Free ad-supported streaming television (FAST) services are all the rage as content providers and distributors look for any way to squeeze profits from streaming video, and though there is a danger that too much of a good thing could once again saturate the market, Barclays Group believes the segment could end up taking share away from more traditional streamers.

The number of FAST services has grown significantly over the past two to three years with services from traditional media giants (Peacock, Tubi, Pluto, Xumo, Vudu and Crackle), hardware vendors — (Freevee, Roku Channel, Samsung TV Plus and LG Channels) and independents (Plex, Kanopy, Hoopla) and more are on the way. Warner Bros. Discovery has said that it plans to launch a FAST service at some point in the future as has Android TV.

Also: More Scripps Channels Go FAST in Deal with Vizio

Low barriers to entry and lower costs for content — most of the services offer classic TV series and older movies — make FASTs attractive to content creators and distributors alike. But in a research note, Barclays Group media analyst Kannan Venkateshwar asked, despite those plusses, is FAST sustainable?

One drawback is the lack of differentiation of content between the services. In his report, Venkateshwar noted that content overlap for FAST services is more than 80%, compared to 3.9% for Disney Plus and 9% for HBO Max.

Also: FAST Usage Was Up 9 points in the First Five Months of 2022

What FAST services lack in content differentiation they apparently more than make up for in availability. In his report, Venkateshwar noted that FAST services may have higher penetration than any single premium subscription service because of the breadth of their distribution, through smart or connected TVs and other means. Smart/connected TV penetration is 87% in the U.S. and 40% globally, and every connected TV has access to the full suite of FAST services as well as streaming offerings like YouTube and TikTok.

Availability is Key

“Access to premium services on the other hand is based on penetration of SVOD services and consumer propensity to pay for multiple services,” Venkateshwar wrote. Although the average U.S. household subscribes to 4.7 streaming services, he added, the one with the highest penetration (Netflix) is at 56% while overall streaming penetration is 85%. 

“This implies that the mix within this SVOD basket consumed by the average household is not constant and there is a lot of switching based on content release schedules,” he continued, adding that it also accounts for the high churn levels of most SVOD services. 

While engagement for individual FAST services is below that of their SVOD counterparts, combined they account for more minutes than subscription offerings. Barclays, citing Nielsen research for one week this year (July 25), noted that together Tubi (4.4 billion minutes), Roku Channel (3.5 billion minutes), Pluto (5.1 billion minutes) and Peacock (3.5 billion minutes), edged out Amazon Prime Video (15.1 billion minutes) and was nearly twice that of Disney Plus (9.6 billion minutes) and almost three times that of HBO Max (6 billion minutes). That gap could narrow further as awareness for FAST offerings increases. That’s also where aggregation services like Android TV, Roku, and Comcast’s Flex offering could become a factor, Venkateshwar wrote. 

Also: David Zaslav and the [Streaming] Deathly Hallows  

“With television viewership increasingly determined by aggregation services and the still growing clutter of thousands of titles across streaming services, we believe content choices are likely to be increasingly determined by the recommendation engines that can look across streaming services,” Venkateshwar wrote. “However, with every major recommendation engine having its own affiliated free ad supported streaming service (Comcast Flex-Peacock, Xumo, Vudu, Android TV — new Channels service, YouTube, Amazon Fire — Freevee, Roku — Roku Channel etc.), content on these services is likely to feature as prominently on TV screens as premium content for SVOD services.”

It’s All About Engagement

Ad revenue for FAST services is still low. According to Barclays, the top three services ad-revenue-wise are Pluto TV ($1.2 billion), Peacock ($1.16 billion) and Tubi ($653 million). And though upcoming AVOD products from Netflix and Disney Plus could further cut into that ad revenue pie, Venkateshwar wrote that it may all come down to overall engagement. 

Also: Is Engagement More Valuable Than Subscribers? 

“One of the most important drivers of engagement however may be the recommendation engine sitting outside these services,” the analyst wrote. “This in turn could turn streaming advertising workflow to a process not that dissimilar to search where the recommendation engine ultimately determines how GRPs are allocated across services, potentially in return for a share of ad revenues.” 

Walled Gardens and Open Spaces

Venkateshwar continued that this could lead to a split in the overall streaming ad ecosystem, similar to what has happened in the digital advertising arena. He estimated that today about 34% of time spent online is with so-called “walled gardens” like Facebook, Twitter, Snap and Pinterest, while the remainder is spent on the open Web, which also accounts for about 40% of ad revenue.

Over time, FAST could act more like the open Web, Venkateshwar wrote, while SVOD is more like a walled garden. 

“This process may result in advertising on these free streaming services being lower-priced fungible programmatic inventory, with CPMs being more comparable to services like YouTube and TikTok,” Venkateshwar wrote. 

According to the analyst, walled gardens are more likely to have CPMs that resemble television because they would have more control over ad delivery and measurement. But he added that across both segments the availability of inventory will most likely be determined by recommendation engines, which could result in lower ad margins. 

Still, Venkateshwar believes FAST services will become a larger category, albeit more fragmented than SVOD or AVOD spaces, making their success more dependent on aggregators. And though the same holds true for traditional SVOD and AVOD offerings like Netflix and Disney Plus, they have considerably more brand awareness as well as their own content franchises that should help drive engagement.  

“With Android TV launching its own free streaming service, Comcast already having Xumo/Vudu/Peacock, Amazon having Freevee and Roku having Roku Channel, we wouldn’t be surprised if independent free ad-supported streaming services like Pluto and Tubi, which have among the highest engagement today, end up declining in importance and consumption skews towards services owned by aggregators,” Venkateshwar wrote. “Therefore, we may see a significant skew in revenues across ad-supported streaming services over time, focused on a small set of services despite broader fragmentation in free service availability.” ■

Four months after closing the deal that created one of the largest content creators in the world, Warner Bros. Discovery CEO David Zaslav is messing with the magic, mixing new ingredients (a refined direct-to-consumer strategy) with some old ones (a commitment to theatrical film distribution and pay TV) that he hopes will bring the competition to its knees. But with a stock price that has been at best anemic and rival streaming services that have considerably raised the bar, Zaslav is under the gun and the clock to come up with the right incantation to bring the storied media brand back from its current realm of uncertainty.

I promise, the Harry Potter references end here. 

In the days leading up to WBD’s Q2 results, the rumor mill was wild with tales of what Zaslav would do to the company that he bought just a few months before. Thankfully, Zaslav’s new direct-to-consumer path was not laden with the landmines that many expected. There were no massive layoffs, HBO Max isn’t going to disappear into the ether, there are no weapons of mass destruction hidden somewhere on the Warner Bros. Studios’ lot, at least for now. But there are going to be changes. Spending is going to be tighter. WBD is going to take a harder look at how it develops programming. Warner Bros. is going to recommit to theatrical releases for movies. 

Some films earmarked for streaming won’t see the light of day. And there is probably more to come. While Zaslav and team laid out some of the streaming strategy on August 4, more details are expected at a planned Investor Day toward the end of the year, including the new name of the combined HBO Max/Discovery Plus streaming service.

So just what is Zaslav’s new formula for success? Here’s a look at five ingredients in the soup that is to be the new Warner Bros. Discovery:

1. Reformulate the way that it counts streaming subscribers.

WBD said total streaming subscribers (HBO Max and Discovery Plus) rose by 1.7 million to 92.1 million customers in Q2. That growth was mainly outside of the U.S. International added 2 million customers while domestic streaming subscribers fell by 300,000, to 52 million from 52.3 million in Q1. That appears to be a big miss from Q1, when HBO Max said it had 76.8 million total customers, and Discovery Plus reported 24 million customers. The Q2 results reflect a new way to count subscribers. WBD said the earlier subscriber count included about 10 million non-core Discovery Plus subs and HBO Max subscribers that were part of AT&T mobility promotions and never activated service. 

“No one else is telling you how many subs they have that get it for free, whether they watch it or not,” FBN Securities media analyst Robert Routh said “They should really break it down on whether or not it is something that people actually pay for, and if it's something they actually watch. That’s a more valid metric, but we don’t get that metric.”

2. Scrap movies that were originally for streaming only — most notably Batgirl, which the company already spent $90 million on before it was ever seen publicly — as well as the animated Scoob! Holiday Haunt that was four years in the making. 

Some saw the decision to shutter the Batgirl film as a financial one — apparently there were tax incentives to cancel the project this year — while others saw it as a move to erase the legacy of executives before him. Zaslav didn’t really address specific films on the call, but some reports have said that Batgirl fell through the cracks because it wasn’t a billion-dollar blockbuster, and the additional investment needed to market and distribute the film in the theaters would have more than doubled its $90 million price tag. To Zaslav, taking the tax write-off and moving on just made sense. 

Aside from the Batman franchise, WBD has had little luck with the rest of DC’s characters on the big screen — certainly nowhere near the success of Disney’s Marvel Entertainment. But some believe it could be a matter of simply finding the right person to run that part of the studio.

“They have a DC Universe, and universes are really hard to create and cultivate,” said producer and filmmaker Gary Pearl, CEO of Aquarius Content who’s Flowers in the Attic: The Origin aired on Lifetime last month. “Look how many years it took [for the Marvel Cinematic Universe]. Kevin Feige [Marvel Studios president and chief creative officer Marvel Entertainment] had to be born and grow up. I remember when Marvel sold for $60 million. … How is it all of a sudden worth $6.5 billion? Because other people came along and made change.”

Pearl said that one sign that Zaslav is serious about turning around the studio is his hiring of two Hollywood veterans — former MGM chairman Michael DeLuca and former MGM Pictures Group president Pamela Abdy — as co-chairs of Warner Bros. Pictures Group. Both have long track records, producing recent buzzworthy and critically acclaimed films like Licorice Pizza and House of Gucci, as well as past box-office hits like Boogie Nights, Fifty Shades of Grey and Austin Powers. 

“I can understand how people feel about Batgirl,” Pearl said. “I haven’t seen it, but I will guarantee you, it’s a bad film. He’s not going to dump $90 million just to make a statement. He’s saying we have a big asset in DC and it's been mismanaged for 30 years. And my definition of that is ‘I don't have my Kevin Feige yet.’ Maybe he hasn’t been born yet. That guy is that brilliant. So who’s the DC guy? I’ll bet you he thinks that is DeLuca.”  

While some critics have accused new WBD management of trying to erase former WarnerMedia CEO Jason Kilar’s legacy, many forget that the decision to put the Warner Bros. slate on HBO Max endangered a lot of relationships with creatives. Dark Knight and Inception director Christopher Nolan told The Hollywood Reporter at the time that Warner “blindsided” the creative community and instead of working for the best studio, they are working for the “worst streaming service.” 

Many of those creatives changed their tunes when they saw the generous bonuses Warner Bros. offered to compensate for missing out on theatrical box office. But there were still a lot of egos that needed stroking.

After the merger was announced, Zaslav went on a highly publicized listening tour to repair those relationships with the creative community. Committing to theatrical releases is just another part of that. 

3. Double down on Warner’s commitment to theatrical releases of films and release no expensive movie on streaming services before theaters.

Kilar introduced the controversial decision to release Warner Bros.' entire 2021 slate day-and-date to streaming, it obviously goosed HBO Max streaming subscriptions and helped put the service on the map. But that was during a pandemic when theaters were closed and Kilar had let it be known that it was only a one-year experiment.

Nevertheless, some directors and producers were outraged at Kilar’s move, with some vowing never to work for Warner again, claiming that once the day-and-date cat was out of the bag, it would become the norm for the industry. They didn’t and it didn’t.

But it did cast a light on what can be bewildering Hollywood economics, where accountability can sometimes be murky. Zaslav, who according to some reports has been notoriously frugal at Discovery — asking some producers to take out loans to front their own production costs — said during the Q2 call that he can’t justify releasing an expensive movie online.

“We’re not going to release any film before it's ready,” Zaslav said. “There is no comparison to what happens when you launch a film in the theaters. This idea of expensive films going to streaming, we cannot find an economic case for it, we cannot find an economic value for it.”

Pearl said that while Kilar’s strategy worked during the pandemic, it is time for a more pragmatic approach. 

“In a weird way, Jason’s approach worked, but it worked in a pandemic,” Pearl said. “I don't know how you call that solid business change. It was the right thing to do for one year. He was gaining subs. And what was he going to do with all of those movies anyway? Shut down Warner Bros. and not make anything?”

4. Combine Discovery Plus and HBO Max into one streaming product.

That shouldn’t have come as a surprise. WBD streaming chief JB Perrette told the ad community in May at the upfronts the company would do exactly that.  

During the Q2 conference call, Perrette said the combined offering would debut in the summer of 2023, adding that it will first be launched in existing HBO Max markets in the U.S., followed by Latin America later in that year and in Europe and Asia in 2024.

Perrette acknowledged that both services have different audiences: HBO Max is more appointment TV than Discovery Plus, which is more “comfort viewing.” But he was confident that the two services would mesh well.

“These are two critical and powerful components of a strong and sustainable subscription business,” Perrette said on the Q2 call.  

Some analysts wondered how the combined offering would be priced, adding that a combined HBO Max/ Discovery Plus might have some flexibility, especially with existing ad-supported versions of both streaming products. Zaslav said that coming soon are an ad-light service and a free ad-supported television (FAST) offering that should satisfy more price-conscious consumers.

At $14.95 per month, HBO Max is one of the more expensive streaming services. Netflix raised charges for its standard streaming service to $15.49 per month from $13.99 in January and others have followed suit. At the same time, these companies are launching less expensive ad-supported versions. HBO Max has an ad-supported service priced at $9.99 per month. Disney just unveiled plans to debut its ad-supported version on December 8 for $7.99 per month. Netflix plans an ad-supported version this year. Disney released other new pricing details last week. 

Discovery Plus has been fairly steady at $6.99 per month for an ad-free service and $4.99 with ads. Just how that pricing will mesh with HBO Max charges remains to be seen. 

5. Preserve the pay TV distribution relationship, even as cord cutting has accelerated to record highs. 

One of streaming’s dirty little secrets has been that although it is without a doubt the future of content distribution, it is a huge drain on finances. Not one of the major content players is making money off of streaming— not Peacock, not Disney Plus, not Paramount Plus, neither HBO Max nor Discovery Plus. All of them are supported by traditional linear networks that are losing subscribers by the bucketful. So the biggest question among content investors is what happens when the traditional content cash cow, and its fat affiliate fees, dries up? The answer may come sooner than anyone thinks.

The pay TV business lost nearly 2 million subscribers in Q2, according to Leichtman Research Group, up from a loss of 1.2 million customers in the same period last year. So, as subscriber losses accelerate, it's only a matter of time before linear networks can no longer feed the streaming beast. 

But it shouldn’t come as a surprise to programmers.  

MoffettNathanson warned back in 2019 that pay TV subscriber erosion was having an effect on affiliate fee growth. While the pandemic may have slowed that erosion down slightly, cord-cutting has come back with a vengeance. In Q1, MoffettNathanson estimated that overall pay TV subscribers (cable, telco, VMVPD and satellite) were down 5.1%, or 2.1 million customers, in Q1, close to the record 5.5% decline set just prior to the pandemic. It is shaping up to be even worse in Q2, with Comcast and Charter alone shedding more than 700,000 subscribers in the period, and heavier losses at satellite and telco providers. 

Zaslav has long been a proponent of keeping the affiliate fee relationship intact. In his early days at Discovery, he was one of the last remaining holdouts for keeping its content offline. While other networks were releasing episodes of popular series on their websites, Zaslav only allowed clips, adding that he didn’t want to dilute the value of the television subscription.

The 100-Plus Percent

In a blog post, LightShed Partners co-founder and partner Rich Greenfield said more than 100% of WBD’s trailing 12-month cash flow comes from its basic cable networks. 

“Unfortunately for WBD (and everyone else in legacy media), cable network affiliate fees are no longer growing and appear set to enter secular decline (thanks to cord-cutting) and advertising faces increasingly stiff headwinds as linear TV viewership erodes along with the impact of a global recession,” Greenfield noted.

Adding to the concern is that as affiliate fees and ad revenue decline, sports costs are rising exponentially, placing further pressure on EBITA growth. WBD’s rights deal with the NBA expires in 2023.

“It appears WBD is now taking evasive action as their dramatically enlarged (via merger) cash cow cable network business is on its way to becoming a starving cow,” Greenfield wrote.

 Disney’s Better, But Not Best 

 While WBD struggled with forces both in and beyond its control, The Walt Disney Co. made it a little worse by reporting much stronger fiscal Q3 results on August 10. Disney appeared to be firing on all cylinders in FQ3, adding 14.4 million global streaming customers, far outpacing analysts’ estimates of 10 million additions. Disney, with 221 million global customers, is now tied with Netflix for the top spot among streamers. Financially, overall revenue and cash flow growth beat consensus expectations. But Disney revised its subscriber growth estimates for 2024 to 215 million to 245 million from 230 million to 265 million, mainly because of the loss of cricket rights in India. Almost all of Disney Plus’s growth in FQ3 was in India, while its domestic growth was nearly stagnant at 100,000 additions.

That caused some analysts to fear that maybe Disney isn’t being conservative enough with its 2024 growth estimates. 

In a research note, Barclays Group media analyst Kannan Venkateshwar argued that Disney’s revised projections should be lower. The top four streaming services -- Netflix, HBO Max, Hulu and Disney Plus -- showed subscriber declines or minimal growth in the last quarter, which Venkateshwar said “speaks to saturation levels in the marketplace.”

“Streaming growth domestically is increasingly becoming a zero sum game and will need distribution models to change for further growth,” he wrote, adding that while Disney’s FQ3 growth was strong, it was almost entirely outside of the U.S. “Domestically, Disney Plus barely grew and was just 100,000 and could see some slowdown in FQ4 due to price increases.” 

Where Are My $3 Billion in Synergies? 

 When they unveiled the deal in May 2021, both AT&T and Discovery believed they could pull $3 billion in cost synergies out of the business in the first year. After a deeper look at the books, WBD isn’t saying that anymore. Cost savings, at least initially, will come from reduced content spending. Zaslav said HBO’s and Warner Bros. Studios’ budgets will grow, but everything else is fair game.

Pearl, who has more than 30 years in the TV and movie business as an agent, writer, director, producer and entrepreneur, said belt tightening is par for the course, especially during an ownership transition. And Zaslav is no different. 

“Yes of course he’s a cost-cutter,” Pearl said of Zaslav. “Because it’s a business.”

And though the massive layoffs some expected didn’t come, it’s probably a fair guess that there will be some down the line. Discovery has a track record of stealth layoffs according to some reports, reducing its workforce in bursts of 30 employees or less, being careful not to trigger any disclosure requirements. So, layoffs could be a series of small cuts instead of one massive beheading.

That apparently has already started -- Variety reported Monday that HBO and HBO Max will lose about 70 employees (14% of its workforce) amid some other restructuring around chief content officer Casey Bloys.

Whatever form it takes, WBD is going to need to find some way to squeeze those synergies out of the business, because cash flow growth is going to be less than expected for a while. And they need to find something to help pare down debt.

WBD has about $53 billion in debt. EBITDA for Q2 was $1.8 billion for the entire company, down 31% from the prior year. While WBD has said previously it expects EBITDA to grow to $12 billion in 2023, down from previous forecasts of $14 billion, most analysts are guessing it will be even lower. Earlier this week MoffettNathanson analyst Robert Fishman estimated 2022 EBITDA will be $9.2 billion (down from his previous prediction of $10.2 billion) and his 2023 estimate to $11.8 billion (down from his earlier $12.6 billion estimate). 

Waiting it Out

Wells Fargo Securities media analyst Steven Cahall downgraded his ratings on WBD to “equal weight” from “overweight” and reduced his 12-month price target on the stock to $19 from $42 per share. He sees WBD as undervalued -- its 7x cash flow multiple makes it one of the cheaper stocks in the sector due to above average execution and earnings risks, he wrote -- but suggests the best strategy for investors may be to wait it out.

“100 days on and the dust has hardly settled, and we thus think the best course is to let the internal work take its course for a bit,” Cahall wrote. “[Discovery] was a ~$45 stock prior to the deal, these assets are the best in content offerings, so when things do start to improve we think investors will be able to be late and still have plenty of upside.”

Routh added that WBD’s problems may be a combination of being first to publicly tighten its purse strings at a time when investment opportunities for investors are varied and plentiful. 

“He [Zaslav] got penalized for being honest,” Routh said of WBD’s precipitous stock price drop. “We haven't seen the cost savings from this merger yet, [but] the integration of media companies takes time. Currently the Street has a lot of other options in terms of where they’re going to  put their money.” 

WBD shares were hit hard after the August 4 earnings report. The stock dropped by 16% on August 5, the first full day of trading after results were disclosed, and fell another 11% between August 5 and August 9. The price has been down all year, though. Shares got a little lift on August 11, rising 4.4% to $13.68 each, as some began to see a bargain in the world’s second largest content operation, but they were flat on August 12 and fell another 3% in early trading on August 15. WBD shares are down 46% since the deal creating the company closed on April 11 and are down 44% for the year.  

While WBD’s decline has been dramatic, streaming stocks across the board have been feeling the pain for months. Before it released fiscal Q3 results on August 10, Walt Disney Co. stock was down 27% for the year. Even with Thursday's increase, the stock is still down 24% for the year.  

