Altice USA chief operating officer Hakim Boubazine‘s decision to resign from the company last week had some media analysts searching for hidden meaning, with Bernstein’s Peter Supino doubting that CEO Dexter Goei, who will take over Boubazine’s duties, can right the ship while concluding the company, often seen as a takeover target, is undervalued.

Boubazine, who has run several businesses for Altice N.V. founder and chairman Patrick Drahi over the years, and joined Altice USA shortly after Drahi first entered the U.S. cable market in 2015, resigned unexpectedly on Sept. 9, agreeing to stay on in an advisory role through the end of the year. In a press release, Altice USA said Goei will assume Boubazine’s duties, in addition to his own as CEO, immediately. 

In a research note, Supino wrote that Boubazine’s departure is significant because he ran so many parts of the business. According to its website, Boubazine was in charge of product, marketing, technology, engineering, and operations functions as COO. His departure also comes at a time when Altice USA has “badly underperformed” its peers, according to Supino, adding just 8,000 organic broadband customers over the past three quarters. 

“Operational trouble seems to run deeper,” Supino wrote, adding that analysts’ consensus cash flow forecasts for Altice USA began declining in 2018, and in the second half of 2019, the company struggled with its OSS/BSS transition and the launch of its wireless service, Altice Mobile. 

Supino also saw problems with Altice USA’s marketing decisions, adding that he found it “odd” that the company focused on price maximization in 2019 through the roll out of its “Price for life’” campaign.

More recently, the company decided to rebrand Suddenlink as Optimum because ”(in our assessment) Suddenlink is loathed by too many consumers and not because Optimum is known to any of them,” Supino wrote.  

Adding to the pressure is that Altice USA stock is down about 24% year-to-date, and there are some doubts as to how effective Goei, an investment banker by training, will be in running the telecom side of the business.

“With roots in investment banking, we are not convinced that Goei has the background to solve Altice’s operational problems,” Supino wrote. But the analyst still recommended the stock, not necessarily because he sees a turnaround — although he called Goei an “energetic leader with an enormous stake in the company” — but because he expects Altice USA to be a takeover target. 

“While our most important 2H21 estimates remain below consensus, we continue to recommend ATUS because we believe the business is structurally sound, under-valued, and strategically appealing to several larger, acquisitive companies,” Supino wrote.

Altice USA has been tossed around as a potential takeover target ever since it came on the scene. With attractive assets in the New York metro area — mainly the Bronx, Staten Island and New Jersey and Connecticut systems it purchased from Cablevision Systems in 2016 — Altice USA could fit well with Charter Communications and Comcast, each of which have substantial assets in those markets. Suddenlink systems in the Midwest could be seen as attractive to operators like Cox Communications and Cable One.

In a research note earlier this month, MoffettNathanson principal and senior analyst Craig Moffett made the case for taking Altice USA private, pointing to its declining share price and undervalued assets. In that report Moffett opined that Altice USA could sell off its Suddenlink systems for around $22.7 billion and take its Optimum unit private for about $10.8 billion. 

So far Altice USA has been a buyer not a seller, doing mainly small deals like its purchase of Service Electric Cable of NJ in July 2020 for $150 million, and its April buy of North Carolina fiber company Morris Communications for $310 million. 

Also Read: Altice and Cogeco: He’s Just Not That Into You 

Last year Altice USA made its biggest M&A splash, teaming up with Rogers Communications in an $8 billion bid for Canadian operator Cogeco Communications and its U.S. cable unit Atlantic Broadband. That bid, where Altice would acquire Atlantic Broadband and Rogers would take the rest, was soundly rejected by Cogeco, and the unsolicited bid was abandoned in November 2020. 

 The pressure is mounting for programmers, in the wake of the pending $43 billion merger between AT&T’s WarnerMedia and Discovery and Amazon’s $8.45 billion purchase of movie studio MGM, to look for similar hookups. But even as some stocks have risen along with hopes for a stream of big deals, most are telling investors they will resist the temptation.

Warner Bros. Discovery, as the new venture will be named, will be a streaming and linear content powerhouse with more than 30 iconic brands, including CNN, HBO, HGTV and Food Network. While the pairing will likely help drive up affiliate fees for those networks — at least for the short term — the long-term benefit from the deal is expected to be in streaming video. HBO Max, launched about a year ago and with around 44 million subscribers, should get an added boost from Discovery’s own streaming offering, Discovery Plus, which has about 11 million subscribers to its mostly reality-based programming.

Amazon said on May 26 that it would buy MGM in a deal worth $8.45 billion, bringing iconic film content like the James Bond franchise, as well as streaming and linear TV series like The Handmaid’s Tale and Fargo into the online retailer’s fold. Most analysts see the deal as a way for Amazon to quickly bolster its content library, and subsequently its Amazon Prime Video subscriber rolls.   

Heavying Up for the Arms Race

Several analysts have speculated that those deals will beget others. In a research note earlier this month, Wells Fargo media analyst Steven Cahall wrote that he expects ViacomCBS to at least explore monetizing its Paramount and CBS TV studios, as scaled production operations are considered “rare gems” in today’s climate. 

“DTC is a content arms race, and scale is most necessary,” Cahall wrote.

Investors apparently believe the same. Stocks for small and large programmers all have risen in the three weeks after the Warner-Discovery unveiling on May 17. The biggest gains were at Lionsgate Entertainment, the movie studio that also serves as home to premium channel Starz, up about 20%, followed by AMC Networks, up about 16% and ViacomCBS up 10%. The Walt Disney Co., which owns industry-leading streaming service Disney Plus, saw its stock rise about 4% in the weeks after the Warner-Discovery deal. 

Lionsgate Entertainment CEO Jon Feltheimer said during its May 27 conference call with analysts to discuss fiscal Q4 results that the WarnerMedia and Amazon deals are a “resounding affirmation” of the continued value of content, IP and brands, but said he didn’t want his company to get distracted by the “concept of scale.”

Feltheimer was a bit miffed that its Starz premium offering, with about 30 million subscribers, was being called a “niche service” in articles speculating about future M&A.

“We don’t think 30 million subscribers is a niche service,” he said, adding that the goal is to make Starz a market leader in premium content. 

“And that’s how we’ll build our value,” Feltheimer continued. “So obviously, we talked to everyone, we listened to everything, but our main job right now is to create outsized value. And the way we’re going to do that is by keeping our head down, having all of our businesses talk to each other 10 times a day, which is what they do.”

Comcast’s Options    

Comcast, which owns NBCUniversal as well as the largest traditional cable distribution arm in the country, has been under pressure to spin off its content arm to unlock value. While that could still happen, Cahall wrote that Comcast has three choices: selling/merging its studios, getting more aggressive with its Peacock streaming service or doing nothing. In his research note, he said option three would be most likely.

At its annual meeting of shareholders on June 2, Comcast chairman and CEO Brian Roberts said there was no need for a buying spree, adding that the company is “pleased with our talent, our assets, our culture, our resources.”

But Comcast has been no stranger to M&A in the past, and the company was said to be looking at WarnerMedia earlier this year but backed off because of regulatory concerns. While its size may ultimately dictate its options, Roberts said Comcast and AT&T are distinctly different companies with disparate needs. 

“What AT&T does sort of speaks for itself,” Roberts said. 

Content is king in the direct-to-consumer streaming wars with The Walt Disney Company in the lead and Steve Cahall, analyst at Wells Fargo sees more deals like the proposed WarnerMedia-Discovery merger on the horizon as media companies seek enough ammunition to compete.

“We think the Discovery-WarnerMedia transaction represents a Media maxim: DTC is a content arms race, and scale is most necessary. More content leads to stronger engagement, which reduces churn, creates pricing power and drives margins. Netflix and Disney are putting this playbook to work, others hope to follow,” Cahall said in a report Tuesday.

“More is better and we expect more media deals that favor content scale,” he said.

In his report, Cahall looked to put a value on each media company’s spending on content and how much their programming library is worth.

Also Read: Discovery-WarnerMedia Deal 'Doesn’t Really Change Much', Says Bob Chapek

Cahall puts Disney’s 2024 content value at $47 billion (or $38 billion without sports) to lead the industry. 

The next biggest is Discovery and WarnerMedia at $36 billion. Cahall sees the combination getting to 178 million subscribers by 2024, behind Disney, Netflix and Amazon.

Comcast’s NBCUniversal/Sky content is valued at $34 billion but Cahall notes that not much of Comcast’s content drives DTC businesses.

Netflix’s content value is $28 billion, ViacomCBS is $24 billion and the combination of Amazon and MGM totals $22 billion.

In fifth place, Viacom has some decisions to make, according to the report.

“Even if curtailing licensing and folding in Showtime OTT, the recent mergers of Discovery and WarnerMedia and Amazon and MGM means tougher competition ahead. In our view it's worth considering all the options especially since scaled studios are now proven to be rare gems,” Cahall said.

The report looks at other combinations that would have huge content value, including Warner-Discovery combining with NBCU and Sky ($70.8 billion), Warner-Discovery and Viacom ($60.7 billion), NBCU/Sky plus Sony, Lionsgate and AMC Networks ($46.2 billion) and Viacom plus Sony, Lionsgate and AMC Networks ($35.7 billion).

Eventually, if you spend big on content you can get enough subscribers so that the cost per subscriber starts to come down, as illustrated by Netflix, Cahall notes.

“In short, everyone wants to be like Netflix,” he said in the report. “In 2020 NFLX had $58 in content amortization per average subscriber and from big content spend comes engagement, which reduces churn and drives pricing power through to margin expansion.”

The threat of further direct-to-consumer content consolidation shouldn’t worry traditional pay TV distributors, Altice USA CEO Dexter Goei said at an industry conference Tuesday, because it will help MVPDs weed out what has been an albatross around the industry’s collective neck for years -- unprofitable video customers.  

Analysts expect that other content companies could follow Discovery and WarnerMedia’s attempt to create a streaming video behemoth, but Goei, speaking at the JP Morgan Technology, Media & Communications conference, said that could be an economic boon for traditional distributors. 

With pay TV subscriber rolls steadily eroding over the years, it is evident that consumers are already moving toward an over-the-top, direct-to-consumer model. As content providers look to get larger and gain more streaming scale, Goei said it could allow traditional MVPDs to focus more on highly profitable broadband service, and weed out low-margin video subscribers.

Also Read: Discovery/WarnerMedia Combo Could Have Biggest Initial Impact on Linear Nets 

“Larger players with a full package of offerings on the direct-to-consumer side is good for our business because it focuses our customers on --  instead of 6-7-8 different choices --  on something a lot smaller that in many respects replaces a video consumer that is less and less valuable to us,” Goei said. “And it allows us to focus primarily on our broadband product, allows us to be a partner for content on a direct-to-consumer basis as opposed to a partner on a linear basis and I think will dramatically improve the economic trends of our business from a cash flow standpoint.”

Goei added that the increased focus on DTC offerings could be an advantage for distributors come carriage renewal time, as the equation shifts toward the DTC model. He added that all of Altice USA’s programming partners have some kind of DTC offering.  

“For us, you want a consumer to be a long-term video subscriber that’s a profitable subscriber, [and] you don't want a video subscriber that’s under three years,” Goei said. “Those [under three-year subs] are the ones that are shifting toward the direct-to-consumer offerings and that's good for us. It’s beneficial to our economics. It makes our priorities very clear, in terms of where we focus our capital allocation and our efforts.”

And that means that distributors are going to look hard at DTC offerings when negotiating future carriage deals. 

“We are going to revisit every equation,” Goei said. “... I think we are going to go through, I would call the next two or three years where you will probably see a big transformation in the MVPD world as to how we partner with our content providers. Because it's not sustainable to continue to see price increases every year with viewership falling.”

As we move into 2021, media and entertainment leaders will be operating in a landscape that has been permanently changed by the pandemic. U.S. consumers have adopted new habits and preferences while the forces buffeting the industry have increased in intensity. Here are five trends to watch in the year ahead as we shift — eventually — into a post-COVID world.

Industry Under Renovation

EY research released in January 2020 found that 50% of media and entertainment executives believe they can no longer rely on traditional business models to drive future growth, highlighting the imperative for strategic and operational reinvention.  

The impacts of COVID-19 accelerated and amplified long-running secular changes, including streaming growth, cord-cutting, fading movie attendance and an increased focus on the price-value relationship by media consumers. COVID-19 also resulted in shorter-term cyclical shocks. Lockdowns and travel restrictions walloped virtually every business that relies on the physical aggregation of people. Industry executives are responding by taking bold steps to reposition their companies to align with new market realities.

Looking ahead, the sweeping restructuring actions already announced by several media majors will take hold throughout the industry. A primary motive is cost reduction, of course. However, the changing nature of the industry is forcing companies to rethink how they are structured and how they go to market.

The steps taken by media and entertainment companies to streamline their operating models for efficiency and effectiveness will remain on center stage as the entire industry plots a course through disruption.  

Time to Partner Up

Consolidation catalysts for media and entertainment companies are clearly defined. Most notably, they include the strategic necessity to acquire content to fuel streaming growth and the tactical reality that increasing size enables efficiencies and unlocks incremental investment capital. However, the window may be closing for studios and network owners hoping to sell to larger players in media or adjacent sectors due to questions around feasibility and demand. 

Media competitors that lack mega-scale face a crucial choice: attempt to forge ahead alone through turbulent waters or move rapidly to tie up with a similarly positioned peer to improve competitive and financial positioning. They must also set their strategy while navigating the uncertainty arising from the pandemic.

In 2021, we will likely see further combination activity involving midsized and smaller network owners and studios, motivated by the need to create a bigger platform to fund the investment in content, marketing and technology required to make the pivot to a direct-to-consumer model.  

