt Disney Co.

Fox is expected to be first out of the gate, releasing fiscal second quarter results today (Feb. 6). The home to perennial ratings winner Fox News Channel, general entertainment powerhouse FX, several regional sports channels and FS1 should have a strong fiscal second quarter, driven by strong ratings for Fox News and the sports channels.

Morgan Stanley media analyst Ben Swinburne estimated Fox’s cable networks should report revenue of $3.96 billion in the fiscal second quarter, up 7% from $3.70 billion in the prior year. Broadcast-TV revenue — driven by an expected 5% hike in advertising sales — should rise 8.8% to $1.85 billion from $1.7 billion in the prior year, Swinburne wrote in a research note.

Cash flow for the cable channels also should be up nicely in the period, according to Swinburne. He predicted that cable network EBITDA would rise 8.3% to $1.3 billion from $1.2 billion in the prior year, while cash flow at the broadcast division should grow by 27% to $353.6 million from $279 million.

COMCAST RENEWAL BENEFITS

Swinburne was encouraged by recent renewal deals with Comcast, which included the return of its YES Network RSN to the operator after a one-year hiatus. Some of Fox’s smaller networks, like Fox Sports 2 and FXM, could also add to growth as their subscriber penetration increases.

Credit Suisse media analyst Omar Sheikh ratedFox his top pick for the year, saying in a recent note that the company’s plan to acquire the remaining interest in U.K. satellite giant Sky it doesn’t already own has removed the M&A discount from the stock and allowed the programmer to focus on organic growth.

Fox News Channel, currently President Trump’s favorite news network, has been riding a wave of ratings growth well past the November election. But what’s good for Fox may not be so for the rest of the cable henhouse. General entertainment networks could feel the pain as viewers are glued to news channels to watch the latest controversy involving the new presidential administration.

That could serve as a blow to programmers that compete directly with news programs, like Discovery Communications, according to Sheikh.

“We expect the political news cycle to remain strong through at least the first half of 2017, driving viewership at major news networks (e.g. CNN, Fox News, MSNBC),” Sheikh wrote. “These networks directly compete with seven of Discovery’s networks for the audience of adults 25-54, therefore strength in news will further pressure Discovery’s domestic ratings, in our view.”

He noted that analysts’ consensus estimates for Discovery’s domestic ad-revenue growth are flat to 1%, and could be even lower.

“We believe there could be some downside risks to this,” he wrote.

UPSIDE SEEN FOR ESPN

Surprisingly, the analysts were bullish on Disney, which has taken it on the chin as subscribers have fled from its flagship sports network ESPN. In his report, Swinburne estimated that ESPN’s could be in for a reprieve from its 2% annual subscriber erosion over the past three years.

“We believe risk now skews to the upside,” Swinburne wrote, adding that skinny bundles and online video distributors — the two businesses many blame for ESPN’s subscriber decline — could be catalysts for growth.

“We believe the combination of moderating skinny-bundle headwinds and the emergence of new, low-priced streaming options create opportunities for incremental ESPN distribution,” he wrote.

Swinburne was also optimistic the Worldwide Leader in Sports will continue to grow affiliate fees in the next renewal cycle, beginning in 2018, largely because of new distribution players.

“We also believe new entrants (such as Hulu Live or YouTube Unplugged) will pay premium affiliate fees, suggesting a positive mix shift tailwind to rate,” Swinburne wrote.

Disney has said it plans to launch a standalone over-the-top ESPN offering using sports rights it currently owns but can’t monetize on its existing networks. While few details have been released about the service, which is expected to debut later this year, Swinburne believes it can coexist with ESPN’s existing linear networks.

“It remains a time of transition at Disney, as it evolves its ESPN/ABC distribution model to attempt to reach consumers that have been opting out of the pay TV bundle,” Swinburne wrote. “We expect the a la carte and bundled offerings will coexist for a long time, creating more earnings stability than the market presumes.”

VIACOM ON THE BOUNCE?

Swinburne upgraded the entire programming sector last week to “attractive,” slapping “overweight” ratings on Disney, Fox and even Viacom, which has experienced the greatest impact from the shift to mobile and online viewing. Swinburne believes that after a period of management upheaval and disappointing results, Viacom, which reports its fiscal first quarter results on Feb. 9, has nowhere to go but up.

“We believe new management has about a year before any significant renewals to try and improve the programming and ratings trajectory, notably for MTV,” Swinburne wrote, adding that Viacom’s biggest EBITDA contributor, kids’ network Nickelodeon, has shown healthy growth over the past year.

But not everyone was quite as optimistic. Sanford Bernstein media analyst Todd Juenger, who rightly predicted the linear network ratings declines years ago, foresees a difficult period for pay TV.

“We see no evidence of fundamental trends to support a view that things are getting less worse,” Juenger wrote last week, adding that pay TV subscribers and conventional TV audiences continue to fall while subscription VOD services like Netflix gain viewers.

“All the media Bulls are clinging to is: hope,” Juenger wrote. “Hope on macro/political (tax rates, GDP). Hope that OTT launches will slow the rate of sub decline. Hope for M&A.”