Other content creators with a streaming presence have had similar declines. Paramount Global, parent of Paramount Plus, has fallen 13% this year. Amazon, parent of Amazon Prime Video, is down 15%. Even Apple is off 5% for the year. 

“No one knows how to value the content companies,” Routh said. “Look at any of them, people are not giving any value to libraries, people are giving no value to current production, because they’re saying there are so many platforms now, what are the odds that what you make is actually going to become watched and monetizable and worth what you paid for it?”   

So if everyone is feeling the effect of a slowing streaming business, why is everyone picking on WBD? The company is getting a lot of attention because of the merger and because HBO is one of the content brands most associated with quality, having  received 140 Emmy Awards nominations this year, leading all networks. People just seem to expect more from HBO’s parent. 

Zaslav will have to weather the criticism for a while, at least until Q3 results are released. My guess is he’ll be able to do it. There will be other reasons to panic from other companies, especially if Netflix misses Q3 subscriber targets. 

In the meantime look for other streamers to tighten their belts, keep a closer eye on profitability and nurture relationships with traditional distributors. It’s either that, or blow the whole thing up and start over. Nobody wants to do that. ■

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

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

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

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

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

Also: Most Eyes Should Be on Comcast Q2 Broadband Performance 

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

The Waiting Is the Hardest Part

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

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

Also: Has Cable Broadband Hit the Wall? 

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

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

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

Movin’ On Up [Not]

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

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

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

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

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

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

Other Than That… 

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

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

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

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

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

The word is that Apple, Amazon and The Walt Disney Co., possessors of three of the deepest pockets in the media business, are the sole remaining bidders for the National Football League’s out-of-market programming package, NFL Sunday Ticket.  While a lot of the talk around the deal is the price tag — at $2.5 billion to $3 billion annually, it is about twice what current rightsholder DirecTV paid for the package in 2014 — what could be most valuable to the streaming bidders is the impact Sunday Ticket could have on subscriber growth. 

There is no doubt that each of the three players have the financial strength to handle a deal. Apple has a $2.29 trillion market cap, Amazon’s is $1.15 trillion and Disney is, well, Disney. And even though all three could use access to the out-of-market package to their respective advantage, it seems at least for now that the one that would benefit most would be Apple.

In an interview, LHB Media & Entertainment president and CEO Lee Berke said that while Sunday Ticket helped DirecTV establish its linear satellite TV business nearly 30 years ago, the package is most likely to benefit streamers today.

“Now, I think it is best offered up as a streaming product because you want increased bandwidth, you want to come up with betting channels, you want to come up with all sorts of variations,” Berke said, adding that in addition to games, there are opportunities like the Manningcast [Monday Night Football with Peyton and Eli]  and other peripheral programming that could be tied to the package. Also part of the mix are equity stakes in NFL Media — which houses NFL Network and RedZone — and possibly mobile rights, which could allow a streamer the chance to price and package services more creatively. 

“There have been all sorts of opportunities that haven’t been exploited in part because there is a limited amount of bandwidth on satellite,” Berke added. “I think that’s why you’re looking at a substantial streaming presence for Sunday Ticket going forward that allows you to exploit those games in more and different ways than you have in the past.”   

It’s Apple’s Deal to Lose 

While all three bidders have a streaming presence, Berke believes that Sunday Ticket makes the most sense for Apple TV Plus.

“I think that the overall heritage and philosophy of the NFL from a media standpoint is not to put all of your eggs in one basket,” Berke said. “They like to have as many different media companies as possible involved, because you’re not beholden to any one, you get them to compete, they try different approaches, they create, they’re inventive. Since you have Amazon making a major investment in Thursday Night Football, it just seems like Apple, now developing its sports resources with Major League Baseball and MLS, it seems like the next step would be establishing an NFL relationship as well.”

Amazon is paying an estimated $1 billion per year for Thursday Night Football rights. 

While The NFL would likely gain from a closer relationship with the hardware juggernaut, Apple too could use the relationship to create its own opportunities.

“I think there’s upside because everybody is looking at it like there is this finite number of games. No there’s not,” Berke said. “The NFL on its own created RedZone out of this. They created a Fantasy [Football] channel out of it. Now you bring in somebody else with a huge amount of expertise — an Apple, Amazon or Disney. It seems like you’ll get  some other very creative people, some very tech-savvy people that can come up with all sorts of variations.”

Berke added that the attractiveness of Sunday Ticket wouldn’t stop at just bringing more subscribers into the streaming video fold. 

“It’s not just the profitability of the media,” Berke said. “For Apple, does it help them sell hardware? Does it help them sell watches? Does it offer unique functions on an iPad when you get Sunday Ticket? Those are really, really valuable things.” 

Apple also seems more than willing to dive deeply into sports rights after years of sitting on the sidelines. Earlier this month, the company restarted talks for rights to Big Ten Conference college football, which recently expanded to 16 teams by adding Pac-12 powerhouses USC and UCLA.

“[Apple’s] content appetite is seemingly insatiable between Apple TV Plus originals, MLB, MLS and maybe Sunday Ticket OTT,” Wells Fargo media analyst Steven Cahall wrote in a recent research note.

Streaming Growth 

Apple, despite its dominance in the tech sector, is lagging significantly behind its peers in the streaming video business. Launched on November 1, 2019, Apple TV Plus has about 25 million subscribers paying $4.99 per month for its video streaming service. In contrast, Disney Plus — launched 11 days later on November 12, 2019 — has 137 million global customers. Amazon Prime Video has around 200 million subscribers, but most of those are there for the free shipping from Amazon Prime.  

But streamers have seen the explosive subscriber growth of the past few years begin to slow in recent quarters, as inflation, the overall economy and subscriber fatigue have caused consumers to cut back. While most point to Netflix’s 200,000-subscriber loss in Q1 as a sign that streaming was losing its luster, other SVOD companies have seen growth slow. Disney Plus added 2 million subscribers in fiscal Q4 — half of what analysts expected — but seemed to rebound in later quarters, with fiscal Q1 streaming subscriber additions rising by 11.2 million and in fiscal Q2 additions up by 9.2 million. But there are fears that consumers are backing away from some streaming services because of rising monthly charges, prompting many to offer ad-supported versions of their service at reduced fees. 

Tick, Tick, Tick 

There are still a lot of ways this could play out. In 2021, Amazon was said to be the front-runner for Sunday Ticket, with that momentum shifting to Apple in April 2022. More recently, speculation is that DirecTV could still be in the mix, opting to share rights with a streamer or reaching a deal to retain lucrative commercial rights (sports bars and restaurants) for the package. The NFL also could decide to keep Sunday Ticket in-house, possibly making it available through its own direct-to-consumer offering — NFL Plus — which is expected to launch in July. 

And there is still a lot of time to hammer out an agreement. DirecTV’s exclusivity doesn’t expire until after the 2022-23 season, giving several months for further negotiations. 

On the other hand, it is getting close to the time that the NFL has announced previous renewals — DirecTV signed an eight-year extension for Sunday Ticket in October 2014, a month after the final season under its old deal began. Whether this will take longer is anyone’s guess. 

Do You Wanna Pay for Some Football?

While Sunday Ticket has been around for nearly 30 years, its value depends on who owns the rights. In DirecTV’s early days, it was a big catalyst for subscribers to its satellite TV service — you still have to subscribe to DirecTV linear to get access to Sunday Ticket — and paid off in spades in subscriber growth. While there were other factors such as pricing, quality of service, clearer pictures, a national footprint and access to then-rare HDTV channels, Sunday Ticket helped push DirecTV into the No. 1 spot among TV distributors. A year after DirecTV launched Sunday Ticket in 1994, its subscriber base nearly quadrupled from 332,000 in 1994 to 1.2 million in 1995. By 2014 the satellite service had more than 20 million customers. 

Will Sunday Ticket have the same impact on its new owners? Probably not. It’s not even having the same impact on DirecTV, which has shed a huge number of subscribers over the years — it had 14.6 million as of Q2 — all while it continued to offer Sunday Ticket. DirecTV does not reveal subscriber numbers for Sunday Ticket, but estimates put it at around 2 million customers. Other reports estimate that DirecTV is losing about $500 million per year on Sunday Ticket.  

At Kagan, the media research unit of S&P Global Market Intelligence, research director Deana Myers believes the subscriber tally for Sunday Ticket is “well below” 2 million, and while she sees the package having some benefit to streamers, don’t count on it being too dramatic. 

“I think getting Sunday Ticket would likely put Apple TV Plus on the map, but not to the degree that it did for DirecTV,” Myers wrote in an email message. “Sunday Ticket’s value for DirecTV was that it drew a lot of really high-end subscribers who would sign up for the top packages. In the old, successful pay TV world that worked, but it loses a lot of money today for them. Apple could gain subs, they have the cash for such a deal, they have been buying a lot of sports rights and it could help them with their main goal of selling more devices.” 

But Berke believes the benefit of Sunday Ticket lies in more than just a beefier subscriber base.   

“If Apple is potentially a co-owner of NFL Media and they come up with five different ways to take that package and off it up in different fashions and if it helps them create a whole new version of iPhones that are NFL-specific, it’s more than carried its weight,” Berke said.

And Then There Were Three

Apple has re-established itself as the front-runner, according to some reports, but what appears to be holding up the deal are the equity stake in NFL Media and the ultimate price tag. While the NFL reportedly wants as much as $3 billion for the rights, pundits believe the deal will come in lower, perhaps in the $2 billion range.    

That’s still above the $1.5 billion annually DirecTV is paying, but may point to problems with the deal’s structure. According to CNBC,  sources familiar with the deal say that the NFL is requiring that whoever buys Sunday Ticket price it at or above its $300 to $400 yearly market value, mainly because of deals the NFL has with broadcasters CBS and Fox. So there will be no deep discounting of the service, something that DirecTV has done in the past to keep existing sub numbers up and attract new customers. Apple and Amazon also are said to be very interested in international streaming rights, something that Myers believes the NFL would like to sell separately. 

“I think the limitations that the NFL is trying to put on a deal will mean the deal comes in pretty far below what they are asking,” Myers said.

In the end, any deal will come down to who needs Sunday Ticket the most. And if scale still matters in the streaming business, that would seem to be Apple. ■

About one year after emerging from Chapter 11 bankruptcy protection, Frontier Communications has been a surprising success story, moving full-speed ahead with building out its fiber footprint, doing it at a cost lower than even the company expected and watching its stock, driven by changing investor sentiment, rise more than 20% in the past three weeks. 

Frontier’s outlook wasn’t always so bright. In 2020, saddled with huge debt, a dwindling subscriber base and an outdated network, the company cleaned house under bankruptcy protection, refinanced its debt and refocused on delivering broadband via a state-of-the-art fiber network. About 14 months later — Frontier emerged from Chapter 11 protection in April 2021 — the company has a clear vision and a mission to beef up broadband speeds and reliability in its predominantly rural markets. Topping it all off is a new logo launched in April to reflect the company’s new direction and commitment to “relentlessly pursue betterness in our business and for our customers,” CEO Nick Jeffery said in a press release at the time. 

That Frontier decided to merely change its logo rather than scrap its name and conduct a total rebrand was telling to MoffettNathanson telecom analyst Nick Del Deo. In a May research report, Del Deo wrote that the decision to refresh the brand was “indicative of the positive effects the changes being made throughout the organization are already having on customer perceptions and marketplace traction.” 

Also: Equipment, Worker Shortage Could Delay Fiber Buildout

Del Deo added that management’s data-driven approach to the business has improved customer perceptions — its American Consumer Satisfaction Index scores are steadily moving up and its Net Promoter scores have surged in markets where it has fiber. 

“Put simply, the choice to refresh the company’s font and logo rather than totally rebrand is further evidence that changes to the business are working,” Del Deo wrote.

That change in sentiment also is evident in Frontier’s stock price. Frontier shares have risen about 21% between May 12 ($22.21) and June 3 ($27.03). While the stock is still down about 8% from the beginning of the year, Del Deo’s $33 target price for the stock seems to signify some decent upside.

Wells Fargo Securities telecom analyst Eric Luebchow was even more optimistic, calling Frontier the “best risk/reward opportunity that has meaningful exposure to fiber overbuilds” in a recent research note. Luebchow estimates Frontier will see an internal rate of return (IRR) of 20% or more at 40% penetration on its fiber build, well outpacing its cost of capital. 

“[Frontier] also has proven metrics that its fiber deployment is gaining traction, with its 2020 cohort of homes already exceeding 40% penetration just 24 months after completion (vs. its 25-30% initial expectations),” Luebchow wrote. “We believe this early success can continue, in part because FYBR on average is undercutting its cable peers on price by ~20% on average over a 3-year period for symmetrical broadband.”

Luebchow added that although year-over-year EBITDA and revenue growth was negative in Q1 — at $1.4 billion, revenue was down 10.7% in the period and  EBITDA of $509 million fell 22%, but both were in line with consensus estimates — he expects them to turn positive in late 2022 and 2023, respectively.

”We strongly view [Frontier] as a mispriced asset and presents a unique opportunity for the longer-term investor,” he wrote.

In a May research note, J.P. Morgan telecom analyst Phil Cusick wrote that Frontier’s fiber buildout was beating expectations, with the third phase of construction -- targeting the last 5 million households of its 15-million home footprint, costing less than the $900-to-$1,000 per passing earmarked for Phase 2. In addition, sell-through was higher and faster than earlier expectations. 

Cusick added that the company was optimistic concerning federal support of the network buildout, and that Frontier has already staffed up to pursue those funds, with the greatest impact expected in 2023. Nevertheless, Frontier believes Phase 2 of the buildout is funded through 2024.

Cusick noted that Frontier plans to build the network out to another 6 million homes in Phase 2, bringing the total number of homes where fiber is available to 10 million. So far, he wrote, Frontier is tracking ahead of schedule, building 640,000 fiber passings in 2021 (ahead of a 500,000-home target) and plans to finish 1.1 million to 1.2 million passings this year, up to 20% ahead of its earlier goal of 1 million additional passings.

In the first quarter, Frontier added 52,000 residential fiber broadband customers, its biggest quarterly addition in that metric ever, and beat analysts’ consensus expectations of 48,000 additions. 

In his report, Luebchow estimated that Frontier would more than triple its residential broadband subscribers over the next five years, from 1.5 million in 2022 to 4.8 million in 2027. Most of those additions will be fiber customers, as the analyst predicts that its legacy copper broadband customers will fall from 1.1 million in 2022 to 650,000 by 2027.

“[Frontier], in our view, remains the best ‘pure-play’ operator given its relative exposure to residential fiber, with a pathway toward revenue growth in early 2023 and a current valuation that makes for an attractive entry point,” Luebchow wrote. ■

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

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

There are Bundles, and Then There’s Bundling

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

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

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

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

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

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

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

Advertising Changes Everything

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

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

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

Aggregation is the Thing

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

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

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

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

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

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

After Netflix’s disappointing first quarter — and another one due on the horizon — a general sense of panic that streaming video may not be what unseats traditional pay TV from its throne has enveloped the entire industry over the past few months. Wouldn’t it be an actual hoot if what saves Netflix and its broadband-delivered brethren ends up being something as mundane and dumb-pipe-like as fiber deployment?

Netflix said back in April that it lost about 200,000 global subscribers, its first quarterly loss ever, adding that it could lose another 2.5 million in Q2. At the same time cable and telcos are furiously building out fiber networks, fixed wireless access and 5G offerings across the country to close the broadband gap, mainly in rural markets. With that fiber deployment, fueled in part by billions of dollars of federal money, could come millions of new broadband customers itching to try out streaming for the first, or maybe the second or third time.

Netflix obviously has other problems — it has shed nearly $200 billion in market cap since December 31 as its stock price has fallen 71% and investor sentiment has literally done a 180-degree turn on the company. Investors who were unconcerned about the ever-escalating content spend (about $17 billion in 2021) as long as the subscriber growth trajectory was maintained, are now urging Netflix to close its wallet.  

And while Netflix stock has seen its ups and downs in the past, this time it was serious enough to force the company to embrace two things it has vehemently resisted in the past: offering a lower-priced ad-supported version and going after paying subscribers that share their passwords. According to reports, an ad-supported version of Netflix could come as soon as the fourth quarter of this year. 

 Fiber Blowout

Fiber deployment and construction are the new buzzwords in the cable and telco business, with AT&T claiming they will pass an additional 30 million customer locations with the technology by 2025. Cable operators are regularly extending their existing footprints with fiber — Comcast and Charter Communications are adding roughly 1 million homes per year through fiber edge-out programs — and smaller operators are constantly announcing new fiber builds. So far in May alone, nine small operators and telcos have announced plans to build fiber networks, with TDS Telecom pledging to pass an additional 160,000 homes with fiber this year and Wide Open West pledging $400 million to extend fiber to an additional 400,000 homes by 2027. 

Forget that there are still some questions as to whether there are enough skilled techs to actually build networks. Forget that these networks won’t be fully built for another five years at least.  Chances are if there wasn’t a worker shortage, the number of projects would be even greater — because nothing creates a growth surge more than money, and the federal government has earmarked $65 billion for network buildouts in areas they deem have insufficient broadband speeds. And even though a lot of those projects will be done in areas that have incumbent providers, more choice and higher speeds can only be good news for streaming service providers, right? 

Netflix obviously needs more subscribers. And cable operators, telcos and soon-to-be-Twitter owners are all spending huge amounts of cash to extend broadband services to rural areas. And since some of the customers in those markets don’t have Netflix or other SVOD services -- because you need broadband to stream video — that would appear to represent a pretty big untapped market. Maybe not hundreds of millions of people, but at least a few million. And every little million helps. 

Sounds pretty simple?

Some Gray Areas

Not really. Like everything else in the media business, there are some gray areas. 

Perhaps the grayest is just how many homes don’t have sufficient broadband. The federal government says there are 30 million people that live in areas that don’t have sufficient high-speed data, but doesn’t say how many homes that works out to be. And though DSL service may be a lot slower than cable broadband, with top residential  speed of 100 Megabits per second vs. 1 Gigabit per second for cable, it’s still fast enough to stream video. So technically, truly new broadband customers — those who have never had broadband and therefore, SVOD — are probably pretty few. 

That’s what  Leichtman Group president Bruce Leichtman thinks. Sure, he said in a recent interview, new fiber builds may attract some new subscribers to Netflix, but it will be a marginal amount. More likely, he added, is that a combination of faster networks, lower prices for ad-supported streaming and the advent of free ad-supported TV (FAST) could present an opportunity to convince customers in those areas to subscribe to other SVOD services.

“I think it's an opportunity, but it’s more of a gradual opportunity,” Leichtman said of the fiber build’s impact on Netflix and other SVOD providers. “Remember, they have to build these markets, and the building takes a while. And we’re talking about the 86th percentile. These are not the early adopters that we’re talking about.”

But Growth is Growth, Isn’t It?

Although there has been a lot of talk about the slowdown in broadband growth, it’s still growing. Leichtman believes that one of the biggest catalysts for Netflix and other streaming services would be a return to new housing growth, which has been stagnant throughout the pandemic. New homes means new subscribers for broadband as well as SVOD services.

“While the breadth [of the SVOD market] is mature, the depth will continue to grow,” Leichtman said. “That means more services per household.” 

LightShed Partners expects total broadband subscriber additions to be fairly constant over the next three years: 3.5 million in 2022, 3.3 million in 2023, 3.2 million in 2024 and 3.2 million in 2025. 

At the same time, traditional pay TV losses are accelerating. Wells Fargo Securities media analyst Steven Cahall estimated that traditional pay TV lost 2.2 million subscribers in Q1, 400,000 more than in the same period last year. 

Our own Next TV estimated that cord cutting accelerated 31% in Q1, due mainly to losses at virtual MVPDs and satellite TV service providers.    

MyBundle.TV CEO and founder Jason Cohen said what some observers are missing is that broadband is still growing.

“That’s the piece of the puzzle that the streaming marketplace isn’t very focused on,” Cohen said, adding that his company has nearly tripled its number of broadband partners from 31 in June 2021 to 90 currently, including many small market ISPs that are bringing broadband to people for the first time.

“Some of these people still don’t have Netflix,” Cohen said. “Is there another 100 million households for Netflix to gain in the US? No. But we’re talking about, on the margin, there are millions left. If you're talking about the smaller streaming services, there are still tens of millions [of subscribers] to gain. There's a lot of investment happening to bring more broadband to the table.”

Streaming is Not Dead 

Cohen bristles at those who claim streaming is dead, pointing to the roughly 68 million households who spend about $120 per month on traditional linear pay TV subscriptions. (That’s $98 billion annually, for those without a calculator) Those ranks are definitely going to deplete as those homes cut the cord, but that doesn’t mean they are going to start reading books and learning how to play the piano for entertainment. They’re going to stream video, either through a service they already have or via one to which they will soon subscribe.

“This idea that streaming is saturated we think is 100% incorrect. Those dollars are going to be shifting from those cable bills. Whatever it is, more broadband means there is going to be more streaming,” Cohen said, adding that consumers unwilling to pay $15 per month for a streaming service may be attracted to paying $9.99 for an ad-supported one.

Netflix won’t be alone in its ad-supported efforts. Others like HBO Max — which introduced its ad-carrying version in June 2021 -- Paramount Plus, and NBCUniversal’s Peacock all have introduced AVOD tiers to varying degrees of success. Disney Plus said it would launch a lower-priced ad-supported version later this year.

