The number of pay TV homes will drop to 73.2 million households by 2024 from 83 million at the end of this year, according to analysts Craig Moffett and Michael Nathanson of MoffettNathanson Research.

In a report issued Tuesday, the analysts said the cord-cutting will continue at a 4% to 5% annual pace, even though sports viewing appears to be rebounding. 

There were 93 million pay TV households in the third quarter of 2019, with 83.5 million with traditional video distributors and 9.5 million on virtual multichannel video programming distributors (MVPDs). They accounted for 78% of homes, versus 26.4 million non-pay TV homes, or 22%. 

Also: Cord-Cutting Getting Worse in 2021-22: S&P Report

MoffettNathanson said that by the third quarter of 2021, there were just 84 million pay TV homes, 71 million with traditional distributors and 13 million via vMVPDs. Non-pay TV homes grew to 39 million, or 32%. By year-end, pay TV households will be down to 83 million, the analysts said.

By 2024, MoffettNathanson said, the number of traditional pay TV homes will be equal to the number of non-pay TV homes. 

In their report, the analysts attempted to figure out what the absolute floor was for pay TV subscribers. Sports fans are among those most likely to keep pay TV. Viewers in about 58 million households describe themselves as sports fans who watch at least one event per month.

The least likely cord-cutters are households with members who are both sports fans and live news viewers. Looking at that group puts the floor at about 53 million, the report said.

“We believe the 18 million pay TV subscribers who are regular news viewers (but do not watch sports) and the 7 million who don’t watch sports or news are at risk for further cord-cutting,” the report said.

MoffettNathanson partnered with consulting firm Altman Solon on a study of consumer interest in sports. 

The number of households that consider themselves regular sports viewers has increased from 2019, while the number of traditional pay TV subscribers has continued to decline. 

“Sports fans are not abandoning traditional pay TV at all,” the report said. ”In fact, we estimate the number of regular sports viewers within the linear ecosystem (traditional pay TV or vMVPDs) has increased by over 2 million to 58.4 million in 3Q 2021 from 55.8 million 3Q 2019. 

“We estimate that the drop in linear TV subscribers has come exclusively from people who do not view sports, and the increase in sports viewership has come primarily from people who either have cut the cord or never had a pay TV subscription in the first place,” MoffettNathanson added.

While sports is a bulwark for pay TV, some sports are moving to streaming, the report notes.

“We expect sports leagues and media owners will become more aggressive in moving sports content over-the-top as it appears to be driving incremental reach without cannibalizing sports,” the report said. "We believe moving sports content to DTC services is a delicate balance, especially if major sports leagues like the NFL decide to become more open with their streaming partnerships.”

This could change the floor for pay TV. “If more sports content moves OTT, then perhaps some casual sports viewers are also at risk for further cord-cutting,” MoffettNathanson said. ■

Dish Network shares were up more than 3% in early trading Monday after influential media analyst Craig Moffett raised his rating on the stock from “sell” to “neutral” and upping his 12-month price target on the stock to $40 from $15, adding that its recent MVNO deal with AT&T erases the biggest overhang on the shares.

In a research note Monday (July 26), Moffett said the biggest weight on Dish stock had been the 2027 expiration of its MVNO deal with T-Mobile, a deadline that the analyst had said previously would make it difficult for the satellite TV pioneer to build out the remainder of its network after that date. But the AT&T agreement, which is essentially for 12 years, pushes that MVNO agreement out to 2033, giving the company the ability to be a hybrid Mobile Network Operator/MVNO “indefinitely.” 

Dish has said it will launch its first 5G wireless market -- Las Vegas -- in the third quarter. In June it launched a website -- Project Gene5is -- that will provide consumers updated information on the launch and possibly gauge interest in the service in markets outside of Las Vegas. 

Also Read: Cable Wireless Grows Up 

“Now, with the stroke of a pen, all those rakes are off the table,” Moffett wrote. “Dish is virtually assured a path to viability.”

Dish shares responded accordingly, rising as high as $43.41 each (up $1.73, or 4.2%) in early trading July 26. The shares were trading at $43.10 (up 3.4%) at 10:50 a.m. on Monday. 

Moffett has been a critic, along with several other analysts, concerning Dish’s wireless prospects, saying in reports several years ago that the company’s claims it could build a nationwide wireless network for $10 billion was dangerously low.  

Also Read: Dish Wireless Pushes Forward 

Moffett still harbors those fears. In the most recent report he noted that the  AT&T deal won’t help the build out at all (Dish is required by federal mandate to make its network available to 70% of the country by 2023) and he estimated that its $10 billion price tag is still incredibly low. But the AT&T deal removed the worst-case scenario from the table, he added.

But making the wireless business easier for Dish doesn’t necessarily bode well for the remaining wireless players. Although Dish will pay AT&T about 4% billion over the life of the MVNO deal, it also allows the satellite company to pick and choose which markets it will build out itself -- most likely the denser, more profitable ones -- and leave the more sparsely populated areas to AT&T.  

“Good news for Dish is bad news for the industry,” Moffett wrote. “We are incrementally more bearish about AT&T and Verizon, and less bullish about T-Mobile, than we were before.”   

Share repurchases, put on hold during the pandemic, are poised to make a big comeback as cable companies look for places to put their huge stockpiles of cash to better use, according to one influential analyst. 

In a research report, MoffettNathanson principal and senior analyst Craig Moffett wrote that with broadband growth slowing, capital intensity waning and share valuations low, cable operators will likely focus on returning cash to shareholders through stock repurchases. 

Moffett noted that cable is at a unique point in its capital cycle — large-scale infrastructure investments are pretty much no longer needed, margins are rising and major industry consolidation is a thing of the past. 

“The entire cable industry is now in harvest mode,” Moffett wrote.

Most analysts believe that broadband growth will slow in the next few years after a record 2020. But the key is that growth is expected to slow, not stop. And while slower growth would be a problem for the stocks if their valuations were high, that is not the case in the cable industry, where public stocks have been trading well below private deal multiples.

The combination of low multiples, rising margins and declining capital intensity leads to a “geyser” of free cash flow (cash flow after interest payments and capital expenditures are made), Moffett wrote, which then can be used to repurchase shares. 

Share repurchases have been a popular vehicle to return cash to shareholders for years. According to Moffett, Comcast has bought back about 17% of its outstanding stock in the past 10 years, while Charter has reduced its outstanding stock by 34% since closing its Time Warner Cable purchase in 2016 and Altice USA  has repurchased about 37% of its outstanding stock since splitting off from Altice N.V. in 2018. 

But in the past two years, repurchases have declined due to a desire to pay down debt and uncertainty surrounding the pandemic. Comcast, which had been buying back an average of $4 billion to $5 billion worth of shares annually prior to the pandemic, stopped its repurchase program in 2019 as it focused on paring down debt associated with its purchase of British satellite company Sky. 

Comcast’s goal was to reduce its leverage ratio to about 2.5 times cash flow from about 3 times at the time. Comcast has said it expects to reach that target by the end of 2022. As of March 31, Comcast’s leverage ratio was at 2.7 times. 

During its first-quarter 2021 earnings conference call with analysts, the company said it planned to restart that buyback program in the second half of the year. At the JP Morgan Global Technology, Media and Communications conference in May, Comcast chief financial officer Mike Cavanagh said the repurchase program was restarted that month. 