Connection Has Value

Cable companies are achieving record results from their high-speed data offerings as consumers rely more than ever on fast internet connectivity for work, school and entertainment. Pay TV packages, once the cornerstone of the subscriber relationship, are being deemphasized in favor of broadband speed tiers and other connected services. According to EY’s 2020 Digital Home study, 40% of respondents purchase internet-only packages from cable companies, up 8% year-over-year, further reinforcing the market dynamics.

Going forward, cable companies will seek to expand more deeply into the household by deploying a broader suite of products that build on the core internet connection, including in adjacent “smart home” areas such as home security, a variety of connected devices – thermometers, doorbells, appliances — and potentially telehealth applications.

Embedding further into the household makes good strategic sense for cable companies as wireless providers begin to roll out 5G networks at scale.  

Live Events Return, Differently

In-person events will see a robust return in 2021 as the human need for shared experiences remains uniquely powerful. We are already seeing this at selective sporting events where limited crowds are back in stadiums cheering for their teams. Even so, absent a fully distributed vaccine for COVID-19, mitigation strategies will be required as fans return. This will change the dynamics for events — and will potentially open innovative new channels to enhance the consumer experience.  

Business conferences will continue to utilize digital platforms to extend reach and include remote participants who remain wary of business travel. Music venues will push ahead with creative audience layouts to encourage attendance, while also promoting interactive options. Owners of large stadiums will utilize their vast capacity to design ticket blocks that meet social distancing guidelines. Theme parks will promote safety measures and offer attractive deals to drive admissions.  

While serving as a bridge to a full reopening, these solutions also will keep audiences engaged and establish new multichannel, customized connections — mobile and powered by sophisticated data analytics — that will become part of the consumer value proposition.

Gaming, Esports Level Up

Esports and video gaming will build on a user base that multiplied in size during the pandemic. When sporting events were shuttered, teams, leagues, athletes and promoters embraced esports competitions involving simulations of “IRL” [in real life] events to maintain fan engagement and fill broadcasting slots. From auto racing to basketball, to cycling and even horse racing, millions tuned into virtual events, opening a wide new consumer engagement pathway that we expect to grow in 2021.  

Meanwhile, video game revenues have almost doubled over the last five years. New game launches from publishers — combined with the growth of in-game microtransactions and advertising — are leading to another record year for the industry. Upcoming releases of next generation consoles and the launch of gaming cloud streaming services will further stoke demand well into 2021.

Success in 2021 will depend on industry leaders adapting strategies to meet unforeseen market opportunities and threats. With disruption as the constant, the only way to survive and thrive in exceptional circumstances is to build systemic agility and execute at lightning speed. In 2021 and beyond, companies will be successful not because they are better at predicting the future but because they can better orchestrate a wide-ranging ecosystem of in-house talent and external partners and pivot in a timely, confident manner. 

A new Gray TV-backed study concludes that media consolidation increases news output.

One of the knocks on broadcast mergers is that consolidation in ownership leads to consolidated newsrooms and a reduction in investment in news.

But a study from economist Mark Fratrik of Gray's 93 TV markets found that in markets where stations were permitted to join forces, as was the case with Gray's 2018 purchase of Raycom Stations, their news output increased "far more" than markets without consolidation.

That study buttresses Gray's long-standing arguments that the FCC should deregulate local station ownership limits, including allowing small-market combos. 

The study also follows an op ed for Multichannel News written by FCC Chairman Michael O'Rielly back in July asserting that the FCC's small-market consolidation policies that he supports can lead to greater news coverage and using Gray TV stations as an example.

The study included the following takeaways:

1. "In markets where a consolidation of local broadcast stations occurred, total news output increased at those stations by almost 28%, while in other markets without any consolidation, the total news output grew less than 18% over the same period. 

2. "In small markets (those ranked between 101-210 by population according to Nielsen Media Research) the rate that news output increased with consolidation was more than double that of small markets without any consolidation. 

3. "In very small markets, if Gray TV obtained an additional pre-existing Big Four affiliation, local news output increased nearly 40%. 

4. "Google earns more local advertising revenue than all commercial television stations in the United States combined, and Facebook is getting closer every year.

5. "BIA Kelsey, a leading advertising analyst, now forecasts that 2020 local broadcast advertising nationwide will be down nearly 13% compared to 2018, the last year impacted by political spending."

Liberty Media chairman John Malone believes that consolidation, which has swept through the traditional cable distribution business largely at his own hand, will come to streaming video as well, and that could be good news for traditional pay TV companies.

Malone, speaking at Liberty’s annual Investor Day in New York, said that first the streaming business will likely experience a period of “hyper-competition” as more and more content owners crowd in to the space.

Already several content owners have debuted direct-to-consumer services -- Disney’s Disney+ offering was launched on Nov. 12 and had 10 million people sign up for the service during its first days, while Apple TV+ launched on Nov. 1 to considerably less hype. AT&T plans to begin offering HBO Max in May in addition to an IP-based streaming service -- AT&T TV -- later in the year.

“In the short run you’re going to see hyper-competition as content owners try to get into the scripted streaming global market space,” Malone said during a Q&A session at the Liberty Investor Day. “I think a lot of investment is going to go in to trying to capture leadership market share in that space. Eventually there’ll be consolidation in that space because it probably won’t support as many competitors as currently think it represents a good opportunity. Some will become niche players, some will become more national players less global players. Quite a few will survive and be able to watch as less competition turns down the heat under the cost of creation of new content.”

Malone said the business already is going through “some skirmishes and maybe some promo wars that will settle down over time.”

The big bundle, a staple of the early cable business, will likely continue to lose popularity. But he said, that could open up other opportunities for cable operators.

“The big bundle -- that number is probably going to shrink slowly in terms of big bundle customers, but probably grow in terms of the app customers,” Malone said, adding that cable distributors could eventually sell packages of OTT services to customers, similar to what it does for Netflix, Hulu and Amazon Prime apps that customers access via set-top boxes.

Malone pointed to Charter Communications -- in which Liberty owns a stake -- as one cable operator that could benefit from this change.

“We saw this play before when multichannel content providers all wanted to be carried and ended up being bundled together and became a video package,” Malone said. “That all happened in the 1980s. That is likely to happen, perhaps with a couple of the big global guys, but in particular with national or regional or specialty or niche providers. I don’t think, in terms of entertainment, that one size fits all.”

Critics of AT&T’s pending $108.7 billion purchase of Time Warner have pointed to the myriad dangers of consolidating large content and distribution companies – but some analysts say the environment is already headed in that direction.

The U.S. Dept. of Justice has already said it would block the AT&T-Time Warner merger, with the parties scheduled to go to court to state their cases on March 19. Whatever the outcome, the rush for scale won’t be slowed, UBS Securities telecom analyst John Hodulik said.

Related: Feds Lay Out Court Strategy for Blocking AT&T-Time Warner

Hodulik — who believes the deal will be approved — cited in a research note the steady decline of traditional TV distributors, the accelerated push for heft and the inevitable move to direct-to-consumer services as catalysts for more deals. Subscribers to traditional pay TV providers have declined by about 50% since 2010 and dipped 14% in 2017 alone, he noted.

OTT Has Changed Everything
“OTT is clearly the future of video distribution,” Hodulik wrote, and is likely the main driver behind the mega content deal between The Walt Disney Co. and 21st Century Fox, Comcast’s unsolicited bid for British satellite TV company Sky and CBS’s moves to revisit a recombination with corporate sister Viacom.

Hodulik argued that government fears that a combined AT&T-Time Warner would limit content choices and drive up prices run counter to the OTT-inspired shift. And if AT&T isn’t allowed to purchase Time Warner, another company will.

Earlier this month, at an industry conference, CBS chief operating officer Joe Ianniello called the current environment an “arms race” to accumulate content needed to drive direct-to-consumer products.

Ianniello said CBS All Access, the broadcaster’s own OTT product, will add six to seven new shows in the next 12 months, just to compete with the likes of Netflix and other providers. “We’re doubling down,” he said.

Hodulik thinks the land rush for content is warranted. He predicted that virtual multichannel video programming distributors such as Sling TV and DirecTV now will nearly triple their subscriber bases from about 5.5 million in 2017 to 15.1 million by 2020.

Watch MCN: vMVPDs by the Numbers

At the same time, pay TV subscribers, down 3.6% in 2017 to 95.4 million customers when vMVPDs are included, are expected to dip another 4.4% in 2018 to 91.2 million, according to the analyst.

Cable Gets Into the Act
Hodulik said traditional distributors dipping their toes in the vMVPD waters — like Comcast and Charter Communications — will make the full plunge in the next few years.

Comcast introduced Instant TV in late September, a package of broadcast and education channels for $18 per month, to compete with Sling TV and DirecTV.

Charter unveiled its “Choice” package — 25 channels for $21.99 per month — earlier this year.

Mostly because of a desire not to cannibalize existing, higher margin businesses, the offerings haven’t been broadly offered. That is about to change, especially as streaming services gain scale, Hodulik believes. He said he thinks it won’t be long before their OTT offerings mirror their existing video packages.

“We believe scale benefits will eventually lead cable to offer streaming TV services out of region, likely in conjunction with a wireless offering,” he wrote.

Wall street analysts are typically concerned about cable programmers’ cash-flow and affiliate fees during earnings season, but these days consolidation is commanding the conversation.

As earnings season begins for big programmers such as The Walt Disney Co., 21st Century Fox and Viacom, investors are concerned about the scale needed for content companies’ plans to stream direct to consumers.

“While advertising and subscriber trends are arguably not set to improve, they’re also not top of mind,” RBC Capital Markets media analyst Steven Cahall wrote in a note to clients, adding that tax reform and consolidation will more probably be the dominant themes. “There’s likely to be as much, if not more, debate around the [Department of Justice] view of media consolidation as there will be around cord-cutting.”

Disney and Fox have already announced their deal plans. In December, Disney agreed to purchase certain Fox assets for $66.1 billion.

Viacom and CBS are reportedly revisiting the possibility of recombining the companies — they split in 2005 — in a move that in the past many believed to be more favorable strategically to the cable programmer than its broadcast cousin.

Related: CBS, Viacom Form Special Committees to Evaluate Possible Merger

But as ratings have declined and cord-cutting accelerates, some analysts believe drafting a viable direct-to-consumer strategy is more important than ever, and consolidation is the only way to get there. “Viacom and CBS simply cannot wait any longer,” BTIG media analyst Rich Greenfield wrote in a recent note. While CBS already has a direct-to-consumer product in CBS All Access, the analyst said that alone isn’t enough.

The Fox deal would strengthen Disney’s programming dominance, adding Fox’s 22 regional sports networks, its 20th Century Fox movie and television production studio, and cable networks FX, FXX and National Geographic, as well as Fox’s 39% stake in U.K. satellite-TV service Sky. With the transaction expected to close by the end of the year — and already receiving a ringing endorsement from President Donald Trump — Disney appears to be taking the more-is-better approach as the content distribution sands continue to shift.

With viewers increasingly moving away from traditional distribution methods for mobile, over-the-top and online offerings, Disney is bulking up its already hefty content coffers to ensure no matter what method viewers use to consume content, they are likely to run into at least one Disney-owned property. As for sports, Fox’s regional sports assets should add fodder to Disney’s planned ESPN Plus OTT offering, scheduled for later in the spring.

Related: It’s Game On for ESPN After Disney-Fox Deal

Fox Takes a New Stance
Fox, in turn, is taking the sniper’s tack as opposed to Disney’s shotgun approach. By keeping its broadcast network and TV stations, perennial news ratings champ Fox News Channel, Fox Business Network and national sports channels FS1, FS2 and Big Ten Network, Fox is honing in on what it believes can still attract robust ratings and ad dollars — live sports and news. It further solidified that stance with its deal to pay about $3.3 billion over five years for rights to 11 NFL Thursday Night Football games.

Whether either, neither or both approaches win the day remains to be seen. But the fundamental truth behind both moves is apparent — traditional TV audiences are shrinking and are not expected to recover soon.

Disney seemed to verify the real impact of cord-cutting when it revealed in 2015 that sports channel ESPN had lost 3.2 million subscribers in the prior 12 months, a figure that rose to a collective 13 million viewers between 2011 and 2017. Since then the losses for pay TV programmers in general have averaged about 3% to 4% per year, although some networks, such as Fox, have experienced far less erosion.

According to Pivotal Research Group senior research analyst, advertising Brian Wieser, using Nielsen Universe data, the median growth rate for Fox networks improved to -1.6% in December from -1.9% in November. Nielsen’s February estimates show an even sharper improvement (-1.2%) compared to the prior month (-1.6%). But according to the Nielsen data, Fox is one of the exceptions.

Those declines have begun to eat into affiliate-fee growth, although some networks are more affected than others. MoffettNathanson senior research analyst Michael Nathanson estimated that calendar Q4 affiliate fee growth would range from 11% at Fox to -6.9% for Viacom. Disney fees should rise about 2.5% in its fiscal Q1, while Discovery Communications and Scripps Networks should gain 3.2% and 5%, respectively.

Less Subs, Less Ad Bucks
Fewer subscribers and declining ratings (Nathanson predicts a 13% drop in primetime C3 18-49 ratings for broadcast and cable in Q4) translates into lower advertising revenue, and in the calendar fourth quarter, total national TV ad sales are expected to fall 2.7%, according to the analyst. Viacom once again is expected to show the biggest declines (-4.5%), with Disney not far behind at -3.6%.

Despite the erosion of core fundamentals, Nathanson urged investors to focus on names that have affiliate-fee pricing power, exposure to live sports and news and unique global content. “These companies are cheap and should likely hold their value when the next wave of worries come,” he wrote.

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.