Disney Plus added 7.9 million new customers worldwide in fiscal Q2, exceeding analysts’ consensus estimates of 5.9 million additions. Including its Hulu, ESPN Plus, and Disney Plus Hotstar brands, total customer additions were about 9.2 million in the period. But the company warned that because the first half of the year came in so much better than expectations, the second half may not be as strong.

“...[T]he first half came in better than expected, so that delta that we had initially anticipated may not be as large,” Disney chief financial officer Christine McCarthy said on a conference call with analysts Wednesday to discuss quarterly results. “But we still do expect an increase in the second half to exceed the first half.”  

The push towards AVOD is a logical next step for streaming, and could ease the pressure to spend heavily on new content just from the nature of the business model. With AVOD, the longer a consumer watches, the more money the service makes, while the absence of advertising means as consumers burn through shows, more content has to be created to keep their attention. 

FAST and Furious 

At the same time, free, ad-supported TV (FAST) services like Paramount’s Pluto TV, Fox’s Tubi TV, the Roku Channel and others are becoming the fastest growing segment in the streaming universe. Pluto TV has about 68 million monthly active users, Tubi about 51 million and indications are that the segment will continue to soar as new players enter the fray. 

Cohen added that the FAST segment is where he believes the ad dollars once earmarked for linear networks will go, adding that MyBundle.TV is building a FAST component into its platform to take advantage of that growth.

“We know people want free TV, they want to pay for no adds, they're willing to pay less to get ads, and then some of them are willing to lean back and say, ‘You know what, I’m willing to take a little bit lower quality content so I can flip through channels,’ ” Cohen said. “Whether it's Pluto or Tubi, you name it, there's a real market for that free TV.”

MyBundle.TV obviously is in the position to take advantage of the shift in how programming is delivered, and Cohen believes that his service, which enables customers to navigate the growing number of streaming services to find the content they want to watch, will become even more valuable as choices increase and traditional linear bundles erode. 

That is even more true today as the number of services increases and the sheer amount of available programming balloons. Tubi alone has a content library with more than 40,000 titles. And as more and more content providers are focusing on originals and other exclusive shows, finding programming across the various streaming services can almost become a full-time job.  

It’s About Aggregation, Not Consolidation

“It’s not what I’m paying for my apps, it’s what am I getting out of it,” Cohen said. “Right now if I subscribe to an app and I'm not going to it to find the content and I’m not finding new shows or movies, then that might be a problem. There’s a lot of content out there, and a lot of good content, on multiple different streaming services. … By helping consumers discover new shows and movies across their services there's another way to increase that value.”

“To me, it’s not streamer vs streamer, it’s still streaming vs the $160 billion [in revenue] between the subscriptions and the advertising that is still spent by advertisers on traditional linear TV,” Cohen continued. “That money is shifting over through this new delivery mechanism that is streaming.”

And Cohen believes that the industry can support more streamers, just as long as there are simple ways for consumers to access the content they want.   

“I think that ultimately our view of the market, there doesn't need to be consolidation, but there needs to be aggregation,” Cohen said. “There needs to be a way for consumers to more simply navigate this process. We think this because the way that consumers build their own bundle that will still include Netflix, that will still include these other big services, as well as the niche services for people’s  interests. 

The pay TV industry is not blind to the need for aggregation either. Comcast and Charter Communications unveiled a joint venture earlier this month that would serve as a streaming platform for its broadband-only customers, one that could easily become a streaming app aggregator.

Cohen acknowledged that larger pay TV companies will likely go on their own when it comes to app aggregation. But he added there is plenty of room for the smaller guys, adding that there is a growing number of ISPs with 200,000 or 300,000 subscribers that would welcome help. 

“We do not think Comcast is going to be using MyBundle.TV,” Cohen said. “But for everybody else, we view ourselves as that aggregator. We consider ourselves the streaming aggregator for the broadband industry.” ■

A day after Charter Communications announced a joint venture with Comcast to create a streaming platform based on the latter’s Flex broadband-only product, chairman and CEO Tom Rutledge said that he sees a day when the bulk of its Spectrum video customers receive service via internet protocol delivery. He called the Comcast partnership a step in that direction. 

“I expect that incrementally most of our customer base will be all-IP,” Rutledge said after being asked about the JV on Charter’s Q1 earnings conference call with analysts. He added that unused video spectrum can be recaptured and used to increase broadband speeds or provide additional capacity over time.

In a research note Friday, MoffettNathanson senior analyst Craig Moffett noted that if the Flex box does become Charter’s new set-top, effectively moving all of its video to IP-based apps, it would free up enormous amounts of capacity. 

Rutledge didn’t say when that would happen, and what he said is something that cable operators have been quietly moving toward for years. But it was a public admission that cable is acknowledging that streaming is becoming the dominant force in video. This is coming from one of the better performers in the video space — Charter lost about 112,000 video customers in Q1, compared to a loss of 512,000 video subs for Comcast. Later on the call, Rutledge said that he still believes in the video business and Charter’s ability to keep its pay TV losses low can be attributed to its knack for packaging.

“We’re continuously improving the rights structures around what we’re able to sell,” Rutledge said. “It’s been difficult because of the way historically video’s been packaged in this very fat, expensive bundle that is driven by sports rights costs. We’ve been able to get some of the content out of that ecosystem and put it into tiers and we’re successfully selling those. I think that over time, we’ll be able to build a very nice video business.” 

Also: Could Comcast’s and Charter’s New Streaming Platform Be the Launching Pad for Something Bigger? 

That’s a key point, and whether or not Rutledge was making it as a hint of bigger things to come, being able to package video correctly is going to be crucial going forward no matter what delivery system is used. I talk a lot about the day when cable operators will aggregate streaming apps and sell them in bundles, replacing the current video model — and Rutledge has hinted at that in the past, too. But with streamers starting to feel the pressure from high costs, competition and viewer fatigue, having someone with a proven track record driving subscriptions could be invaluable. Whether they take the industry up on it remains to be seen.

Maybe streamers are beginning to learn their lesson. Netflix, after years of saying they didn’t care if subscribers shared passwords, last month said they would crack down on the practice. Other streamers are keeping a closer eye on password sharing, something that Rutledge warned about years ago. 

And though it would have been easy to gloat about Netflix’s current dilemma, aside from a brief “I-told-you-so” joke, Rutledge took the high road, pointing out that the practice affects the entire media industry. 

“It’s not just a problem for the companies that are not controlling their passwords, it’s a problem for everybody in the industry, because all of that content that comes out without anybody paying for it affects the supply and demand of all content, not just the provider that is selling the content,” Rutledge said. “[That] diminishes the value of content for everybody, which is a point we had been trying to make for years.”

Another plus for Charter is that Rutledge actually likes the video business. He doesn’t see it as an albatross, or as a roadblock to offering more profitable broadband service, but as a good product in a growing lineup of good products. It helps that he has seen the various transformations of that product over the years, and not just in video. During the call, he was asked how he felt about the explosion of new fiber builds and fixed wireless offerings geared at taking broadband share away from cable. 

“There have been periods in my cable career where sentiment has gone up and down, and my sentiment has remained the same,” Rutledge said. “I think it [broadband] is a great business and I think we have a great opportunity to continue to grow the business successfully. When everybody’s euphoric it’s probably odd, and when everybody’s pessimistic it’s odd, and I’m unchanged.” ▪️

Is it just me or was the first thing you thought about when Charter and Comcast announced their streaming platform partnership Wednesday, was that it was the foundation for what the industry has been quietly thinking about for the past couple of years — becoming de facto aggregators/curators of the growing number of streaming services/direct-to-consumer offerings that are dominating the video landscape. 

OK, maybe it was just me. But think about it. Comcast has been saying for years that it would think about licensing its Flex product -- which offers a ton of free programming and more importantly, links to just about every major and minor streaming app out there, to its broadband-only customers for free -- but hasn’t really pulled the trigger outside of Cox Communications’ Contour product and a few Canadian operators. Charter, as far back as 2019, has said it would consider licensing Flex if it was made available. Now, Comcast and Charter have decided to partner to offer a platform that is basically the Flex product, offering data-only consumers a more convenient path to streaming services at a time when those streamers are experiencing a slowdown in customer growth.  

Not all of the details have been worked out yet -- there is still a question of whether Charter will charge a monthly device rental fee, a flat fee or no fee at all for a Flex-like box when it becomes available to its customers in 2023. And while the functionality will be incorporated into XClass TVs, which Comcast launched through Walmart last year, whether it will find its way into other Smart TVs is uncertain. One thing is certain though -- it won’t charge its broadband-only customers for the Flex-like service, just like Comcast doesn’t. And though it won’t be automatic for broadband only customers to receive the service, it seems kind of counter-intuitive not to sign up for it if you’re already signing up for broadband service. Why wouldn’t you? Whaddaya got to lose?

The distribution opportunities are huge. Charter has about 28 million broadband customers, and 15.2 million video customers, meaning broadband-only represents about 13 million subscribers. At Comcast, with roughly 17.5 million video and nearly 30 million residential broadband subscribers, the broadband-only rolls are about 12 million. Even with, at last count, 3.8 million Flex boxes deployed, there is still a lot of runway for the product.

Because if it’s anything like the current iteration of Flex -- and chances are it will be exactly that -- consumers will get access to 10,000 free movies and shows from NBCUniversal’s library like Saturday Night Live and others as well as  access to subscription apps like Netflix, Amazon Prime Video, Disney Plus, HBO Max, Apple TV Plus and ad-supported apps like Tubi and Pluto TV.  

Also: Netflix is Dead; Long Love Netflix 

It’s the apps access that could be key in the future. At the Morgan Stanley Media Entertainment and Technology conference last month, Charter chairman and CEO Tom Rutledge said that he sees opportunity for cable operators to serve as curators for all the streaming content that is out there and is to come. That was controversial enough to force Charter chief financial officer Jessica Fischer to walk back those comments a bit at the Deutsche Bank TMT conference a day later, adding the timing wasn’t quite right for streaming aggregation. 

Now, maybe Rutledge jumped the gun a bit, or maybe Fischer was saving the big reveal for Wednesday’s announcement, or maybe it really will take a while before cable operators can “curate” streaming apps, but at least the groundwork is done. How difficult do you think it would be for Charter, Comcast or both to offer the ability to manage your growing streaming subscriptions for you, offering you a place where you can pay for all of them via one bill? Gosh, that  almost sounds like cable video, but with apps, and none of the hassle of having to negotiate carriage agreements. Why, heaven forfend, would any cable operator ever want that?

Already, Xfinity Flex customers can navigate the ever-crowded landscape of shows using their Xfinity voice remotes -- speak a title into the remote and the guide will show you what services it’s available on, and whether you have a subscription to the service. How hard would it be to take that functionality to the next step?

Adding Charter gives Flex a tremendous amount of additional scale -- including strongholds in the two biggest media markets in the country, New York and Los Angeles -- which is critical to the success of a product like this and its possible future iterations.    

On Comcast's Q1 earnings conference call Thursday, chairman and CEO Brian Roberts perhaps offered a hint of insight into the future, adding that one of the great things about the cable industry is its ability to reinvent itself.

"We believe aggregation is a real opportunity to see customers who have now so many more choices, and they just want to get to the content they want really fast and in a seamless way and have somebody who makes it work for them,” Roberts said, adding that as viewing patterns change, Comcast and NBCU have responded with new ways to access programming through linear, VOD, and streaming through its Peacock service. 

“I think we take those kinds of examples and figure out, in this new partnership with Charter and across the NBC portfolio, a way to continue to innovate and be relevant to the next generation of television viewers,” Roberts continued.

Take note of that last part. What could be more relevant to streaming viewers than offering a way to make their journey an easier one? 

That, Ladies and Germs, has always been cable’s reason for being. Cable was invented literally to make it easier for consumers in markets that couldn’t get broadcast TV to get better access to that programming. As new technologies emerged, cable was always there to take advantage of them and make them better, whether it was HDTV, VOD, high-speed data, phone service, and a bunch of other things I’m forgetting. Cable has always responded better when its collective back was against the wall. Streaming was/is supposed to kill linear TV. Now that streaming fatigue is beginning to set in with some consumers, cable has the opportunity to come to the rescue. 

Netflix stock fell again Friday (April 22), ending the day at $215.52 (down 1.2%) and capping a three-day decline that saw the company shed 38% of its share price, more than $55 billion in market capitalization and the unofficial title of Streaming Champion of the World. Now with expectations low for Q2, the company is faced with a dilemma: what to do to regain its crown. 

The last time Netflix stock fell like a stone -- remember January 21? -- there was a quick response from hedge fund managers who saw the drop off as an opportunity to take advantage of the panic, to snap up a good stock for a bargain price and rake in the money later. Now, three months later, during Netflix’s latest share cratering, those earlier white knights have left the castle, and there doesn’t seem to be any replacements at the drawbridge, at least anytime soon.

Back in January, hedge fund Pershing Square and its chief Bill Ackman said they had bought 3.1 million shares of Netflix for about $1 billion, claiming he was “all in” on the streaming space and was ready to reap the profits once Netflix turned itself around, probably in the first quarter. At the time, Netflix predicted that it would add about 2.5 million global subscribers in Q1, substantially lower than in past Q1’s -- typically one of the strongest growth periods for the company -- but strong enough. A few days later, Netflix founder and co-CEO Reed Hastings said he bought $200 million of Netflix stock personally, showing his commitment to the company and the stock. 

Also: Netflix Comeback Could Take a While 

Fast-forward to earlier this week and Ackman sold his Netflix stake for a $450 million loss on April 19, and Netflix didn’t add 2.5 million global customers, it lost 200,000 of them. Adding insult to injury, the company said it would lose another 2 million subscribers in Q2. 

In a note to shareholders on April 19, Ackman said that while he and the Pershing team believe in Netflix’s management, its “enormous operating leverage” means that any fluctuation in the company’s future subscriber growth can impact value. 

“In our original analysis, we viewed this operating leverage favorably due to our long-term growth expectations for the company,” Ackman wrote.

“While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty,” he continued, adding that given its management’s track record, Netflix can still be a successful company and a good investment. “That said, we believe the dispersion of outcomes has widened to a sufficiently large extent that it is challenging for the company to meet our requirements for a core holding.”

In other words, Ackman and Pershing, like just about every other fund that invested in Netflix, believed that the subscriber growth train would never stop. Only a few years ago, analysts were predicting Netflix would have 300 million global subscribers by 2023. Now, analysts like Needham & Co. 's Laura Martin are wondering if 222 million (its current global tally) is the peak.  

Despite the irrational exuberance that fueled a lot of Netflix’s unprecedented run in the past few years -- its stock price more than doubled from $302.60 on November 18, 2019 to $700.99 on November 17, 2021 -- investors had to think, at least in the very back of their minds, that it couldn’t last forever. Like the booms and busts of past stock market bubbles -- tech in the 2000s, real estate in the mid-2000s, everything in the late 1990s -- it eventually has to come to an end. In the past week, Netflix stock has fallen 38%. Shares are down 63% since the beginning of the year. The ride, it seems, is over.

Who or What is to Blame?

To some analysts, the pandemic is partly to blame -- Netflix added nearly 55 million subscribers globally between 2019 and 2021, the height of stay-at-home orders that forced people indoors and in front of their TV sets. Broadband experienced the same slowdown after a booming two years -- Comcast and Charter alone added a combined 7 million high-speed data customers between 2019 and 2020 and just 2.5 million in 2021. Netflix was different because it kept spending money on content -- $15 billion last year, by some estimates -- had some of its most-watched shows ever during the pandemic and even though the North America market was pretty saturated (about 60% of pay TV households have a Netflix subscription), they were going to make it up in spades internationally.

But COVID was a global problem, and even international customers had more streaming choices in the last couple of years -- Disney Plus, for example, has about 46 million subscribers in India alone, a market that Netflix is just-now taking seriously. In the U.S., Netflix was becoming a victim of its own success. Couple that with very aggressive competitors and international instability -- Netflix suspended its Russian operation in March after that country’s invasion of Ukraine -- and it's no wonder that Netflix has had a tough go finding new customers. 

“In hindsight, COVID pulled forward Netflix to maturity in its oldest markets (North and Latin America and Western Europe),” wrote Evercore ISI Group analyst Mark Mahaney in a note to clients, adding that Netflix has about 60% penetration of North American broadband households, 80% when password sharing is counted. “It’s not easy to raise penetration beyond that level.” 

Netflix says it is going to crack down on password sharing and will introduce an ad-supported tier, but there are questions about how soon either of those can be implemented and whether it will make much of a difference. Wedbush Securities analyst Michael Pachter, a long-time bear on Netflix stock, told CNBC in March, when talk began to circulate that Netflix, like other streamers, would consider an ad tier, that it likely wouldn’t be big enough or fast enough to make that much of a difference. He added that Hulu has an ad tier that brings in about $10 per month per subscriber in advertising revenue. 

“The question is do they make more money at $10 per month for advertising or do they make more money charging $15.49 [for service]?” Pachter told CNBC. “I think it’s a push. …Five bucks, six bucks per month plus $10 advertising, that’s a push. What’s the point?”

Needham & Co.’s Martin believes that the ad-tier will help Netflix, but advertising alone won’t solve its problems. In an April 20 research note, Martin wrote that in addition to a lower-priced ad-supported version, Netflix needs to add sports and news content, bundle the service with other products and/or purchase a large film or TV content library. 

“Every streaming competitor does one or more of these things, which puts Netflix at a structural competitive disadvantage, we believe,” Martin wrote. “Another alternative is for Netflix to acquire other companies that provide one or more of these attributes, as it has done for video games.”

Borrowing For Growth 

Pachter has been a harsh critic of Netflix's seemingly endless habit of continually increasing its content spend -- $17 billion last year, according to some estimates, compared to $4 billion for Disney Plus -- by borrowing. Increasing leverage was OK'd by Wall Street as long as the subscriber growth was strong. When it started to trail off, then investors began to worry.

Netflix still has a junk-bond rating on its debt, but it was expected to move into investment grade territory soon. Moody’s Investors Service raised Netflix’s debt rating two notches to Ba1 in April 2021, based on revenue and subscriber growth, and the belief that as that continued, Netflix would begin to report positive, sustained free cash flow soon. Having steady, sustainable free cash flow would allow Netflix to take its leverage ratio below 2.5 times, consistent with its current rating.    

Moody’s is still optimistic that Netflix will be able to pull itself out of the hole. 

“We still see the company continuing to build on its significant scale to penetrate the world's 800 million pay TV homes and the global addressable homes of over 1.5 billion (both excluding China), sustaining competitively low cost per viewing hour leadership, growing average revenue for member, and reinvesting in even more content as it benefits from this virtuous cycle,” Moody’s SVP Neil Begley wrote. 

But that confidence does not come without caveats. In his Friday note, Begley warned that the causes of the Q1 losses and the “potentially sharp” first half declines in subscribers are still there: price increases; competition; and customers that are taking a break from in-home binge-watching as COVID restrictions are lifted. Moody’s said it will continue to monitor those conditions. 

Not Such a Big Surprise 

Pachter had warned that this day would come for years. In a 2019 article by then-Bloomberg columnist Joe Nocera, the analyst remembered being asked to justify his $183 price target on Netflix shares when the stock was already trading at $368 each. He said to justify his price target, Netflix would have to show a $2 billion improvement in free cash flow and have around 300 million subscribers paying $20 per month. Pachter believed Netflix could get there in a competition-free environment, but that wasn’t the case.

“What will happen if competitors are charging $7?” Pachter asked.

Well, that day is here. Hulu raised the price of its ad-supported service to $6.99 monthly in October, Disney Plus raised its price to $7.99 per month earlier this year and Apple TV Plus and Peacock’s premium tier are still at $4.99 per month. Netflix upped the monthly charge for its standard service to $15.49 per month in January.

Back in 2016, Nocera wondered in an article he wrote for the New York Times what would happen if the Netflix hamster wheel of constantly escalating spending to fuel subscriber growth ever slowed down. In his mind, it would lead to a lower stock price, which would increase the cost of debt, forcing Netflix to increase prices or cut back on costs or both. In a New York Times article at the time, he wrote that it would turn the “virtuous circle” of increased spending fueling increased subscriber growth, into a “vicious circle.” 

For years, Netflix was the bratty younger brother in the media business, making fun of its slower, older and less stylish cousins, while spending the equivalent of dad’s money like it was going out of style. That behavior was tolerated, even encouraged by lenders and Wall Street as long as it kept up its blistering growth pace. Now that growth has appeared to stop, or at least slowed considerably, Netflix’s hijinks just aren’t so cute anymore. 

But probably more important is that despite the ups and downs of the streaming market, Netflix was always a pretty predictable company. Sure, subscriber growth would fluctuate, but in the end it would always be higher than before. Today, a hedge fund that three months ago thought it was a good move to take a $1 billion plunge in buying Netflix stock, now thinks it’s better to take a $450 million bath just to get out of the water. ■

As the record date comes to a close for AT&T’s divestiture of the last vestige of its most recent foray into the media business -- Warner Media -- MoffettNathanson’s Craig Moffett drove another nail into the telco’s already bullet-riddled coffin, slapping a $19 per share price target on the company, while maintaining his “neutral” outlook on the shares.

Tuesday (April 5) is the record date for the deal, when AT&T will spin-off 100% of WarnerMedia to its shareholders. Those shareholders will later receive 0.24 shares of Warner Bros. Discovery for every AT&T share they own. That final tax-free exchange is expected to happen later in the month.