As the earnings season rapidly approaches, analysts see a strong second quarter for cable distributors, a combination of continued momentum and benefits from the six-week strike by Verizon Communications employees in April and May.

Comcast is expected to be the first cable operator out of the earnings blocks, releasing its Q2 results on July 27.

Consolidation catalysts Charter Communications and Altice N.V. — Charter completed its acquisition of Time Warner Cable and Bright House Networks on May 18, while Altice finished its purchase of Cablevision Systems on June 21 — are both slated to release results on Aug, 9.

Actual numbers for Verizon — expected to show subscriber declines, or at least slower increases — aren’t expected until July 26, when the telco officially releases results. That hasn’t stopped some analysts from estimating the damage.

Verizon employees walked off the job on April 13 and stayed out until May 27, when a deal was struck that increased hourly wages and avoided pension cuts for nearly 46,000 unionized workers. The six-week standoff ground Fios installations to a crawl, as contractors were brought in to take up the slack.

UBS Securities telecom analyst John Hodulik predicted Verizon would lose about 33,000 Fios subscribers in Q2, compared to a gain of 26,000 customers in the year-ago period.

Verizon has experienced a steady decline in Fios TV customers over the past several three-month periods: it gained about 178,000 customers in 2015, down from 387,000 additions in 2014. But the strike apparently pushed the telco into the red in the second quarter. Hodulik expects the telco to return to positive video subscriber growth in the third and fourth quarters (about 10,000 each), but at a slower pace.

Verizon chief financial officer Fran Shammo has said in the past that total wireline customers, including non-video subscribers, could flirt with negative territory because of the strike. At a Bank of America Merrill Lynch media conference in London in June, Shammo said because most of the strikers were in installations and maintenance, Verizon was in “catch-up mode” and expected broadband additions to be negative in Q2.

Comcast is expected to continue to temper basic-video subscriber losses in Q2, shedding just 10,000 video customers compared with a loss of 69,000 subscribers in the same period in 2015.

In a note to clients, Hodulik said the results were helped by the Verizon strike as well as the transition of former Fios properties in California, Texas and Florida to Frontier Communications, which wasn’t ready to do a lot of subscriber acquisition marketing while absorbing the territories with some 1.2 million Fios customers.

Overall, Hodulik estimated cable operators would lose a collective 500,000 video subscribers in the second quarter, slightly better than a year ago.

Other analysts weren’t quite as optimistic. Morgan Stanley media analyst Ben Swinburne expects Comcast to shed about 24,000 video customers in the quarter, with Charter dropping 86,000. Analysts share an enthusiasm for improvements in the cable sector for the full year, though. Swinburne estimated Comcast and Charter will both end 2016 on a positive basic-video subscriber note, with Comcast adding 100,000 subscribers and Charter adding 58,000 customers.

“We see another strong sub quarter for cable at the expense of its telco/satellite competition,” Swinburne wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak reduced his estimates for Q2 subscriber losses at Comcast from 50,000 to 20,000, based on his belief that churn trends continue to be solid and to better reflect the effects of the Verizon strike.

“We expect a solid cable result in the seasonally weak 2Q,” he wrote.

About 10 months into his tenure as general manager of lifestyle channel Z Living, Rafe Oller is well on his way to transforming the channel from a health information network to a health entertainment network.

By roughly doubling the number of homes where Z Living is available in less than a year — the programmer says its approaching 40 million homes now, and hopes to be in 50 million by the end of 2016 — Z Living appears to be realizing the potential Oller saw in the channel when he joined last September, after stints at Fox and Warner Bros. Entertainment Group.

“I didn’t sign up for what this network is,” Oller said. “I signed up for what I know it could be.”

SAILING ROUGH SEAS

Oller joined Z Living after an embarrassing series of personnel issues rocked the company: a discrimination lawsuit filed against the network and parent Asia TV by former head of marketing Michael Snyder in 2014; the earlier departure of its CEO; and layoffs in its New York offices.

Oller, who joined the network formerly known as Veria Living after those issues surfaced, said he has had no issues with the parent company, which has given his team freedom to make decisions and run the U.S. business, he said.

“My relationship with the parent company is excellent,” Oller said in an interview. “We all feel very welcome. We’re all rowing in the same direction, which is establishing a really great network.”

Helping move the boat along has been the number of distribution deals Oller and his team have been able to secure in the past few months alone.

In June, Z Living renewed its distribution deal with satellite-TV provider Dish Network, an agreement that puts the channel in 11 million homes and includes carriage on its over-the-top platform Sling TV. This month, it renewed with AT&T’s U-verse TV, adding another 5 million homes in the telco-TV service’s Top 200 programming package, where Z Living is grouped with Scripps Networks Interactive’s lifestyle networks.

Those deals are in addition to Z Living’s current carriage on Altice USA (formerly Cablevision Systems), Verizon Communications’s Fios TV, General Communication Inc., RCN, Buckeye Broadband and Comcast’s Chicago system. Other deals are expected this year.