With the Disney-Fox deal moving closer and closer to inevitability – most reports say that it could be announced as early as next week – Sanford Bernstein media analyst Todd Juenger said that despite earlier beliefs that Fox would never sell, market forces and personal taste may have played a role in the decision to come to the table.

In a note to clients, Juenger wrote that faced with a decision to either build the infrastructure needed for its streaming video plans or buy them, Disney choose the buy path. While that will require a lot of upfront capital, it will also take a lot less time, Juenger said, adding that the Fox assets are perhaps the closest thing to giving Disney what it needs – a strong content studio, sports assets and popular cable networks.

“But Fox would never be for sale, right?” Juenger wrote. “Well, apparently, hell has frozen over, and (most of) Fox is for sale.”

Juenger speculated that the change of heart at Fox, which just a few years ago was a buyer – remember its failed attempt to buy Time Warner? -- could have been caused by two factors: a realization that its business is a declining asset and its peak value is now; or that CEO James Murdoch is frustrated over sexual harassment scandals and the conservative bent of Fox News and wants to get out.

Both scenarios, Juenger wrote, have a “ring of truth” to them.

As far as the deal goes, Juenger estimates that the Fox assets Disney will be acquiring are worth about $57 billion, leaving about $31 billion in properties – Fox broadcasting, Fox News, FS1, etc. – that could be combined with the Murdoch’s newspaper business (News Corp.) and perhaps taken private.

One asset that appears to be a key piece of the deal – Fox’s 39% interest in the Sky satellite service in Europe, could also be a wrinkle in the deal. Fox is in the process of buying the 61% of Sky it doesn’t own – the Murdochs have said they expect it to clear by the end of the year – but a sale will likely hold up the regulatory process even further. Juenger estimated that UK regulators put the deal on hold again, wait for the Disney deal to pass U.S. regulatory muster and then start the whole process again.

Given the size of the deal – Juenger estimated that Disney would pay $78 billion for the Fox assets (a 30% premium) -- it would need to extract about $1.6 billion in synergies to make the transaction break even for Disney on an earnings per share basis.

The analyst added there are some very good reasons for Disney to buy the Fox properties, mainly that it gets to market faster without having to weather the many years of earnings declines a build out would require. But there are costs, too. Juenger estimated that Disney will have to pay about $20 billion more than what the Fox assets are worth to get a deal done and some of the assets – FX Network – are not family-friendly.

“The Studio and National Geographic make perfect strategic sense to us,” Juenger wrote. “Beyond that, it gets questionable. The FX/FXX networks have a pedigree of having created some of the most memorable serialized drama series on cable television. They are also filled with violence, language, and sexual themes that absolutely do not fit with the 'Disney' brand.”

So Disney has an important choice to make, the analyst continued. If it wants to build an OTT service for the widest possible audience, including the FX networks in the mix with their edgy, grown-up programming is the way to go. It gets trickier if it wants to be true to a brand that is arguably the most well-known in the media space. If that's the case, then it has to protect that brand at all costs.

“One way Disney could bridge this gap is to put the 'R-rated' content into a different brand wrapper – such as Hulu,” Juenger suggested. “On one hand, this fragments Disney's OTT offerings in an already fragmented space. But, Disney could also bundle/unbundle its different OTT products (sports, 'Disney', Hulu) in packaged offerings to consumers.”

But that also hinges on whether Disney ends up with full control of Hulu – it will acquire Fox’s 30% interest in the deal, bringing it to 60%, but it still has other partners in NBCUniversal and Time Warner for the service.

The sports assets also present another dilemma – sports programming is one of the biggest drivers of live TV viewership, but RSNs have been a thorn in some distributors’ sides because of their high cost and consumers who believe they shouldn’t pay for them if they don’t watch them.  

"Perhaps Disney is willing to live through the pain of that transition, to eventually emerge with a more appealing OTT sports product that offers both ESPN and the RSN in each applicable market,” Juenger wrote.

The analyst was less optimistic on the deal’s impact to Disney shares and the cable network sector in general. While Disney could be considered to be the Walmart of the content space – the old-school retailer is behind Amazon but receives a premium from investors because it has scale – it all comes down to the multiple the market assigns the stock. Currently trading at about 15 times earnings, that multiple would need to climb to 20 times to justify the deal.

“The market would have to *really* believe Disney is creating something special, to re-rate the multiple several turns upward in the face of all the downward pressures,” Juenger wrote.

As far as other stocks in the sector like AMC Networks, Discovery Communications and Viacom, the signal Disney (we’re not big enough) and Fox (get out while you still can) are sending presents another problem. Juenger doesn’t see any larger potential buyer for those companies, adding they may have to combine together themselves, probably at little or no premium.

“On that basis, especially if Disney acquires Fox, we would expect the already bleak outlook for these little, over-levered pure play cable network companies to be even worse,” he wrote.

Illustration by cpuga/Getty Images.

Lachlan and James Murdoch sure didn’t sound like two media chiefs hot to unload their programming assets Wednesday, spending a good portion of 21st Century Fox’s fiscal first quarter earnings call touting the growth prospects for their cable and satellite operations.

But while neither executive would directly address speculation around their desire to sell assets, they didn’t quite squash all of chatter either.

Fox was said to be in talks, since ended, to sell its movie studio and cable assets like FX Networks and National Geographic channel as well as its 39% stake in European satellite company Sky to The Walt Disney Co. While Fox co-executive chairman Lachlan Murdoch opened up the earnings call telling analyst he would not respond to media speculation, he had plenty of wind left to tout the company’s ongoing operations.

Overall results were strong – revenue was up 8% in the fiscal first quarter and affiliate fee revenue for its cable channels rose 11%, due to contractual increases across all of its brands.

“We told you many years ago that innovative disruption would come to our industry,” Lachlan Murdoch said on the call. “…We moved early to jettison our thin brands and went deep with investments for our rich distinctive brands, when many market pundits were skeptical of this approach.”

He added that because of that strategy, Fox’s brands have full carriage on all traditional and newly launched platforms.

“There is a lot of talk about the growing importance of scale in the media industry. And let me be very clear, Fox has the required scale to continue to both execute on our growth strategy and deliver increased returns to shareholders,”  Lachlan Murdoch said. “We are specifically seeing this in our affiliate fee growth again this quarter and the success of Hulu and our inclusion in all of the emerging MVPDs. We are excited about all of our brands and the breadth of opportunity they continue to offer.”

Asked if the changing landscape Fox is rethinking its asset mix and whether scale matters less or more today, CEO James Murdoch said that the company has changed its portfolio over the past several years.

“We’ve really simplified our operating model, we’ve got a great set of brands and a great set of assets that we really like,” James Murdoch said. “And as you can see from these quarterly results and from the past couple of quarters I hope, a real trajectory of good performance.”

James Murdoch also commented on plans to fully consolidate the Sky satellite TV business, adding that the company continues to work with U.K regulators and hopes to receive approval of the transaction by the middle of 2018.

NEW YORK — Broadcast station group stocks, on the rocks over uncertainty around potential deals and deregulation, could be on the rebound, Wells Fargo media analyst Marci Ryvicker said, and the resurgence could spell some bad news for cable operators.

Broadcast stocks had been on a roll late last year, when investors, buoyed by the election of business-friendly President Donald Trump, helped drive shares up 25% to 35% between Nov. 9 and the end of the year. When the benefits of one-party control over the presidency and Congress didn’t come as fast as expected, stock prices suffered.

Since the beginning of the year, shares in publicly traded station groups like Sinclair Broadcast Group, Nexstar Media Group, Tegna and Tribune Media have been relatively flat.

Ryvicker, speaking at the broadcast-centric TVB Forward conference, blamed the sluggishness on disappointment over the lack of movement on the regulatory front and a lack of substantial merger activity.

So far, only Sinclair’s pending $3.9 billion purchase of Tribune has emerged, and it has underwhelmed, she said, partly because of Tribune’s asset mix with several The CW and My Network TV affiliate stations and a small cable network, WGN America. “Wall Street did not like the Tribune stock,” she said. “They didn’t like the assets.”

A finished Sinclair-Tribune deal could help open the M&A floodgates, though, and continued deregulation, especially a relaxing of local ownership rules, should heighten the deal-making, Ryvicker said.

Bigger station groups could give broadcasters more muscle in retrains-mission-consent negotiations with cable operators. Ryvicker said retransmission prospects were not a cause for worry, and relationships between affiliates and their networks are strong.

Broadcast investors also have been spooked by developments outside the industry, particularly declines in pay TV subscribers. Pay TV and broadcast networks are separate industries and have separate issues, but they often trade in tandem, even with radio.

“Investors tend to invest in bundles,” Ryvicker said. “If they are nervous about media as a whole, it’s called a risk-off trade. They start trading everything and anything that is media related.”

Disney sparked jitters two years ago by saying its flagship sports network, ESPN, had shed about 3 million subscribers. That number has risen to between 5 million and 6 million and put pressure on the entire programming sector, not just pay TV networks.

Disney also faced the first test of ESPN’s power on Oct. 1, when its deal with Altice USA systems in the New York area was up for renewal. Altice was expected to reject Disney’s demands for higher rates and broader carriage, and to allow ESPN and Disney’s ABC station in the market to go dark.

Ryvicker sees pay TV erosion continuing, estimating total pay TV subscribers will fall from 97 million in 2016 to 82 million in 2022.

While that could hurt broadcasters, who rely on retransmission-consent revenue from operators to fill their coffers, Ryvicker thinks the slack will be more than taken up by virtual multichannel video programming distributors (vMVPDs) such as Hulu, DirecTV Now and Sling TV, which have begun to include broadcast stations in their offerings. In that same time frame, she estimated, vMVPD subscribers will rise from 1.86 million to 15.9 million.

“Broadcast is in the bundle,” she said, and retransmission-consent revenue will be “totally fine.”

Merger and acquisition activity in the entertainment, media and telecommunications industry rose in the second quarter from a year ago, although the value of those deals dropped slightly, according to PwC.

The quarter saw 232 deals, up from 216 deals a year ago but down from the first quarter's 255 deals.

Related: Viacom Pulls Out of Bidding for Scripps Networks

The deals announced in the second quarter were worth $18.8 billion, down from total deal value of $21.3 billion in Q2 2016. In the first quarter, mergers and acquisitions were worth $10.4 billion.

Big deals in Q2 included Sinclair Broadcasting Group’s $3.8 billion bid to acquire Tribune Media, RCN’s $2.4B merger with WaveDivision Holdings and Verizon’s acquisition of Straight Path Communications, worth $2.3 billion.

“Deal activity in 2017 continues to outpace 2016 as market participants look to secure their footing in the digital value chain and position themselves in anticipation of regulatory change,” said Bart Spiegel, partner, media and telecommunications deals.

Read more at broadcastingcable.com.

Less than a month after he goosed the stock by saying he was open to a mega deal with Comcast, Verizon CEO Lowell McAdam turned down the hype notch a few ticks at Verizon’s much anticipated Analyst Day Monday (May 8), claiming the telco is under no pressure to do transformative M&A.

Verizon has been dogged by analysts and investors that have insisted the telco has to do a big deal along the lines of rival AT&T, which in October announced a $108.7 billion merger with Time Warner Inc. That deal, still pending, came just a year after AT&T purchased DirecTV for $48.5 billion.

Verizon has focused instead on smaller deals – after much agita, it expects to close its $4.5 billion purchase of former internet icon Yahoo in the second quarter – but some analysts have called for the company to make a big splash in the distribution or content space.

That talk was fueled in January when reports surfaced that Verizon held preliminary talks with Charter Communications about a possible merger,  which has since fizzled.  In an interview with Bloomberg in April, McAdam again opened the M&A Pandora’s Box by claiming he would be open to a deal with Comcast, Disney or CBS.  That sent Verizon stock up about 2% for a bit – it went as high as $49.49 per share that day – but since then, as no deal came, the stock has fallen to about $46.63 each.

At the Analyst Day, McAdam said the Bloomberg article that quoted him as being open to talking to Comcast on a deal wasn’t inaccurate, just out of order.

“The article that caused so much interest, let me say, a couple of weeks ago, was fairly reported, but the order was different,” McAdam said. “My comment was we prefer to grow organically. And then the question was, ‘Well, if you got a phone call from somebody, would you talk to him?’ Well, I like to consider myself a polite and hospitable person. It doesn't change anything that's gone on in the last 5 years. If somebody calls, you have a nice chat with them. But the bottom line is we don't feel the urgency that seems to be out there in the analyst community, the banking community and the media.”

McAdam proved he wasn’t fibbing a couple of days later when Verizon announced it had agreed to purchase wireless spectrum holder Straight Path for $3.1 billion. That deal – a 486% premium to 

Straight Path’s Jan. 11 closing price (the day it agreed to seek strategic alternatives after missing Federal Communications Commission deadlines to build out its network) – was a bit of a head-scratcher. Verizon had been behaving like it had all the spectrum it needed – it chose not to participate in the recent FCC wireless spectrum auctions – and was bidding against AT&T for Straight Path’s hand. But it became a little clearer in hindsight. At the analyst day, SVP of Network Infrastructure Planning Ed Chan said as the network moves toward 5G, millimeter wave spectrum (which Straight Path has a lot of) is becoming more important, but that Verizon had “more than enough capacity to bring us into 4G through 2020 easily and connecting it up -- us up into 5G.”

In a recent report, MoffettNathanson principal and senior analyst Craig Moffett wrote that Straight Path owns a large block of uncontested 28 GHz spectrum licenses that could be used for a 5G network, but perhaps more valuable is its block of 39 GHz licenses.  According to Moffett, 39 GHz frequencies are general too narrow to be useful, but the FCC has plans to repackage the licenses into wider bands. That bodes well for Straight Path, which owns 34% of the available licenses.