AT&T agreed to sell its WarnerMedia unit (the former Time Warner Inc.) to Discovery last May, unwinding what was the last of its big media assets -- the other was DirecTV, which it sold to TPG in 2019. While AT&T shareholders will technically control a 71% interest in the combined Warner Bros. Discovery, former Discovery CEO and soon to be Warner Bros. Discovery CEO David Zaslav and his team will clearly be in the driver’s seat operationally. For AT&T investors, it is a welcome “see ya” to what was an enormous albatross around the telco’s corporate neck.

In unloading WarnerMedia, AT&T sheds a big debt load ($38.5 billion) as well as a big chunk of cash flow ($6.6 billion) that the analyst argues proportionally cancels each other out. While he cheered the divestiture, Moffett said AT&T still has an enormous debt obligation ($177 billion) and he wasn’t really convinced that this deal solves all of AT&T’s problems.

“It is tempting to think of this moment as a fresh start,” Moffett wrote. “Unfortunately for AT&T, the damage done by their acquisition of Time Warner, and by their earlier acquisition of DirecTV, cannot be undone with the stroke of a pen.”

On the surface it seems pretty simple: by moving WarnerMedia to Discovery, AT&T gets to focus on businesses it knows best -- wireless and wireline telecom. Except, Moffett pointed out, those businesses aren’t doing so hot either. 

Moffett wasn’t all doom and gloom. He said AT&T’s valuation is fairly unchallenging, has a fat dividend, low expectations and sentiment around the stock is already negative. But his main beef is that the growth outlook is nearly non-existent. 

In its Mobility segment, where AT&T has more than 180 million wireless customers, the company is expected to lose share in what Moffett called a “sub-GDP growth industry.” Its Business Wireline segment is expected to deliver negative mid-single-digit percentage growth, and its Consumer Wireline segment, which accounts for about 11% of revenue, is still mostly copper. Although AT&T has a fiber deployment plan, Moffett writes that it will mainly offset the declines in the copper network, and generate low single digit growth.

“The resultant mix yields little or no growth in an industry with little or no pricing power... At a time of high (cost) inflation,” Moffett wrote.

Moffett has been down this road before. In February he issued a detailed analysis of what AT&T would look like after the WarnerMedia spin, putting a $20 per share price target on the stock. Today, his outlook is equally glum, it’s just that now he sees AT&T as a $19 stock. For context, AT&T closed at $23.88 each on April 5, down about 30 cents per share, or 1%. In the past 12 months, AT&T shares have fallen about 15%. 

Maybe AT&T will shock us all. Maybe with its hands firmly on the telecom wheel, with no distractions, it will be able to drive this truck to Hawaii and make us all look like idiots. (You’ll understand that metaphor better if you’re a Robin Williams fan.)  

But history shows us this simply isn’t the case. Yes, AT&T is now in a business it knows. But it is also a business that has a lot of competitive pressure. How long will it be before the next crop of executives decides it’s time to branch out again? 

In the meantime, several analysts see telcos like AT&T positioning themselves to take broadband share away from cable, with AT&T committing to building fiber to 3 million homes this year and 4 million in 2023. Moffett agrees that is a plus for its Consumer Wireline business, but notes that segment is about 60% copper at the moment. In other words, it’s going to take a while. And we all know how important speed is in the telecom business. ■

With all the hype surrounding fiber buildouts and network construction to deliver 5G wireless technology to the masses, Barclays Group media analyst Kannan Venkateshwar wondered if 5G will be the last “G” for wireless technology. In a brief note to clients Friday, the analyst makes a good (and quite humorous) case for 5G to be the end of the road, at least for a while.

Anyone who has followed the telecom industry for any length of time knows that it is pretty common to talk about the next greatest thing well before the latest greatest thing becomes reality. In wireless, pundits and providers alike were talking about the promise of 4G while they were building 3G networks, and 5G when they were building 4G. Starting next year, the International Telecommunications Union is slated to begin work on its International Mobile Telecommunications vision for 2030, the first step in 6G standards. 

In his report, Venkateshwar notes that so far, 5G’s costs far outweigh any revenue it is currently generating. And he noted that every prior tech generation was about both improving functionality and introducing new application capabilities. For example, 1G was about mobile analog voice, 2G about digital voice and texting; 3G about multimedia and internet access; and 4G about smartphones and associated applications. The analyst argues that 5G could be the first generation where the network outpaces its possible applications. And so far, he added, “initial white papers on use cases for 6G seem highly forced and bordering on the bizarre.”

Sensory Overload? 

Venkateshwar pointed to one 6G white paper that touted the Internet of Senses. According to that report, IoS would augment a person’s senses beyond the boundaries of their body, giving users augmented vision, hearing, touch and smell.

But that begs the obvious question: Does anyone really want to smell the internet?

Venkateshwar’s guess is no, and he writes that the current approach raises questions about the need for periodic generational shifts in standards, arguing instead for a more incremental approach. 

“We believe the next generation standard development process will need to be a lot more about applications than network functions and air interfaces,” Venkateshwar wrote. “We also believe the evolutionary path for applications may also look different, partly as a result of network functionality. More importantly, we believe the next generation standard development process is likely to force a structural rethink about what wireless networks are.”

The analyst added that some providers are already headed on a path toward a more modular and virtual wireless architecture. Dish Network's 5G build is one example, he wrote, with its core network functions operating in the cloud. While there is still a question about whether this architecture can achieve sufficient scale, Venkateshwar wrote that over the long term it is likely that migrating network functions to the cloud will become a force in the industry. 

“What this means is that the wireless network will be just another component of the broader cloud infrastructure that has grown all around it,” he wrote. “This will create new network capabilities and applications and will also change the meaning of what network quality means in the coming years. This also means that 6G will have to be more about software than air interfaces, which is likely to require involvement from those not typically part of the standard making process such as the cloud operators.”

Decommoditizing Data

So what does this all mean? Venkateshwar wrote that he believes networks will become more closely integrated with apps, which will “decommoditize data.” That could lead to basing data pricing not on volume or speed, but on application functionality on a given network. 

That isn’t really new. Venkateshwar wrote that is what the cable industry did in the 1980s — pricing was based on applications (the bundle) rather than volume. But as applications and networks become more tightly intertwined, having consumers pay for applications and data separately could become less likely. 

“In our opinion, we may see models where consumers don’t explicitly pay for data at all and data becomes an application feature,” he wrote, adding that early examples include Apple’s air tag, and Amazon’s sidewalk and whispersync.

It is for that reason that Venkateshwar sees 5G not as another stop in the ongoing journey of network improvements, but as a demarcation point in long-term network evolution. 

“This is why 6G in some ways will be more about realizing the true potential of 5G,  and the evolution of networks after that could be more about a synchronized software pathway with broader cloud architecture than wireless networks on a standalone basis," he wrote.

So the next generation won't necessarily be chock full of new bells and whistles and awe-inspiring products, but more of a realization of the potential of the technology before it. That's fine with me. As long as I don't have to smell it. ■

 The spring conference season is upon us, a time of new beginnings, when nature and CEOs of major media companies show the world just what they have been hiding under their drab little husks for the past four months. For nature, the metamorphosis bursts forth in an explosion of color, new life and possibilities. For cable CEOs, it comes in a series of presentations and fireside chats with the investment community to prove their businesses aren’t going to die this year.

Investors have been lining up for cable’s funeral for decades. The industry’s death rattle supposedly began in the nineties with competitive threats from satellite TV and telcos. Now streaming video, direct-to-consumer offerings that bypass the traditional bundle and fixed wireless access service that is expected to steal away broadband customers are expected to deliver the fatal blow. But instead, every year cable survives. It weathered the satellite onslaught, the multiple attempts by AT&T to weasel its way into the video business, and by the looks of things, it is preparing itself to ride out the latest storms. 

I’m not saying cable, or any industry, is invulnerable. Taking even a cursory look at the industry is proof that the business is nothing like it was a decade ago. But unlike buggy whips and the Betamax, whenever the collective consciousness began to stray, cable operators have for the most part managed to figure out a way to make themselves attractive again to consumers. 

In the past century, cable pushed back video competition by introducing more channels, more choices and better pictures through digital and later HDTV offerings. Later, competitive wireline phone offerings, high-speed internet service and in the past few years, mobile service have helped the industry not only survive, but thrive. Now cable companies have twice as many broadband customers as video subscribers, and mobile service, once thought of as merely a retention tool, is becoming a real threat to traditional carriers. In the meantime, cable continues to invest in the business, build out fiber networks and reinvent itself.

Even though those moves are far from secret, operators continue to make the seasonal rounds, reminding investors that although they may not be the latest thing, they are what makes that latest thing work.

Investor Conference Rites of Spring

March is the traditional beginning of the spring conference season (I know spring doesn’t officially begin until March 20, but it was 74 degrees in New York this week, for gosh sake), with Morgan Stanley's Technology, Media & Telecom conference on March 7, and Deutsche Bank Securities hosting the next media get-together on March 14. There is expected to be a bit of a reprieve in April, followed by MoffettNathanson’s Media & Communications conference and J.P. Morgan’s Global Technology Media & Communications conference slated for May. Evercore ISI should wind down the spring season with its TMT event expected sometime in June, although others could be sprinkled in between. And then the fall season starts.   

Already, CEOs of the top three publicly held cable companies have hit the conference circuit and have had to reassure investors that: Yes, they still intend to add broadband subscribers; no, they haven’t given up on video quite yet; and yes, mobile service is on the path to becoming profitable.

Comcast chairman and CEO Brian Roberts kicked off the spring season with his March 7 appearance at the Morgan Stanley conference, He spent most of his time telling the investment community that while broadband growth is indeed slowing down, it has lots of runway ahead of it. He pointed to four areas where he sees Comcast can boost broadband growth: expanding its footprint; competing more aggressively; bundling with other products like wireless; and growing its business services reach.

Comcast has been expanding its reach to about 1 million more homes per year within its footprint through edge-out programs. This year, he expects that expansion to be even greater, given government initiatives to build out unserved and underserved rural areas. 

“Where it's been uneconomic previously, it will be economic in the future for us to extend our broadband,” Roberts said. “And we're going to compete aggressively to do that.”

Roberts also defended cable broadband against the latest competitive threat — fixed wireless access from the telcos — adding that at the moment it is an inferior product to high-speed data service from cable, reminding the audience again that cable has a history in pushing back competitive threats. 

“We don't take it for granted, but we've seen lower-price, lower-speed offerings before,” Roberts said. “And in the long run, I don't know how viable the [FWA] technology holds up.”

Altice USA CEO Dexter Goei, who has been dealing with a steep drop in his company’s stock price since it lost broadband subscribers in 2021, spent his time at the Morgan Stanley conference reiterating plans to accelerate its fiber network buildout, and hinting about faster speeds becoming available to a wider swath of customers. 

Altice‘s accelerated fiber rollout has been well-documented, and Goei said at Morgan Stanley that it is expected to make a big difference. 

Goei said Altice has been talking about fiber for three years, and the slowdown in deployment has been a combination of permitting and COVID-19 related delays and the company’s inability to “get its own ducks in a row.” But now with a restructured management and a clearer focus,  growth is expected to take hold in 2023.     

“The goal was to reinvigorate distribution, rebrand the company, address some customer service-related issues we were dealing with and make that a one-time investment,” Goei said, which “leads to a nice payback in 2023.”

Goei hinted at “multi-gig” speeds for its Optimum broadband service in the second quarter, stopping short of saying just how fast its offering would be. But the company has said publicly — back in May 2021 at the MoffettNathanson Media & Communications conference — that its goal was to offer 10 Gigabit per second broadband within 18 months.       

On the video side, Charter Communications chairman and CEO Tom Rutledge said there is “more damage to come” regarding continued customer losses, but all is not lost quite yet.

“There’s nothing about the old model that’s really changed, Rutledge said at the Morgan Stanley conference, adding that prices for traditional video service continue to rise, driven by ever-increasing sports rights fees. “There’s nothing to really constrain the cost of live sports in the linear business and that’s still the glue that holds it together. I see that business continuing to get more and more expensive for consumers.”

Eyeing a Mobile Future

Despite the shift toward streaming, Rutledge isn’t expecting the pay TV business to change that much over the next few years. But he echoed Roberts in saying that the mobile/broadband bundle will be the future. And he acknowledged that he often thinks of how cable could eventually aggregate and package streaming services for consumers. 

“The opportunity going forward is to start to reaggregate and use that aggregation to give a better, more cost-efficient consumer experience to more people,” Rutledge said. “We think about that every day and how that might happen. I don’t want to be overly Pollyannaish and say that is about to happen because the current model is still very much in force. I don’t see that disappearing in the next couple of years.”

But Rutledge said Charter is laying the groundwork for that day when it does come, making itself available on apps like Roku, where it is one of the most used applications. He added that nearly 12 million customers access Charter services (broadband-only as well as video) via an app instead of a set-top box.

“The upside is still yet to be realized,” Rutledge said. “The reaggregation is somewhat far away, but we’ve been thinking about how to build a platform that can be used by customers  in a more efficient way.” 

It’s a concept that has been well-documented in this column over the past year, and a place where, whether participants say it aloud or not, the industry is headed. But it is also an example of something that cable has been famous for, at least during the 30 years I’ve been covering it: No matter what gets thrown at it, this industry has managed to adapt. It sounds a lot easier than it is to do, and the landscape is littered with the carcasses of companies that underestimated the resilience of this business. This March and beyond, cable executives will get to remind investors of that fact once again. ■

With practically every telecom and cable company moving to step up their fiber buildout plans over the next few years, MoffettNathanson senior analyst Craig Moffett wondered last Friday if the recent acceleration in construction was indeed too much, and whether telcos and cable companies will be able to justify the cost.

There is no question that broadband subscriber growth is slowing down, and that the remedy for both telco and cable providers appears to be investing more in building out and expanding their fiber reach. It makes sense in that the only way left for most operators to grow broadband is to either expand their footprint to homes that don't currently receive service, and/or boost new home growth. Since providers have no control over the latter, the former has been a big focus. 

According to Moffett‘s report, over the past 20 years about 30% of the U.S. population has been overbuilt by fiber networks. But that coverage is expected to rise to 60% in the next five years and possibly 80% by 2033, as nearly every telco and cable operator has put forth plans to build new or expand existing networks. Based on announcements of fiber-to-the-home projects, Moffett estimated, telcos will add nearly 40 million new fiber passings between 2020 and 2025 for overbuilds alone. 

“If fully completed, the additions would amount to an additional 25% of housing units (assuming 1% growth in total housing units per year), nearly doubling the current overbuilt cable footprint,” Moffett wrote.

Buildouts Come with Risks

But Moffett warned that the success of those projects is reliant upon buildout costs remaining low, penetration rates and average revenue per user (ARPU) numbers staying high and capital to fund the projects being easily available and cheap. 

“Our conclusion is that there is simply too much enthusiasm for too many overbuilds,” Moffett wrote. “Some, it seems clear, will end in disappointment (or worse).”

Though buildout costs are relatively low now, Moffett noted that they probably won’t be as demand increases. Further pressuring companies is a shortage of available labor to build the networks that is only going to get worse as the number of projects increases.   

Also figuring importantly into the overall cost of a fiber build is whether it will be aerial or underground, and the housing density of the area it will ultimately serve. Moffett pointed to industry benchmarks that put the average cost of building aerial plant at about $25,000 per mile, with buried fiber costing about twice that. But that depends on a relatively large number of homes per mile, and the numbers can vary widely.

For example, Verizon Communications’ fiber network passes about 849.2 homes per mile, while Windstream passes about 126.4 homes per mile. The national average is about 37.3 homes per mile, but that too falls off substantially after the larger cities are taken out of the mix. According to Census data, the densest 10% of housing units are in areas where the homes number 10,100 homes per mile. The numbers fall sharply in the second 10% — 3,756 homes per mile and the last 10%, just 4 homes per mile.

Telcos tend to build fiber in more dense areas than their overall footprint. According to Moffett, based on Federal Communications Commission broadband deployment data, AT&T, Verizon, Frontier Communications, Lumen Technologies, Apollo, Ziply, Cincinnati Bell, Shenandoah Communications, and Windstream cover land areas averaging about 134 homes per square mile. Their fiber footprints average around 534 housing units per square mile.

Geography Matters

And then there is the geographical makeup of the area a company is building out. According to Moffett, the rockier the terrain, the costlier, and much of the less dense areas that are a key target of the federal rural broadband initiative are pretty rocky. He pointed to two builds — one in a particularly rural, particularly rocky area that cost $75,000 per mile to bury fiber. Moffett also cited a Communications Consulting Group study about the feasibility of building a municipal broadband network in Falmouth, Massachusetts, that said that hitting rock during construction could quadruple the cost per foot of building the network.  

How much providers will charge for service also is going to be a function of the build costs and expected penetration rates. Moffett estimated that a provider that wants to charge $50 per month for fiber broadband and anticipates a 40% penetration rate, needs to keep costs around $1,500 per home passed.  

In the end, whether telcos and cable operators continue their respective fiber buildout binges will depend on demand and how much customers are willing to pay. Despite the slowdown in broadband subscriber growth over the past few quarters, rural areas, where choices are few or nonexistent, appear to be hungry for higher-speed service. The economics of getting them that service will just have to work themselves out. ■

Tomorrow (March 9), lawyers for Cox Communications will begin oral arguments in the appeal of a $1 billion copyright infringement award that it says is not only wrong on a legal basis, but could upend the entire broadband industry if it is allowed to stay. 

A Virginia federal court awarded 53 music publishers, including Sony Entertainment, Universal Music Group, Warner Music and others, $1 billion in December 2019, agreeing with claims that despite complaints and warnings from the music publishers, Cox continued to allow its broadband subscribers to illegally download music. All in all the publishers found 10,017 instances of infringement by Cox customers, and a jury assigned a value of $99,830.29 to each one, for a total of $1 billion. 

Cox immediately appealed the decision, but that was rejected by another federal court in Virginia in June 2021, which upheld the verdict. The latest appeal is before the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, with oral arguments set for March 9. A decision is expected sometime this spring.

Cox had originally hoped that it would be protected by the Digital Millennium Copyright Act, the federal law that protects internet-service providers from liability for content that its subscribers put on the web. An earlier court ruled that Cox wasn’t protected by the DMCA because it didn’t terminate enough customers who had been accused of the infringement. According to court filings, the DMCA requires ISPs to terminate subscribers that repeatedly infringe copyrights under appropriate circumstances. 

The suit centered around about 58,000 of Cox’s estimated 6 million broadband customers who, according to the publishers, were suspected of downloading copyrighted material without permission. The plaintiffs claim they sent Cox about 163,000 notices concerning those subscribers (about 2.8 notices for each customer) regarding 10,017 individual sound recordings and compositions over Cox’s network. .

Other MSOs in Crosshairs

 Cox isn’t the only cable ISP facing a potentially crippling lawsuit regarding illegal downloading of content. In August, Sony Entertainment, Universal Music Group, Warner Music and their subsidiaries sued Charter Communications in U.S. District Court in Colorado, claiming the cable company failed to terminate “tens of thousands” of subscribers who were allegedly downloading music illegally, and claimed the company profited from those downloads by selling higher speeds of service. Last June, the record labels sued Frontier Communications, claiming similar copyright violations. 

While Cox doesn’t deny that some of its broadband subscribers illegally downloaded music during the period in question, it does take issue with the extent of the punishment — about $100,000 per song that typically retails for $1 each — and the idea that ISPs are supposed to immediately disconnect subscribers at the mere hint they are downloading something they aren’t supposed to. 

The Recording Industry Association of America, the trade group that represents record labels and distributors in the music business and who in 2019 said the original verdict sent a message to ISPs concerning their obligations to stop piracy, declined to comment on the appeal.

But in a brief filed in June, attorneys for the plaintiff record companies said the court had already correctly determined that Cox repeatedly allowed copyright infringers to remain on the service, creating a “safe haven” for them as the company collected millions of dollars in fees for broadband service. 

“During the time period at issue here, Cox terminated over 600,000 subscribers for not paying their bill,” the plaintiffs said in the filing. “It terminated 32 for copyright infringement.”

While Cox has argued that it has no financial incentive to allow its customers to illegally download copyrighted material — it charges the same amount no matter the usage — the record companies argued that music pirates tend to subscribe to higher-speed service, which does carry a higher retail price. 

“By not terminating known repeat infringers, Cox received subscription revenues it would not have otherwise obtained, and avoided costs it would have otherwise incurred,” the plaintiffs wrote. They pointed to one Cox residential customer who was the subject of more than 100 infringement notices and was billed $8,594 between February 2013 through 2016, after Cox received at least 13 infringement notices for that subscriber. The plaintiffs also claimed that two Cox Business customers were billed $706,434 and $12,525, respectively, after receiving 13 infringement notices. 

“Between February 2013 and December 2016, Cox received $208 million in revenue from subscribers caught infringing three or more times,” the plaintiffs wrote. “Cox thus demonstrably and consistently prioritized cash over copyright.”

According to Cox’s arguments, it had issued warnings to subscribers that they were illegally downloading music in three phases. In phase one, Cox sent subscribers automated email warnings concerning the complaint that they were illegally downloading music, demanding removal of any material that infringed on copyrights, and providing educational resources on infringement. Cox’s Abuse Tracking System (CATS) repeated the warnings after the cable operator received a second notice of infringement and repeated them again for the next five notices. Those warnings ended the infringement 78% of the time, Cox said in court filings. 