Oller has tried to broaden the network’s focus, away from just providing information to providing entertainment. In that vein, the network green-lighted four new original series in April that will air in the fourth quarter: Finding Fido, hosted by canine expert Seth Casteel, which matches dog-owners-to-be with the perfect pet; Altar’d, a reality program where couples undergo separate 90-day weight loss and healthy lifestyle programs and don’t see each other until their wedding day; The Big Fat Truth, hosted by Extreme Weight Loss and The Biggest Loser executive producer JD Roth; and Yoga Girls, a docu-soap that follows two groups of Los Angeles yoga instructors as they try to build their client lists and brands.

PROGRAMMING PUSH

Two of those shows (Finding Fido and The Big Fat Truth) are part of a larger development deal with unscripted producer 3 Ball Entertainment. Z Living also has reached deals with producers Ebersol Lanigan Co. and Popsugar. The Popsugar deal will include series for both the linear network and online.

Oller wouldn’t say how much Z Living is spending on original programming, but said the network is doling out about the same per episode as comparable channels from Scripps Networks and A+E Networks.

Networks across the board are investing in original programming to help differentiate themselves, which has helped fragment audiences, according to a recent report by Morgan Stanley media analyst Ben Swinburne.

According to Swinburne, there are 111 new scripted series slated for the 2016-17 TV season from broadcasters alone, an increase of 9% from the prior year. That makes it harder for consumers to navigate through the lineup, but it helps networks to stand out come carriage-renewal time. And though smaller, independent networks are sometimes easier to single out when distributors are looking to pare down their lineups, Oller said distributors are beginning to realize the benefits of tapping into the $1.8 trillion fitness and healthy lifestyle market.

Oller said he understands that fitness equipment sales don’t necessarily translate into fitness viewers, but by providing a mixture of information shows — mainly geared toward morning workout regimens — and entertainment programming later in the day, the network should capture a broader audience.

Health and fitness is attracting a broader scope of people. Oller said that three out of four Americans are either becoming healthier or are working out regularly, weight loss shows like The Biggest Loser are getting big ratings on broadcast TV and even the grocery aisles are reflecting changing attitudes.

Oller pointed to a time not too long ago when Horizon milk was the only organic food product available in most grocery stores. Now, there are entire sections of the supermarket dedicated to organic foods, which, despite their sometimes-higher prices, are gaining popularity. More than half of millennials are buying organic.

“Welcome to the era of the $7 heirloom tomato,” Oller said.

Integrating apps from subscription video-on-demand services into cable set-top boxes could go a long way toward tapping into an underserved demographic for subscription video-on-demand — older viewers — while providing pay TV with another retention tool, according to some analysts.

Several cable, telco TV and satellite-TV providers already have integrated apps from Netflix and Hulu into their set-tops, and digital video recorder pioneer TiVo has had a Netflix app incorporated into its boxes for years. And TiVo’s newest product — TiVo Bolt — integrates Netflix, Amazon Prime, Hulu and other Internet streaming services with the box, while also serving as a DVR. But Morgan Stanley media analyst Ben Swinburne said there a few key operators missing, notably Comcast and Charter Communications.

POSSIBLE WIN FOR BOTH

Getting Comcast and Charter into the set-top integration fold could help the cable operators’ retention efforts while giving the SVOD services access to older customers.

That could be a key demographic for Netflix in particular. After a strong first quarter of domestic subscriber growth — it added 2.2 million customers in the period — Netflix said subscriber increases would slow in the second quarter to about 500,000. Netflix could make up the difference by targeting older pay TV customers, Swinburne said.

According to a survey by researcher AlphaWise and Morgan Stanley, about 63% of respondents aged 18-29 were Netflix subscribers while just 30% of those aged 45-64 and 19% of those aged 65 and up used the SVOD service. Ease of use was one of the reasons those nonsubscribers gave for not being Netflix customers.

Attracting the older demo could be a coup for Netflix. Swinburne said older viewers watch more TV on their TV sets: about 19 hours a week, compared with 11 hours for 18-to-29-year-olds.

They also are more likely to subscribe to pay TV: 92% of consumers 65 and up and 88% of 45-to-64-year-olds were pay TV subscribers, compared to 86% for the 18-to-19-year-olds.

“Set-top integration would introduce Netflix to this customer base through a service the cohort is already using frequently, and reduce the friction associated with Netflix consumption on a TV set,” Swinburne wrote in a note to clients.

Swinburne has some data to back that up. In the U.K., cable operator Virgin Media saw Netflix subscriptions rise significantly after it began rolling out TiVo set-tops.

Swinburne said there was a direct correlation between customers with TiVo boxes and Netflix usage. Virgin began rolling out TiVo boxes with a Netflix app in November 2013, when Netflix usage among its customers was less than 20%. By September 2015, when 78% of its customers had an integrated TiVo box, Netflix usage grew to 28%.

Virgin Media wasn’t the only U.K. provider to experience the same phenomenon. At telecom and video service provider TalkTalk, Netflix usage increased from 17% in September 2014 to 25% in September 2015. TalkTalk began integrating the Netflix app in its boxes in January of 2015.

While there are issues that would have to be worked out still, Swinburne said he believes that adding the nearly 40 million video customers from Comcast and Charter to the mix could help tip the scales for Netflix. Comcast’s X1 platform could easily accommodate a Netflix app as it continues to roll out across the country. Although Comcast has been mum on the possibility of integrating Netflix into X1, Charter CEO Tom Rutledge has said publicly that the cable operator would investigate the possibility.