“In other words, he who owns Straight Path has all the leverage in working with the FCC to repackage the spectrum for an upcoming auction,” Moffett wrote. “And it goes without saying that should the auction be materially delayed, he who owns Straight path will hold essentially all the usable 39 GHz license on the market.”

But even that may be slightly missing the point. Moffett himself notes that Verizon’s participation could mean that millimeter wave could be the foundation of their entire strategy.     

And it also could be a metaphor for a continuing strategic rift between Verizon and No. 1 rival AT&T. AT&T also is pursuing its own 5G strategy – some would say DirecTV Now fits squarely in that 5G mold – but has been making most of its headlines with mega-deals. And remember not too long ago when AT&T was praised by some for taking the lower-cost path in its initial U-verse strategy, utilizing existing twisted pair plant to deliver data and video while Verizon spent billions of dollars building a fiber optic network that some called overkill. AT&T turned those tables with the $48.5 billion purchase of DirecTV in 2015, and the telco has spent the past two years transitioning U-verse customers to the satellite platform. In the meantime, AT&T continues to chuck buckets of cash at its latest strategic target (Time Warner), while Verizon is taking the opposite tack, keeping its powder dry with small deals aimed toward 5G. Who’s to say it’s the wrong move?

With just 10 days left in the year and the Dow Jones Industrial Average inching toward a record 20,000 points, cable distribution stocks were a good place to be in 2016, with the sector up nearly 40%.

Dow 20,000 has been a possibility for days – the index was at 19,919.73, down 22 points at 10:45 a.m. on Dec. 22. The market barometer has gained more than 4,000 points in the past 12 months.

With consolidation on every cable investor's mind in the wake of Charter Communications’ $80 billion purchase of Time Warner Cable on May 18, it was no surprise that the two best performers in the sector were Charter – up 43.8%, or $88.74 per share to $291.24 on Dec. 21 – and Cable One, up 43.9%, or $190.21 per share to $623.87 each on Dec. 21. Cable One, which has switched its focus from video to broadband – it has lost about 20% of its video customer base in the past two years – is generally thought to be a prime takeover target in the coming months. But so far, no one has pulled the trigger on a deal.

Comcast, which agreed to purchase content company DreamWorks Animation earlier in the year for about $3.8 billion, rose 25.5% ($14.40 each) between Dec. 31, 2015 and Dec. 21, 2016, mainly on strong execution. The cable operator is expected to report its first full year of basic video customer growth in ten years in 2016.

Still, that combination of solid fundamental growth and merger speculation helped the sector over the hump in 2016  compared to 10% growth in 2015. And though consoldiation has removed two stocks from the distributor ranks in 2016 -- Time Warner Cable and Cablevision Systems, which was purchased by Altice USA in June -- one more stock could be added tto the mix in 2017. Altice USA, the domestic arm of Altice N.V. has said it is exploring a  possible IPO of a minority interest in the company in 2017.

Liberty Global, the international cable operator chaired by cable legend John Malone, was the lone declining stock in the sector, dipping 16.5%, or $6.14 per share, to $31.06 on Dec. 21.

Programmers had a tougher time, with declining subscribers, falling ratings and sluggish ad sales outweighing possible M&A activity. On that note, Time Warner Inc. was the top performer in the sector, rising 48.4% ($31.32 each) between Dec. 31 and Dec. 21 to $95.99 per share. Driving most of that growth was its October agreement to be purchased by AT&T for $108.7 billion, or about $107.50 per share.

That deal, which is expected to spark further attempts at vertical integration in the sector, is expected to close by the end of 2017.

AT&T’s stock rose about 23% for the year, from $34.41 on Dec. 31, 2015 to $42.36 on Dec. 21.

Scripps Networks Interactive, another possible M&A target, also posted strong gains for the year, rising 30% ($16.92 each) to $72.13 per share on Dec. 21.

The Walt Disney Co., which has been plagued by subscriber losses at its flagship sports network ESPN, managed to eke out a slight gain for the year, rising 0.5% (48 cents each) to $105.56 per share).

Viacom, which seemed to be headed toward a recombination with former corporate sister CBS until controlling shareholder Sumner Redstone’s National Amusements Inc. put the kibosh on the deal, fell 14.4% ($5.91 each) to $35.25 per share on Dec. 21. In contrast, CBS, which has ridden a wave of rising retrans fees, strong ratings and success at its over-the-top services CBS All Access and Showtime Anytime rose 37.1% ($17.50) for the year, closing at $64.63 each on Dec. 21.  

Other programmers reported more modest gains, with 21st Century Fox up 4.7%, Discovery Communications up 6.6% and MSG Networks up 4.6% for the year.

At Netflix, continued commitment to original programming and subscriber growth helped boost its stock up 10.6% ($12.12 each) for the year to $126.50 per share.

The biggest decliners in the programming sector were AMC Networks, down 30.3% ($22.61 each) to $52.07 per share for the year; and QVC Group, down 26% ($7.11 each) to $20.21 per share.   

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.

Cox Communications has long been the gold standard in the cable industry, reaching the top of the list of cable operators in J.D. Power customer-satisfaction surveys and as one of the first pioneering operators to introduce telephone services way back in 1997. Lately, though, Atlanta-based Cox has been more known as a target. Altice NV chairman Patrick Drahi made his desire for the family-owned cable operator well-known as he made plays for, first, Time Warner Cable and then Suddenlink Communications and Cablevision Systems. Cox made it clear it had no intention of selling, and it maintains that position today.

And why would Cox sell out? As one of the last remaining independently owned cable operators — controlled by the Cox family, it is part of Cox Enterprises and is the largest private telecom company in the U.S. — the MSO has thrived. Like its larger peers, Cox has reduced video customer losses over the past several years while consistently growing broadband subscribers: it has about 6 million residential and commercial customers. Commercial revenue is expected to reach $2 billion this year and president Patrick Esser believes $3 billion in annual sales in that category is not that far away.

Cox also continues to innovate. It has licensed Comcast’s X1 operating platform for a new version of its multiscreen Contour offering; launched a mobile-first, app-based offering aimed at millennials called Contour Flex Watch; and is trialing a Spanish-language video streaming service called Glosi. Efforts to convert Cox’s network to all-digital are expected to be completed this year and other projects, like an in-home gateway, Internet protocol- based voice service and DOCSIS 3.1-based Gigabit broadband are all on the way.

Esser says execution, not consolidation, drives Cox and its management team, led by chairman James Kennedy and himself; executive vice president and chief operating officer Jill Campbell; EVP and chief financial officer Mark Bowser; EVP and chief technology officer Kevin Hart; EVP and chief marketing and sales officer Mark Greatrex; and EVP of product development and management Steve Necessary. For stability and innovation amid the industry’s constant change, Cox Communications has earned the title of 2016 Multichannel News Distributor of the Year. Esser — the top executive at Cox since 2006 and an employee since signing on as director of programming in Hampton Roads, Va., in 1979 — spoke with senior finance editor Mike Farrell about Cox’s present and future positioning in the multichannel universe.

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MCN:Cox is one of the last sizable, independent family-owned cable operators left. Given how consolidation continues to transform the landscape, how do you maintain that independence in the new order?

Patrick Esser: When you look at the industry in general, we all talk about how much change we’re going through. I would probably use the word metamorphosis. I think it’s more of a step change than just change. You have to think about things differently today than you did five to 10 years ago, especially as it relates to the products we put out for our customers to use; the capabilities we have, what it is going to take to compete and grow.

The three things that I think about a lot are the pace of change that’s going on with technology; the pace of change going on with consumer behavior; and what’s going on with competition and consumers’ ability to choose. Those are all moving at such a rapid pace. That is really driving a lot of the change that is going on in the business.

That being said, our networks are faster today and smarter than they’ve ever been. The devices we’re putting in businesses and people’s homes and the experience they’re having is faster and smarter. The bottom line is this: Our customers are just more connected. You have to think about the business as a connected world.

Our mantra, which comes from the employees that deal with customers every day, is we connect people to the things in life they care most about. That drives a lot of our decision-making.

We have a very highly capable network. From the 1996 Telecom Act to this year, we’ve invested over $25 billion. We continue to spend at least 15% of our revenue every year on capital, most of that going into our network, to keep our network highly competitive and capable of delivering today’s products and services and ones we want to put into the market in the future. We’re very committed to our local communities. We believe this is a local business and so do our employees. That’s part of what makes Cox, Cox.

Our products are competitive. But you have to have those moments where you’re willing to pioneer some things, even before the product is fully baked, to keep yourself on your toes, leaning forward and moving at the kind of pace that the market is and your customers are.

But even talking about those things, in reference to Cox, I think it’s our people. I think it’s the values we all live by and our people’s commitment to take care of our customers that makes us such a special company. And none of this would be possible without the leadership and tone that is set by the Cox family. They are incredible stewards of this asset and their values have transcended generations for over 100 years, and they care about the businesses they own, the markets they do business in and the people that come to work here every day. So our values are very intact, and it gives us the ability to talk to [the family] and think long-term about the business.

MCN:You mentioned consolidation. Obviously, that has been a big issue over the past few years. Does having 4 million video customers have the same clout it did five years ago? How do you feel about scale?

PE: Scale really occurs at two levels: nationally and locally. Locally, we believe we have the scale in the markets we do business in. We can do the marketing and sales and service activities we need to do to compete and we’re willing to make investments in those markets. There are a couple of places where scale plays out, and that is in innovative platforms and services that you want to roll out and also with the supply chain work going on — in other words, the money you spend to buy products and services. We have a pretty close handle on what the difference is because of our size, in terms of what we pay for some of the products and services and content. That is always a tradeoff that we make.

To be able to 100% control a company — and don’t forget, no individual, no family is making a bigger bet on this industry than the Cox family — all of this company is owned by them and it is a large bet for them. So they think about it that way. The second thing about the markets you do business in, we can do the marketing, we can do the sales, we can do the execution we want to, but we have to be cognizant of the platforms. That’s why things like working with Comcast on the X1 platform as the foundational platform for our video product called Contour, was an important move for us to get the kind of innovation scale we wanted to get. The industry’s broadband platform is DOCSIS, we all share that same platform. That was important to us.

Our Homelife product [uses] a company called iControl; we all use that same platform. So it is important that you don’t do one-offs to the point that you lose innovation; that you are still swimming in the same direction that our peers are swimming. And that gives us some of the scale that we need.

MCN:But Cox really hasn’t been in the deal market since TCA Cable [in 1999].

PE: We’ve been doing deals. We’ve just been investing in other spaces, especially adjacent spaces.

MCN:In keeping with the industry trend of pigeonholing its participants, are you a buyer? A seller? Neither? Both?

PE: We have this total flexibility as a private company, and our balance sheet is in really good shape, to do whatever we want to do, whether it be in adjacent spaces or core business. But execution is where most of our time has been focused. And because we take such a long-term view on the business, we can be patient or we can [make moves] depending on the moment in time. I have had numerous conversations with Cox Enterprises and members of the Cox family that are very, very happy with this asset and where they stand today. We are right in the middle of our budgeting and long-range planning and we like what our plan says to us. There’s not been any lack of commitment by the Cox family or Cox Enterprises in the business. I don’t see any of that changing.

MCN:You touched on being a private company. It would seem that would be a big advantage because there isn’t a large group of outsiders pressuring the company to do something it might not want to do.

PE: I agree. You nailed it. That’s it. We have a different set of criteria and decision makers who plan to be here and to pass this on to their children or the next generation, so they think about it very differently.

MCN:Cable video has picked up, broadband is going strong and others are focusing on mobile and online. Where do you see the growth happening in this business going forward?

PE: There is more video being consumed today than ever in the history of the country. Now, it’s being done on different platforms, it’s been aggregated in different ways and we have to adapt to meet the customer where they want to consume it. But we are still bullish about the video business. The broadband business has been an incredible business for us, all the way back to 1997 when we launched it. We continue to add a lot of broadband customers every year. I think they buy the service because the product continues to perform extremely well, we continue to invest heavily in that space, we continue to raise our speeds [and] we offer customers a lot of choice. I think we have a lot of wind left in our sails with broadband.

Business services have done very well for us. We will hit $2 billion in annualized revenue for business services this year. Compare that to the size we are, that’s pretty impressive. Per business passed, per homes passed, per [fiber] mile laid, whatever term you want to use, we have performed extremely well in that space. I’m going to share a secret with you. We had a 10-year plan to build that business to $2 billion and this was the year we thought we could do it in, and we’re right on schedule. I think it could be a $3 billion business for us. There are some things we have to do and some investments we have to make in adjacent spaces to make it a $3 billion business, but with the team we have and the relationships we have in our communities and the customers we serve, they all want us to do more and more and more. Working with the other cable operators in the industry, we have just scratched the surface on enterprise revenue. Most of the stuff we’re doing is local and regional. But there are solutions and products that we can bring to the market that can make large nationwide, larger footprint customers very happy. I think that is the next phase of growth.

MCN:Have you made a lot of inroads into large enterprise business?

PE: Large regionals and small local business is our bread and butter today. Large regionals are city government, schools, military and banking. Those are large regionals we do very well with. I consider the Las Vegas Convention and Visitors Authority a large regional; they’ve been a very big customer for us. At the same time if you drive down the street, you can see business after business after business with 20 or fewer employees. We have done extremely well in that space. Our market share is getting to pretty impressive levels. It’s just a matter of the industry getting to a place where we have a standardized set of products that we can go to large enterprise customers [with], and serve them nationwide working together as an industry.

MCN:Cox has also made some moves with new products like a Spanish-language OTT service Glosi. What was the strategy behind that?