If that wasn’t enough, Cox moved to the second phase, automatic suspension of internet service. According to the filings, Cox suspended thousands of subscribers during the period and refused to restore service until the subscriber promised to stop the infringement, either via an online form or, if the violations continued, in a conversation with Cox investigators who would determine how the infringement started, and how it could be stopped. According to Cox, phase 2 increased the success rate to 95%. 

Phase three was termination, a measure that Cox said it rarely had to resort to. According to the filing, Cox determined a few dozen customers — out of about 6 million total broadband subscribers — were terminated in 2013 and 2014. “[U]ltimately, the only accounts that continued to rack up more and more notices were all business accounts or regional ISPs, termination of which would have carried especially devastating consequences,” Cox said in the filing. 

Cox tried to have the $1 billion award reduced in 2021, but was rejected by the court in June. But the company, in its latest appeal, tells the court that upholding the verdict will have a devastating effect on the broadband industry as a whole.

ISPs Left Exposed

“It would effectively make ISPs strictly liable for every act of infringement on the internet, from downloads to social media posts,” Cox said in the filing. “And given the threat of crushing liability, ISPs would have no choice but to terminate subscribers the moment they are accused of a single infringement, stranding countless subscribers in an internet exile.”

Other ISPs believe so as well. At least four amicus briefs were filed with the court in favor of Cox’s position, by 17 distinguished university intellectual property law professors and industry organizations like the Electronic Frontier Foundation, and The Internet Association (which represents 40 leading tech companies). All said upholding the ruling would result in massive terminations of internet subscribers. 

“Consumers, whether they personally engage in infringing conduct or not, could be subject to wholesale termination of their internet access based on unproven allegations of infringement occurring at the IP address through which they connect to the internet,” the law professors said in their brief. “And entities through which multiple users connect to the internet via a single IP address could lose internet access entirely due to alleged infringement by a single user.”

They argued that Cox did not receive any benefit from allowing the illegal downloads — it got paid a flat monthly for service either way — which is a key part of the law. According to the professors’ brief, in order for Cox to benefit from the illegal activity, the “infringing activity must constitute a draw for subscribers.“

“But no evidence on the record shows that customers purchased Cox’s internet service because of the ability to infringe,” the brief continued. 

And terminating one individual because of a single act of infringement, or just the suspicion of such an act, could mean that every member of a household loses service. 

“The harm of cutting off an entity, in this case, could greatly outweigh the harm of a single infringing act,” the brief said. “And because 40% of Americans have only one option for broadband internet service, being terminated by one provider is not just an inconvenience, but can mean the loss of internet access altogether.”

With broadband subscriber growth dwindling, and cable companies relying more and more on broadband service to survive, the outcome of the case could have a chilling effect on the industry. With the federal government pumping billions of dollars into programs to encourage expansion of broadband service to rural areas, the 4th Circuit may well hold the fate of high-speed internet connections for all in its hands. ■

Dish Network chairman Charlie Ergen said Thursday that the satellite TV business would “melt away” without a merger between his company and DirecTV, but in addition to boosting that dying industry for a few more years, a merger could possibly serve another purpose -- funding Dish’s $10 billion wireless buildout. 

Ergen’s prediction that a DirecTV deal is inevitable has almost become a quarterly tradition. But continued speculation that a deal was more likely to happen now than ever -- fueled by dramatic subscriber declines at both companies -- helped drive Dish stock up by more than 11% Friday and 16% in the past two days. That helped erase the stock’s 2022 decline -- it was down 15% since December 31. But it’s still a long way from the $45 per share range the stock was trading at just five months ago.   

It’s been clear for years that Dish and DirecTV are basically shells of their former selves, and Dish shedding 273,000 video customers in Q4 -- well ahead of analysts’ consensus estimates -- is more proof that the satellite business needs help. Even Ergen seems to believe that time is quickly running out for the business.   

“I think it's inevitable that Dish and DirecTV go together,” Ergen said Thursday during Dish’s Q4 earnings conference call with analysts. “Otherwise, both companies will just melt away, and there'll be no service for customers. The regulatory reasons to not allow it, don't exist anymore.” 

Also: Satellite TV: Five Years, that’s All You’ve Got 

While there has been a lot written about the possible synergies associated with a DirecTV merger, Barclays Group media analyst Kannan Venkateshwar took a look at whether a deal could help Dish fund its $10 billion wireless network buildout. His conclusion: while regulatory hurdles are fewer, it will all come down to valuation.  

Dish has repeatedly said it will cost about $10 billion to build its 5G wireless network, and said Thursday that it expects capex to more than double this year to $2.5 billion from $1 billion in 2021 to pay for the network. Dish is expected to launch its first wireless market -- Las Vegas -- soon and revealed another 25 cities, including Dallas, Nashville, St. Louis and Oklahoma City, that will receive service in the coming months. Still, delays associated with difficulties surrounding integrating equipment and software from different vendors, and a snag regarding 911 emergency service have pushed back the buildout schedule. 

“We’re six months behind where we thought we’d be, and it’s my fault,” Ergen said on the conference call. “We just didn’t anticipate that we would have to do as much on the technical side.”

And though analysts have said in the past they believe the $10 billion buildout figure is surprisingly low, Ergen stressed that because its network configuration is different than any other provider -- he said it was more of an IT network than a wireless network -- the number is valid. 

“Because we're in the cloud, we can automate and do things and provision and other things that people can't do,” Ergen said on the call, adding that its labor costs are lower, too.

But it still is going to cost a lot. Analysts have noted that the $10 billion figure does not include tower leases for the service. In a research report, MoffettNathanson senior analyst Craig Moffett wrote that Dish has commitments for about $12.7 billion in tower leases, which is in addition to the $10 billion construction budget.

So where is Dish going to get the money for that? Ergen has said that funding is readily available, but some have wondered whether the source could be a merger with DirecTV.

Also: Does a Dish DirecTV Merger Make Sense? 

In January, the New York Post reported that Dish and TPG were in talks concerning a DirecTV merger deal, but so far neither side has confirmed that and there are no signs that a deal is close. 

Dish and DirecTV tried a merger before -- in 2001 -- but were blocked by government regulators who said a deal was anticompetitive. But the landscape has changed dramatically since then -- DirecTV and Dish combined have about the same number of TV customers that DirecTV alone had five years ago. But are still roadblocks to a combination. 

Venkateshwar also believed that regulatory challenges are fewer -- and could be even less if the government decided to impose broadband deployment conditions to a deal for both parties. AT&T already is committed to building out fiber broadband to rural markets. And Dish’s wireless offering is mainly targeted at smaller cities. Requiring the two expand their rural broadband footprint as a condition of a deal seems like a no-brainer.    

But what could derail a satellite TV deal, according to Venkateshwar, is valuation. 

The analyst pointed to AT&T’s sale of a 30% stake in DirecTV to private equity group TPG Capital, a deal that valued the satellite giant at $16.25 billion, about one-quarter the $65 billion AT&T paid for the asset back in 2015. And though he wrote that synergies in a deal could be significant -- between $1.5 billion and $2 billion -- valuation is where a transaction could hit a snag.

Venkateshwar estimated that the TPG deal valued DirecTV at about 3 times forward looking cash flow, but said the actual valuation could be lower considering non-cash fulfillment costs. 

“At these valuations, the deal will not make sense for Dish given the debt attached to its own DBS assets, as there may not be any equity value left at 3x EBITDA even including synergies,” Venkateshwar wrote. “A big difference in valuation between DTV and Dish would risk Dish implicitly walking away with a large part of the deal synergies and potentially future cash flow (if Dish continues to be an investor) in the combined company.”

That could be a problem for AT&T because its free cash flow guidance of about $20 billion pro forma for its WarnerMedia merger with Discovery relies on $1 billion in free cash flow from DirecTV. 

“This is why the transaction parameters may be difficult to narrow down, especially given Dish Chairman Charlie Ergen’s proclivity for an all or nothing approach to deal making and Dish’s own need for capital,” Venkateshwar wrote. 

There could be other deal structures, including having TPG invest in Dish prior to the assets being combined, or, like the WarnerMedia/Discovery transaction, Dish could split off the satellite TV assets before combining them and spinning it off to shareholders. 

“However, all these deals will require some flexibility from Dish to meet mid way to satisfy AT&T’s strategic needs, something that is not a given,” Venkateshwar wrote.

Dish could just sell the satellite TV asset outright and pocket the cash, but Venkateshwar added that, too, isn’t as easy as it sounds.

For starters, selling off the satellite TV business would remove a big cash generator for Dish, leaving it with a wireless business that isn’t generating as much revenue as its current free cash flow take. enough revenue  

“While the balance sheet would be much lighter in theory, raising further capital to fund its wireless business without any cash generating asset could become expensive,” Venkateshwar wrote. “This is why Dish will likely want a much higher valuation if it has to sell out of the asset, which is likely to make the deal less attractive for AT&T. This framework in essence highlights the challenges in negotiating the deal even absent regulatory issues.”

MoffettNathanson senior analyst Craig Moffett has said that a DirecTV merger would be good for both companies in the past, but he isn’t convinced it’s possible. Moffett wrote in a Thursday research note that a merger really depends on synergies, and given Dish’s gross subscriber additions, there aren’t many to be found in a combination of the two.

“A merger wouldn’t allow for consolidation of satellite fleets, nor would it change industry growth rates, but it would reduce the activity levels required to achieve those growth rates by cutting churn, and gross additions, roughly in half,” Moffett wrote. “But with gross additions this low, there isn’t much synergy opportunity left here.”

Nevertheless, Dish stock was up 11% Friday, in part because of merger speculation but also because Ergen offered more details on the wireless rollout and the apparent resolution to another dilemma -- T-Mobile’s decision to shutter its 3G CDMA network, the very platform over which most of Dish’s Boost Mobile customers receive service. Ergen said that T-Mobile will shut off the CDMA service on March 31, and that the two are working together regarding communications, handset supplies and incentives. That should make some investors happy.   

For the rest, Dish plans to hold an Analyst Day on May 10 -- its first in about 15 years -- where it hopefully will address any remaining doubts and questions. In the meantime, the stock continues to be fueled by what Dish might do, not necessarily what it is doing. ■

About seven years after embarking on a bold new strategy to transform itself into a media company, AT&T is months away from becoming a phone company again. But merely selling off its media assets -- and getting very little in return -- won’t solve all of the telco’s problems, says MoffettNathanson senior analyst Craig Moffett.

AT&T spun off DirecTV to TPG last year, in a deal that valued the satellite TV giant it bought for $65 billion in 2015 at about $16.5 billion, and is nearing the finish line in its spin off of WarnerMedia to Discovery Inc., a deal that will net AT&T $48 billion in cash and give its shareholders a 71% stake in the new entity. In a research report Thursday, Moffett wrote that although it's about time AT&T acknowledged its media experiment was a horrible mistake, merely selling off those assets won’t get it out of the hole the company has dug for itself. 

Taking a look at AT&T’s share performance over the past five years is a big indication of how dalliances with media have mostly had one effect -- seriously eroding value. 

Investors weren’t really pleased when AT&T said it would buy DirecTV back in 2015, driving the stock down about 6% from $36.38 per share when the deal was announced on May 18, 2014 to $34.29 each when it closed on July 24, 2015. But despite paying a hefty price for DirecTV just as the satellite TV provider was beginning its downward spiral (it would lose about 7 million subscribers over the next seven years). AT&T managed only to slightly underperform the S&P 500, lagging that index by about 3.6%, according to Moffett. But when AT&T doubled down on media and announced a $100 billion deal to buy Time Warner on October 22, 2016, the real slide began. For the next four and a half years, according to Moffett, AT&T stock trailed the S&P 500 by more than 100 percentage points.

So, it would seem logical that if investors hated AT&T as a media company, they’d love it when it finally unwound that whole mess, right? Not a chance. Since announcing the TPG deal in February 2021 and the WarnerMedia Discovery deal in May 2021, AT&T stock has underperformed the rest of the market by 29%, per Moffett. Over the full seven-year period, AT&T lagged the S&P 500 by 176 percentage points, making it one of the  worst performing stocks in the index over that time frame.    

Also: AT&T Investors Bail as Discovery Close Nears 

In his report, Moffett said there are two conclusions to take from that “soul-crushing trip down memory lane:” One, that the underlying telecom business was shaky to begin with; and two, that “the damage from the two acquisitions can’t be undone simply by selling them off.”

At the heart of AT&T’s problems are its debt, currently at about $153 billion as of December 31. According to Moffett, the DirecTV deal was less a sale than a leveraged recapitalization, so it won’t have much effect on its debt load. The WarnerMedia merger, expected to close in the second quarter, will pump about $48 billion in cash into AT&T’s coffers at least partly to pay down debt. But even after that cash infusion, AT&T will have obligations of well over $100 billion.

Also: Eureka, AT&T is a Phone Company Again 

While other companies have carried huge debt loads while managing growth businesses -- the cable industry for one -- Moffett’s biggest fear is that the wireless business, which will account for the majority of AT&T’s total business, isn’t growing as much as it used to.

AT&T added about 884,000 postpaid wireless customers in Q4, but the majority of those gains have been won through deep, deep discounting. And customers that sign on for a free handset or free months of service tend to go away when they see another promotion elsewhere.  

Also: AT&T and TPG: There is No Why 

According to Moffett, AT&T service revenue was up about 3.2% in Q4 while operating revenue rose about 4.2%. Back out WarnerMedia, video and Vrio (its Latin American operation sold to Groupo Werthein in November) and operating revenue grew 1% and service revenue was down 0.3% in the quarter.

Cash flow in the new core businesses also will be hit hard by the DirecTV and WarnerMedia sales. Moffett wrote that AT&T’s pro forma organic EBITDA growth in Q4 was 0.0%.

“Investors might be forgiven for their lack of celebration about stripping to this particular core of assets,” Moffett wrote. ■

Netflix stock, which enjoyed a brief respite from its January 20 decline after two big investors snapped up a large amount of shares, is down again this week, a combination of fear, looming price increases and analyst reports.

Netflix stock took a double-digit nosedive after it released Q4 earnings after hours on Jan. 20. The next day, shares in the SVOD pioneer dropped 25% to $397.50 each and pundits were claiming that the tide was shifting away from the company that basically invented the subscription streaming video business. 

A few days later, on January 27, Netflix shares rose 10% after it was revealed that hedge fund guru William Ackman’s Pershing Square Capital Management said his fund purchased $1 billion in Netflix stock on January 21, boosting confidence in the company once again. Later, on January 31, Netflix founder and co-CEO Reed Hastings said in an Securities and Exchange Commission filing that he bought about $20 million in Netflix stock, which drove the shares up another 11.1% to $427.14 each. The thought was that Netflix stock had weathered the storm, that investors saw the intrinsic value in the company and its business and the stock would return to normal. Netflix shares closed at $457.13 on February 1, up 7% each. 

But it didn’t last long. Netflix shares began to slide and by February 2  fell 6% to $429.48 each. By February 4, the stock was down to $410.17, amid growing fears that Netflix had run its course, that despite spending $19 billion on content, releasing some of the most talked-about programming last year -- Squid Games, anyone? --  no one wanted to watch it anymore.

Also: What $19 Billion Gets You: Netflix Previews Entire 2022 Film Slate 

Those fears were somewhat founded in reality -- subscriber growth was down despite the release of popular programming -- but what got lost in the panic was that every streaming service was experiencing a growth slowdown. Disney Plus, HBO Max and Peacock all added fewer customers in Q4 than in the past. But Netflix was singled out because it spends the most on content and had been considered to be the unstoppable force of streaming TV. 

Shares were down again Monday to $402.10 after Needham & Co. media analyst Laura Martin issued a report claiming that only half of Netflix subscribers were satisfied with the service despite having its strongest content year ever, and 41% say they are more likely to jettison the service this year. Martin surveyed 504 Netflix subscribers in the U.S. (the service has more than 75 million domestic customers) and concluded if the SVOD pioneer wants to stop the bleeding, it has to add an advertising tier, buy an old media library to improve its content ROICs and/or sell out. 

“Netflix can NOT win the ‘streaming wars’ given its current strategy, we believe,” Martin wrote.

Shares have slowly inched back up in the past two days -- they closed at $403.53 on February, 8 and were priced at $404.09 on Wednesday afternoon, but they’re still far short of the $508.22 per share benchmark of about two weeks ago. 

This could truly be another example of the roller coaster ride that comes with being a Netflix shareholder. The stock has historically had big ups and big downs, usually around subscriber news, and maybe this is no different. But something just feels a little more off this time.

For one, there is a lot more competition on the streaming side than there was just a few years ago. Secondly, everybody is experiencing some kind of subscriber slowdown. Thirdly, all indications are that people are watching more video than they ever have, but if they aren’t watching streamers and are increasingly cutting the pay TV cord, what are they watching, video games? 

Or maybe the other explanation is that they are moving toward free ad-supported services like Pluto TV, Tubi and the like. Tubi already predicted that AVOD subscribers will surpass SVOD subscribers later this year. Maybe pricing really is becoming more and more important. 

But whatever it is, providers should take notice, because investors are. Disney Plus parent The Walt Disney Co.’s  stock was down about 5% between January 20 and February 9 and HBO Max parent AT&T fell 12% in the same timeframe, partly because of the fears around streaming.

While Disney seemed to reverse the slowdown in fiscal Q1 -- adding about 11.8 million Disney Plus subscribers, well ahead of consensus and driving its stock up 5.5% early February 10 -- some analysts pointed to possible weakness ahead.  

Fiscal Q1 was helped by new content releases, including the three-part Beatles documentary Get Back, and new programming could help accelerate subscriber growth beyond Q1 levels. But Barclays media analyst Kannan Venkateshwar worried that it may not be enough to get the service back on track to its previous guidance levels. Disney reiterated its guidance of 230 million to 250 million Disney Plus subscribers by 2024. 

“Next quarter may be a trough both seasonally as well as in terms of footprint expansion and content releases,” Venkateshwar wrote. “Q3 will see launches in 40 new territories in addition to tailwind from the IPL [Indian Premier League cricket] in India, which should add to growth, but Q4 will likely bear the bulk of the growth load due to release calendar. Given this cadence, the company may not be able to fully get back to its guidance trendline this year despite strong fiscal Q1.”  

Attracting the most attention from Martin’s survey is that 41% of respondents said they were “more likely to churn” from Netflix in 2022 because of the price increases. Take that with however big a grain of salt you want -- there’s a huge difference between “I probably will cancel”  and “I just cancelled.” But it does cast some shadow on what in the past has been the gold standard for streaming. Martin’s survey also suggests that 70% of respondents say they won’t pay for additional streaming services in 2022, which doesn’t bode well for the remainder of the streamer-verse. 

In her report, Martin wrote the “clear learnings” from the survey were: (1) That consumers believe they’ve watched “everything” Netflix had to offer during the pandemic of 2020 and 2021, and there was “nothing” on rival services like Discovery  Plus and Peacock. “Better to pay for new services than old,” she wrote; and  (2) Netflix still doesn’t offer a lower priced ad-supported tier like most of its competitors, meaning that “consumers that disconnect Netflix can replace it with 2 or 3 different streaming services for an identical monthly fee.”

Martin has been a sharp critic of Netflix in the past, and has called for a lower cost, ad-supported tier ever since Disney Plus came on the scene in 2019 at a $6.99 monthly price point.

Netflix management has been adamant in its resistance to including ads in programming in the past. And maybe all it will take is another popular movie or show or series or whatever to bring people back to the fold. But the fold is a lot different than it was in the past, and most of Netflix’s competition has either raised prices, included an ad-supported tier or both as a result. (FYI, I am leaving Amazon Prime Video, which said it will raise its annual charges by about 32% this year, out of the mix  because the vast majority of subscribers pay for the free shipping, not the video.)  

HBO Max launched in 2020 at $14.99 per month and last year introduced an ad-supported version at $9.99 per month. NBCUniversal launched Peacock nationwide in July 2020; Paramount Plus launched in 2021 with limited ads for $5 per month; and Discovery Plus launched in 2021 at $4.99 per month with ads.

Netflix has raised prices about 6 times since it launched its streaming video version in 2011 -- in 2014, 2015, 2017, 2019, 2020 and 2022. Each time there was a fear of a massive subscriber exodus that never came. But this time may be different. There are a lot more choices for consumers on the streaming video front. 

Netflix co-CEO Reed Hastings has said that he believes Netflix will weather this storm as it always has -- by providing more compelling content. Netflix spends more than any other service on streaming content -- $19 billion this year -- and last week previewed its entire movie slate for 2022. But more shows may not be the answer. Netflix had its most watched show ever -- Squid Games -- in September and still managed to disappoint regarding subscriber growth. And this year it said it expects Q1 subscriber additions to be about 2.5 million, its lowest growth in years. And Q1 is usually one of the company’s biggest growth quarters. 

By their very nature surveys are worded in a way to find out what people are going to do, not what they’ve done. And when those questions are put to people while the wounds of a price increase are still fresh, or shortly after they've binge-watched a show and don’t think they’ll ever be anything else to watch, the answers are usually pretty harsh. Wait a week and cooler heads usually prevail. 