Cavanagh said at the conference that Comcast would repurchase stock at about the same pace it had before halting the program, which has averaged between $4 billion and $5 billion per year. Given the huge amount of cash the company is generating, though, that won’t be enough, Moffett wrote.

By Moffett’s estimates, Comcast is expected to generate about $16 billion in free cash flow in 2022, $18.6 billion by 2023 and $24 billion by 2025. Given average annual operating cash flow increases of about 7.6% over the next five years, even spending all of its free cash flow on stock repurchases won’t be enough to keep leverage at 2.5 times.

In his report, Moffett estimated that if Comcast indeed wants to keep its leverage ratio at 2.5 times, it would have to spend all of the free cash flow it generates plus 2.5 times in each year’s EBITDA growth.

“Based on our estimates, and assuming that they increase their dividend by 10% per year, by 2025 they would need to buy back more than $90 billion of stock, an amount roughly equal to 34% of the company’s current market cap,” Moffett wrote. 

He estimated that over the past 10 years, Comcast has returned about $60 billion in capital to shareholders — $33.1 billion in buybacks and $27.2 billion in dividends. 

Moffett was quick to add that Comcast has not said what it intends to do after 2022 regarding repurchases, and analysts’ consensus estimates predict the company to spend between $8 billion and $9 billion per year buying back its stock. Moffett’s estimates are nearly double consensus estimates at $15 billion to $16 billion. But even at that level, the analyst pointed out that it still falls short of consuming all the cash Comcast is expected to generate. 

“Our forecast for repurchases — again, roughly 2x consensus — represents an 11% decrease in shares outstanding (net of shares issued under employee plans) by 2025, still only a fraction of what they could do,” Moffett wrote. 

Moffett admitted that there are a lot of other things Comcast could do with the money, and speculation has been high it will seek out a major acquisition, despite the company’s claims to the contrary.  But consolidation has largely already happened in the industry, and any future deals are expected to be small ones. In addition, the market, Moffett wrote, would prefer share repurchases or a separation into two separate stocks -- an idea other analysts have floated in the past -- and then even more buybacks.

“Indeed, one can argue that share repurchases are more than just a ‘niceto have,’” Moffett wrote. “Given where Cable is in its life cycle — slowing growth, rising free cash flow — this is arguably the only appropriate strategy, at least from the perspective of institutional investors.” 

Others, like Charter and Altice USA, have maintained or even increased their buyback pace, but are poised to step on the accelerator in 2022 and beyond.

According to Charter’s 10-K annual report, it bought back about 21 million shares of its stock in 2020 for about $12 billion, up about 55% from the 19 million shares it repurchased for $7.8 billion in 2019. The dramatic rise in Charter’s stock price over the periods was a big factor in the amounts spent on repurchases — between Jan. 1 2019 and Dec. 31, 2020, Charter stock rose from $284.97 to $661.55, or about 132%. So far this year, Charter stock is up about 7.4%. 

Charter is different from Comcast in that its current leverage ratio of about 4.4 times is within  its targeted range of between 4.0 and 4.5 times cash flow. But even if it decided to pare its debt just a bit more, Moffett noted it could substantially increase its repurchases.  

“If Charter were to manage to the midpoint of their target leverage range (4.25x EBITDA), our model would imply share repurchases of $66 billion  over the next five years, a sum equal to 47% of today’s market cap,” Moffett wrote. 

Moffett predicts that Charter will spend a little less, about $58.6 billion, on buybacks by 2025, adding that the cable company is not prioritizing capital returns over capital investments. Its participation in the RDOF auction is evidence of that, and the company has said that it would like to own more cable. 

But again, the number of deals available are small given Charter’s size. As the No. 2 cable operator in the country, it has about 16 million video customers and 29 million broadband customers. 

“So cash return not only looks like the best use of capital for Charter… it also looks like the most likely,” Moffett wrote.   

Altice USA has made some small acquisitions — it bought Morris Broadband in April for about $310 million and Service Electric Cable TV of New Jersey in July 2020 for $150 million — while pulling the plug on larger deals like its abandoned joint $8 billion bid for Atlantic Broadband parent Cogeco Communications in November. 

While the operator says M&A is still in the mix, Moffett believes that it won’t be big enough to affect capital returns to shareholders. 

That’s because Altice has been an aggressive buyer of its own stock — it repurchased about $7.5 billion worth of shares since 2018 — and its valuation multiple is low. In addition, Altice has said it would prefer buybacks to paring its debt. Its leverage is currently at about 5.5 times, just short of the targeted 4.5-to-5 times, and Altice believes its stock is cheap.

Altice has only guided its repurchase intentions in the short term and has said it plans to buy back about $1.5 billion of its shares in 2021. Moffett estimates it may buy back about $1.6 billion worth of shares this year, but noted that taking leverage down to about 4.75 times would imply a buyback potential of more than $11 billion through 2025.    

MoffettNathanson initiated coverage of the video gaming sector Thursday, adding that sub-par broadband speeds in a large chunk of the country could affect growth at some of the biggest game makers. 

In a 104-page report, MoffettNathanson research analyst Clay Griffin issued “buy” ratings on top game makers Activision Blizzard and Take-Two Interactive and slapped a “neutral” rating on Electronic Arts. He outlined three “mega-trends” in the industry, two of which have at least some ties to the cable broadband business, with increased digitization of game distribution being the largest.

Griffin wrote that the movement from packaged games sold in stores to titles that can be directly downloaded to PCs has been going on for years, but that digital distribution of console games only recently passed 50% of total unit sales. While Griffin noted that Electronic Arts finished the last fiscal year with a 62% digital full game mix and Take-Two and Activision reported even higher percentages, he doesn’t see the total elimination of video game stores just yet. One of the reasons for that is the lack of availability of ultra-high broadband speeds throughout the country. 

“The convenience argument — ‘avoid the store, just click to buy’ — is diluted by the fact that modern games are huge files,” Griffin wrote. “Activision’s Call of Duty: Black Ops Cold War weighed in at 136 GB on XBox Series X/S. Broadband speeds have improved, but according to the FCC, about ⅓ of the country doesn’t yet have a connection capable of 100 Mbps.”

Griffin added that even at 100 Mbps, Call of Duty: Black Ops Cold War would take three hours to download.

President Joseph Biden has proposed spending about $100 billion for broadband deployment as part of his American Jobs Plan infrastructure package that would help close that digital divide. While the government’s definition of sufficient high-speed internet has been in the 25 Megabit per second range in the past, some Democrats have pushed for that minimum to be raised to 100 Mbps. 

Cable operators have noticed an uptick in take rates for higher speed broadband tiers during the pandemic, and many expect that trend to continue. Broadband speed has been a priority for cable operators for years — Comcast has increased the average speeds of its broadband service every year for the past 20 years, Comcast Cable CEO Dave Watson said during the company’s Q1 earnings call.  Charter Communications said during its Q1 earnings call that most of its broadband customers opt for its entry-level 200 Mbps package. 

About a week ago (June 17), the National Telecommunications and Information Administration (NTIS) released an interactive map that shows key areas of broadband need across the country using data from public and private sources. According to that map, there are large pockets of the U.S. that have average broadband speeds of 25 Mbps or less. 

Though game developers have made it possible to start and play games without finishing the download and broadband speeds are expected to improve, game files will likely get bigger, too.  Data caps that limit downloads to 1 Terabyte per month seem huge on the surface, but could become another barrier, “especially as video streaming steadily replaces cable/satellite,” Griffin wrote.