Comments like those have helped fuel Swinburne’s optimism, adding that Charter and even Comcast could be “willing partners with Netflix in the near or medium term.”

ENHANCING BROADBAND

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said integrating the app with set-tops makes sense.

“It is pretty easy to get Netflix, but for some folks — mainly the older generation — anything that makes it easier to sign up would be beneficial for Netflix subscriptions. If Netflix is willing to give up part of the economics, it becomes more palatable for distributors.”

While cable operators may be skittish, thinking that integrating Netflix could cut into pay-per-view revenue, Swinburne believes the impact would be minimal.

And as broadband becomes more prevalent — all the major operators now have more high-speed Internet customers than video customers — making them happy becomes even more important.

“At two hours daily of viewing per member, cable operators — increasingly more ISPs than MVPDs — have growing reason to bring Netflix into the tent,” Swinburne wrote.

Broadcasters continued to eke out double-digit percentage increases in retransmission-consent revenue in the first quarter, despite mounting evidence that the pay TV universe is shrinking.

A look at some of the top broadcast station groups show that retrans revenue, while still rising at a healthy double-digit percentage clip, leveled off a bit from the triple-digit increases of a year ago. But overall growth at the top five publicly traded broadcasters rose a collective 25% in the period, slightly behind the 35% increases in the first quarter of 2015.

SCRIPPS LEADS THE CHARGE

Leading the charge was E.W. Scripps, which boosted its quarterly retrans haul 92% to $53.6 million, behind the 123.8% increase in the same period last year. Sinclair Broadcast Group — the largest station owner with 172 broadcast properties in 81 markets — maintained a high-single digit percentage increase in the period, although it told analysts those raises will taper off in the next three years as its deals mature.

Sinclair said its next big retrans negotiation will be at the end of the year, with Comcast, and it expects 2017 retrans increases to be in the mid-single digits, dipping to the low-single digits by 2018.

The company, which has been aggressively accumulating stations over the past five years — it had only 58 stations in January 2011 — will have some added leverage in retrans negotiations going forward. It agreed to purchase sports network Tennis Channel in January (the deal closed on March 1), adding to its growing stable of cable networks that include American Sports Network, Ring of Honor and Comet TV. While Tennis Channel had little impact on the first quarter — it had only been officially under the Sinclair umbrella for a month in the period — the network is expected to have influence in future negotiations.

The second-largest station owner — Nexstar Broadcast Group, with 104 properties in 54 markets — saw retrans revenue rise 46.2% to $97.3 million in the quarter, less than the 89.5% increase in the same period in 2015.

Of the top six station owners, all except Tegna, the former Gannett broadcasting group, reported a smaller percentage increase in Q1 2016 than in the prior year. That could be in part because of a declining pay TV subscriber base, as total pay TV customers fell by 1.2% in the quarter. But it is more likely tied to the timing of retrans renewals and overall market maturity. Tegna said it expected retrans to grow more than 30% for the rest of the year.

MVPDs reached several retrans deals with station owners in the first quarter, including Cox (with Nexstar), Time Warner Cable (with Scripps) and Dish (with Cordillera Communications), which likely had an impact on revenue growth. Most of those deals — except for TWC and Scripps — also included brief blackout periods, which one pay TV industry group believes has a huge impact on rates.

The American Television Alliance, a group that includes the traditional pay TV distributors such as Charter Communications, Cablevision Systems, DirecTV and Dish Network, said there were 193 blackouts in 2015 — a new record and more than twice the 94 blackouts in 2014. So far in 2016, 26 blackouts have occurred, and more are expected as deals come up for renewal, usually around major sporting and entertainment events.

The ATVA sees a direct correlation between blackouts and higher retrans fees, adding that oftentimes consumers are forced to pay higher rates after a dark period has ended.

“Each broadcaster’s quarterly earnings report is further confirmation that the retrans cash grab is driving the TV blackout crisis,” said ATVA spokesman Michael Hacker in a statement.

Back in July 2015, SNL Kagan raised its estimates for overall retrans revenue growth to $10.3 billion by 2021, a 63% increase from the $6.3 billion in 2015. CBS alone has said it will generate about $1 billion in retrans revenue in 2016, growing to $2.5 billion by 2020.

RETRANS TAKES UP THE SLACK

Retrans fees have been a savior for some broadcasters, taking up the slack in recent years as the advertising market has tanked. But even as ad sales have begun to rebound — Morgan Stanley media analyst Ben Swinburne said in a recent note that the first quarter was the strongest for national TV ads since Q3 2013, with broadcast advertising revenue up between 8% and 10% — retrans fees continue to rise.

While overall percentage growth appears to have slowed in the first quarter, Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said it probably won’t last long, adding that it could simply be a result of the “law of large numbers.”

“As they keep getting bigger, the growth is going to slow,” Wlodarczak said. “I see broadcasters trying to push through higher fees on distributors to offset lost revenue from cord cutters/shavers, which will of course only exacerbate the problem.”

As the pay TV industry as a whole continues to weather the cord-cutting threat to its business, Dish Network could be readying what some analysts have been calling for all along — the eventual shift of its traditional satellite-TV customers to cheaper and more easily managed over-the-top offerings.