That could very well be the case here. People are ticked off about another price increase, there are a lot of other lower cost choices around and none of them require long-term contracts, so people can drop them and sign up with abandon. But it does raise questions about streaming, which is turning out to be a lot like its predecessors in the video entertainment business, just trying to figure out the most convenient, cost-efficient way to deliver content to people who want it. Only time will tell who will come up with the formula that satisfies everyone's needs best. ■

Charter Communications’ strong Q4 mobile subscriber growth -- its best quarterly increase ever -- could be the thing that finally changes investor perception of cable wireless from mere “hobby” to “real business,” according to MoffettNathanson senior research analyst Craig Moffett. 

Both Charter and Comcast reported their highest quarterly wireless subscriber growth ever in Q4 -- Comcast also set a record for yearly growth -- and with aggressive pricing and rising profitability, mobile could become a strong second growth product behind broadband for the industry.

Charter launched Spectrum Mobile, a Mobile Virtual Network Operator (MVNO) offering in conjunction with Verizon Wireless in 2018.  Since then, Charter has grown Spectrum Mobile from 0 to 3.6 million customers. With aggressive pricing and plans to expand its reach to rural markets funded in part by federal Rural Digital Opportunity Fund (RDOF) money, it can only get better. 

Spectrum Mobile isn’t profitable yet, but it’s getting closer. According to Charter, the mobile business had negative EBITDA of $92 million in Q4, and for the year EBITDA was negative $311 million. But the deficits are getting better -- EBITDA was negative $401 million in 2020 and negative $520 million in 2019. According to Moffett, Charter could reach EBITDA break-even this year. 

That would put it on a profitability path akin to its MVNO partner and the largest cable operator in the country -- Comcast -- which already has reported four straight quarters of positive wireless EBITDA growth.

Moffett doesn’t expect wireless to replace broadband in investors’ hearts -- he still believes  high-speed internet is a better business. But he does believe that investors have to stop thinking of cable as “only” a broadband provider.

“Cable isn’t a broadband-only business,” Moffett wrote. “It is, as we have repeated so often over the past two decades, an infrastructure business, with multiple revenue streams – residential and commercial, wired and, yes, wireless – riding on that infrastructure.”

To drive that point home, Moffett pointed out that mobile is becoming a larger component of overall revenue -- wireless accounted for 4.8% of total Q4 revenue, up from 4.1% in Q3. 

Also: Analyst Says It’s Time to Take Cable Wireless Seriously  

“Up to now, investors have treated Cable wireless as something closer to a hobby than a real business,” Moffett wrote, adding that while growth numbers have been good, the service has been pooh-poohed as just an MVNO. Spectrum Mobile’s 380,000 subscriber additions in Q4 -- beating analysts’ consensus estimates by nearly 100,000 customers -- could “go a ways towards changing that perception.”

Comcast is no slouch on the wireless front either. Xfinity Mobile launched in 2017  -- about one year before Charter, using the same Verizon MVNO agreement -- and ended 2021 with 3.98 million subscribers. Xfinity Mobile added 312,000 subscribers in Q4 -- its best quarter ever -- and 1.12 million for the year -- its best annual growth ever.   

Adding to the optimism is that Charter plans to expand its broadband and mobile footprint substantially over the next five years. Charter was the largest recipient of federal Rural Digital Opportunity Fund money last year, and launched its first market -- El Paso, Texas -- this month. According to Charter, the plan is to expand its mobile and broadband reach by about 1 million homes in that five-year period. That’s on top of the 1 million homes passed it is adding each year via edge-out and network expansion programs. 

Also: Cable Knocks on Wireless Giants’ Door 

Last year Charter committed to spending $5 billion -- including $1.2 billion from RDOF -- over five years to bring broadband to more than 1 million customer locations in unserved areas of the country. In El Paso, Charter said it will offer broadband, mobile, TV and wireline voice service to more than 1,200 homes. 

Broadband expansion can only help mobile growth -- customers need high-speed data service to be mobile customers. And at least for now, as the pandemic has caused more and more consumers to stay put and stick with existing providers, much of Charter’s mobile growth is coming from existing broadband customers upgrading to mobile service and existing mobile customers adding lines. 

“I expect that through time, we’ll get more pull-through on the new customer creation side of it,” Charter chairman and CEO Tom Rutledge said on a conference call with analysts to discuss its Q4 results. “But just when you do the math in terms of where the opportunity is to grow mobile, given our existing broadband penetration --  just mathematically, we have more upside in upgrades.”

Rutledge added that Charter also is making inroads in offloading mobile traffic from the MVNO to its own WiFi network, which makes service more cost efficient. Charter also has a large block of CBRS spectrum, which Rutledge said the company could use to offload as much as 30% of its mobile traffic. 

“We also are already offloading enormous amounts of traffic on WiFi,” Rutledge said on the conference call. “And I think that we have the ability to take that up significantly, too.”

That could be key. According to Moffett, the biggest goal for both Comcast and Charter in cable wireless is to offload as much traffic as they can onto their own networks to become both a Mobile Network Operator (MNO) and an MVNO.  

“A hybrid MNO/MVNO combines the best of all outcomes,” Moffett wrote. “They will be facilities-based where the returns are high and an MVNO in the places where the returns on building would be low. Margins will likely grow over time, but the real appeal of the strategy isn’t EBITDA margin but instead return on invested capital.” ■

Netflix stock, down 30% since it missed Q4 subscriber growth estimates and issued weak guidance for the first quarter, got a boost Thursday after hedge fund legend William Ackman’s Pershing Square Capital Management said it has purchased 3.1 million shares worth about $1 billion in the SVOD pioneer, vaulting into the top 20 largest individual shareholders in the company.

Netflix stock was up by nearly 10% to $394.80 each in early trading Thursday -- it was up 7% to $385.44 each as of 11:39 a.m. -- not a huge bump but perhaps the beginning of a reversal of the downward trend in the past few days. Whether Ackman’s investment is a true showing of confidence in the company or just another example of an investor snapping up shares when they are down, remains to be seen. In a letter to shareholders Wednesday, Ackman praised Netflix’s “best-in-class management team.” Later on Twitter, he said he has long admired Netflix chairman Reed Hastings and “the remarkable company he and his team have built.”

Pershing Square financed the Netflix share purchase by unwinding most of its interest rate hedge, which raised about $1.25 billion. 

In his note to shareholders, Ackman said Pershing Square didn’t own a share of Netflix before Friday, and he decided to buy the stock after it fell about 25% on January 21, adding that the hedge fund has been looking at the company for months, along with streaming music company Universal Music Group. 

"Now with both UMG and Netflix, we are all-in on streaming as we love the business models, the industry contexts, and the management teams leading these remarkable organizations," Ackman said in the note to shareholders. 

Ackman’s stance on streaming appears to be contrary to the current consensus, as players like Disney Plus, Paramount Plus, HBO Max and others have seen their early torrid customer growth slow down. 

Also: Did Wall Street Just Give Up on the Streaming Wars?  

But $1 billion from one of the more savvy Wall Street players is nothing to sneeze at. Ackman has made billions over the past several years taking positions that at first were against the conventional investing tide.

Ackman himself said essentially the same in his shareholder letter. 

“Many of our best investments have emerged when other investors whose time horizons are short term, discard great companies at prices that look extraordinarily attractive when one has a long-term horizon,” Ackman wrote.  

Ackman is known as an “activist” investor -- he famously convinced Wendy’s International hamburger restaurants to spin off the Tim Horton coffee shop chain in 2006.  Pershing Square has about $13billion in assets under management in relatively few companies -- Lowe’s, Chipotle Mexican Grill, Hilton  International and Domino’s Pizza are among its biggest holdings. Pershing Square Capital Management gained about 27% last year after a 70.2% rise in 2020. In January, the fund slipped almost 14%, its worst start in years.    

But not all of his investments have been home runs. In 2010, Pershing Square bought about 18% of the J.C. Penney retail chain and sold the stake in 2013 for a $500 million loss. A five-year battle with health supplement maker Herbalife -- in which Pershing had a near-$1 billion short position and had been accused of using a PR campaign and regulatory pressure to keep its stock price low -- ended in 2018 after the fund exited its position in the company.  Later, his misgivings about the company were justified in 2020 after Herbalife agreed to pay about $123 million in fines to settle U.S. Dept. of Justice claims that it bribed Chinese government officials.

Granted, Netflix is not a fast food restaurant, hotel chain  or a home improvement retailer, but Ackman wrote in his note to shareholders that the SVOD giant has a strong position in the market, its recurring subscription-based revenue has “enormous future growth potential,” has economies of scale and a rapidly growing international subscriber base that should continue to increase margins, and has an improving free cash flow profile that should allow for continued growth investment and cash returns to shareholders. 

And he seems to be betting real money on a Netflix turnaround. In his letter to shareholders, Ackman said that by selling its interest rate hedge, Pershing likely missed out on gains as rates rose in the past week. But he has confidence in Netflix’s prospects.

Also: Netflix Bulls No More 

“Had we not sold the hedge, we could have likely realized more gains based on the increase in rates, largely today (January 26), since our sale,” Ackman wrote. “That said, we believed the opportunity to invest in Netflix at current prices offered a more compelling risk/reward and likely greater, long-term profits for the funds.”

Netflix has missed subscriber growth targets before, and has weathered huge swings in its stock price in the past, 

but what seems to have spooked investors and analysts the most recently is the lack of visibility beyond Q1. If Netflix sees such shrinkage ahead in what is traditionally one of its biggest growth quarters -- Q1 subscriber additions have accounted for as much as 45% of total yearly growth in past years -- what does that mean for the rest of the year?

Also: The Netflix Effect 

Netflix isn’t alone in seeing its subscriber growth ease. Disney Plus, HBO Max and Peacock all have experienced a slowdown in the pace they add new customers, just as they are all committing to step up content spending to keep the subscribers they do have. Some analysts have even predicted that streamers will have to make the decision soon to either double down on content spending or sell assets. Netflix appears to be in spend mode -- it spent about $14 billion in 2021, up from about $11 billion in 2020 -- as are Disney Plus, Paramount Plus, Peacock and HBO Max. Only time will tell whether that is money well spent.  

Netflix stock fell as much as 25% on Friday after the SVOD pioneer slightly missed subscriber growth targets in Q4 and issued weak guidance for the future, forcing some analysts to rethink their prior bullish stance on the stock.

Netflix shares were trading as low as $380 each on Friday morning, down 25% or $128.25 per share. The stock closed at $397.50, down 21% for the day.

Other streaming-heavy stocks fell as well. The Walt Disney Co., whose own Disney Plus service has shown some signs of slowing subscriber growth, was down 7% to $137.41, while Discovery Inc., which launched Discovery Plus last year and is in the process of merging with HBO Max parent WarnerMedia, fell 4.7% to $26.19 per share. ViacomCBS, whose Paramount Plus service was revamped last year, fell 7.4% to $31.25 each.

While the Q4 subscriber miss had a lot to do with Netflix’s decline -- it added 8.3 million new customers in the quarter, slightly below consensus estimates of 8.5 million additions -- the real damage came in its guidance for Q1. Netflix estimated that it would add about 2.5 million new customers in Q1, its lowest growth in years and particularly surprising given the first quarter’s influence on the rest of the year. Since 2017, Q1 additions have represented an average of 29% of total full year subscriber additions, according to MoffettNathanson media analyst Michael Nathanson. Using that average, Netflix could add as little as 8.5 million new subscribers in 2022. In contrast, it added 18.2 million new customers in 2021 and 36 million in 2020.

Also: Has Nielsen Been Shortchanging Netflix on Streaming Metrics? 

Adding to the concern is that Netflix had some of its most-viewed content in the past year -- Red Notice and Squid Game. If content like that wasn’t enough to drive subscriptions, what will?   

It wasn’t too long ago that a lot of analysts considered Netflix bulletproof, consistently adding subscribers and expanding its reach to the rest of the world on its way toward 300 million global subscribers by 2023. While domestic customer growth appeared to begin to level off in recent years -- Netflix has about 75 million customers in the U.S. and Canada -- international markets were expected to more than take up the slack.

But in Q4, the opposite appeared to happen. Domestic growth at 1.2 million new paying customers was nearly five times consensus estimates of 250,000 additions. Europe and the Middle East also outperformed -- 3.5 million additions versus 3.3 million consensus -- while Latin America and Asia underperformed severely. Analysts had expected Netflix to add about 1.2 million new customers in Latin America -- it added 925,000 -- and 4.1 million in Asia -- it added 2.6 million. 

That sent a signal to analysts that what was thought to be an unstoppable streaming juggernaut had an Achilles heel, and sent them to their excel spreadsheets to recalculate the future.

Barclays media analyst Kannan Venkateshwar, Morgan Stanley media analyst Ben Swinburne, Evercore ISI Group media pundit Mark Mahaney and Macquarie media analyst Tim Nollen all reduced their overall ratings and slashed their 12-month price targets on Netflix stock. Other analysts like Nathanson and Wells Fargo’s Steven Cahall maintained their overall ratings on Netflix, but slashed their price targets.

Nathanson kept his “neutral” rating on the company but cut his 12-month price target by $85 to $375 per share. Cahall maintained his “overweight” rating on the shares, slashing his price target by $200 to $600 per share and adding in a note to clients that the Q1 guidance “has investors rethinking the growth path.” 

Venkateshwar, who has been bullish on Netflix in the past, reduced his rating to “Equal Weight” and wondered if the slowdown expected in Q1 is a longer-term phenomenon. 

In his research note, Venkateshwar wrote that Netflix’s Q1 guidance “plays almost perfectly into the bear thesis” for the stock, as it will be its lowest growth target ever. And because Q1 usually is a big part of overall annual growth, the analyst speculated that the lower guidance could mean that 2022 will be significantly lower than 2021.

“Both the Q1 guide  and ’22 margins were among investor concerns going into earnings and seem to have been validated based on guidance,” Venkateshwar wrote. “Overall therefore, based on company guidance, 2022 is effectively shaping up to be the company's slowest year of growth on most KPIs.” 

Swinburne dropped his rating on the stock from “Overweight” to “Equal Weight,” and slashed his price target to $450 from $700 per share, adding that he expects content spend to continue to rise as subscriber additions slow. 

Macquarie’s Nollen dropped his rating on Netflix to “underperform” from “neutral” and slashed his price target to $395 per share, adding that he was concerned about increased competition and how that could eat into the SVOD giant’s  international growth. 

“Competition is intensifying, especially internationally,” Nollen wrote “This is becoming a bigger problem now: for example a combined Discovery/Warner this year brings strong brand recognition to many countries, with lower-priced ad-supported tiers, while other players like Paramount [Plus] and NBCU are joining forces in Europe on distribution.”

At Evercore ISI, Mahaney dropped his rating on the shares from “outperform” to “in line,” reducing his 12-month price target from $710 to $525 per share. In a research note, Mahaney said that while there are many excuses for the Q4 miss and lower Q1 guidance -- including heightened near-term churn due to an expected U.S. price increase, increased competition, market maturity, the ongoing pandemic and the late Q1 release of key content like Bridgerton -- the “negative inflection implied by the Q1 guidance is significant.”

Mahaney dropped his full year 2022 subscriber growth estimates by nearly 40% to under 17 million new customers from 26 million previously. 

While Mahaney said this could be a one-off and Netflix could recover its subscriber mojo, he noted it also could be a sign of Netflix’s maturation in key markets. And though he wrote that he has been a consistent buyer during other ebbs and flows at the company -- this isn’t the first time it has missed quarter subscriber targets -- he believes this time may be different. 

In his note, he said the reason for the downgrade was twofold -- the Q1 guidance “implies a real, surprising negative inflection point in the company’s growth outlook;” and the shift changes his growth equation for the company from one based on unit and subscriber growth to one based on price and average revenue per customer, “which makes it less attractive/sustainable.” ■

Sinclair Broadcasting Group’s Diamond Sports Group (home of its regional sports networks) dodged a big bullet last week by hammering out a carriage deal with the National Basketball Association for its upcoming direct-to-consumer streaming service and negotiating $600 million in additional financing that secures its survival for at least another year. But the sports giant still faces pressure in the next few months to reach deals with Major League Baseball and Charter Communications. 

Sinclair reached a deal with the NBA on January 13, about one month after securing a similar arrangement with the National Hockey League on December 3.   While both of those deals include rights for Sinclair to stream games via its direct-to-consumer service, slated for the second quarter, the content company still has to strike deals with Major League Baseball, which in the past has been critical of the company. 

Sinclair said last year that it had rights deals with four teams -- and some have speculated those are the  Detroit Tigers, Milwaukee Brewers, Miami Marlins and Kansas City Royals -- for its DTC service. But the company still needs to secure DTC streaming rights for another 10 MLB teams. The regular season is expected to begin around April 1, although a possible lockout of players by team owners that need to renew a bargaining agreement with their union could push that date back days or months. In an interview with the Wall Street Journal  January 13, Sinclair CEO Chris Ripley said the DTC product would have a soft launch in the second quarter, rolling out more broadly in Q3. 

DTC service is critical, and so is the linear carriage deal with Charter, which is set to expire in Q1. Charter has about 15 million video subscribers in 41 states, including many where Sinclair has an RSN presence.  In a research blog earlier this month, LightShed Partners partner and media and telecommunications analyst Richard Greenfield predicted Charter would place the Sinclair RSNs on a separate tier, something RSNs across the board have resisted for years. Placing those channels on a tier could severely cut into their carriage revenue, as it is generally believed that about 30% of cable subscribers subscribe to tiered sports channels.   

Greenfield pointed to the prevailing wisdom that as DTC sports services launch, the need for a linear counterpart diminishes. Dish Network, which reached a retransmission consent deal for Sinclair’s TV stations in November, declined to reach a similar deal for its RSNs. The same could hold true for Charter.  

“Charter is not known for going to war on programming fees,” Greenfield wrote. “However, we expect Charter will demand RSN tiering vs. basic tier carriage, as minimum penetration requirements fall dramatically. If Sinclair balks at this demand, Charter will be forced to simply drop the RSNs altogether, as the content will be easily available to only the subs that want it via OTT.” 

According to the Sports Business Journal, talks between Sinclair and Charter have already started, but the two are still far from a deal. The paper said Charter is looking for “more flexibility” in how it offers the RSNs.   

That sounds like code for tiering, and if it is, it would be a problem for Sinclair. Because while everybody else is concentrating on the DTC service, Sinclair, like every other RSN, still relies on its linear TV deals to pay the bills. In an 8-K filing with the Securities and Exchange Commission, Sinclair mapped out three separate scenarios for the linear and DTC offerings. In every scenario, distribution revenue for the linear business remained relatively stable over the next five years -- $2.56 billion in 2022 dipping slightly to $2.39 billion in 2027. That 6.6% decline over five years comes as cable, telco TV and satellite TV businesses are experiencing a 6%-to-7% annual decline in subscribers. While traditional sports lovers are said to be stickier subscribers to the Pay TV bundle, it is unclear if the subscriber projections include Charter or not.    

Sports consultant Lee Berke, CEO of LHB Sports, Media & Entertainment, said it appears that Sinclair’s projections for their sports businesses are making some  interesting assumptions. 

“It assumes that there is no more churn, there is no more shrinkage in the pay TV universe,” Berke said. “It’s tough to see how that could be the case.”

In a research note earlier this month, MoffettNathanson senior analyst Craig Moffett estimated that the pay TV universe shrunk by about 5.2% in Q3, the latest figures available.  Cable operators shed 6.2% of their video customer base while satellite TV services providers like Dish Network and DirecTV lost 12% of their subscriber base. Even virtual MVPDs like YouTubeTV, Hulu Live TV and FuboTV are showing signs of a slowdown, adding under 1 million customers in the period, compared to 1.5 million in the prior year.

Sinclair has said in the past that its DTC service will be able to tap into a growing number of consumers who have no traditional pay TV relationship at all -- about 35 million homes at last count -- which could be a reason for the optimism. But it doesn’t explain the relative stability it seems to expect from the linear service, which relies on traditional TV distributors. According to the SEC filing, Sinclair doesn’t give estimates for linear subscribers, but it does project that EBITDA will drop from $396 million in 2022 to $150 million in 2027, so whatever customers remain will be less profitable. 

“It seems like a really solid piece of financial engineering,” Berke said. “But the marketplace is still the marketplace, and the trends are still happening in terms of churn and in terms of shrinkage of pay television and what people would pay.”

Also: Sinclair RSNs: Focus on the Dish Deal 

At the UBS Securities Global TMT conference on December 8, Rutledge didn’t specifically talk about tiering, but said that sports is one of the biggest components of high-priced cable bills.

“We’re trying to -- given the constraints in our own access to content -- create as many packages as we can for customers to meet their needs, recognizing that most people would love to have the fat bundle if it wasn’t so expensive,” Rutledge said at the December conference.   

Also: Ripley on RSNs: Believe It or Not 

According to the financial estimates in the SEC filing, if Diamond is projecting having about 309,000 subscribers to its DRC service in 2022, and generating about $75 million in revenue for the service, that works out to a charge of about $20 per month for the DTC service, below the $23 price point that some reports suggested in the past. The Sinclair revenue estimates also do not include possible revenue from gambling, which could be a huge profit center for the networks going forward. Ripley has said in the past that he expects the DTC service to be “lean-forward,” giving consumers a video game-like experience that allows them to play a game within a game.    