Among gamers, that transition is already happening. 

Griffin cited a Deloitte study that showed 26% of Generation Z (those born between 1997 and 2015) and 16% of Millennials (those born between 1981 and 1996) cited playing video games as their favorite entertainment activity. Watching TV shows or movies at home placed last for Generation Z (10%) and a close second for Millennials (18%, compared to 14% that picked listening to music). In comparison, 39% of Boomers (those born between 1946 and 1964) picked watching TV shows and movies at home as their favorite entertainment activity, with only 3% selecting video games.

While entertainment choices will likely shift once Generation Z gets older, that isn’t always the case, pointing to the 16% of Millennials who picked gaming as their favorite entertainment activity. 

“Over half of Millennials are now over 30 years old. Old enough where the “chains of habit” are starting to get pretty heavy,” Griffin wrote. “The implications of this are clear. Even if Gen Z were to look more like the Millennials do now a generation forward, Millennials and even Gen Xers, will undoubtedly be more involved with video games than Boomers are today.” 

Griffin referred to Take-Two CEO Strauss Zelnick’s often-quoted remark that “people consume the media they fell in love with when they were 17 for the rest of their lives. We think there’s some credence to that idea.”

There are a lot of reasons why a merger between DirecTV and Dish Network wouldn't make long-term sense — it would cost too much, it would be the combination of two business that are in rapid decline, it’s anti-competitive, it’s just plain dumb — but that doesn't stop people from bringing up the possibility from time to time. And while talk about a possible deal probably will never truly die, Moffett Nathanson principal and senior analyst Craig Moffett said in a research note Tuesday he may have found the final nail in the Dish/DirecTV merger coffin: President Joe Biden’s $2 trillion infrastructure bill.

In a 19-page research note, Moffett pointed out that the infrastructure bill, which includes about $100 billion for broadband expansion into rural areas, could remove one of the barriers to a DirecTV-Dish combination — the fear that it would reduce TV distribution competition in rural markets from two players to one — but creates another. By giving cable, telco and other operators financial incentives to extend broadband into areas that didn’t make economic sense in the past, it also gives consumers the final reason to dump their satellite TV subscription. 

“The Biden infrastructure bill explicitly targets taking the rural core of customers historically served exclusively by satellite providers to zero,” Moffett wrote. 

Also Read: AT&T and TPG: There is No Why

While opening up the rural broadband market would appear to remove one roadblock to a satellite merger — that such a deal would take down the number of competitors in less populated areas from two to one — it poses another challenge in that it could eviscerate satellite TV’s last stronghold. 

“Given the option, for the first time, of choosing not just cable but also OTT alternatives, it’s a safe bet that many customers will simply leave,” Moffett wrote of the satellite TV subscriber base. 

The old arguments for a DirecTV/Dish merger appear compelling on the surface — putting the two together would create a satellite TV juggernaut with 23 million subscribers (more than Comcast!) and would produce cost efficiencies and synergies in the billions of dollars per year. But despite the plusses, those that would push for a merger between the two companies are ignoring the one very big minus — consumers are abandoning traditional pay TV structures for more flexible streaming relationships that ensure that a combination would only prolong the inevitable breakdown of the business. 

Also Read: Dish Gets Back to Its Rural Roots 

And it already is breaking down pretty rapidly without any external help. Moffett estimated that pay TV (cable and satellite) has been losing customers at a 7+% clip over the past four quarters. Gross additions for both DirecTV and Dish have also been plummeting — from a combined 6.45 million subscribers in 2016 to 2.36 million subscribers in 2020. 

In his report, Moffett wrote that the Biden bill would be a “body blow” to the satellite TV business, but especially for Dish, which has made a focus on rural markets its main focus over the years. The same strategy, according to Moffett, has kept DirecTV’s subscriber losses from going totally in the tank.

While Moffett added that the actual size of the rural subscriber pool is unknown, it is obviously large enough to keep these companies going as it becomes an increasingly important part of their respective businesses.

“As the subscriber bases of the two companies spiral lower, the rural core has been steadily growing as a share of what’s left,” Moffett wrote. “Merging the two companies would not change this dynamic at all.”

And now, he continued, “The federal government wants to spend $100B to make this market segment disappear.”  

Dish Network chairman Charlie Ergen has said on several occasions that he believes a DirecTV/Dish merger is “inevitable,” but given that Dish’s future is tied to whether it will be able to successfully build a wireless network, merging with DirecTV shouldn’t be top of mind, according to Moffett.  

Dish has about $16.5 billion in debt ($10.5 billion of which is pledged toward the satellite business) with about $2 billion in maturities due in June. Dish could make that payment with cash on hand, but according to Moffett, that would starve the wireless effort of needed cash to fund its buildout. 

Dish has said that it will spend about $10 billion on its wireless network, a figure that Moffett has said in the past he believes is strikingly low. Adding pressure to that aspect of the business can’t help the situation. 

DirecTV relies on the rural markets as well — Moffett estimates that most of the churn in rural markets is actually between the two satellite companies, so any reduction in that base will adversely affect both companies. In addition, AT&T’s deal to spin off its DirecTV, AT&T TV and U-verse businesses with TPG Capital earlier this year carries a high interest loan (10%) from TPG that also includes a “warrant for 30% of the excess value in the event DirecTV ever realizes an exit at a valuation of greater than $16.2 billion, as it might in the event of a Dish merger,” Moffett wrote. 

Dish and DirecTV tried to merge in 2002,  when both were much stronger companies and the threat of broadband was minuscule, and the government blocked it.  Even as satellite’s fortunes began to wane during a presidential administration that was supposedly open to more deals, the feds reportedly made it pretty clear that they would block a merger, and the current administration appears to be even less inclined to allow a big combination. But ultimately, whether a deal is done will come down to what these things usually come down to — economics. And with the government ready to fund satellite TV’s competitors in its most stable market, those economics don’t look so good. 

Notwithstanding the cratering of viewership in last Sunday’s Super Bowl LV, which collapsed quicker than the Kansas City Chiefs’ offensive line, streaming services could be poised to snatch what has been the last vestige of appointment television: live sports, according to at least one influential analyst.  

According to Nielsen, 96.4 million homes watched Super Bowl LV on TV, the lowest number since 2007. About 5.7 million homes streamed the game, the highest level for that metric ever. 

In a research note that was issued before those ratings numbers were released, MoffettNathanson media analyst Michael Nathanson pointed to the growing trend of younger viewers migrating to streaming video, and that it would likely mean that sports would have to follow them. Nathanson didn’t expect big tent sporting events like the Super Bowl or the World Series to switch exclusively online, but he said games from various professional and college sports leagues, a staple of cable networks like TBS, TNT and regional sports networks owned by teams, could be in danger.

“We would think that the NFL, NCAA, ‘March Madness,’ NBA and MLB Playoffs will remain the domain of broadcast and will have digital rights that are monetized via affiliated services like Paramount +, Peacock or ESPN +,” Nathanson wrote. “Fox, the odd man out without a paid OTT service, will have a decision to make about how they move forward.”

Fox bought entertainment streaming service Tubi last year, which offers free ad-supported movies and shows from several networks, including Fox, doesn’t have a sports component. On Feb. 9, Fox said it expects Tubi to reach $1 billion in revenue over the next few years. In 2021, it anticipates revenue at the service will double to about $300 million. 