PE: We just saw a consumer group that was being underserved. Sometimes you have to say, “OK, if I have a large customer opportunity, and this is the content that they want and they want it both on their TV and their screen of choice, how do I get the content? How do I put it on their screen of choice? How do I make it a reasonable value play?” Remember, I said you can’t be afraid to pioneer. You have to go to the market and trial it and see what the customers tell you. We’re in a trial now with that product.

MCN:You have another relatively new offering, the app-delivered Flex Watch product. Is that your answer to younger viewers who want mobility and skinny bundles?

PE: It is mobile-first. We recognize the point that they may or may not consider the television their primary screen. That’s not my decision, that’s the consumer’s decision, it’s just accepting that. What is the aggregated set of content they want and what price point makes sense for them and allows me flexibility to do that? Whether they’re younger or it just meets their lifestyle — because not everybody’s 25 years old — it gives us another product that fits a lifestyle, and we’re trying to be responsive to the market within the constructs of what our content agreements allow us to do.

MCN:Everyone seems to be struggling to figure out a mobile strategy and video seems to be driving that. People are watching a lot of content on their phone.

PE: They’re watching a lot of content period. A lot of journalists have written that video is dead; they’re missing the point. It’s just showing up in more places than it ever has before. So content aggregators like ourselves have to adjust and adapt to what consumers are telling us. At the same time, we have the majority of our customers who love the video experience on a large screen TV in their front room. And we cannot leave them behind in terms of investments, and we’re not.

MCN:What about the next level — having an OTT product that goes outside the footprint? Has that tempted you at all?

PE: It hasn’t because it doesn’t fit with our core competency. That core competency of the local market has been really important to us. That competency of leveraging the network we’ve built; our service and billing organizations are all built around geographic regions. So no, we have no intention to work in that space.

MCN:Not even down the road, as the market becomes more saturated?

PE: Who knows in five years, but right now there is no energy being spent on that.

MCN:You were the first U.S. company to license Comcast’s X1 platform. What made you decide to go that route, rather than develop one yourself?

PE: Comcast has done a wonderful job developing that product. We got an opportunity to look into their road map and out further and there was a situation where they were willing to license it and its capabilities to us for about what we were spending a year on our video products. They’ve been a wonderful partner, by the way. They have something like 1,500 engineers working on this every day. I will never have 1,500 engineers working on it, but it creates a national platform that is extremely powerful and everything they said in their road map, they have done it.

We looked at the market; we looked at all of our options, even what we were doing ourselves, and we couldn’t think of a better scenario than the X1 platform. It made sense to us financially; it gave us, we thought, the most competitive product in the market and a product that continues to evolve. Fortunately they’ve got about 25 million reasons to get it right. They’re as motivated to get it right and keep it innovative as anybody, and we benefit by that.

MCN:How long before this is in everyone’s hands? Is it available in all of your markets now?

PE: Any customer in any Cox market can order the product. We rolled it out across the entire company. Over the next few years, it will become a larger and larger part of our user interface. It’s not going to be a forced migration.

MCN:Cox has always been willing to take risks and to admit when it was time to cut its losses and move on. You did that with the cellular business a few years ago, perhaps a good idea at the time but when the market shifted you pulled the plug. What have you learned from those mistakes?

PE: You have to have an environment that allows people to take risks; otherwise you will not be able to keep up with the pace of change. We’re right now in the process of wrapping up going all-digital, we’re driving the next generation of DOCSIS into the market — 3.1 will be here before you know it. We’re building fiber deeper and deeper. We’re building an all-IP voice platform. We have the next-generation gateway for the home [and] we have a whole new way to think about the WiFi experience in the home.

You’ve got to constantly be pushing yourself to move. You may never be able to move faster than the market, but you have to try to keep a cadence that reflects the market. If not, competitors will show up and steal valuable customers from you, and that shouldn’t happen. You have to be willing to make the investments, you’ve got to be willing to take some chances, you have to have extremely competent leaders and people working in the company — which we do — that you bet on and that you believe in. And you’ve got to be willing, if you’re wrong, to change.

In other words, we’re going to do some things, we’re going to trial some things, we’re going to launch some things. And if we find out six months later or a year later it wasn’t exactly what we thought it would be, then stop. Nobody’s ego is involved here: stop, learn and move on. I don’t care what Cox business you’re in, whether it’s the automotive division, the media division or the telecom division, I think that entrepreneurial spirit lives in all of them.

As the private jets returned from Allen & Co.’s annual media mogul summer camp in Sun Valley, Idaho, last week, speculation around possible deals in the content sector grew louder.

Allen’s conference has been the petri dish for several huge media mergers over the past several decades — including The Walt Disney Co.’s 1995 purchase of Capital Cities/ABC, Comcast’s 2009 acquisition of NBCUniversal and Verizon Communications’s 2014 purchase of AOL.

And this year’s soirée comes at a pivotal point in the content business, as programmers contemplate adding scale to compete against heftier distributors like Charter Communications and Altice USA, as well as subscription video-on-demand services such as Netflix.

At the same time, boardroom turmoil at Viacom — Shari Redstone, a company director and Sumner Redstone’s daughter, was a much-watched figure at the Allen conference — could set the deal wheels moving at full speed. Analysts would like to see Viacom and its former bandmate CBS reunite, but there is also the possibility the parent of MTV, Nickelodeon and Comedy Central could continue to go solo or attract the attention of a larger suitor, such as 21st Century Fox.

Consolidation has always been an option for programmers in a land of giant distributors. Most analysts expected a wave of deals after Charter made its first overtures to Time Warner Cable in 2013, starting with Fox’s aborted $80 billion takeover of Time Warner Inc.

MERGER FEVER RETURNS

Content merger fever waned in 2015, when stocks fell sharply over subscriber-loss concerns. But deal activity has begun to pick back up, with last month’s $4.4 billion Lionsgate-Starz merger and NBCUniversal’s $3.8 billion purchase of DreamWorks Animation.

Download "Media's Free Radicals," a guide to the content consolidation possibilities. 

According to research company Mergermarket, which tracks the number and value of media deals globally, 260 transactions worth $43.9 billion were announced in the first half of 2016, up 91% from the $23 billion announced in the same period in 2015. That pace is expected to continue.

Mergermarket TMT Group Sector editor Ed Mullane said in an interview last week that more deals will come in the wake of Starz-Lionsgate, as programmers look to insulate themselves from larger distributors demanding lower prices and skinnier packages, as well as SVOD companies that are pumping billions of dollars into original programming.

“Lionsgate and Starz is an example of two companies that didn’t have the scale to compete against the new players and the incumbent players,” Mullane said.

Netflix, which has committed to spend about $6 billion on content in 2016, also is driving consolidation talk, especially among smaller programmers.

“How are production companies going to compete against that?” Mullane asked. Bigger may be better.

THE LIONS’ DEN

Lionsgate, which many pundits see as cable legend John Malone’s latest consolidation vehicle — he owns 4.5% of Lionsgate and is the largest individual Starz shareholder — is expected to go back to the deal well. And it makes sense in that Malone’s hands are tied on the distribution-deal front, at least for the near term, as Charter focuses on integrating its $78.7 billion purchase of Time Warner Cable.

On a conference call with analysts after the Starz transaction was announced, Lionsgate vice chairman Michael Burns said the Starz deal “would not preclude us from additional acquisitions.”

Wunderlich Securities media analyst Matt Harrigan said he believes Lionsgate will reenter the deal fray within the next 18 to 24 months, but its potential targets are unclear. Movie studio Metro-Goldwyn-Mayer is a possible target, as is Viacom’s Paramount Pictures, which is in the process of selling off a minority interest.

While in the past some pundits have pointed to another Malone holding — Discovery Communications — as a target, particularly because of its reality programming, that value diminished after Lionsgate’s purchase of Pilgrim Studios late last year.

For Harrigan, the most likely consolidation candidates are Viacom, CBS and Time Warner Inc., for two simple reasons: Viacom and CBS shouldn’t have been broken up in 2009 in the first place, and Time Warner’s corporate structure — it has no overly dominant shareholder — makes it ripe for a takeover.

Rupert Murdoch’s 21st Century Fox, which abandoned its $80 billion pursuit of Time Warner Inc. back in 2014 after the Time Warner’s board of directors nixed that deal, could rethink another bid. Adding to the speculation is that Time Warner’s stock has fallen below the $85-per-share threshold of the old Fox bid.

Back in 2014, one of Time Warner’s biggest arguments against the merger was that it could surpass the per share valuation of the Fox off er, which it did for a period. But like other media stocks, Time Warner shares have fallen, as pressures from over-the-top and subscription video-on-demand providers and a weak advertising market have taken their toll.

Time Warner stock is up about 15% ($9.87 each) so far in 2016, but the shares are down 14.6% in the past 12 months. Like many programming stocks, Time Warner never fully recovered from the August 2015 sector bloodbath in the wake of Disney’s revelation that sports programmer ESPN had lost subscribers. It was also the last time that Time Warner shares traded above the $85-per-share mark Fox set in its aborted takeover bid.

Typically, weak stocks and readily available capital — despite the economy, debt is still cheap — lead to deals.

“The obvious target is Time Warner,” Mullane said. “It doesn’t have the ownership structure that large companies do. Everyone would target Time Warner.”

A Viacom-CBS deal makes sense in that adding broadcast network CBS could give cable programmer Viacom additional leverage during carriage negotiations. For CBS, the benefits are less evident, and Harrigan said that a recombination could attract attention from regulators.

“Gigantism can be a little unhealthy,” Harrigan said.

Adding to the fray is the emergence of several Chinese companies into the U.S. entertainment sector. Focus Media, a Chinese advertising and media conglomerate, has said it plans to invest heavily in sports and entertainment properties. Other players like e-commerce company Alibaba and conglomerate Dalian Wanda Group have focused on movie studios, but could turn their heads toward pay TV content.

Still, Harrigan said he doesn’t see an imminent combination of major media properties because of the regulatory angle. For example, he estimated that a Fox-Time Warner hookup would create a company that generates about 40% of total linear TV production through its 20th Century Fox and Warner Bros. studios. That concentration, he said, has little chance of cutting the regulatory mustard.

Moreover, the top five programmers already have a “ridiculous amount of eyeballs,” Harrigan said, so adding another huge company to the mix doesn’t necessarily solve any problems.

Plus, with the advent of skinny bundles, consumers want packages of fewer channels, not more networks being forced on them from a mega-programmer with dozens of channels.

SMALL BUT MIGHTY

Indeed, for all of Malone’s emphasis on “free radicals” in the programming business, there’s no guarantee that bigger is better. Some of the most-watched and respected shows on TV are coming from smaller networks like AMC, which has the top-rated show on cable, The Walking Dead. AMC Networks CEO Josh Sapan said as much at last month’s Gabelli & Co. Movie & Entertainment conference.

“Big is better if it’s really good stuff, and big is worse and is a weight if it’s not really good stuff ,” Sapan said at the conference. “You would rather not have that weight because it will actually burden your fair reward for what you have that is performing.

“Scale’s good if the stuff punches at or above weight,” he added. “Scale’s bad if the stuff punches below weight.”

There is an argument for both philosophies, Harrigan said, adding that having multiple networks can help insulate a programmer from a chilly ratings spell.

“If you’re hot and you’re small, people want the content,” Harrigan said. “But if you hit a cold streak, you’re irrelevant.”

Fueled by two major deals involving Liberty Global and broadcaster Nexstar Broadcasting Group, media M&A deals were up 69% in the first quarter according to research firm Mergermarket, even as the overall deal climate contracted.

Liberty Global and Vodafone’s $6.97 billion joint venture to combine their Dutch cable assets and Nexstar Broadcasting’s pending $4.6 billion purchase of Media General, helped drive the media segment for the quarter, which finished at 117 deals worth $20.4 billion, a 69% increase from the $12.1 billion last year. The media segment was the only sub-sector that showed gains in the period, according to Mergermarket. In total, about 583 telecom, media and technology deals were made in Q1 worth $85 billion, down 45.5% from the 745 transactions valued at $156 billion last year.

While deal volumes and values across the tech and telecom sectors were down for the year, Mergermarket expects activity to pick up as the growing importance of the Internet of Things, big data, could computing and mobile platforms could drive deals. In the media sector, continued consolidation and the need for scale should also keep transactions high.

“Media in the first half of 2016 could see an increasing trend toward consolidation as the need for cost synergies grows within the sub-sector,” Merger market said in its report.

CBS chairman and CEO Les Moonves isn’t worried that fears over lower pay TV affiliate fees and continued consolidation of distributors could affect retransmission growth for his broadcast network, adding that fees are expected to continue to grow at a healthy pace.

On a conference call with analysts to discuss fourth-quarter results, Moonves said retransmission-consent fees grew more than 40% at CBS in the fourth quarter. He estimated that total retrans revenue is on track to grow to $1 billion in 2016, a year earlier than previously expected, and double to $2 billion in 2020.

“Everybody knows what the ballgame is with retrans,” Moonves said on the call, adding that its last negotiation with Cablevision Systems was “no muss, no fuss.”

“Retrans is stronger than ever,” Moonves continued. “Every deal is larger than the one before. The tone hasn’t changed.”    

Charter Communications’ pending $77.7 billion purchase of Time Warner Cable isn’t expected to stop the flow of deals in both the distribution and content areas, experts at a Paley Center for Media event said.

“I think we’re on the verge of a significant uptick in activity,” said JP Morgan global chairman, Technology, Media & Telecommunication Investment Banking Jennifer Nason at the Paley Center for Media’s 2015 Paley International Council Summit here Thursday. “We are sort of in this disruptive vs. incumbent world in just about every industry you can think of and media is no exception. With OTT taking hold, ad models being disrupted, I think there is a lot of concern out there by all players, the established ones and the new ones, as to do I have the right assets in the right location, who are my competitors. I think when you go through periods where there is concern about what tomorrow will look like, there’s the overwhelming temptation to do deals to feel better about your position in the ecosystem.”