Also: Networks Get Ready for New York Mobile Sports Betting on Jan. 8

A lot of sports networks are looking to gambling as a huge potential cash cow on the advertising and sponsorship side. Several networks have forged marketing and other relationships with sportsbooks and casinos -- MSG Networks has marketing and sponsorship arrangements with Caesars Sportsbook and BetMGM; FanDuel and DraftKings has a long advertising relationship with Turner Sports and other channels have similar deals with other outlets. Sinclair has a deal with Bally Inc., where the casino giant paid $88 million over 10 years for naming rights for the channels. As Bally continues to roll out its BallyBet mobile app, currently in four states  it’s probably a good wager that it and the RSNs will have an even more symbiotic relationship. ■ 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Also: Netflix Video Gaming: Pros, Cons and Concerns 

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

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

About a year after it purchased a 30% interest in DirecTV for a bargain price, private equity firm TPG Capital is reportedly in talks with Dish Network about a possible merger of the satellite giants, a move that while familiar, nevertheless managed to boost Dish stock about 10% in the past two days.

Dish shares were up about 4% ($1.43 per share) to $35.38 on January 11 and rose another 4% to $36.83 at 11:03 a.m. on January 12. 

The New York Post reported January 11 that TPG and Dish were in advanced talks concerning DirecTV, but that the deal has hit a potential snag amid Dish founder and chairman Charlie Ergen’s supposed demands for a big chunk of voting shares and a greater say in decision making for the combined company. Together, Dish and DirecTV would become the largest pay TV distributor in the country with about 23 million subscribers, edging out Comcast by a few million customers, but coming during a time when consumers have been canceling their pricey video subscriptions for streaming services.    

Talks of a Dish-DirecTV merger have been around for decades. The two first stepped to the merger podium in 2001, only to be shot down by federal regulators. With the satellite business in steep decline — Dish has lost 5 million TV customers and DirecTV has shed 10 million since 2017 — some have speculated that the government may be more open to a merger this time around.

Whether federal regulators would approve a deal this time isn't a given. Just two years ago, the U.S. Justice Department let Dish know that it would not sign off on a merger. Maybe that stance has softened, maybe not.

Ergen has said for years that he believed a merger with DirecTV was “inevitable,” and some have claimed a combined Dish-DirecTV would have about $1 billion in cost synergies. 

Every single business in the pay TV space — distributor, content provider, streamer — wants additional scale, and having 23 million TV subscribers (15 million from DirecTV, 8 million from Dish) would deliver that, at least for the short term. Federal plans to pump about $65 billion to help extend broadband into more rural markets could also bode well for a merger. 

From a financial standpoint, the idea that a deal could be done cheaply for the parties involved also makes it more palatable. TPG bought its 30% interest in DirecTV last year for a price that valued the entire company at about $16.5 billion. AT&T paid about $66 billion for DirecTV in 2017. 

Also: AT&T and TPG: There is No Why 

Still, on the surface, putting together two companies in steep decline only seems to prolong the inevitable race to zero customers. But others say that any delay to that apocalyptic conclusion could have some real economic value and short-term benefit for consumers. 

Also: Satellite TV: Five Years, that’s All You’ve Got 

In an email message, MoffettNathanson senior analyst Craig Moffett said that while he has no idea whether talks between the two companies are actually going on, a merger deal has made sense for a long time. 

“Satellite TV will remain the only available option for rural Americans for some time — rural broadband buildouts take time — and ultimately regulators will have to take that into consideration,” Moffett said in the email. “Is one stronger satellite operator better for rural Americans than two weaker ones?”

Sanford Bernstein media analyst Peter Supino said in an email that a merger seemed plausible because “the point is to capture the efficiencies of putting the two companies together.”

Also: Getting Rid of DirecTV Won’t Be So Easy 

He added that combined EBITDA would be billions of dollars more than what the two generate today, and there are opportunities to reduce programming, network, subscriber acquisition and retention costs, as well as general and administrative expenses (G&A).

And even though Dish has shifted its focus to wireless — it is currently in the throes of building out its network — a DirecTV combination could provide a valuable cache of future mobile customers. 

More Mobile Opportunity

“The satellite TV business’s value to Dish is primarily financial, but to the extent Dish becomes more active in the future in the mobile services business, those TV subs represent potential customers to which Dish could market efficiently,” Supino said.

He added that Dish’s pitch to the Federal Communications Commission for the deal could be that the merger could curb future programming cost inflation by giving the combined company more bargaining power, and a merger would allow satellite TV to survive for a longer period. 

LightShed TMT Partners partner and media and technology analyst Rich Greenfield predicted that Dish and DirecTV would get together this year, part of his January Top 22 TMT Predictions for 2022. While talk of a combination has gone on for years, only to be quashed by regulators, he said believes this is the year for a combination to take place. 

“No, really,” Greenfield wrote. “We believe the regulatory risks today are not high given the state of the Pay TV market. Frankly, if Ergen can’t get it announced this year, it might never happen.” ■

The New York State Gaming Commission approved four licensed mobile sports wagering operators to begin taking mobile bets in the state beginning at 9 a.m. on January 8, and cable networks are gearing up for what they hope to be a big financial windfall.

Caesars Sportsbook, DraftKings, FanDuel, and Rush Street Interactive, which operates the BetRivers Sportsbook, got the green light from the Gaming Commission on Jan. 7, about a week prior to the January 15 start of the National Football Leauge playoffs and around a month before Super Bowl LVI on February 13, the biggest betting day of the year.

In a press release, Rush Interactive CEO Richard Schwartz said New York’s decision came just in time. 

“With the college football championship game on January 10th and NFL playoffs approaching, and the NBA and NHL seasons in full swing, in addition to countless other sports and betting options available for play, fans have endless entertainment at their fingertips at BetRivers,” Schwartz said in a press release.

Eyeing a $10 Billion Opportunity

New York State expects mobile sports gambling to represent a $10 billion revenue windfall annually. On Nov. 8, the state agreed to allow mobile sports wagering — about 18 other states, including neighboring New Jersey, have allowed it for months —- with the government taking 51% of gross revenue generated by the providers. 

With New York in the mix, however, other states that have been on the fence regarding mobile sports betting — including Connecticut, Delaware, Ohio, Louisiana, and Maryland, which have approved mobile gambling but haven’t gone live — will give them a needed push. 

“When it starts in New York, it becomes a national story,” said sports consultant Lee Berke, CEO of LHB Sports Media & Entertainment. “You’ve got four of the biggest sportsbooks starting on this, they’re creating New York-specific commercials, it’s going to become a subject of New York-based media outlets,” which should give any fence-sitters a needed push.

Another incentive for states: the enormous amount of money to be made. Some reports estimate that New York could reap about $1 billion in yearly profits from mobile sports betting. The state also is charging each mobile sports wagering operator a one-time $200 million licensing fee, and other providers are expected to join the fray. Initially nine providers were conditionally licensed by the state — Bally Corp.’s BallyNets; BetMGM, WynnBET; PointsBet New York; and Empire Resorts, doing business as Resorts World — were the others. The state Gaming Commission is still considering those five other applicants.   

“The remaining five conditionally licensed Mobile Sports Wagering Operators continue to work towards satisfying statutory and regulatory requirements necessary to launch and will be approved on a rolling basis when requirements are met,” the Gaming Commission said in a statement.

New Jersey has said gross revenue from online sports wagering was about $1 billion in September, most of that from mobile transactions. New York allowing mobile betting might cut into that handle — New York City gamblers were known to travel into the state just to make mobile bets. According to some reports, New York gamblers made about 25% to 30% of the sports bets in New Jersey. 

For television networks, the initial windfall is likely to be in the form of additional advertising — already Caesar’s Sportsbook, FanDuel, DraftKings and Rush Street, have been ramping up ads leading to Jan. 8. While sportsbooks have been advertising on sports channels ever since the U.S. Supreme Court allowed legal sports wagering in 2018, Berke said the introduction of the largest media market in the country to mobile wagering is a game-changer. 

“As it becomes more national in scope, the economics change in terms of being able to offer up a range of national content in a range of national media outlets,” Berke said. “Even six months ago, buying on the NFL, people were starting to do it, but it’s inefficient because half of the country can’t bet. When New York kicks in, suddenly, things change.” 

Berke said that viewers should expect similar programming on other sports channels, as “the line blurs between what is sports programming and what is sports betting programming.”

At YES Network, the home of New York Yankees baseball, Brooklyn Nets basketball, New York City Football Club soccer and New York Liberty basketball, the initial impact will mainly be on ad sales. But the RSN, the most-watched in the country, already has strong relationships with sportsbooks like FanDuel and DraftKings, so New York's entry into mobile sports betting “just makes YES all the more valuable to these entities,” said spokesman Eric Handler. 

FanDuel and DraftKings probably have the biggest relationships with television networks, having inked a deal with Turner Sports in October 2020 to integrate betting information into content from TNT, TBS and Bleacher Report. That pact also included the ability for Turner to collect referral fees if bettors placed wagers through their sites. 

MSG Moves Aggressively

Across the board, sports networks have long been anticipating this day, and many have spent the past few months forging partnerships with casinos and sports wagering outlets and creating programming geared toward gaming aficionados.  

One of the more aggressive networks on the programming and deal fronts has been New York area regional sports network MSG Networks, which has expanded its sports betting-focused programming. In October MSG Networks launched Odds with Ends hosted by former New York Giants players Mathias Kiwanuka and David Tyree on Sunday mornings during the NFL season; and The Bettor Half Hour hosted by Alex Monaco to complement its existing betting shows including The Betting Exchange with sports gaming experts Katie Mox, Jeff Johnson and former New York Jets safety Erik Coleman.

Also last year, MSG Networks struck marketing partnerships with FanDuel, Bet 365, BetMGM and Caesars Sportsbook.   

Caesars Sportsbook also plans to launch a new series on MSG Networks and its social media channels featuring actor and comedian JB Smoove — who also stars in the sportsbook’s national commercials. The show, One Course with JB Smoove, will integrate Caesars Sportsbook betting odds and content. In addition, the gaming giant and MSG Networks will launch a 20-part programming marathon to bring back the 2013 series Four Courses with JB Smoove, where the actor and comedian conversed with athletes and celebrities over dinner and which will now be updated with Caesars-themed content.

Caesar’s Sportsbook also will sponsor a special month-long programming block tied to former New York Ranger goalie Henrik Lundqvist. ■

The New Year rang in with a bit of a whimper on the retransmission consent front, with the American Television Alliance estimating that blackouts in 2021 — those periods when stations go dark as deals expire — were about one-third their number in the previous year. But distributors won’t have much time to celebrate, as the traditional deal cycle suggests that 2022 could be another record year for broadcast service disruptions.  

According to the ATVA, a trade group that represents satellite and cable companies, there were about 105 blackouts in 2021, less than one-third the record 336 stations that pulled their signal in the prior year and less than half the 278 stations that were blacked out in 2019. 

The lack of heated disputes as the clock neared 12 on Dec. 31 was in line with what Kagan, a research arm of S&P Global Market Intelligence, had predicted nearly 11 months prior. Back in February, the researcher had estimated that retrans blackouts would be lessened simply because there were fewer deals set to expire. According to Kagan, about 22 retrans deals affecting 30.2 million subscribers were expected to expire in 2021. That compares to 2020, when retrans blackouts affected about 56 million homes. 

Kagan based its predictions on the usual three-year timeline from the last public retrans transaction announcement or from earnings calls and investor presentations. Typically, broadcasters and distributors don’t reveal when a deal is up until it is, citing non-disclosure agreements embedded in retrans contracts. 

With that in mind, 2022 could see a big resurgence in retrans battles, as more deals are expected to enter the expiration queue. 

AT&T, which spun off a minority stake in its DirecTV, AT&T TV and U-verse TV units to TPG in February, struck several big retrans agreements in 2019 that could come up for renewal this year. Included in that mix are Nexstar Media Group, Sinclair Broadcast Group, CBS, Hearst TV and others that involved more than 300 stations alone. While it is no guarantee that all of those stations will go dark for some period this year, it’s a good guess that many will.

Other distributors who reached large retrans deals in 2019 include Comcast (with Nexstar and Tegna), Charter Communications (Nexstar and Tegna), Verizon Communications (Tegna, Nexstar and Cox Media), Suddenlink Communications (Tegna) and Frontier Communications (Nexstar). Dish Network reached a retrans deal with Meredith (now part of Gray Television) and Cox Media Group in July 2019. It is unclear as to whether the Meredith stations will fall under Gray TV’s retrans schedule.    

Also: No Cigar 

While there were fewer actual blackouts in 2021, several disputes that began earlier continued into the New Year. The largest is Tegna’s dispute with Dish Network, involving stations in about 53 markets that went dark on Oct. 6. Both sides have accused the other of negotiating in bad faith, and there was no indication at press time that a resolution was near. 

Verizon Fios TV customers lost access to Tegna stations in about five markets on Jan. 4, after the parties couldn’t renew their retrans agreement, which was originally scheduled to expire on Dec. 31, 2021. 

Also: AT&T and TPG: There is No Why 

Many of the bigger retrans disputes in 2021 took place at the beginning of the year and were resolved in the subsequent weeks and months. Dish Network reached a long-term carriage deal with Sinclair Broadcast Group’s 144 stations in November, but the broadcaster failed to reach an agreement for its regional sports networks. The Sinclair stations never went dark to Dish customers during those negotiations — the original deal was set to expire in August — because of a series of short-term extensions offered by the broadcaster. 

Almost exactly one year ago, Cox Media Group resolved a 20-day retrans blackout of its stations to Suddenlink subscribers, and in February last year Cox Media settled a five-day blackout with AT&T, getting its stations back in front of DirecTV, U-verse TV and AT&T TV customers mere hours before the start of the Super Bowl.

Also: New Year Ushers End to Several Cable Networks 

On the streaming side, YouTubeTV avoided a prolonged blackout of Disney channels by hammering out a deal with the entertainment giant that brought back broadcaster ABC‘s owned stations and cable channels ESPN, FX, Disney Channel, National Geographic and Freeform after a 36-hour hiatus. YouTube had promised its subscribers a $15 one-time credit to their monthly bill if a Disney blackout occurred, a pledge the company said it would still honor.   

The Google-owned streaming service also reached a carriage deal with NBCUniversal in October, avoiding a blackout. 

In the meantime, YouTubeTV and Hulu Live+ TV are still locked in a carriage battle with Sinclair’s Bally Sports Network RSNs, which went dark to those streamers in October 2020. 

Regional sports channel MSG Network hammered out a deal with Verizon’s Fios service on October 6, while its ongoing fight with Comcast, which began earlier in the month, raged on. At press time, MSG was still off Comcast systems.   

Dish dropped RSNs Root Sports Network and AT&T Sports Network in September.  Three months later it dropped its final RSN -- New England Sports Network -- making Dish the only major MVPD without a regional sports network. 

In July, Dish and HBO ended their three-year carriage battle, while earlier that month ViacomCBS struck a carriage deal for its linear and streaming networks with Charter Communications. In June, Charter struck a separate carriage deal with Multicultural News Network while Verizon signed on Black News Channel that same month. 

In January 2021, CMG struck a retrans deal with Suddenlink, while Fios averted a blackout of Hearst TV channels by hammering out a deal at the beginning of last year. 

So it isn't all doom and gloom when distributors and broadcasters make their ways to the negotiating table, and it seems the likelihood of a deal getting done without a  disruption in service is increasing. At the same time, the threat of a blackout is sometimes a broadcaster's only negotiating leverage, and most aren't afraid to use it.   

Broadcasters and distributors have been playing the blackout game for years. And though the decline in pay TV subscribership and the increase of direct-to-consumer offerings that include broadcast fare could eventually eliminate the need for these disputes — or maybe someone will invent an antenna-like device that will allow consumers to capture broadcast signals over the air for free — chances are that’s going to take a few years to fully play out. Until then, consumers, distributors and programmers will just have to deal with their retrans agita. ■

The term “metaverse” has become a thing again because Mark Zuckerberg has decided to wholeheartedly embrace the idea of a 3D, interactive world where users can work, play and be entertained, even changing Facebook’s holding company name to Meta. 

So while the social media mavens continue to tout how the cool kids will use whatever Silicon Valley can throw at them to interact with content, create creepy little avatars of themselves while they talk to and text their friends’ equally creepy-looking avatars and play games and whatnot using advanced augmented reality (AR) and virtual reality (VR) technology, just remember that this is really nothing new. 

It’s being touted as a revolution but for me, a person definitely way outside the target audience for these products, we’ve been down this road before. Interacting with content is nothing new for media watchers — we’ve been talking about it ever since Time Warner Cable launched the Full Service Network back in the 1990s. And with streaming and ultra high-speed broadband outpacing more traditional forms of entertainment consumption, media types have long prepared for this inevitable evolution.  

But the media business has never met a buzzword that it couldn’t beat to death and for the moment, “metaverse” appears to fit that bill. According to Bernstein Research, “metaverse” mentions on public company conference calls rose from just one in Q2 2020 to 449 in 3Q 2021.

Even actor Keanu Reeves, an owner of bitcoin and enthusiastic embracer of technology — he’s Neo, for gosh sakes — has asked for the metaverse hype to be turned down a notch, telling The Verge during the press tour for the upcoming Matrix: Resurrections movie that the term is decades old. 

Also: Meta May Not Be Betta But it Still Matters to Streaming Video’s Future  

“Can we just not have metaverse be like invented by Facebook?” Reeves told The Verge. “The concept of the metaverse is like, way older. It’s like, c’mon man.”  

Bernstein Research hosted a conference call with its clients about the metaverse on Dec. 10 (a transcript was provided on Dec. 16) and for software developers and hardware manufacturers it appears that momentum is going their way.

According to Bernstein, the metaverse could represent a $2 trillion annual revenue opportunity, but there is a big question regarding timing: nobody knows exactly when that opportunity will come. Still, that revenue is expected to come from multiple sources — advertising, gaming, software, mobile apps and more — and some is even being spent to some extent today.  

“Companies are already spending to build it [the metaverse] and that costs real capital dollars,” Bernstein Internet analyst Mark Schmulik said on the call. “As they build it, we're already starting to see certain companies like Meta gain traction in hardware sales and related software sales. While it's still too early to draw a line of whether that's going to be successful or not, it's certainly underway.” 

That includes cable and telecom companies, which see the metaverse as another catalyst to drive the need for higher speeds. On the Dec. 10 Bernstein call, cable and telecom analyst Peter Supino noted that he expects 80 million U.S. homes to have at least one way to purchase Gigabit symmetrical service by 2025. 

And while wireless has been capacity constrained in the past, Supino noted that about 500 megahertz of mid-band spectrum has been reallocated by the Big Three carriers (AT&T, Verizon and T-Mobile) to 5G. 

The metaverse also is important to the cloud services business, because connecting as many machines as possible is a big priority. And that need for connectivity could be a potential boon for Dish Network, which has about 100 MHz of fallow wireless spectrum and partnership possibilities with Amazon Web Services, Azure or Google Cloud. 

“Dish is an unencumbered, high capacity link between the industrial metaverse and the cloud service providers that would like to serve and foster it,” Supino said.

But on the media and entertainment side, the benefits of the metaverse aren’t so clear.

Bernstein media analyst Todd Juenger admitted he was a “card-carrying” cynic when it comes to the Metaverse, adding that with all the hype surrounding the industry’s latest buzzword, he’s feeling more than a little déjà vu.  

Also: A Deeper Look At the Netflix VR Environment 

“The reason I'm cynical is that I feel like I've seen this before in media and entertainment,” Juenger said according to the transcript. “To me, the metaverse just sounds like a new word to describe an evolution that's naturally happening anyway.”

He then went on to offer an example. Remember 3D? Not too long ago, in the wake of James Cameron’s Avatar, the most successful 3D movie ever made, all content was supposed to be 3D, movies, television, networks began springing up all over the place. In 2010, ESPN was set to launch a 3D channel, Discovery was teaming up with Sony and IMAX to launch a 24-hour linear 3D network with movies, documentaries and children's programming and electronics vendors were scrambling to introduce 3D TVs to satiate what they expected to be tremendous demand. 

I don’t have to tell you what happened, but I’ll let Juenger tell you why it did anyway. 

“A couple years go by and where is 3D, right?,” Juenger said. “It was just [that] consumers didn't like it. They didn't benefit from it. It was almost being forced upon them.”

Sound familiar?

Also: A New Reality Check for VR and AR 

Juenger went on to talk about AR, which was all the rage a few years ago, fueled by Pokémon Go, the mobile game that had young and old alike wandering into traffic to capture little AR anime figures. That was supposed to take the video game business by storm and again, it didn’t. Juenger recalled that while Pokémon Go was a massive success and its still going relatively strong, it remains the go-to example of AR’s supposed takeover of the video game business a half decade after its introduction. 

“It's funny that when we talk about AR when it relates to media, we still have to use Pokémon Go as the example, right?” Juenger said, noting that in the entertainment business, everybody copies everybody else, but so far that hasn’t happened with AR. 

“If AR is a big idea, where are the other AR video games?” Juenger said. “Why do we still have to point to Pokémon Go?”

Juenger wasn’t denying the opportunity that a new and improved metaverse presents. He just believes that the concern as to whether media and entertainment companies will take advantage of it is a bit misplaced.They already seem to be doing it. 

Also: Ripley Says Bally Sports Net DTC Offering Will Be Lean-Forward Experience 

“When it comes to entertainment, I will say the content creation will follow the technology platforms.” Juenger said. “I don't deny that there will be a big advancement in devices people use and [are] using social elements of entertainment, which incorporates elements of what we call the metaverse.”