Keeping tentpole sporting events on the four major broadcasters makes sense for now because that’s where the majority of viewers are. Even the worst-viewed Super Bowl in 14 years was watched on traditional TV by a nearly 20:1 margin over streaming. 

But for nationally televised sports like the NHL, NBA, golf, tennis and college sports, the staples of sports-based cable channels, networks may have to make some hard choices soon, Nathanson continued, adding they may have to adopt a hybrid approach like Peacock and NBCU, putting a limited number of events across a smaller number of networks. That, Nathanson wrote, in turn “would mean the end of FS2, ESPNU, CBS Sports Networks and a greater number of games carried on OTT products also now including HBO Max.”

Analysts have been warning that streaming services like Netflix, Amazon Prime Video and the like could disrupt the televised sports business for years, but so far they have only dipped their toes in the sports business. But as new services emerge, they are beginning to pay attention to sports, and that should have linear networks worried.

In the past month Peacock, Comcast NBCUniversal’s streaming offering, has said it will assume sports programming from NBCSN at the end of the year, when that regional sports network shuts down. 

Peacock also reached a deal with WWE, where its WWE Network streaming service will be available exclusively to Peacock subscribers for $4.99 per month (free to Comcast Xfinity customers, who also get Peacock premium for free). In addition, WWE renewed its licensing relationship with NBCU’s USA Network, which airs WWE’s Monday Night Raw.  

Viewership on cable sports channels has been slipping as younger viewers cut the traditional pay TV cord. ESPN has lost about 9% of its subscribers since 2015 because of cord cutting, while FS1 has lost 5% and the Golf Channel has dipped 11%, according to MoffettNathanson. At the same time, overall time viewed on cable sports channels like ESPN and Fox Sports 2 has fallen a collective 5% since 2015. For some channels the drop is more pronounced -- ESPN2 dropped 12% and ESPNU fell 11% in that time frame. Also during that period, remaining viewers are getting older. According to MoffettNathanson, 65% of all cable network viewers are over the age of 50. 

“Obviously, if you are a sports league trying to build long-term connections with the next generation of fans, this is an increasingly terrifying outcome,” Nathanson wrote. 

Nathanson pointed to both the WWE deal and the NBCSN closing as signs of a sea change in the industry.

“If a Comcast-owned network decides the economics of a standalone national sports network no longer makes sense, what does this mean for other national sports networks?” Nathanson wrote. 

Sports consultant Lee Berke, president and CEO of LHB Media & Entertainment said that while the business is changing, it won’t necessarily be an either/or scenario. Berke believes that most sports networks won’t pick sides in the streaming wars, but will instead continue on a path toward multi-platform offerings.  

“I don’t see pay TV going away. I don’t see sports going away on pay TV. I think you see less of it,” Berke said. “I think you see a more consolidated bundle of fewer networks, that are general interest, sports, entertainment and news. Even in the worst scenarios, they’re still going to have 50-60 million TV homes that are subscribers to these bundles. So there’s still value there. There’s an audience there.”

Berke added that networks will continue to beef up their direct-to-consumer services with sports. He pointed to ESPN +, which has added considerable content from its launch in 2018, and which he believes will be nearly indistinguishable from ESPN- proper in the next few years.  

“You’ll see this sag in the pay TV universe,” Berke said, adding that some sports will migrate to streaming services, some will revert to broadcast and some will remain on pay TV. “I think the key is there has to be a multi-platform strategy. The idea of a linear-only sports network just is not going to work going forward.”   

Content companies already have started putting much of their linear content on their direct-to-consumer offerings. During the Super Bowl, ViacomCBS spent a lot of money on ads for its upcoming Paramount + launch, mainly showing shows that are already available on their linear channels. 

Making all of a network’s linear content available to stream on a separate app hasn’t sat too well with distributors in the past, especially if the streaming app is priced lower than the rate the distributor is paying. That, Berke said, will have to be negotiated out.

“There will have to be a reckoning,” Berke said.       

Programmers will have to start making those decisions soon. Although streaming has obviously been a part of at least some sports rights deals -- and the major broadcasters have already locked up Major League Baseball, PGA Golf and SEC Football agreements recently -- there are still several left to negotiate. According to Nathanson, ESPN’s MLB rights deals come due in 2022, as does NBC’s Premier League pact. In 2023, several NFL rights deals expire: ESPN’s Monday Night Football, Fox’s Thursday Night Football and Sunday NFC packages, NBC’s Sunday Night Football and CBS’s Sunday AFC football package. Also that year, Fox and ABC/ESPN’s Big Ten college football packages are set to be renegotiated.  

Further out, ESPN’s and Fox Sports’ Pac-12 and ESPN’s UFC deals expire in 2024. In 2025, the NBA’s rights agreements with  ABC/ESPN and TNT come due; as do Fox and NBC Sports pacts with NASCAR. 

While streaming is expected to play a big role in those negotiations, and sports has come under fire for driving most of the rate increases for pay TV, Berke said he still expects a robust rights market.

“Because every technology, every new platform needs sports to drive subs, the key properties that are out there will have healthy increases in rights fees,” Berke said. “I think the NFL is going to come close to doubling. The NBA, which has acknowledged that the one issue they have is that they haven't established a strong streaming presence in a sport that skews young, when their deals are up in 2025 they will go much more heavily into streaming platforms and direct-to-consumer. Because these media businesses will have multiple screens and multiple ways to make money, and because they need to drive subscribers across all of them, the rights fees will go up substantially.”  

Who would have thought five years ago, when former Disney chairman and CEO Bob Iger told analysts that the then-relatively new phenomenon of cord cutting was starting to erode its pay TV subscriber base, that the saving grace for the company would be embracing the very thing -- streaming video -- that was destroying it?

At the time, the company’s direct-to-consumer offering, Disney Plus, wasn’t even a twinkle in old Bob’s eye. But five years later -- Iger is now executive chairman and Disney is led by former theme parks division chief Bob Chapek -- it not only is one of the more successful DTC streaming services on the planet, influential media analyst Michael Nathanson, who like others adopted a conservative stance in the streaming service's early days, now believes the sky's the limit. In a research report released earlier this week, Nathanson estimated that Disney Plus subscribers will reach 50 million domestically and 155 million globally in the next four years.

Nathanson pointed out in the report that he remains neutral on the stock, but that is mainly because of the pandemic's effect on its theme park business (which laid off 28,000 workers earlier this week), its theatrical movie business (production is only just beginning to ramp up and no one is going to theaters) and its sports channels. Disney Plus remains the bright spot, and Nathanson rightly points out that the success of that business has shifted investor attention away from the eroding pay TV subscriber base.

The evidence is in the stock price. Disney shares tanked in August 2015, when Iger let it be known that cord cutting was in fact affecting ESPN’s pay TV customer base -- dropping 10% in one day and dragging down the entire sector. 

The stock made a big recovery in the past few years and was priced in the $140 per share range before the pandemic hit. That, coupled with continued pay TV subscriber erosion (traditional pay TV customer losses have broken records for eight straight quarters) have chipped away at programming shares in general. Disney stock fell as low as $91.81 each on March 12, but have gained ground since, closing at $123.31 each Oct. 1. That reversal appears to have come solely on the back of the streaming business. 