Dish had its fourth consecutive quarter of net subscriber losses in Q1, shedding about 23,000 total customers.

But because Dish lumps its Sling TV over-the-top service results in with satellite figures, the losses on the traditional side were much heavier. Depending on the analyst, those losses were between 158,000 and 165,000 in the first quarter.

Even at the smaller number, it would be the worst first quarter ever for Dish on the subscriber front — on the heels of its worst third quarter ever and its worst Q4 since 2010.

BLEEDING OR SHIFTING?

The losses could be intentional, according to Morgan Stanley media analyst Ben Swinburne. In a recent research report, he noted that the company could be slowly migrating its traditional base of direct broadcast satellite subscribers to its potentially more profitable Sling TV over-the-top platform.

Moving traditional subscribers to a new platform isn’t unprecedented: AT&T seems to be shifting its U-verse TV telco subscribers to its DirecTV satellite platform, and even Verizon Communications has hinted that its go90 mobile platform, rather than Fios TV, is the future.

Such a move would not be without risk, though. A shift from satellite to Sling TV would help lower costs and would appear to target higher-end customers, but Sling TV has a significantly higher churn rate than Dish Network.

In a note to clients, Swinburne estimated that subscriber-acquisition costs (SAC), or the amount of money Dish invests to attract a customer, is expected to fall from $875 per gross satellite customer addition in 2015 to about $840 per customer this year, in part because of lower advertising costs.

But the larger and more sustainable reason, Swinburne said, is a dramatic shift in capitalized SAC — mainly equipment costs — to $125 per gross satellite addition in the first quarter, mainly from recycling returned set-top boxes instead of buying new ones. It was the lowest level of capitalized SAC Dish has reported since it started leasing boxes to customers in 2009.

In a research note, MoffettNathanson principal and senior analyst Craig Moffett said blended SAC for both services was about $648 in the first quarter, down from $727 in the fourth quarter.

The managed shift to Sling TV also appears to be reducing programming costs. Swinburne estimated that programming costs rose 2% to 3% in the quarter for Dish.

“We also believe Dish will be able to moderate any growth in customer service and retention spend as it shrinks its satellite sub base and pivots towards the lighter-touch Sling business,” Swinburne wrote.

But the churn rate for Sling is nearly three times that for a traditional customer — 4.3% vs. 1.6% for traditional satellite TV.

Gross subscriber additions, an important metric for satellite-TV companies, were about 496,000 in the first quarter (less the Sling TV estimates), Moffett estimated, representing a 10.5% decline year-over-year.

“Either the core business is rapidly losing its appeal to consumers or Dish is actively pushing consumers to its online Sling alternative,” Moffett wrote.

He added that it is unlikely Dish would push its customers to Sling, but if they did, they would have huge hurdles to overcome. While there will be invariable comparisons to Netflix’s transition from mail-order DVDs to streaming media, there are two key differences: Dish’s business is much larger and its fixed-cost infrastructure — the billions of dollars of satellites currently orbiting the Earth — is enormous.

“All that means is that the transition will be much, much harder than Netflix’s,” Moffett wrote.

TOUGH TRANSITION

Swinburne doesn’t think it will be easy, either. Making Sling TV more attractive — Dish said it was trying to entice The Walt Disney Co.’s ESPN to join its recently launched multistream service — would likely result in a price increase to at least $30 per month from its current $20 per month. At that price point, Sling TV and a broadband connection will cost about the same as the traditional triple play, which would make it a harder sell to cost-conscious consumers.

Still, the analyst said that Dish shouldn’t be underestimated.

“Two years ago, Disney-Dish birthed Sling and the product was roundly dismissed by media companies as niche to the consumer and benign to the bundle, but many now are demanding to be distributed on Sling,” Swinburne wrote. “Two years from now, perhaps Dish will be dictating content cost terms on Sling, not the other way around?”

As cable’s earnings season kicks off this week with Comcast reporting first-quarter results on Wednesday (April 27), analysts think tallies for the typically strong period will see big broadband and video subscriber gains for operators.

Cable operators have turned the corner on basic- video subscriber losses in the past several quarters, with Charter Communications and Time Warner Cable reporting their first basic-video customer gains in nearly a decade last year. In this year’s first quarter — typically a strong season for multichannel-TV subscriptions — the Big Three are expected to show video growth, while all four publicly traded cable operators (including Cablevision Systems) are expected to show gains in broadband customers.

Morgan Stanley media analyst Ben Swinburne said overall pay TV net additions should be down 50%, but that’s mainly due to satellite-TV subscriber losses and declining growth at the telcos. Cable operators, he said in a research note, should see gains via the likes of Comcast, Charter Communications and Time Warner Cable.

‘BIG 3’ GAINS IN SIGHT

Evercore ISI Group media analysts Vijay Jayant and David Joyce also predicted that Comcast, Charter and TWC would post video-subscriber gains, but said the overall pay TV video losses would be more moderate: about 80,000 in the period, compared to a loss of 60,000 in 2015.

Jayant and Joyce in a note said Q1 2015 was the first time pay TV showed a loss of video subscribers in the first quarter, which is typically strong despite being prime rate-increase time. The trend toward overall losses is expected to continue, the analysts said, while cable companies for the most part are expected to show gains.