In the session moderated by Multichannel News/B&C editorial director Mark Robichaux, Waller Capital Partners chairman John Waller said he expects deals to move away from the typical large-company-buys-small-company scenario and instead focusing on adding new aspects to existing businesses in content, technology and distribution.

“Although some of the bigger companies will be involved, a lot of the deals will be in those three sectors,” Waller said. “It will be opportunistic buying, media companies buying digital media companies or ad tech companies, or cable companies buying fiber companies. It will be opportunistic mergers to make their business better.”

Waller added that while the climate today is different than the last big period of consolidation in the industry – the 1990s and early 2000s – the reason for deals isn’t that different

Back then, he said, the bet was on building a broadband business. And now that the infrastructure is built, the bet is the same but with a twist .

“The bet is still on broadband, but there is so much data consumption,” Waller said. “Cisco says 90% of data consumption comes through WiFi. That means you still need broadband pipe.”

Nason said that wireless, over the top and xx are attracting other players to the media business. And she said that more are likely to come.

“Traditional players have to find out how to evolve,” Nason said, adding that we will likely see some great and not so great deals in the future. She pointed to 21st Century Fox’s aborted attempt to buy Time Warner Inc. in 2014, which didn’t attract other bidders after their overtures were rejected.

“If Time Warner was to sell today, the people that would jump into that race would be very different today,” Nason said, adding that possible bidders could be consortiums of international buyers and big technology companies.

“A lot has changed in the last 12 months,” Nason said. “There is a different universe of competitors.”

Go big or go home.

That appears to be the pay TV industry’s current mantra, as distributors and suppliers face the realities of a consolidating business that is also being disrupted by a shift toward “skinny bundles” and the onslaught of popular mobile-focused, over-the-top video options.

As consolidation has played out among some of the nation’s largest distributors — with the recently consummated AT&T-DirecTV merger and a proposed deal to combine Charter Communications with Time Warner Cable and Bright House Networks — the wave is now sweeping over the advanced advertising technology sector.

Barely a week goes by without a deal in which an ad-tech vendor is acquired by a direct or tangential rival, or swallowed whole by a multichannel video-programming distributor eager to shore up its own advanced-video strategy for a new class of services aimed at elusive millennials and other viewers who are increasingly gravitating to smartphones and tablets.

The ad-tech sector remains ripe for even more consolidation amid a digital-video market that is littered with smaller vendors and suppliers that will need to scale up to survive, let alone thrive.

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“There’s an overabundance of ad-related solutions,” Tim Hanlon, founder and CEO of The Vertere Group, a boutique investment advisory and strategic consulting firm, said. “You name it, and there is a point solution for a point solution for just about everything.”

There are five to six companies on the market for every ad-tech point solution, Hanlon estimated. “And that’s arguably four to five too many,” he said, adding that the situation is “overcomplicating the digital advertising complex … It screams for more consolidation and simplification.”

And those shouts are apparently being heard, as an increasingly number of those companies have either bought in or have been bought out (see sidebar).

But companies that don’t make a move soon could be on the outside looking in, if the venture- capital community loses its enthusiasm for technology that’s focused on the advertising solutions or if backers are “frankly getting itchy to monetize” existing investments, Hanlon said.

Going public — as YuMe and Tremor Video did in 2013 — isn’t necessarily the right move, either. Both firms are now driven by quarterly results, and thus challenged to pivot and evolve as rapidly as private companies can.

“The ad-tech bloom is off the rose, so to speak, as things change more quickly and as investments become longer and longer to monetize,” Hanlon said.

MAKING THEIR MOVE

The AT&T-DirecTV deal is a hybrid in the sense that it involves both pay TV distribution and ad technology — the latter coming by way of AT&T AdWorks, which will now look to link its “TV Blueprint” data-driven platform to DirecTV’s addressable advertising capability under the new banner of “AddressablePlus.”

“We believe that we’re giving advertisers the ability to reach their target audiences at scale,” Rick Welday, an AT&T veteran who was recently named the president of AdWorks, said. “We’re starting from a position of strength.”

DirecTV, the No. 1 U.S. satellite-TV provider, will add about 12 million addressable homes to an AdWorks TV Blueprint platform that already had access to data from 70 million homes.

AT&T AdWorks has already begun the process of developing a more-integrated offering. “Job one for me is to get the organization settled,” Welday said. After that, the division will look to pull together the assets and enhance the platform’s data capabilities.

Those enhancements will play up cross-screen opportunities and AT&T’s mobile platform. Further down the road, “we will also be able to incorporate some of our exposure to the connected car business,” he said.

BlackArrow, a dynamic ad-insertion company that cut its teeth on cable set-top video-on-demand, was rumored to be on the block for more than a year when it pulled the trigger on a deal last week to be acquired by Cross MediaWorks, a company that aggregates local linear TV ad buys for cable operators and other MVPDs.

The deal, they said, essentially combines vendors that have a similar set of major MVPD clients, but also enables them to cover the gamut — linear TV, on-demand, and emerging OTT and mobile video platforms.

Why do the deal now? The big drivers were the “changing landscape” and the desire to extend advanced advertising to more platforms and provide an integrated view across them, Nick Troiano, the CEO of BlackArrow, who will now serve in that role at Cross MediaWorks, said.

While VOD advertising continues to be a growing business, 90% of ad revenues still come by way of traditional linear TV, so the combined company can cover both bases. The combination “just rounds out the whole platform play,” Stephanie Mitchko-Beale, Cross MediaWorks’s chief technology officer, said.

“And we’ve always believed that scale matters,” Troiano acknowledged, noting that the industry will need a large, “independent” ad-tech and media solution provider to turn to as more vendors get snapped up by major distributors like Comcast, which also happens to be a BlackArrow customer.

Ooyala, an online video specialist that’s part of Australian telco Telstra, jumped headlong into the whitehot programmatic advertising sector last fall when it acquired Videoplaza. The integration is largely done, as Ooyala has shed the Videoplaza name completely.

Ooyala decided to buy in because it wanted to get a foothold in the programmatic TV/video market while it was still in its infancy, senior vice president of ad tech Sorosh Tavakoli said.

“It’s gradually maturing, and we definitely want to be part of that maturing process,” Tavakoli said.

By bolting Videoplaza to its larger platform, while still offering separate programmatic services, Ooyala said it believes it can stand out in a market bursting at the seams with vendors that provide one-off solutions.

“We believe differentiation will come in not around enablement but [through] data, analytics and insights,” he said.

Ooyala, which also counts clients such as Univision, NBCUniversal, Comedy Central, France’s M6, Sweden’s TV4 and Spain’s Mediaset, might not be done buying, as “we have all ears open” to M&A opportunities, Tavakoli said.

Another ad-tech focused company that could benefit from ongoing MVPD consolidation is Canoe Ventures, which is jointly owned by Comcast, TWC, Cox Communications and Bright House. Charter, which started off as a Canoe partner before dropping out later, might grab an oar and rejoin Canoe’s crew.

But nothing’s official yet. Canoe is continuing talks with various MSOs about joining up within the next year or so, said Chris Pizzurro, head of product sales and marketing for the J.V.

STAYING ABOVE THE M&A FRAY

Despite the volume of ad-tech deals, not all companies are eager to jump into the fray.

“None of those deals really affects us first-hand,” Mark Lieberman, president and CEO of Viamedia, said, noting that some of them run parallel to his business, which is also trying to take advantage of the ad dollars flowing from HuluTV into the digital realm.

But the flurry of M&A action, he said, “shows the importance of ad-tech coming to television, and that TV distributors and even the agencies are looking for solutions that they are accustomed to on the Internet side. The result is that the TV industry is now more attuned to the power of data and being able to take back some of those digital dollars, and that’s something we’ve been very focused on.”

Viamedia, which launched a programmatic platform called Placemedia in September of 2013, has plenty of scale now. The company has more than 450 employees, including 300 sellers who are working with more than 10,000 local advertisers serving up about 1.2 million ads each day.

That gives Viamedia the heft it needs to pursue opportunities on its own, including working with MVPDs that are focused on ad-serving to IPTV environments on the set-top box level, and are looking to build strategies that rely on best-of-breed solutions, Lieberman said.

But Viamedia is also on the lookout for opportunities to buy other companies, he conceded, so long as they would allow it to remain relatively agnostic, because MVPDs might prefer using one vendor’s ad solution over another’s.

“We’d be concerned about losing our position as an independent, honest broker looking for best-of-breed solutions,” he said.

And having larger, though independent, advanced advertising companies still in the mix could become increasingly important as others are snapped up.

The ad-tech sector faces challenges as it consolidates, but broader, multifaceted “marketing technology” companies remain attractive to VCs, as the “television world has its digital transitional moment,” Hanlon said.

While that climate favors IP- and multiscreen-focused companies, those with ad-tech products that were initially developed for quadrature amplitude modulation set-top platforms still hold value, he added. SeaChange International is an example of a company that has such a legacy business as it pursues OTT and other next-generation video opportunities, he said. SeaChange has been the subject of M&A rumors for years, but continues to go it alone.

Another question mark hovering over all of this M&A activity is how an acquired company behaves later and addresses the needs of clients that don’t happen to be its owner. This Technology, FreeWheel and Visible World, for example, bring great strategic value to Comcast, but it’s still to be determined how the priorities of those vendors might evolve and shift in the months and years to come, Hanlon said.

Wheelin’ & Dealin’

A sampling of recent M&A activity in the ad-tech sector in recent months:

► Verizon Communications: The carrier clinched its $4.4 billion acquisition of AOL in June, a deal that includes key programmatic advertising technologies expected to play a role in Go90, a “mobile-first” OTT offering to feature content from ACC Digital Network, Campus Insiders, CBS Sports, Vice Media, ESPN, 120 Sports and Awesomeness TV, among others.

► Comcast: Has shored up its advanced-advertising capabilities through three separate acquisitions — FreeWheel (online, multiscreen advertising, March 2014); Visible World/AudienceXpress (targeted and programmatic advertising, June); and This Technology (dynamic ad insertion, IP video back-office systems, August).

► Ooyala: The Telstra-owned multiscreen video specialist acquired programmatic advertising company Videoplaza in October 2014. Ooyala has since integrated Videoplaza into its broader platform and dropped the brand.

► Facebook: In July 2014, the social-networking giant snapped up LiveRail, a video ad platform for publishers and marketers that counts clients such as Hulu, ABC Family, A&E Networks and MLB.com.

► Cross MediaWorks: Inked a deal last week for BlackArrow, a dynamic ad-insertion VOD supplier that reaches more than 40 million homes thanks to customers such as Time Warner Cable, Comcast, Charter Communications, Bright House Networks, Rogers Communications and Liberty Global/Virgin Media.

The once inevitable cable distribution consolidation wave may have to wait a bit, according to two of the most aggressive participants in the M&A space. On Friday, Charter Communications chairman Eric Zinterhofer (pictured) and Altice CEO Dexter Goei, told an audience at the CTAM Europe Conference in Amsterdam that after a flurry of deals, cheaper assets are getting harder to find.

According to Bloomberg News, Zinterhofer told the audience at the CTAM conference that Charter, which agreed to purchase Time Warner Cable in a deal valued at $78.7 billion in May,  won’t pay high multiples of cash flow, which he characterized as between 9 and 11 times, for other assets. Zinterhofer continued that the multiples are expected to go down eventually, “but we can’t help but notice interest rates will have to rise, China’s causing wobbles and commodity prices are affecting some markets.”

At Altice, which had tried to purchase TWC before being outbid by Charter, later agreed to buy a 70% stake in Suddenlink Communications for $9.1 billion. On announcing that deal, CEO Dexter Goei said the intention was to use Suddenlink as a vehicle to acquire more cable assets in the U.S. Altice, based in Luxembourg, is one of the most aggressive players in the telecom space. Shortly after the Suddenlink deal was announced, Goei told several European papers that he was interested in acquiring Dutch telecom giant Royal KPN.

At the CTAM conference, Goei apparently changed his tune. According to Bloomberg, Goei said that here are no obvious M&A targets for Altice, including KPN.

“There’s a scarcity of assets that are cheap, but if a stock is too expensive today, maybe we’ll look again in two years when China blows up or something else happens,” Goei said according to Bloomberg. “We’re always opportunistic.”

Both Charter and Altice were expected to compete for cable assets after their pending deals are closed. Charter is hoping to receive regulatory approval on the TWC deal by the end of the year – a date Zinterhofer reiterated at the CTAM conference – but some analysts believe it may take until March to close the deal.

Altice also was expected to be an aggressive acquirer of systems, and chairman Patrick Drahi specifically named Cablevision and Cox Communications as possible targets. Cox has said publicly that it is not for sale, but given the past rise in its stock, the market seems to believe that a Cablevision deal could be a possibility down the road, especially since CEO James Dolan said back in May that his service territory should be consolidated.

The cable universe is shrinking.

Consolidation, competition and new viewing habits are irrevocably changing the pay TV landscape, with more contraction expected as larger deals close and smaller cable systems are snapped up by their larger peers.

But unlike years past, when deals were driven by a desire to cluster operations more efficiently, the coming consolidation wave seems sparked purely by a need to get bigger — bulking up to roll out new services more effectively and cheaply across a broader base, and to help keep rising programming costs in check. Cable operators aren’t the only ones looking for scale. AT&T completed its $48.5 billion acquisition of DirecTV in July, raising its video-subscriber tally to 26.3 million customers and vaulting the telco to the top of the list of multichannel video-programming distributors (MVPDs). Comcast, which abandoned its $67 billion pursuit of Time Warner Cable in April when it determined regulators would not sign off on the deal, is still a solid No. 2 with 22.3 million subscribers.