Also Read: Brave New TV World 

In his note, Nathanson wrote that Disney stock has effectively "decoupled from the usual historical pattern witnessed in prior economic downturns where negative earnings revisions and multiple contraction generate meaningful market under-performance. This time around, the once in a generation, pandemic-driven disclosure of theme parks and movie theaters plus the acceleration in cord-cutting has been largely ignored as investors gravitate to a Sum of the Parts valuation approach using Netflix’s price to sales as a valuation comp for DTC." 

Aggressive pricing (it launched at a very attractive $6.99 per month), strong programming from its recently acquired Fox library and a little luck (The Mandalorian), continues to drive the business. Disney Plus also should have a halo effect on Disney’s other streaming properties -- Hulu and ESPN Plus. Nathanson estimated that Hulu subscribers will grow to 66 million by 2024 (up from earlier guidance of 55 million) and ESPN Plus customers will rise to 18 million in the same time frame (up from previous estimates of 12 million).

Also Read: Everything You Need to Know About Disney Plus

That’s pretty impressive, given that at the end of 2019, Disney Plus had about 26.5 million subscribers globally. At the time Nathanson estimated that 24 million of those subscribers were domestic, meaning that in just two months (Disney Plus launched in November 2019), the streaming service accounted for about 20% of the broadband subscribers in the U.S. Now, Nathanson, who last year estimated that Disney Plus would reach 25 million subscribers by 2024 -- predicts the streamer will grow to 42% of U.S. domestic broadband subs, not far from the 57% he expects to be Netflix subs in the same time frame. 

Disney said in August that Disney Plus had about 60.5 million subscribers, reaching the low-end of its five year guidance of between 60 million and 90 million customers in one year. 

“Disney has proven to the Street that Disney Plus is a big enough lifeboat to help the company reach the other side of this media landscape upheaval in a strong position,” Nathanson wrote. 

But it will come at a price.

Nathanson estimated as Disney Plus rises, most of its other assets will be severely weakened. At the Parks, he estimated that pandemic effects will bleed into fiscal 2021, which will continue to be impacted by capacity restrictions and discounting to incentive travelers. At ESPN, the analyst believes that traditional pay TV declines will reach -9% this year, and that he expects cord cutting to remain at around -5% in the out years.

“Given these secular pressures, ESPN’s linear channel business will have a hard time maintaining its level of profitability over the next few years even if no major sports rights are dropped,” Nathanson wrote. 

He added that even if ESPN manages to successfully renew its affiliate deals over the years, he doubted it would be at a rate high enough to offset the cost of escalating sports rights. As a result, he’s forecasting a 100- to 200-basis point drop in affiliate fees in the out years, with margins shrinking from 30% in 2019 to 27% this year and 22% by 2024.

The C3 commercial ratings used to buy and sell advertising fell 13% among adults 18 to 49, according to an analysis of Nielsen data by Wall Street analyst Michael Nathanson of MoffettNathanson Research.

Cable ratings were down 11% and broadcast was down 16%, Nathanson said.

TV ratings got a boost in 2016 when Nielsen switched to a bigger sample size.

“Ratings declines in 2017 were even worse than we imagined, with seven of the past 11 months declining double digits,” Nathanson said in a report.

Nielsen and the networks do not release C3 figures.

21st Century Fox’s networks were the biggest decliners among cable channels. A+E Networks and Disney were the only cable network owners to post gains in primetime among 18-to-49 year-olds.

Related > Disney-Fox: Hell Freezes Over

Among individual cable networks in total-day C3 ratings, Nathanson said A&E was up a whopping 40% for the month. Also posting gains were Hallmark Channel, up 12%; History, up 9%; MSNBC, up 8%; and Freeform, up 7%. Viacom’s MTV was flat.

The biggest decliner was Fox News Channel, followed by Viacom’s Nick at Nite. It's worth noting that Fox News uses live-plus-same-day ratings as it primary ad sales metric. The network recently noted that it has had its highest rated year in its history on a total-day basis.

The declines by the broadcast networks came against the backdrop of the presidential election a year ago, which brought viewers to their sets. Fox, which had a huge World Series finale a year ago, was the biggest decliner.

”Given the challenged ratings trends we have seen and expect to continue, we remain cautious on the TV advertising market’s ability to grow dollars by offsetting these declines with higher CPM inflation,” Nathanson said.

Analysts say AT&T’s declaration that it would offer distributors arbitration when Turner carriage deals expire—and its promise of no blackouts for seven years—if its acquisition of Time Warner goes through answers one of the government's biggest objections to the deal.

AT&T disclosed the offer on Tuesday in response to the Justice Department’s suit looking to block the merger on antitrust grounds.

Related: AT&T, Time Warner Accuse DOJ of Selective Enforcement

In a research note Wednesday (Nov. 29), MoffettNathanson Research analysts Craig Moffett and Michael Nathanson called AT&T's arbitration and no-blackout gambit clever.

“In a single commitment, AT&T has gotten to the very heart of the DOJ’s case,” the analysts say. "This commitment captures the very essence of the so-called 'non-exclusivity provisions' of the erstwhile Program Access Rules about which we have written so frequently in the past.

“And by making the commitment irrevocable, they have alleviated the take-it-or-leave-it nature of the decision that would otherwise have faced Judge Leon,” Moffett and Nathanson say. “This both reduces pressure on Judge Leon – he no longer has to consider the deal as if it has no behavioral remedies whatsoever, as would have been the case absent this commitment – and increases it, as it now becomes much harder to reject the deal when AT&T is committing to exactly the same behavioral remedy to which Comcast committed (and for the same amount of time).”

The analysts say it would be tough for the Justice Department to argue that AT&T would be able to raise the wholesale price of its content to competitors when it is agreeing not to use the weapon that gives it the most leverage, and most hurts consumers.

Cable operators have a few years left of continued increased capital spending, but advances in customer equipment coupled with increasingly intelligent and high-capacity networks could drive spending down substantially.

Overall capital spending as a percentage of revenue could drop from its current level of about 15% of total revenue to 10% in the next five years, according to a report by U.K.-based New Street Research.

On average, New Street estimates that capex per home passed could fall from its current level of about $140 to around $120 per home passed. And that’s after some operators — Altice USA and Charter Communications — complete ambitious network upgrades aimed at increasing data speeds and improving efficiencies.

FTTH Buildout
Altice USA is well underway with its “Generation Gigaspeed” project to bring fiber directly to the home. The upgrade is expected to take five years, and the company recently said it is on track to reach 1 million homes with fiber by the end of 2018.

While Altice is expected to see capex rise slightly in the next few years as it goes through that project — Morgan Stanley media analyst Ben Swinburne estimated it would spend an additional $3 billion over the next five to six years on Gigaspeed — other operators will see their capital commitments shrink.

That freed up cash could be used to bolster other parts of the business, introduce new products or simply be returned to shareholders in the form of stock buybacks and dividends.

Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said he believes how the extra money is used depends on the operator. For Charter, he sees most of that capital being reallocated to stock buybacks. In Comcast’s case, it could possibly go toward M&A; and for Altice USA, debt retirement and M&A.

“Eventually, after a couple years of decline, I think that all starts moving in the direction of Altice USA, to [fiber-to-the-home] where demand warrants,” Wlodarczak said.

Not everyone is convinced that capex is on the way down though. Moody’s Investor’s Service senior vice president Neil Begley said in an email message that while smaller operators may see some declines, the larger players will stay at or around current levels.

“I think that video product development and wireless spending will keep capex high for the large players,” Begley said. “But for the smaller players, since they do not possess the scale to develop their own software and hardware applications, and are unlikely to spend much on wireless other than to extend some fiber, there is a good chance for capex to decline to maintenance levels and commercial extensions of fiber.”