Swinburne expects Comcast to gain 35,000 video customers while Charter and TWC should add 1,000 and 29,000 respectively.

Cablevision, which has struggled with aggressive discounting by Verizon Communications in its footprint, is expected to shed 23,000 video customers, according to Swinburne.

Jayant and Joyce believe Cablevision will shed about 15,000 video customers in the quarter, followed by gains at Comcast (40,000), Charter (15,000) and TWC (20,000). The analysts see most of the video losses being weathered by smaller operators, with Cable One expected to lose 22,000 video customers in the period, Suddenlink Communications — purchased by Altice in December — down about 10,000 video customers and “other” operators losing a collective 100,000 video customers.

Jayant and Joyce believe Charter will get more aggressive after its $78.7 billion deal to acquire Time Warner Cable is approved, after which he predicts the company will unleash “an arsenal of marketing campaigns.”

Already during Q1, Charter has continued its strategy of targeting satellite-TV subscribers and was giving away a free DVR to new tripleplay subscribers, the analysts said in their report.

On the broadband side, growth is expected to slow because of sluggish telco additions, but cable should continue to exert its dominance in the space.

Overall, Swinburne predicts 775,000 broadband additions, down slightly from last year as AT&T’s U-verse Internet loses 5,000 subscribers and Verizon’s Fios Internet gains 6,000, down from 41,000 in Q1 2015.

Swinburne predicted cable would grab 95% of total broadband additions in the period. Leading the charge will be Comcast (373,000), Charter (123,000), and TWC (227,000).

On the telco side, broadband additions are should continue to slide, with AT&T shedding 5,000 customers, compared to an addition of 94,000 in 2015.

Verizon, which released first-quarter results last Thursday morning, surprised many analysts on the broadband front, reporting 98,000 Fios Internet additions in the period, below the 133,000 additions of last year but still above the 6,000 that Swinburne predicted. Fios TV adds were about even with last year at 36,000, compared to 35,000 in 2015.

On the satellite side, AT&T’s DirecTV unit is expected to report 170,000 net new video subscribers in the quarter, fueled by its parent’s efforts to migrate U-verse TV customers over to the satellite platform. Earlier this month, AT&T debuted a satellite, broadband and wireline phone triple play for $90 per month that could drive additional growth.

CABLE’S BROADBAND HEFT

At Evercore ISI Group, Jayant and Joyce estimated that broadband additions will grow by 1.1 million customers in the first quarter, with cable accounting for more than 1 million of those adds. Telcos, the two analysts estimate, will account for about 50,000 broadband additions.

At Dish Network, which reported its results April 20, net new subscriber losses were 23,000 in the period, but that includes subscriber gains from its Sling TV over-the-top product. Moffett-Nathanson media analyst Craig Moffett estimated that Dish lost about 158,000 legacy satellite TV customers in the period, its worst first quarter ever.

Sling TV, Dish’s over-the-top service, grew by about 135,000 subscribers, though. Sling TV, by Moffett’s reckoning, has about 658,000 video subscribers, in line with estimates. Swinburne estimated legacy satellite losses could be in the 110,000 to 160,000 range.

A two-year grace period that shielded veteran Netflix subscribers from a 2014 price increase expires next month, an event some think could cause the subscription VOD pioneer to actually subtract customers during the second quarter of 2016.

The May switchover could be tricky: It’s the biggest price increase since 2011, when the company announced a rate hike for its streaming/mail-order DVD combination from $9.99 to $15.99 per month. Back them the backlash was swift — Netflix stock fell 40%, and customers called for Netflix CEO Reed Hastings to resign.

This time around, the company has been careful, buying itself time in the two-year wait for the initial outrage to wane. And analysts point out that customers intent on keeping the $7.99 price point can do so by dialing back their tier of service to the single-stream, standard- definition Basic Plan.

The pricing details: Netflix hiked the monthly fee for new customers in May 2014 to $9.99, but allowed existing customers at the time to remain at the previous $7.99 and $8.99 monthly rates for two years.

UBS media analyst Doug Mitchelson estimates about 17.8 million Netflix customers in the U.S. (37% of its total base) were at the $7.99 price point. He thinks the $2-permonth increase will be too high for between 3% and 4% of those customers, who will probably cancel service.

‘U.S. MATURITY FEARS’

Netflix is offering those grandfathered customers an opportunity to stay at the $7.99 rate, but they would have to downgrade service to one streaming device in standard definition, as opposed to two streaming devices in HD. While that could offset some of the cost-conscious churn, it isn’t expected to be much.

The churn from the grandfathered base amounts to about half of Netflix’s quarterly subscriber gains; in the fourth quarter it added about 1.5 million U.S. customers. Couple that with a maturing market — subscriber growth has softened in recent periods — and Netflix could be heading into its first negative streaming quarter ever.

“Investor concerns regarding the potential churn from such a large price increase are compounding the U.S. maturity fears already plaguing Netflix’s stock,” Mitchelson wrote. “Add in the fact that 2Q is the seasonally softest quarter, and some investors are even questioning whether Netflix will have its first quarter ever of declining U.S. streaming subscribers.”