Charter Communications, which started the whole consolidation wave in 2014 when it began a dogged pursuit of Time Warner Cable, finally won that prize with its May agreement to purchase the 10.8 million-subscriber TWC for $78.7 billion. That deal is expected to close by the end of the year, and with Charter’s $10 billion purchase of Bright House Networks — also expected to close in December — the Stamford, Conn.-based operator will have 17.2 million customers with which to spread the operating acumen of CEO Tom Rutledge.

CATCHING THE WAVE

Charter is expected to at least look at other potential acquisitions, but others are not sitting idly by. European telecom giant Altice agreed to purchase a 70% interest in Suddenlink Communications for $9.1 billion, and has said it will use the midsized St. Louis-based cable company as a vehicle to expand its U.S. presence.

Already, Altice chairman Patrick Drahi has named Cox Communications and Cablevision Systems as potential targets. And though Cox has insisted it isn’t for sale — and there is some doubt as to whether Altice could pay Cablevision’s price — there is no doubt that further consolidation is coming.

In a recent report, MoffettNathanson principal and senior analyst Craig Moffett said possible acquisition targets could include some of the larger operators at the lower end of the top 10 — Mediacom Communications, Cable One or WideOpenWest.

“It would be foolish to dismiss the idea that any or all of them might be acquired,” Moffett wrote.

And the cable industry has a long history of acquisition. For example, only three of the Top 25 MSOs of 1985 still exist today (Cox, Cablevision and Comcast); the rest have been assumed by other entities. Five of the Top 25 of 1995 are in business today — Time Warner Cable, Comcast, Cox, Cablevision and Charter — with TWC expected to be swallowed by Charter by year-end.

Cable operators stopped growing their basic-video subscriber rolls more than a decade ago. The industry peaked at about 66.9 million total subscribers in 2001, and in 2014, it finished the year with a total of about 54 million subscribers, according to the National Cable & Telecommunications Association. Broadband, for years the profit center of the business, emerged as the subscriber leader last year — the first year that cable broadband customers exceeded video subscribers.

While that had been anticipated — and in some cases, encouraged — for years, cable operators are beginning to turn the corner on basic-video subscriber growth. The four top cable service providers have drastically reduced their customer losses over the past three years; Comcast alone has cut losses by nearly 75% since 2010.

Telcos, which had been engines of video-subscriber growth for more than a decade, began reporting losses for the first time in the second quarter. AT&T said it lost about 22,000 U-verse TV customers in the most recent quarter, while Verizon Communications saw its growth cool considerably, adding 26,000 FiOS TV customers in the period compared to 100,000 additions in the prior year.

At the same time, satellite subscriber growth has stalled — DirecTV lost 133,000 net subscribers in the second quarter, well below the 60,000 additions in the first three months of the year. No. 2 satellite company Dish Network lost 81,000 net subscribers in the second quarter, almost twice the 44,000 it lost during the previous year.

Dish Network lost about 79,000 net subscribers in 2014, compared to a gain of 1,000 in 2013.

DISRUPTING THE DISRUPTOR

As satellite- and telco-TV service stagnates, a new distribution model is disrupting TV’s early disruptor — cable operators. Over-the-top services like Sling TV, HBO Now and Sony’s PlayStation Vue have burst onto the scene with much fanfare, and pay TV operators who may have dismissed those services in the past are now scrambling to come up with their own solutions.

In the second quarter, pay TV lost its traditional growth engines — satellite TV was down 284,000 customers while telco TV providers lost 2,000 subscribers — and perennial loss leader cable cut its losses almost in half to 280,000 from 534,000 a year ago.

Indeed, pay TV subscriber growth dipped to a record low of -0.7% in the past 12 months, according to Moffett. The pay TV industry lost 566,000 subscribers in the second quarter, 76% worse than the 321,000 it lost during the same period in 2014.

With more OTT services slated to launch later this year — Verizon is expected to debut its “mobile-only” Go90 service in the late summer and other programmers are considering launching their own direct-to-consumer services — cord-cutting will likely get worse. And cable operators will likely meet the challenge by trying to add scale.

But just how many customers will migrate over remains to be seen. Years of consolidation have narrowed the number of large available properties. While there are about 660 cable operators and 5,208 cable systems in the United States, more than 80% of the nation’s 116 million TV households are represented by the top eight MVPDs.

And unlike other years when an MVPD could buy the operator below it on the list and move up several spots on the list, today the fifth-largest provider (Verizon) could could buy the next three largest distributors below it and still be stuck at No. 5 with 13.7 million customers, behind Dish Network’s 13.9 million subscribers.

To see the current and historic lists of Top 25 MVPDs, please click here.

EARLIER:Reports: Charter Near Deal to Buy Time Warner Cable

Charter Communications has agreed to purchase Time Warner Cable in a cash and stock deal valued at $78.7 billion, just weeks after the second largest cable operator in the country watched its deal with Comcast crumble amid growing regulatory opposition.

Charter, which began pursuing Time Warner Cable about two years ago, finally snagged the prize, agreeing to pay $100 per share in cash and 0.5409 shares of Charter stock. The deal values Time Warner Cable at $195.71 per share based on Charter’s closing price on May 20, or $200 per share based on Charter’s 60-trading day volume average price. TWC shareholders can opt to take $115 in cash and 0.4562 shares of Charter stock.

Comcast terminated its $67 billion merger with TWC on April 24, 14 months after agreeing to merge with the company, after it became clear regulators would not approve the deal. Charter, which has substantially fewer customers than Comcast, is expected to have an easier go at it during the regulatory aproval process.

At the same time, Charter agreed to purchase Bright House Networks for $10.4 billion, another deal that has been in the works for a while. Combined, the deals will give the combined companies 23.9 million customer relationships, or about 14.8 million video customers. 

Liberty Broadband, the tracking stock that holds about 25% of Charter shares, has agreed to purchase about $5 billion in newly issued shares of the combined company.

The deal, expected to close by the end of the year, is a substantial premium to the Comcast deal, which valued TWC at more than $158 per share.

When the dust settles, TWC shareholders will own between 40% and 44% of the new company (depending on which option they take).

In a statement, Charter said the deal will result in faster broadband speeds, greater deployment of WiFi and more advanced services.

“The teams at Charter, Time Warner Cable and Bright House Networks are filled with the innovators of our industry. Representatives of each of these companies have invented some of the most revolutionary communications products ever created; innovations like video on demand, VOIP phone service, remote storage DVR, cable TV through an app, downloadable security and the first backward-compatible, cloud-based user interface. That spirit of innovation will live on, and it will create real benefits and great long-term value for the customers, shareholders and employees of all three companies,” said Charter CEO Tom Rutledge in a statement. “With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully–featured voice products, at highly competitive prices. In addition, we will drive greater competition through further deployment of new competitive facilities-based WiFi networks in public places, and the expansion of the facilities footprint of optical networks to serve the large, small and medium sized business services marketplace. New Charter will capitalize on technology to create and maintain a more effective and efficient service model. Put simply, the scale of New Charter, along with the combined talents we can bring to bear, position us to deliver a communications future that will unleash the full power of the two-way, interactive cable network.”

Rutledge will serve as CEO and a board member of the new company, which will have a 13-member board of directors. The remaining 12 directors will include seven independent directors nominated by the independent directors serving on Charter’s Board of Directors, two directors designated by Advance/Newhouse, and three directors designated by Liberty Broadband. Charter’s current chairman, Eric Zinterhofer, will continue to serve on the new company’s board.

“With today’s announcement, we have delivered on our commitment to maximizing shareholder value,” said TWC’s chairman and CEO Robert Marcus in a statement. “This agreement recognizes the unique value of Time Warner Cable, and brings together three great companies that share a common philosophy of strong operations, great products, robust network investment and putting customers first. This combination will only accelerate the great operating momentum we’ve seen over the last year and provide enormous opportunities for our 55,000 dedicated employees. We remain wholly committed to bringing the very best experience to our residential and business customers coast to coast.”

Bright House CEO Steve Miron seemed equally pleased.

“Today’s announcement is good news for customers and potential customers, as well as our employees, since we will be in a stronger position to deliver competitive services, invest in advanced technology, and develop innovative products that will compete with global and national brands,” Miron said in a statement. “In addition, I am very pleased that Tom Rutledge will be the CEO of the new company. Tom recognizes the importance of placing a high priority focus on customer care drawing from the expertise of all three companies, and I believe this will be a strong pillar of the new company’s culture.”

Altice CEO Dexter Goei didn’t waste any time clearing the air about his greater intentions across the Atlantic, telling analysts and reporters Wednesday that he is poised to use the European telecom company’s latest acquisition – Suddenlink Communications – as a vehicle to consolidate the U.S. cable market.

On a conference call to discuss the Suddenlink deal, Goei said that every property “below Comcast is effectively in consolidation mode. We clearly expect to be right in the middle of that consolidation.”

That comment helped goose the stocks of several cable operators skyward – Cablevision Systems soared 11% and Time Warner Cable, said to be in Altice’s sights already, rose 3%. Charter Communications, which up until this morning was expected to be the prime consolidator in the U.S. cable market, saw its stock dip about 1%.

Cablevision Systems CEO Jim Dolan effectively put his company in play at INTX: The Internet & Television Expo earlier this month when he said that efforts should concentrate on consolidating markets and not companies. He offered the New York metro market — in which Cablevision operates — as a prime candidate.

Analysts were split on whether Altice would set its sights on Cablevision – it already has had some preliminary talks with Time Warner Cable, according to reports – and questions around its valuation and competitive position (it has the highest exposure to Verizon’s FiOS TV in the industry) could cloud a deal.

Pivotal Research Group CEO and media & communications senior analyst Jeff Wlodarczak wrote in a note to clients that Altice’s entrance into the consolidation fray could make Cablevision an attractive buy.

The presence of an aggressive Altice plus what appears to be Cablevision’s increasing willingness to sell plus our previous belief that Cablevision HAS to sell based on the direction of its core operations means the likelihood of a successful sale of the company has risen materially,” Wlodarczak wrote, adding that an Altice buy is not a slam dunk. He said “we believe Altice has to do more deals and the sizeable costs cuts available at Cablevision will likely prove to ultimately be attractive for Altice.”

Media General, Inc. and LIN Media shareholders gave the thumbs up to their pending $1.6 billion merger in separately held meetings Monday.

Media General and LIN announced their deal in March. After certain divestitures, the combined company will own or operate 71 TV stations in 48 markets across the country, reaching 27.6 million or 24% of U.S. television households. The deal still needs approval from the Federal Communications Commission.

After the closing, expected early next year, the combined company will keep the Media General name and will be led by LIN Media CEO Vincent Sandusky. Media General chairman J. Stewart Bryan III will continue to serve in that role. Additional board members will include Diana F. Cantor, Royal W. Carson III, H.C. Charles Diao, Dennis J. FitzSimons, Soohyung Kim, Douglas W. McCormick, John R. Muse, Wyndham Robertson and Thomas J. Sullivan. Four of the directors were designated from LIN Media and seven from Media General.

“Today’s votes were an important milestone that brings us one step closer to finalizing the merger,” Bryan said in a statement. “We are pleased by the support of our shareholders, which confirms our confidence in the significant value that this business combination will create for our investors.”

The LIN deal was one of several in the broadcast space over the past several months. Some analysts have speculated that the deal could help spark a second wave of consolidation in the sector, as smaller station groups look to bulk up to compete.

“This announcement is an important step on the critical path to ensuring the company is prepared to hit the ground running once we receive the necessary regulatory approvals,” Sandusky said in a statement. “After the merger is complete, we will have one of the strongest leadership teams in the industry. Their expertise and dedication gives me even more confidence that we will deliver on our promise to build a stronger, more efficient company that will compete effectively in the rapidly evolving media landscape.”

Cable stocks, fueled by a consolidation frenzy over the past few years, are beginning to run out of gas.

The euphoria associated with the expected deal bonanza in the wake of the Comcast-Time Warner Cable merger has been increasingly overshadowed by fears of onerous regulation and increased compet it ion from over-the-top video service providers.

Cable operator stocks were down slightly for the third quarter — 0.5% — as investors found out they had to wait a bit longer for the Comcast-TWC closing (now expected in early 2015 instead of by the end of the year) and learned that over-the-top video offerings from Sony, Dish and Verizon are coming closer to reality.

OTT LINEUPS TAKE SHAPE

Sony signed up Viacom’s 22 cable networks — including MTV, Comedy Central, Nickelodeon and VH1 — in August for its over-the-top service, and more are expected to join the list.

Dish Network has already signed The Walt Disney Co. and A+E Networks to its OTT offering — which could be called nuTV — slated for an early 2015 release, and Verizon Communication is readying its own over-the-top service, expected by mid-2015, based on Intel Media’s former OnCue service.

Although distribution stocks are still up by about 8% year-to-date, it seems like a slowdown compared to the 35% gain the stocks enjoyed in the first nine months of 2013 and the 50% gain they experienced in the full year.

For the most part, cable distribution stocks were fairly stable — the highs weren’t too high and the lows weren’t too low.

In the third quarter, Comcast and Cablevision Systems showed slight gains — Comcast was up 2% to $54.86 per share, and Cablevision was up 2.3% to $18.05 each.

Charter, Time Warner Cable and Liberty Global all fell slightly during the period, but the declines were well under 1%.

MoffettNathanson principal and senior analyst Craig Moffett said in an interview that cable stock performance in the quarter wasn’t the result of one factor but a series of them. And though the sector is still in positive territory for the first nine months of the year, he said he fears investors may not be taking the larger picture into account.