Capital expenditures have been up and down for cable operators over the years, especially as MSOs have embarked on new product and service initiatives.

Comcast, which began the national launch of its X1 platform in 2012, saw its capital spending rise sharply as it deployed new boxes and beefed up infrastructure across its markets. Capex for the company, which had normally risen by about $100 million per year prior to 2012, began to rise by about $500 million annually after that date. But that spending is expected to decline beginning this year, from $7.6 billion in 2016 to $7.02 billion in 2017 and to $6.8 billion by 2018, according to MoffettNathanson principal and senior analyst Craig Moffett.

Similar capex reductions are expected at other cable operators.

Longer CPE Life
Cable companies are approaching the end of the most recent upgrade cycle, according to the New Street Research report, written by analysts Frank Knowles and Andrew Entwistle.

What’s different this time is that new CPE in the form of set-tops and WiFi router equipment can be upgraded remotely, which should extend the life of the equipment substantially.

With the increasing trend of placing storage and functionality in the cloud, the era of the bulky set-top box also could be coming nearer to a close. New Street predicted that, long term, the typical set-top box will essentially be a dongle with IP access and encryption but with storage and intelligence housed in the cloud.

“We can see an end in sight for the expensive set-top box as storage and functionality move to the cloud, but offsetting this from a capex perspective is the increasing cost of solving customers’ in-home networking problems,” Knowles and Entwistle wrote. They added that additional costs for WiFi equipment, like home network hubs, could be offset in the short term by charging more for the service and in the long-term through reduced churn and better customer satisfaction.

Cox Communications is already doing this with its Panoramic WiFi product, a whole-home WiFi solution that costs about $9.99 per month. Comcast’s xFi product, a cloud-based home WiFi management platform, became available to existing customers in May at no additional charge.

New Street estimated that CPE costs per customer were fairly stable between 2012 and 2015 at about $100 per customer, but have fallen sharply in recent years, to under $80 per customer by the second quarter of this year.

Costs vary among operators – Comcast is deploying more expensive X1 boxes while operators like Cable One have de-emphasized video. But New Street expects CPE reductions alone to result in a 15% savings in overall capex per home passed from nearly $140 to $120.

“We think that core network spend can reduce as networks are modernized and virtualized, leading to savings in equipment maintenance and in space/power,” the analysts wrote.

Analyst Michael Nathanson of MoffettNathanson Research is forecasting a bigger decline in TV advertising for 2017.

In a new report released Thursday (Aug. 24), Nathanson said he sees national and local TV ad revenue decreasing by 5.1% compared with his prior 4.1% estimate.

Nathanson said he expects the broadcast networks to drop 4%; cable nets, 2.5%; local TV stations, 9% (including political ads); local cable, 10%; and syndication, 1%.

Related: Analyst Forecasts 5% Decline in Total TV Advertising

Overall, Nathanson’s latest forecast sees U.S. advertising growing at a slower 2.5% rate, with digital increasing 18.5%.

The new forecast follows second-quarter earnings reports in which most TV companies reported lower advertising sales. Total national TV ad revenue was down 2%.

More recently major ad agency holding companies have reported lower revenue because of spending cutback by big clients.

“Simply put, traditional media and agencies in the U.S. face the same problem,” Nathanson said in a report Thursday. "They have too much client concentration in sectors like retail, consumer products and auto that are not growing budgets and not enough small-to-medium sized enterprises that continue to fuel online growth."

Read more at broadcastingcable.com.

WideOpenWest is inching closer to a planned initial public offering, setting a price range for the stock that potentially could raise nearly $500 million to help pare down debt.

While the overbuilder has stressed it is focused on organic growth, it also points to a string of successful purchases over the past 15 years and is keeping its deal options open while moving deeper into a strategy that favors broadband over video.

Related: WOW Sporting New Logo

WideOpenWest was formed in 2001 and made its mark that same year when it bought SBC Communications’s Ameritech New Media, a state-of-the-art overbuild in Illinois and Michigan and Ohio that gave the upstart company instant credibility. WOW paid between $200 million and $300 million for the assets, which added about 300,000 subscribers. Using a popular metric from the period, the Ameritech deal was valued at about $1,000 per subscriber, or about one-quarter of SBC’s original asking price for the assets, according to reports.

From there, WOW set off on a string of acquisitions that beefed up subscriber rolls. Buying Sigecom in 2006 gave the company an inroad in the Indiana market, followed by five other deals that added 330,000 customers for a combined $1.6 billion.

New Organic Approach
WOW has focused on organic growth lately. Chairman Jeffrey Marcus, who joined the company after private-equity player Crestview Partners purchased a 35% interest in WOW in 2015, has said it will emphasize broadband rather than video going forward. But it also wants to take advantage of smaller tuck-in acquisitions.

Related: Marcus Helps Set WOW's Winning Strategy [subscription required]

Tuck-ins may be the only deals left to pursue. Altice USA, the domestic cable arm of European telecom company Altice N.V., is expected to unveil its IPO later this year and could be an aggressive buyer in the future. While Altice has said it is focused on integrating its past purchases of Cablevision Systems (2016) and Suddenlink Communications (2015), many expect it to at least kick the tires on midsized operators such as Cox Communications (which says it isn’t for sale) and others once it has a public deal currency.

Related: Testing Cable's Value Proposition

In the meantime, WOW will focus on growing the high-speed data business. That’s a tack many small operators have taken over the years in the wake of rising programming costs, most notably Cable One, the Phoenix-based cable operator that was the top-performing stock in the sector in 2016.

But that approach has pitfalls. While Cable One stock rose more than 40% in 2016, due largely to takeover speculation, its metrics have declined. Video subscribers have plunged from 436,370 to 293,726 between 2014 and March 2017. Broadband revenue increases have largely been the result of steep price hikes for service.

According to MoffettNathanson principal and senior analyst Craig Moffett, Cable One broadband subscribers increased by about 2.9% in the first quarter, above the 2.5% growth of the previous quarter, but still about half the growth rate for its peers. Video customers declined at about a 12.4% clip.

The big difference is that Cable One has little competition in its markets: customers who want high-speed internet either have to pay the increases or opt for inferior digital subscriber line service. According to its prospectus, 53% and 39% of WOW’s footprint is overlapped by Comcast and Charter, respectively.

The competitive dynamic with phone companies is a bit better. AT&T’s U-verse (a mixture of fiber and DSL) is available in about 63% of WOW’s footprint based on homes passed. Verizon Fios is in about 3.5% of the footprint and Frontier Communications operates in about 2.7% of WOW’s territory, according to the prospectus.

Allure of High Margins
The allure of high broadband margins — in excess of 95%, according to the prospectus — is strong, though, and led to a steep rise in net income ($26 million in 2016, a $53.6 million improvement over 2014) while revenue increased about 1% to $1.2 billion.

At the same time, video customers have declined steadily while broadband increases have been relatively minimal. Video revenue-generating units (RGUs) fell from about 635,000 in 2014 to 474,000 by this March, according to the prospectus. High-speed internet customers increased from 728,000 to 729,000 in the same time period. During that time, WOW sold its Lawrence, Kan., system with about 31,000 customers, to Midco.