In the past several quarters, Netflix has seen a steady softening of domestic subscriber additions, from 2.3 million adds in Q4 2013 to 1.5 million in Q4 2015. Most analysts who follow the company aren’t expecting the worst, but anticipate that the slower growth trend will continue.

Morgan Stanley media analyst Ben Swinburne revised his Q1 subscriber estimate downward to 1.8 million from 2.2 million after the SVOD pioneer missed his Q4 estimates.

“When you have as large of a subscriber base as Netflix, minor changes in churn can have a material effect on net subscriber additions,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. “I would be surprised if it goes negative even with negative 2Q seasonality, but you cannot completely rule it out. I figure they can do at least a couple hundred thousand.”

Mitchelson said in his report that the bear case for Netflix to lose subscribers in Q2 is unlikely, and he estimated the company would end the period with an increase of about 450,000 customers in the U.S.

Of the customers paying the old $7.99 monthly rate, Mitchelson estimated that 229,000 would churn off in Q2, with another 360,000 dropping the service in Q3.

Swinburne was a little less optimistic. He estimated that total additions would be about 150,000 and paid customer additions would be flat in the second quarter.

Fueling Mitchelson’s optimism is Netflix’s programming lineup. The company, the analyst wrote, has a strong original content slate with hit shows like Orange Is the New Black, Jessica Jones and Daredevil.

This year is expected to be especially strong — Netflix is increasing its original scripted series slate to 31 in 2016 from 16 in 2015 with shows like The Crown, Marvel’s Luke Cage, Frontier and The Ranch and has 10 feature films released or in production.

“We feel comfortable the slate supports our view for low levels of churn,” Mitchelson wrote in a report.

GROWTH MARKET: THE WORLD

While domestic growth is slowing, Netflix’s real opportunity is international, Mitchelson said. UBS estimates that the U.S., which represented 60% of total gross customer additions in 2014, will shrink to 38% by the end of 2016. Taking up the slack will be areas like Latin America, Europe and Australia.

Swinburne, also in a research note, figured international subscriber additions would rise to 3 million in the second quarter (from 2.4 million last year), with full-year additions at 15 million — 28% higher than the 11.75 million added in 2015 and outpacing his estimates for 4.1 million domestic additions in 2016.

Swinburne said he thinks international streaming customers will overtake their domestic counterparts in 2017, with 54.6 million subscribers (compared with 52.6 million domestically), reaching nearly 80 million customers by 2020. Domestic subscribers could reach 60 million in 2020 by his figures.

Wlodarczak added that, while international growth is important, so is stable U.S. growth, which validates Netflix’s increasing its original programming spend.

Pay TV service providers are doing a better job of keeping customers satisfied, but that isn’t doing much to quench their subscribers’ desire to cut the cord, a new Morgan Stanley survey has found.

In its sixth annual Streaming Media Survey of 2,500 adults 18-34 conducted in March, Morgan Stanley media analyst Ben Swinburne and Internet analyst Brian Nowak found that nearly 90% of respondents who have a pay TV subscription were satisfied with their service, an increase of 400 basis points over the prior year.

At the same time, the share of respondents who said they plan to cut the pay TV cord increased 550 basis points, to 26%.

Swinburne said that while “it’s a little hard to circle that square,” the paradox seems to highlight what other analysts and operators have been saying for months — broadband service is becoming the most important part of the pay TV bundle.

A deeper look at the survey seems to bear that out. Telco service providers, which generally have higher data speeds than cable companies, had the highest satisfaction rates at 55%, but also had the highest intent to cut the cord at 22%.

Cable service providers had their best performance in the six years the study has been conducted, with just 5% of respondents saying they intend to cut the cord in the next 12 months.

Younger respondents showed the greatest desire to cut the cord — 33% of those aged 18-29 and 37% aged 30-44. But Swinburne said recent carriage disputes may have played their part. AT&T and DirecTV customers showed the greatest desire to cancel service during the survey period — 43% and 29%, respectively — while the Spanish-language broadcaster Univision has been in a carriage spat with U-verse TV. (AT&T owns both U-verse and DirecTV.)

Consumers also seem to be more willing to pay for streaming services: Those who said they would shell out for online subscriptions nearly doubled to 39% in 2016 from 19% in 2011.

More than half of total respondents cited price as the largest concern against buying TV and movies online a la carte, with more respondents willing to purchase at lower prices.

Netflix once again was first choice among services consumers would replace their pay TV subscriptions with — 35% — followed by You Tube (29%). Amazon Prime Video and Hulu Plus tied for third at 27%.

Original programming continued to drive Netflix use, with 45% of respondents saying that was a primary reason for subscribing (up from 43% last year).

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said the survey results point to a common problem when people are asked about switching pay TV service.

“When push comes to shove, people may say they want to cut the cord but, for most, that is incredibly difficult,” Wlodarczak said. Last year’s survey seems to back that up: 20% of respondents said they intended to cut the cord, but pay TV penetration only dropped 1 percentage point, to 77.5% from 78.5% in 2014. Wlodarczak also pointed out that telco TV providers don’t have an obligation to offer service to everyone, adding, “So a survey  of telco TV is effectively a survey of higher per-capita-income households that are better able to afford price increases, while cable offers service to many lower income households that feel the pinch from continued video price increases.”