“I think the bigger issue is that the level of regulatory uncertainty has just ratcheted higher,” Moffett said. “It’s hard to make a big new commitment to the sector when you’re waiting to find out what’s going to happen with Title II and merger conditions and a laundry list of regulatory items.”

Moffett said investors are keeping an eye on regulatory possibilities, but are not as wary of other issues.

“What people are worried about is regulation,” Moffett said. “They’re not worried about OTT. I don’t think OTT is very top-of-mind, and arguably it should be. It’s easy to imagine a scenario where [cable operators’] ability to respond through usage-based pricing or higher interconnection charges are limited by regulation.”

Moffett also wasn’t sure whether the stocks would rebound in the fourth quarter. He said he doesn’t expect to see any strong positive signs until the early part of 2015.

“Eventually it all comes down to how much cash fl ow you can generate,” Moffett said. The cash-fl ow picture for these guys is pretty good.”

While distributors were stable, their programmer counterparts as a whole were down about 1.7% in the quarter and are down 4.5% for the year.

Although the sector got an early lift in the quarter when 21st Century Fox revealed it had made an $80 billion unsolicited off er for Time Warner Inc. (whose shares rose 23% on the news), it retreated just as quickly when Fox withdrew that off er in August, adding that there were no other merger targets on its radar.

The content consolidation wave, which was supposed to happen in response to Comcast-TWC and DirecTVAT& T, doesn’t look like it’s going to happen — at least in the near term.

That leaves investors to worry about an increasingly competitive advertising market, and possible regulatory backlash from retransmission consent and high programming costs.

Pivotal Research Group media analyst Brian Wieser said negative sentiment comes partly from a sluggish upfront and a fear that advertisers are shifting dollars away from television and into digital.

That showed in the performance of some top companies in the sector — CBS dropped 11.7% ($7.29 per share) in the quarter and Viacom, which has been at the center of affiliate fee controversies over the years, dipped 9.9% ($8.60 per share).

‘LAST YEAR WAS TOO STRONG’

Some bright spots emerged: Time Warner Inc. was up about 8.5% in the quarter ($5.95 each) and 13.8% for the year. But most of those gains were residual effects from the aborted Fox takeover attempt.

Disney also maintained a healthy growth clip — up 4.3% for the quarter and 17% for the year — while Starz, Liberty Media and Discovery Communications remained relatively stable.

Wieser said he believes fears that the TV ad market is drying up are mostly unfounded and that the problem lies in comparisons with last year.

“The problem is that last year was too strong,” he said. The sector outperformed his estimates by about 2 percentage points in 2013.

This year the ad market is on track, and Internet ad spending is actually declining.

While Wieser conceded that the upfront was sluggish and that most advertisers overestimated the strength of this year, he said he sees signs of a rebound.

He pointed to recent reports that automotive ad spending is expected to increase next year and that videogame maker Activision will spend about $500 million to develop, market and promote its latest game release, “Destiny.”

“What drives total market growth is the creation, introduction and execution of spending by new brands and new marketers,” Wieser said. “If the economy fails to produce new marketers, then you should worry.”

Since his first week on the job in July 2009, when he jumped into the confirmation hearing for Supreme Court Justice Sonia Sotomayor, Sen. Al Franken (D-Minn.) has hit the ground running. He is a prominent inquisitor on the Senate Judiciary Committee, and he has taken the lead on big privacy issues as chairman of the privacy subcommittee.

A Harvard graduate, five-time Emmy Award winner and best-selling author, the 63-year-old former comedian has been a familiar TV face, and voice, to the Baby Boomer generation for decades as one of Saturday Night Live’s original writers and performers. As Stuart Smalley in the 1990s, Franken sought daily affirmation that could have served as a campaign slogan: “I’m good enough, I’m smart enough and doggonit, people like me.”

He is currently seeking a second Senate term this November, which would take him through 2020. According to Public Policy Polling, Franken leads all his potential Republican opponents by double digits. That would be a big change from 2008, when he won in a recount by a razor-thin margin over incumbent Norm Coleman — Franken was not sworn in until July of 2009.

With the retirement of “prairie populist” Byron Dorgan (D-N.D.) in 2010, Franken arguably inherited the mantle of the Senate’s biggest media-consolidation critic — Independent Bernie Sanders of Vermont is in the running as well — with a reputation for doing his homework and saying what he thinks.

Franken has said his opposition to the merger of Comcast, parent of NBCUniversal, with Time Warner Cable is nothing personal, even though he was an NBC employee when a writer and performer on SNL. Instead, his view is that the deal is too big to succeed, if success means a consumer-friendly programming platform receptive to independent content.

In a rare, wide-ranging interview, Franken talked to Multichannel News Washington bureau chief John Eggerton about those deals, network neutrality, privacy and why the former funnyman became a serious legislator.

MCN: How has your experience of being part of the media business, particularly working for NBC, informed and shaped how you view big media companies?

Al Franken: I want to emphasize that I really loved my time at Saturday Night Live. Even though I opposed Comcast buying NBC, I kind of recognized that, in a way, it was better for NBC to be owned by a media company rather than a company that sells toasters [General Electric]. But what I have been taught is that, sometimes, what these media companies say in hearings is not what happens.

I think you wrote about it when I talked about fin-syn in the Comcast-NBCU deal. The lesson from that was that [when the fin-syn rules, which prevented networks from owning a financial interest in the domestic syndication of shows on their air, were removed] they swore up and down that they wouldn’t favor their own content. (Chuckles.) And I’m laughing, because you know what happened. They said: “Why would we do that? We just want the best shows that get the best ratings. We just want the best content.” And then as soon as fin-syn went away, they started favoring their own content. We have seen what happened to independent production on television: It plummeted. My experience was that the networks basically said, “Now that we can, we will own as much of our content as we can.”

And when an independent producer would do a pilot, say, there would be kind of an implicit understanding that if the independent owner gave some ownership to NBC it was more likely to get on the network and into a good timeslot. So, they leveraged their position, and this has given me an insight into how this leverage not only can be used, but is used.

MCN: Is that why you have had issues with companies adhering to conditions put on deals?

AF: Even [with] how they are able to be enforced, because of the FCC’s resources versus the resources of these companies. You know, a Tennis Channel that is competing with Comcast/NBC, if they feel like Comcast is favoring its own channel, enforcing these conditions sometimes has to be through private right of action, and boy it is really hard to do that against a behemoth. And even when the FCC wants to take action, that large company can drag it out and task the resources of the FCC.

MCN: You have been a big critic of the proposed Comcast-Time Warner Cable merger. What is your biggest concern?

AF: That it will hurt consumers, that it will be anti-competitive, so we will have less innovation and worse service to consumers in Minnesota and elsewhere, and less choice. It’s just too big. It is the No. 1 cable provider buying the No. 2 cable-TV provider. It’s the No. 1 Internet-broadband provider buying the No. 3 provider, and Comcast has about 12% or 13% of all television content and they can leverage all of that in a way that poses a lot of difficulties that I have with competition and it makes them a kind of gatekeeper in content. It gives them too big a position in the market and they will leverage that position with their Wall Street investors on their phone calls.

MCN: Are there any conditions the government could put on the deal that would make it acceptable? Say, extending the network-neutrality conditions beyond 2018?

AF: I am not talking about conditions at this point, because I think the FCC and [Justice Department] should block the deal.

MCN: Do you have a similar “bigness” issue with AT&T-DirecTV?

AF: I am continuing to evaluate that deal. It is a different thing, but I have the same kind of problems. One of them is size and what that does to competition. They say they will make broadband access available to millions of new customers and that the deal will create jobs, but this will just give AT&T a lot of power across the telecommunications industry, and that can be bad for consumers.

MCN: But you don’t oppose it?

AF: I have not come to a conclusion on that. I’m still analyzing the deal. I wrote a letter to the FCC and the DOJ explaining my concerns, and I pressed AT&T about some of the questions I had in the hearings on municipal broadband and on net neutrality. I am very concerned about network neutrality, as you know.

MCN: Comcast and others argue that they need this size and scale to compete with each other and to have the wherewithal to invest in all this higher-speed, more available broadband the government is pushing them to deploy. Don’t they have a point?

AF: When AT&T is saying it needs its size to compete with Comcast if it buys Time Warner Cable, I think that speaks to the importance of not allowing Comcast to buy Time Warner Cable, because you see that more concentration of media begets more concentration of media.

I believe that media consolidation is a huge problem for American consumers and a real threat to our democracy. We need more competition, not less, because as these big corporations get bigger, consumers get stuck with higher prices, fewer choices and worse service. And these companies aren’t selling widgets; they control the means by which we communicate with each other and share ideas, so media consolidation threatens the diversity of views on which our democracy relies.

MCN: Moving to network neutrality, you are pushing the Federal Communications Commission to use its Title II authority to restore the rules …

AF: Yes, just label [broadband service as] a telecommunications industry. The court has said they could do that, and I think they should probably take the court’s advice. I think that would go a long way toward protecting net neutrality and I think it would go a long way toward making this sphere more competitive.

MCN: You described FCC chairman Tom Wheeler’s proposed new Open Internet order as possibly the beginning of the end of the Internet as we know it. Why did you say that?

AF: The chairman had brought up the idea of fast lanes, essentially. And I find that completely, diametrically opposed to net neutrality. I mean, the whole point of net neutrality is that all content is treated neutrally, or the same and travels at the same speed, and that has been the architecture of the Internet from the beginning. I want people to understand that. We’ve had members of Congress saying, “Well, we’ve had all this innovation of the Internet without net neutrality,” and they don’t understand that. I don’t want any of your readers to misunderstand that because we have had net neutrality from the beginning and the Internet has grown and exploded not just while we have had net neutrality, but because of it. The innovation that has come along has allowed startups and new companies to compete with very large companies and beat them because their content gets to travel at the same speed.

MCN: You were talking earlier about municipal broadband. You signed on to a letter about pre-empting municipal broadband regulations. Why should the FCC step in?

AF: I think the incumbents in Internet broadband have worked to stop municipal broadband, which can serve their residents and citizens very well. [Incumbents] have funded campaigns in state legislatures to stop municipalities from doing their own broadband, and I think that’s wrong.

That is why I asked [AT&T CEO Randall Stephenson] whether they had done that [at a June 24 hearing on the AT&T-DirecTV merger], and I guess he didn’t know.

MCN: Ultimately, though, it is the legislatures that vote on those laws. So, are they ostensibly representing their constituents?

AF: There has just been a big lobbying effort in state legislatures that has kind of been one-sided, and I think that they may not be voting in the interests in these municipalities and the citizens of these municipalities. So, it is sometimes when these very big, deep-pocketed corporations exercise those resources you get results that don’t necessarily serve the people.

MCN: Protecting privacy online is one of your signature issues. What is the latest on that front?

AF: I have been looking at location privacy. Smartphones have exploded over the last several years and these phones have apps, and sometimes the phones themselves, that can record where you are. And I feel that this location information is sensitive. It is where you live and work and take your children to school and go to church and where and when you go to the doctor. So, I think people should have the right to control that information; to give their approval if you want to take that information and share it.

Obviously, a lot of great things come out of there being this location data. If you want to go to the nearest Pizza Hut or bowling alley or whatever, you need to do that, and you are going to say, “Yes, take my location.” But there also have been abuses, and one of the worst abuses was from one of the first pieces of testimony that I got when I first did hearings, which was from the Minnesota Coalition for Battered Women. It was about a woman in Northern Minnesota in an abusive relationship who went to a county building where there was a domestic-violence center. The counselors there took her to a county courthouse to file a restraining order against the guy. Within a few minutes, he texted her and asked why she was in the courthouse.

This cyber-stalking has being going on for a long time, but the last statistics DOJ had on this were, I believe, from 2006, and it was 25,000 cases. Think of what the explosion has been since then in the use of smartphones. We have had hearings with law-enforcement and domestic-violence groups and this is very, very prevalent. Part of what I am trying to do with my location bill is making the marketing and selling of these [stalking apps] illegal.

MCN: What made you decide to get into politics and do you see it as a natural progression from your taking aim at the right wing, both on Air America and through your books, to actually being able to do something about it through the process?

AF: Well, yeah. I had been very conscious of public policy throughout my entire life. Ever since I was 11 or 12 years old, during the civil rights movement, I got kind of involved and interested in public policy. My dad was a Republican, but during the civil-rights debate he became a Democrat because of the 1964 Civil Rights Bill. Sen. [Barry] Goldwater [then the Republican candidate for president] had voted against it, and my dad said, “That’s it.”

That was very informative to me. This is something I have always been interested in. When I started doing comedy in high school with Tom Davis, I started doing political satire. When we got to Saturday Night Live, we were doing a lot of the political satire with Jim Downey, who is conservative, but a very, very thoughtful conservative. We felt the job of the show was to be insightful in our satire, but not to be liberal or conservative.

I think we did a really good job of that, and I am very proud of the work I did with a lot of my other writers there. But when I left the show in 1995 finally, I saw what the Gingrich revolution was, and I wrote the book about Rush Limbaugh [Rush Limbaugh Is a Big Fat Idiot and Other Observations]. That was my sort of saying, “OK, now I’m not writing for a bunch of other people, I’m writing for me.” I think your take is exactly right that it was a natural progression [to politics].

The tragedy of Paul and Sheila and Martha and others all dying in that plane crash was also part of the road there. [Paul Wellstone, former Democratic senator from Minnesota, was killed in a plane crash in 2002 along with his wife, Sheila, and daughter, Martha.]

MCN: Do you consciously downplay your funny side so you will be taken more seriously, or are you just a Harvard government major who got sidetracked by comedy?

AF: People have written a lot about this and I think it is overplayed. I think my staff will say I’m funny around the office and my colleagues will say I’m funny. But I’m also very serious, and I think you can be funny and serious at the same time.