WOW apparently sees greater upside in broadband, driven by increased data consumption from social media applications, OTT video and cloud-based computing. Customers who crave video are just going to have to pay more.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ESPN on Monday (Jan. 9) will air live the College Football Playoff National Championship game between the Clemson Tigers and Alabama Crimson Tide (pictured) amid questions regarding the continued value of live sports programming on linear TV.

UPDATE, Jan. 10, 2017: ESPN Scores 24.3 Million Viewers for Clemson-Alabama Game

The ratings gravy train that sports networks and the TV industry in general have enjoyed over the years may soon come to an end, MoffettNathanson senior research analyst Michael Nathanson warned in a recent report. Given the ratings falloff for 2016 regular season National Football League games, as well as silver-medal level ratings for the Summer Olympics — and the potential of digital companies such as Facebook and Twitter vying for sports properties and driving up rights fees — TV sports is heading into its future with two strikes already against it, Nathanson argued.

Related: Units of NBC Sports Digital, Turner Expand OTT Sports Deal

In addition, a recent Thuuz Sports survey reported that 84.3% of pay TV subs with DVRs used them to record sports. The results cut into the cable-industry narrative that live sports programming is “DVR-proof,” so the sports-heavy traditional cable bundle is invaluable to fans.

The fact is, some “skinny bundle” offerings are drawing subscribers without a robust lineup of national and regional sports networks, including ESPN.

Live TV sports undoubtedly faces some challenges, but it’s still very much game on for the category, at least in terms of its huge appeal and value to viewers and distributors. When the ratings come out for ESPN’s Clemson-Alabama telecast, it will most likely secure the top spot as the most watched show on cable for the year, beating out Nielsen live-plus-7 ratings for the more than 400 scripted series that will air on cable in 2017. Last year’s CFP National Championship game garnered a cable-best 25 million viewers, and expectations are that this year’s rematch will match or surpass that number.

ESPN’s combined 36.6 million viewers for its two CFP semifinal telecasts on New Year’s Eve topped the disappointing 34.1 million viewers the network generated a year prior for the games.

The year is just getting started, but with live telecasts of the NCAA men’s basketball tournament, National Basketball Association games, National Basketball Association and National Hockey League playoff contests, soccer, Ultimate Fighting Championship and boxing events and yes — Monday and Thursday night National Football League games — on tap for 2017, it’s not too early to predict that live sports programming will continue to score big audiences and drive valuable appeal for distributor packages offering such programming.

Cable One stock, the top performer in the distribution sector in 2016, took a slight dip out of the stratosphere after influential media analyst Craig Moffett lowered his rating on shares to “sell” — with a $408 target price. The cable operator, riding a wave of hefty price increases and plummeting programming costs, is about to hit a wall, in Moffett’s view.

Cable One shares declined about 5% ($33.22), going from $619.66 on Jan.3 to $586.44 on Jan. 5, the day after Moffett’s report came out.

It all underscores the stock’s remarkable rise. Cable One stock rose 43.4% in 2016 — or nearly $200 per share — ascending from $433.66 to $621.73 at year’s end, pumped up by speculation that it would be the next takeover target in the consolidation wave after Charter Communication’s $80 billion acquisition of Time Warner Cable.

European telecom company Altice N.V., which spent more than $25 billion on purchasing Suddenlink Communications and Cablevision Systems in the past year, has been singled out as the most likely Cable One buyer, although private equity and other smaller players could enter the fray too.

IRRATIONAL EXUBERANCE?

Moffett said that while it might seem strange to downgrade CableOne’s stock right around the time that Altice is expected to spin off a minority interest in its U.S. operations — Altice USA — to the public, he believes the takeover premium has been long baked into Cable One’s stock price.

What concerns Moffett and other analysts is how Cable One has been able to maintain its growth trajectory as customer growth has eroded rapidly.

Cable One embarked on a broadband-only strategy in 2012. The midsized operator has taken a hardline stance against rising programming costs, dropping Viacom’s networks in 2014, and instead has focused on high-speed data service, offering speeds of up to 1 Gigabit per second in some markets.

But with lower costs — programming expenses dropped 10% in 2014, its first year without Viacom — have come heavy subscriber losses. Cable One shed 20% of its video customer base in 2015 (about 87,000 subscribers) and while those numbers have improved — it lost 13.5% of its video base in Q3 2016 — they are still well above those of the operator’s peers.

Overall, the pay TV market is losing video customers each year. But cable has been improving on its losses and could post its first positive growth year in a decade in 2016.

Cable One has said publicly that its strategy is unorthodox, but it believes it is on the right path.

“While this strategy runs contrary to conventional wisdom in the cable industry, which puts heavy emphasis on video customer counts and maximizing the number of PSUs [primary service units] per customer by bundling services, we believe it best positions us for long-term success,” Cable One said in its 2015 annual report. “For us, success in winning and retaining residential data and business services customers are far more important metrics than the number of triple-play customers we have.”

So far the approach appears to have paid off. Cable One has maintained steady revenue and double-digit percentage increases in cash flow in 2014 and 2015, and is expected to have another strong year in 2016. And though Moffett commended the company for its performance so far, he also said he believes that time may be running out.

Moffett said “more than all” of Cable One’s growth has been due to price increases; it imposed a hefty 10% hike to broadband charges in 2015 and it’s on the verge of having to increase fees again to a customer base that is, overall, the least affluent compared to the customer groups served by other top MSOs.

“We don’t project that Cable One’s EBITDA will actually decline in 2017, but we do project that EBITDA is about to hit a wall,” Moffett wrote, adding that the expected deceleration comes at a time when the stock is trading a premium multiple (11.7 times cash flow) to its competitors.

A PRICE TOO HIGH?

Moffett conceded the high multiple is largely due to takeout speculation, but he also noted that it is not only higher than the multiples of much bigger companies (Comcast trades at 7.6 times and Charter at 9.9 times) but outpaces the premiums paid for Cablevision (10.1 times) and Suddenlink (10 times) by more than a full turn of cash flow.

Cable One’s strategy also may throw a wrench into the one thing that most investors have bought the stock for: a potential acquisition. Moffett notes that falling subscriber rolls mean less opportunity for a potential buyer.

“Even if de-emphasizing video was the right decision for Cable One on a standalone basis, any potential acquirer would naturally view Cable One’s video subscribers through the lens of their own programming costs, not Cable One’s,” Moffett wrote. “By shedding so many video subscribers, Cable One has foregone a tremendous amount of potential synergy for an acquirer.”

Cable stocks had a strong run in 2016 — distributor shares increased almost 40% for the year — and with a more business-friendly presidential administration set to take hold later this month, the sector has ample runway ahead, according to several analysts.

That kind of optimism wasn’t quite so evident before the Nov. 8 election, when analysts had expected more scrutiny of media companies and pressure to keep pricing low and access high under another Democratic administration. But after Republican candidate Donald Trump’s surprise win, Wall Street’s attitude toward the sector has switched from “anything but” to “anything goes.”

“After yet another year of strong outperformance for cable stocks, investors might be forgiven for assuming that all the good news must at long last be fully discounted in the sector,” MoffettNathanson principal and senior analyst Craig Moffett wrote. “On the contrary, however, we think there is a good deal more room to run.”

Related:Viewer Watch 2017: Download the Complete Report [subscription required]

BARRIERS GET LOWER

Moffett’s optimism is fueled by three factors: lower taxes, less regulation and lower capital intensity.