CHART: Satisfaction Guaranteed

Customer satisfaction in the pay TV universe is on the rise from last year, according to Morgan Stanley research.

                                                             2016          2015

Very/Somewhat Satisfied . . . . . . . . 88% . . . . . 85%

Very/Somewhat Dissatisfied . . . . . .12% . . . . .16%

SOURCE : Alpha Wise and Morgan Stanley research

After a seasonally weak second quarter, analysts and investors hope better broadband subscriber results and continued improvement in basic video-customer growth in the third quarter will lead to better days for the sector.

Pay TV took a beating in the second quarter, as steady basic subscriber performance by cable companies was off set by greater telco and satellite losses. Like the previous period, the third quarter also is seasonally weak, as students return to campus in September, but analysts are optimistic that stronger broadband growth will off set any video declines.

“The good news about Q3 which, like Q2, is a seasonally weaker time of the year (all the additions are weighted to September) is that whatever the results, Q4 trends should be seasonally stronger, so they will likely be able to point to solid Q4 trends,” Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said. “The overall focus, though, for cable investors should be on data subscriber results, which is clearly the key in the cable investment thesis.”

EARNINGS CALENDAR

Comcast, Time Warner Cable and Charter Communications are slated to be the first two out of the box with third-quarter results — Comcast is scheduled to release earnings on Oct. 27 with Time Warner Cable and Charter following on Oct. 29.

Both cable giants managed to report strong second-quarter customer growth — Comcast reduced its basic-video losses to 69,000 from 144,000 in the year-ago period, while keeping broadband customer additions relatively stable (180,000 in Q2 2015 vs. 203,000 in Q2 2014.)

Time Warner Cable, which is currently winding through the regulatory approval process in its $78.7 billion merger with Charter, reported some of its best quarterly subscriber growth in years in the second quarter — basic-video losses were down to 45,000 (compared to a loss of 152,000 in the prior year) and residential broadband additions were 172,000, nearly triple the 67,000 adds in the prior year. The consensus is that both companies will continue on that path in the third quarter.

Telsey Advisory Group media analyst Tom Eagan said the momentum of the past few quarters should continue for cable operators.

“We expect the numbers to be better than last year,” Eagan said of third-quarter results. He added that satellite TV providers DirecTV (now part of AT&T) and Dish Network are expected to continue their subscriber slide. And while telcos are expected to report video gains, growth is likely to be slower. That was evident last week when Verizon Communications said it added 42,000 FiOS TV customers in the third quarter, compared to 112,000 additions in the same period last year.

Charter lost about 33,000 basic-video customers in the second quarter, on par with the 29,000 it lost in the prior year.

In a note to clients, Morgan Stanley media analyst Ben Swinburne wrote that he expects third quarter pay TV subscriber losses to be slightly higher than last year — 90,000 compared to 55,000 in Q3 2014. But he expects cable to fare much better in the period — he predicts overall cable customer declines of about 110,000 compared to 345,000 last year.

All eyes will be on Time Warner Cable, which has dramatically changed its subscriber fortunes in the past year, Eagan said.

“They were one of the worst performers last year in terms of customer loss,” Eagan said. “Now [TWC chairman and CEO] Rob Marcus has said most recently they expect to add subscribers this year. That’s probably the biggest turnaround.”

The Charter deal is supposed to close by the end of the year and is currently winding through the regulatory approval process. While some analysts believe that the actual closing will take a little longer, possibly lasting into the first quarter of 2016, Eagan said investors are confident the transaction will be completed. He noted that the spread between Time Warner Cable’s trading price and the Charter offering price has narrowed from 7.2% to about 6.8% in the past few days, “which shows that the market feels better about the deal closing.”

Several companies have come out in favor of the deal and even its opponents said they would change their stance if certain conditions — mainly involving net neutrality and access to content — were adhered to. The Federal Communications Commission is shifting its focus away from distributors that could potentially restrict access to over-the-top video to another aspect of the industry, Eagan said.

“We think the sector most impacted by the FCC in 2016 is going to be content, not cable,” Eagan said, adding that the agency will be especially interested in retransmission-consent fees and network nonduplication rules that prevent distributors from importing distant broadcast signals into local markets.

NOT MUCH OTT IMPACT

The analyst added that fears of over-the-top video taking a chunk of cable subscribers for the most part have been unwarranted and that SVOD services like Netflix and Hulu, as well as OTT offerings like Sling TV, have proven to be a complement to the pay TV subscription.

“Every five to seven years there’s a new competitor — first it was satellite, then it was telco and now it’s over- the- top,” Eagan said. “I think, ironically enough, OTT will be less of a competitor than satellite and telco were to cable. You’re seeing those customers already being pay TV customers or they were never pay TV customers in the first place. OTT isn’t a replacement. ”

That could change if over-the-top offerings offer more channels at an affordable price, though.

“I would say cable has to get significantly worse or more expensive or OTT service has to get significantly better or cheaper for them to take material market share,” Eagan said. “I don’t think we’re quite there yet, especially with the average viewer watching 149 hours a month.”