Lower taxes, one of the promises of the new administration, should help lift all boats in the market. But cable, with high cash-flow margins (around 39% to 40%), low capital intensity (around 15%), could increase its trading multiples from about 7 times cash flow to 9.5 times cash flow if the corporate tax rate dips from 38% to 15%, according to Moffett.

On the regulatory front, the Trump administration is expected to reverse Title II regulation of the broadband business, which could open the door for usage-based broadband pricing and even material charges for interconnection or peering, two items that were off-limits under outgoing Federal Communications Commission chairman Tom Wheeler.

Related:The FCC's New Playbook

Capital intensity is expected to drop as more and more functionality is placed in the cloud and more customers get their video through apps, extending the life of set-top boxes in the field and reducing the need to buy new ones. Moffett estimated that a reduction in capital intensity from 15% to 13% would result in an increase of warranted valuations of almost a full turn of cash flow.

Telsey Advisory Group media analyst Tom Eagan was encouraged by cable’s subscriber performance for the year. While pay TV subscribers fell harder in 2016 than in the prior year, cable nearly halved its losses for the year.

That could encourage some privately held cable operators to tap the public markets. Altice USA, the domestic arm of European telecom company Altice N.V., has already said it is investigating an initial public offering of a minority interest in the U.S. cable operation. Eagan said he believes others could step up to the IPO plate in 2017, including privately owned Cox Communications and Mediacom Communications.

Moffett said increased competition from over-the-top services could erode customer growth, but that the greatest threat could come from 5G wireless services. The higher-speed data technology is expected to take years to fully deploy, but already Verizon has said it plans to conduct trials in 2017.

Related:New Normal: Digital Distribution [subscription required]

“If there is a downside risk to multiples, this is it,” Moffett said of 5G.

The analyst was less fearful of OTT services, in part because they have been here for years and also because what was supposed to be the category killer — AT&T’s DirecTV Now — has been plagued early on by spotty service and disruptions. New OTT offerings from Hulu and Google in 2017 are expected to have an impact, just not a very great one.

“In all likelihood, however, these services will pose a bigger headline risk than they will a financial one,” Moffett wrote. “Cable’s broadband moat provides a very powerful pricing counterbalance. By charging a premium for standalone broadband, and by upselling a portion of cord-cutters to faster broadband tiers, cable operators can relatively easily insulate themselves from subscriber losses to cord-cutting.”

On the programming side, 2016 was a mixed bag as cord-cutting and skinny bundles chipped away at what was once considered to be rock solid subscriber bases. The Walt Disney Co.’s ESPN took the highest-profile hit — it lost an estimated 7 million subscribers over the past two years and about 10 million since 2010 — but across the board networks averaged a loss of about 2% of their subscribers. That had a domino effect on other parts of the business, affecting affiliate fees and ad rates for even the strongest networks.

AT&T’s pending $108.7 billion purchase of Time Warner Inc., expected to close by the end of 2017, gave a lift to programmers and refueled interest in vertical integration. If that deal passes regulatory muster — and many analysts believe it will — it could start a chain reaction in M&A. A more laissez-faire regulatory attitude also could strengthen existing vertically integrated Comcast-NBCUniversal and others by allowing exclusive content for distributors.

OUTLOOK ON MEASUREMENT

Eagan said that despite negative headlines for the advertising business overall, ad agency stocks and fundamentals performed well. On the measurement side of the business, Eagan noted that Nielsen may have won the battle but not the war, saying both Nielsen and comScore will “benefit from marketer demand for third-party digital metric verification.”

Internal stresses helped pressure Viacom into another year of poor performance as infighting between CEO Philippe Dauman and controlling shareholder Sumner Redstone resulted in the former’s resignation in August. While the stock got a lift from talks concerning a recombination with former corporate sister CBS, those discussions ended in December with no deal.

While the hope is that new CEO Bob Bakish, a longtime Viacom international executive, can turn things around, it could take time. Meanwhile, Viacom’s ad revenue continues to slide, executives continue to leave, and its once-strong Paramount film studio limps along.

“For Viacom, if anything could go wrong for them, it did,” MoffettNathanson senior research analyst Michael Nathanson wrote in a note to clients.

AMC Networks, parent of AMC, IFC, WE tv, Sundance and BBC America, saw its stock drop more than 50% in 2016 as investors worried that it was too dependent on one program, albeit a big one: The Walking Dead. While that series remains the No. 1 scripted show on television, AMC is facing increasing pressure to come up with hits, as are other programmers like Scripps Networks Interactive (parent of Food Network and HGTV) and Discovery Communications.

In a fresh study that probably won’t aid Netflix in its negotiations to secure digital rights to shows from cable networks and other programmers in the traditional pay TV sphere, the OTT giant was responsible for about half of a the 3% decline in the U.S. TV viewing audience last year.

That’s per Moffettnathanson analyst Michael Nathanson, who presented his findings this week in an updated report under the heading: Is Netflix Killing TV?

Nathanson’s study, a follow up on one issued last April, also forecasts that it the affect will only grow – with Netflix’s percentage of overall TV viewing expected to climb to 14% by 2020, up from 6% today.

“Based on our analysis of Nielsen data, Netflix’s domestic streamed hours would equate to about 6% of traditional TV hours vs. over 4% in 2014,” the analyst noted. “Given that the number of traditional TV hours fell by -3% in 2015, on  can assert that half of that change can be sourced by Netflix.”

Furthering that connection, Nathanson said Netflix could be viewed as larger than the smallest cable networks, but still smaller than the seven largest cable and broadcast TV conglomerates. (NBCUniversal, Disney, Viacom, Time Warner Inc., 21st Century Fox, Discovery and CBS).

But weighed in to this is that the impact of Netflix and other SVOD services are more significant in certain pockets of the ecosystem, and skews more heavily to certain age groups. Penetration of those services, Nathanson points out, in broadband homes under the age of 45 is 75%-plus, double the rate of penetration among homes with residents who are 65 or older.

But it’s not bad news across the board for the traditional TV world.

He found that networks like ESPN and Adult Swim generate more hours of consumption in Netflix homes than in non-Netflix homes, suggesting that they remain essential to core Netflix users.

It’s a somewhat mixed bag elsewhere, as the analyst pointed out that total viewing hours increased at Time Warner, Discovery, Scripps Networks and AMC Networks, but dropped at networks run by A&E, Viacom, NBCU and  Disney.

 “Currently, Netflix is a source of industry  pain, but not necessarily a cause of industry death,” he wrote.

Netflix ended 2015 with 74.76 million subs worldwide, including 44.74 million in the U.S.

MoffettNathanson media analyst Craig Moffett has raised the odds to 90% on the Charter-Time Warner Cable deal getting done.

In a note to investors Thursday (Jan. 28), Moffett said that even with the launch of the Stop Mega Cable Coalition last week, he believes most of its members were looking for conditions rather than expecting to block the deal.

He conceded hurdles remained, including clearing a California Public Utilities Commission process -- it held a public hearing on the deal this week -- that had a tedious timeline, but he said for all that, he sees the stumbling blocks as getting smaller.

One of the big plusses, Moffett said, is that Netflix is on board with this deal, contrasted with its vocal opposition to the Comcast play for TWC.

Netflix is enthusiastic about Charter's settlement-free peering policy and extending it to TWC.

Given that OTT impact was what scuttled the Comcast deal, Moffett said, Netflix's support "speaks volumes," and Charter's OTT-friendly track record clearly works in its favor.