Juenger, who also follows the video game industry, said that Roblox, the online platform that allows people to play games created by other users, already bills itself as a metaverse. The difference between Roblox games and more traditional games like Grand Theft Auto, he said, is that a user can move his Roblox avatar through different games. 

“I'm not sure you even want to take your GTA persona and move it into a different game, so maybe those will just stay separate,” Juenger said. “In terms of VR and AR games — in VR games, every major publisher makes some — but they all tell you that they just earn the minimum. And the only reason they do it is not really to make money, it's really just to stay involved and to build capabilities in case this takes off.” 

Even Disney has jumped on the metaverse bandwagon, envisioning a merger of the physical and virtual worlds in its theme park experiences, which Juenger said, although a  bit cringe-worthy, probably makes sense. 

“To me, that just sounds like an idea of a Disney video game,” Juenger said, adding that the prevailing wisdom that only huge conglomerates can afford to take advantage of metaverse opportunities may not hold true. 

Sure, the mega-media giants like Disney have all the money, technology and resources and have managed to build huge communities with their brands, but their size can make them slow to react to changes in the business. With development getting easier and faster and distribution barriers being shattered across the landscape, Juenger said some believe it is time to consider smaller, faster, more advanced startups to displace some of their older, larger competitors.    

“This is all still new enough and video games are inherently innovative,” Juenger said. “I would bet on the big IPs. But I think it's an evolution, not a revolution. Video game manufacturers — they've gone through a lot of change already. I think this is just another one.” 

Other analysts have delved into the metaverse conversation, with Evercore ISI Internet analyst Mark Mahaney issuing a 33-page report on December 10 that highlighted the pros and cons of the technology. Pros: there is a lot of money to be made. Cons: It’s going to take a big change in consumer behavior to realize that revenue.

On the plus side, Mahaney said Meta (the former Facebook) is putting its money where its vision is, investing more than $10 billion annually in the concept, has about 3.5 billion monthly users in its family of apps that are already engaging in what is most likely the core use of the metaverse (social media); and has the majority of the VR device business through Oculus Quest. And the pandemic has shown that consumers are willing to interact more online -- Zoom went from 10 million data meeting participants in 2019 to 300 million by April 2020. Roblox has more than 47 million DAUs that average 2.6 hours per day on the platform in Q3 2021, and while VR adoption is still nascent -- about 2% of monthly users on Steam -- it is rising.

But there’s a downside too. According to Mahaney’s report, the biggest question is whether enough consumers will swap “real” reality for virtual reality or whether VR will just be another niche product. And then there is the technology part of the metaverse. Zuckerberg has said that the biggest challenge for the industry is cramming a super-computer into the frame of normal-looking eyeglasses. 

“Ultimately, we need high-fidelity graphics, low latency, with hundreds of millions of concurrent users in real-time at a relatively cheap price point,” Mahaney wrote.

That, to me, is going to be the real deciding factor in this. People have different expectations as to how the metaverse will look and feel and I will bet you that none of them has a basis in the current reality.

The technology industry is really good at driving interest and excitement about technology, but it takes time for these things to deliver what’s being promised. And now they are talking about a technology that in order to work as promised is literally going to have billions of users accessing servers and whatnot simultaneously. Just think of how annoyed you get when Netflix takes too much time to load a movie and multiply that by 1,000 or so when your virtual jaunt through the rainforest crashes into a sea of pixels. 

And then there are the social and privacy aspects. It’s probably a safe bet that to keep the cost of these products and services down, people are going to have to give up a load of personal data. Sure many are doing that already, but you’ve got to wonder how much more everyone is going to have to surrender to make a low-cost metaverse worthwhile. 

And as far as the social impact, while most people have spent a year in isolation, when they get a chance to go out and interact with actual people, they do it in droves. The news is full of stories of people, young and old, that risked going to large gatherings during the outbreak. Heck, just yesterday (December 16), AMC Theaters said that 1.1 million people went outside to an actual movie theater to watch Spiderman: No Way Home, the second largest box office day in AMC’s history  (The Avengers: Endgame was No. 1). 

So I guess what I’m saying is that for the metaverse to really be worth the hype, it has to deliver on its promises. If it doesn’t, it risks turning consumers off of the concept, or at least substantially delaying its acceptance until it resurfaces years later with another name -- my vote is for  Vitametamegaverse (“It’s So Tasty Too!”). And that’s another thing that this industry has seen before.  ■ 

The slowdown in cable broadband subscriber additions may be even slower than anticipated after executives at two of the top three publicly traded cable companies -- Comcast and Altice USA -- hinted that customer growth is trending at an even more decelerated pace than expected. 

Comcast Cable CEO Dave Watson touched off a mini firestorm on Dec. 7, telling the virtual audience at the UBS Global TMT Virtual Conference that he expected to end 2021 with 1.3 million additional broadband subscribers. That is lower than the 1.4 million Comcast added in 2019 and implies that Comcast would add about 185,000 high-speed data customers in Q4, its lowest growth since Q2 2017. 

Most analysts had expected Comcast to end 2021 with about 1.4 million additional broadband customers. In a recent research report, MoffettNathanson principal and senior analyst Craig Moffett predicted Comcast would add about 286,000 broadband customers in Q4. Moffett expects Charter to add 271,000 broadband customers and Altice to add 3,000 high-speed internet subscribers in the period. 

While Charter may well hit Moffett's target, chances are that Altice USA, coming off a third quarter where it lost 13,000 broadband customers, could see negative growth in Q4.

“We probably are trending -- and we still have a big month of December coming up -- slightly negative in Q4, which probably leads us to be down in a range of 5,000 to 10,000 for the year,” Goei said at the UBS conference.

He added that the declines are in markets where Altice USA competes with Verizon Communications’ Fios Internet product, which Goei described as heavily promotional. 

“These losses are in Fios zones,” Goei said. “I think Fios has been saying they have not lost momentum. We’ve slowed momentum relative to Fios and we really need to drive to the first quarter when we have a better mobile product.”

The news sent Comcast shares down 7% on Dec. 7, as well as the rest of the sector. At the end of the day, losses eased a bit -- Comcast stock closed down 5%, Charter down 3% and Altice USA fell 2%. But the fear that sluggish broadband growth could last a while longer didn’t seem quite as irrational as the day before. Between Dec. 6 and Dec. 8 the three stocks fell 6.5%, 4.6% and 6.4%.

Charter Communications chairman and CEO Tom Rutledge spoke at the UBS conference on Dec. 8, and avoided making any specific broadband predictions. Rutledge did say that as the spike in pandemic-fueled consumer acceptance of the broadband product begins to unwind, there is still plenty of runway left. 

“I do think that the opportunity to grow the business is pretty much unchanged,” Rutledge said at the UBS conference. “If you look at it on a four- or five-year growth rate trend, it’s pretty solid, pretty straightforward and pretty consistent. I think that that future will look more like the trend than it will look like the third or fourth quarter.”

Cable operators have consistently denied that stepped up telco 5G wireless and fiber broadband initiatives would cut into their businesses, and at the UBS conference tried to stress that in addition to strong opportunities ahead for broadband, their other services are even more robust. Watson said at the conference that wireless subscriber additions should break records in Q4, and added that cable EBITDA growth should be between 7% and 8% in the period, exceeding analysts expectations.  

Watson said Comcast would add a record number of mobile customers in Q4, after signing on 285,000 additional Xfinity Mobile customers in Q3, its best quarterly performance since launching the wireless product in 2017. At the UBS conference, Watson said Comcast expects cable EBITDA growth to be in the 7% to 8% range in Q4, while net cash flow growth will be in the low double-digit percentages. 

“In wireless, we’ll  beat Q3 in Q4,” Watson said. “We’ll set a record.”

Rutledge didn’t make any wireless subscriber predictions, but said mobile service will be Charter’s biggest growth engine going forward, likening the mobile opportunity to that of the wireline telephone business several years ago. Back then, traditional phone companies were offering wireline phone service for $72 per month. Today, cable companies are selling wireline service for $13 per month and dominate the industry, with Comcast and Charter the two largest wireline phone companies in the U.S. 

“We took that business,” Rutledge said. “So, what kind of upside is there [to the mobile business]? That kind of upside.” ■ 

Investors in streaming pioneer Roku have had to weather some pretty extreme price swings over the past four years, but they have managed to come out on top. But even though the stock reached a new all-time high over the summer, as SVOD and other streaming services begin to see take rates slow as their services begin to mature, Roku shareholders may have to take a step back and evaluate if the ride, up until now a very profitable one, is worth the risk.

Roku shares have had their ups and downs over the past few weeks, rising as high as $350.60 per share on Oct. 19 to as low as $233.86 earlier today (Nov. 22). Driving much of that nearly $120 per share swing has been anticipation leading up to the release of its Q3 results on Oct. 20, and the aftermath of a downgrade to “sell” by MoffettNathanson media analyst Michael Nathanson. Nathanson lowered his 12-month price target on Roku shares from $330 to $220. The stock fell about 11% on Nov. 17, closing at $245.11 each and has been inching toward that low target price ever since, closing at $234.10 on Nov. 19 and $230.98 on Nov. 22.

As detailed in this May 2020 Next TV feature, Roku has long charted a jagged line graph on the Nasdaq.

Roku went public on Sept. 28, 2017 and rose sharply in its first two days of trading, nearly doubling its price in its second day of trading to $29.80 each before closing at $26.54 per share, up about  68% from its opening day on the market. The next two trading days -- Oct. 2 and Oct. 3 -- Roku stock fell a collective 21% to $20.81 each. It was as if the company was telling the market early on that this ride was going to be a bumpy one.

Since then Roku has established itself as one of the more volatile stocks in the entertainment sector -- it has lost or gained 10% or more of its share price in a single day 45 times since its IPO. While so far the gains have outweighed the declines --  Roku stock has been up 10% or more for 29 of those days, and declined more than 10% for 16 of those days -- most of the volatility in the stock has been event-driven.

Despite those dramatic ups and downs, in the past two years Roku stock always managed to recover, finishing 2019 up 337% and 2020 up $148%. But this year, despite hitting its all-time high price of $490.76 on July 27, Roku stock is down 30% for the full year. 

Like cable stocks, Roku shares tend to sink or swim around earnings -- its biggest one-day gain in the past four years was a 54% rise on Nov. 9, 2017 after it released quarterly results for the first time as a public company, soundly beating estimates. Its worst single-day performance was a 22.3% dip on Nov. 8, 2018 after it missed platform revenue expectations in the third quarter. In between there have been peaks and valleys around product launches, discount offerings, and competitive fears. Kind of the same thing that drives other cable stocks.

Also: Roku Plans to Produce More Than 50 Basic Cable-Level Original Shows in the Next Two Years 

But Roku is NOT a cable stock, and that is proven simply by looking at its price appreciation since Sept. 28, 2017 (1,381.6%), compared to Comcast (49.7%), Charter (90.7%), Altice USA (-39.5%) and Cable One (156.5%) in that same time frame. 

Roku is a streaming stock, and it has ridden that wave for nearly four years. But after nearly half a decade of Surf’s Up, Roku may be headed for calmer seas. 

In his research note, Nathanson wrote that companies that meet or beat quarterly expectations usually get a pass from intense scrutiny -- no one asks the tough questions if there isn’t anything to worry about. For Roku, the assumption has been that the strong ad-supported video-on-demand and connected-TV markets were the big catalysts for Roku’s revenue performance.

“The company’s lack of disclosure and consistent quarterly narratives didn’t provide many alternative views or clues,” Nathanson wrote. “However, over the past few months, we have started to question that thesis and the core assumptions in our model.”

Nathanson added that now he believes that a lot of Roku’s growth has been tied to new  SVOD service launches, which are headed for a slowdown.

“While there is no doubt that advertising was a significant driver of Roku’s revenue upside, a material part of the company’s growth has come from third-party SVOD-related revenue contributions, which are obviously set to slow,” Nathanson wrote.

It’s already happening. In Q3, Disney Plus added 2.1 million domestic subscribers, well below past performance.  Consolidation also is expected to play a role, as the pending Discovery/Warner Media combination and the potential sale of Starz is bound to have some effect on their respective streaming services.

Nathanson estimated that direct-to-consumer streaming services added about 7.8 million new customers in Q3, a “notable” slowdown from the double-digit increases of the past few years.

As a result, Nathanson lowered his ad revenue, total revenue and adjusted EBITDA  estimates for Roku through 2025. While he still believes the company will achieve $1.245 billion in video ad revenue in 2021, he now expects that to slow to $2 billion in 2022 (down from his prior estimate of $2.1 billion), and to $4.865 billion by 2025 (down from the prior mark of $6.375 billion). Total revenue estimates, unchanged at $2.798 billion in 2021, is expected to be $7.461 billion in 2025, instead of his previous prediction of $8.971 billion. And adjusted cash flow, at about $466 million in 2021, is now expected to be about $1.378 billion in 2025, instead of $1.827 billion.  

“Simply put, we think our and the Street’s long-term revenue and earnings estimates are just too damn high,” Nathanson wrote. Using a series of comparable data points and third party research, it appears that Roku will need to monetize an absurdly high portion of long-tail AVOD impressions to come even close to Street numbers, which we think will be a challenge given rising competitive pressures in TV OEMs and operating systems.”  

While Nathanson has taken the bear stance on Roku, not every analyst agrees. In a research note Nov. 3, Evercore ISI Group analyst Shweta Khajuria wrote that despite a rocky Q3, she believes there is still a lot of upside for the stock.

“We would be buyers on a dip,” Khajuria wrote, adding that while supply chain headwinds are likely to persist into the first half of next year, as the broader environment normalizes, Roku should benefit from linear TV ad revenue moving to connected TV, inline with viewing hours shifting to streaming. 

“Our long term thesis is intact – Roku has scale, with 56.4 million Active Accounts making it an essential ad platform for all major advertisers; superior measurement capabilities that should present a clear value proposition vs. linear TV; expanding TAM potential with Ad product innovations (OneView, etc.); early innings of international expansion; and better monetization of the Roku Channel,” Khajuria added. ■

On the heels of its popular Formula 1: Drive to Survive docuseries, which gave viewers a behind-the scenes look at drivers and racers in the Formula One World Championship, Barclays analyst Kannan Venkateshwar wrote in a report Friday that perhaps Netflix should make the popular racing circuit the target of its next rights purchase.

Analysts have been waiting for years for streamers like Netflix, Amazon Prime Video, Facebook and Google to get serious about sports rights, but so far most have merely dipped their toes, like Amazon renewing its deal for Thursday Night Football rights in 2020  and streaming select Major League Baseball games. And while others have made small investments in sports, for the most part they haven’t yet written the mega-checks that some pundits have said they are capable of. 

In his Friday note to clients, Venkateshwar wondered if the entertainment business is looking at streaming sports all wrong. For one, he said, the industry should stop modeling sports content the same way they have modeled scripted and nonscripted content for decades. And secondly, he said streamers may be looking at the wrong sports.

Venkateshwar argued that one of the biggest issues facing new entrants and sports leagues is that distribution of traditional sports like football, soccer and cricket is that they already are widely distributed around the world. 

“This ironically makes the biggest sports the least scalable,” Venkateshwar wrote, adding that may be why potential new entrants to the sports game like Netflix may find traditional sports the least attractive. 

Part of that is due to the tribal nature of most sports. While streamers have dipped their toe in rights auctions for traditional sports like NFL football, NBA and NCAA basketball, MLB baseball and soccer, which he said has helped drive awareness, but is more similar to “how a Korean show like Squid Game became popular globally.”

Sports, he said, has much deeper cultural connotations compared to storytelling.

“This could be why Turkish shows are a bigger rage in Latin America, at present, than local telenovelas but in terms of sports, it is tough for us to see any sport replacing soccer’s pre-eminence in Latin America or Europe,” Venkateshwar wrote.

But the cultural hold is much less with sports like Formula One Racing, UFC mixed-martial arts events and WWE pro wrestling, which can be an advantage for new entrants. 

“The underlying driver of this scalability is the fact that the connective tissue for consumption of niche sports tends to be inherent to the sport itself rather than underlying cultural storylines,” he wrote. For example, Formula One fans share at least some affinity for cars, their underlying brands and even the individual teams and drivers, all of which are less anchored in any particular culture. 

“This may make live carriage of a sport like Formula One a lot more organic for a service like Netflix, especially given the success of affiliated programming like Drive to Survive,” he wrote. 

But cultural scalability isn’t enough for sports like Formula One and the others, Venkateshwar continued, adding that in order for new distribution channels to open, streamers will need to ramp up the viewing experience, with things like virtual paddock clubs, in-cockpit or VR/AR viewing and virtual and real merchandise.  

“This allows for content continuity without distinct boundaries for a given form of content which is why a sport like Formula One could fit well into services like Fortnite, Roblox or Netflix,” Venkateshwar wrote.

Formula One could be more attractive because it has fewer events (about 22 races this year), global locations, is technology-heavy and has direct participation with global brands. While baseball has more games — about 2,400 each season — they are centered more on local markets. Baseball fans in Arizona don’t watch the Seattle Mariners and vice versa. 

For traditional sports, sports betting is most likely the best experiential enhancement, and many distributors are making inroads in that industry. But for distributors like Netflix, the better path may be through sports like Formula 1. 

“Over the near term, we believe Netflix could make its live sports foray by potentially bidding for Formula One broadcast rights in the US in ’22 and Europe in ‘23/‘24,” Venkateshwar wrote. “As a sport, Formula One happens to be one of the most global in terms of reach across all sports but until recently, it struggled to grow its audience, especially as media rights moved away from broadcast to pay TV in different parts of the world. Over the course of the last year however, the sport appears to have seen a resurgence in interest even from casual fans due to the popularity of Netflix’s documentary Drive to Survive. This synergistic growth of the sport and its content extensions could be a significant opportunity for Netflix to present sports as a continuum in a manner that is unique, without content boundaries.”

According to Barclays, while Formula One has dipped in popularity over the past few years — unique viewership has fallen from 490 million in 2018 to 433 million in 2020 — in the U.S., on the heels of the Netflix docuseries, it has risen. Barclays estimates that Formula One viewership on ESPN has grown from 670,000 viewers in 2019 to 920,000 so far in 2021. 

And in the U.S., Formula One events are attracting new fans. During its Q3 conference call with analysts on Nov. 5, Formula One Group CEO Greg Maffei said of the 400,000 people that went to the U.S. Grand Prix event in Austin, Texas, on Oct. 24 — setting an F1 attendance record —  70% were first-time attendees. The usual mix is about 30% first-timers. 

“We have never seen such a crowd in Austin,” Maffei said on the call.  

Venkateshwar noted if Netflix were to dabble in Formula One, its biggest impact would be on churn, given most fans would already be subscribers. But he added that for every $100 million in annual rights costs and 2% churn, Netflix would need just 136,000 new subscribers to break even. For Formula One and others like UFC and WWE, a relationship with Netflix would be beneficial because it would likely draw fans in from areas outside its normal scope. The analyst noted that 60% of F1’s  media rights revenue comes from five countries which account for 35% of its total viewership. 

“Growing rights fees outside of these markets has been a challenge despite the scale of global viewership, not just for Formula One but also other global sports like WWE and UFC,” he wrote.

David Zaslav is definitely going back to Cali after Discovery closes its $43 billion merger with WarnerMedia next year, reigniting speculation that the Warner Bros. Discovery CEO could tap long-time CNN chief Jeff Zucker as his No. 2.

Zaslav has been expected to move to California for months (he bought former Paramount Pictures chieftain Bob Evans’s Beverly Hills mansion in 2020) but confirmed that re-domiciling yesterday (Nov. 10) at the Paley Center for Media’s virtual International Summit. 

“I’m moving to California,” Zaslav said. “That’s where I’m going to live. CNN is a big asset. I’ll come back here and spend time with the CNN asset, but I’m going to live in L.A. with an office on the lot. I’ll be at the lot, I’ll be at Culver City, because that’s where content is made. This is a content company. The better our content is, the better chance we have of being to the leading media company in the world.” 

With Zaslav in California, that could mean he will need a seasoned executive to steer the company’s New York operations: both Discovery and WarnerMedia have offices in the city. That refueled speculation that Zucker, a longtime friend of Zaslav’s dating back to their days at NBC, could be that man.

According to The Information, Zucker is a likely candidate for Zaslav’s No. 2  because the two have been friends for decades. Prior to becoming Discovery CEO in 2006, Zaslav spent about 18 years at NBC, and counts Zucker as a close friend. Zucker had his ups and downs at the broadcaster but ultimately became CEO of NBCUniversal in 2007. He left NBC in 2012 and joined CNN in 2013.

Zucker’s CNN tenure has been spotty. He was criticized early on for the 24-hour news network’s apparent obsession with an intestinally troubled cruise ship (dubbed the “poop ship”) in 2013 and a year later attracted ire over its incessant coverage of the disappearance of Malaysia Airlines Flight MH370. But he also boosted CNN’s ratings with its coverage of the ascent and decline of former President Donald Trump.  

In February, Zucker said he would resign at the end of 2021 when his contract is set to expire, but postponed that departure to the first half of next year, when the Discovery deal is expected to close.

Talk of Zucker’s potential return is nothing new, as pundits have been predicting it ever since the Discovery-WarnerMedia deal was unveiled in May. 

Zaslav praised Zucker at the Paley Center conference, but demurred when interviewer Ken Auletta asked whether the CNN executive would find a home within the new structure.

“We’re specifically not speaking to any individuals,” Zaslav said at the Paley conference. “I’ve worked with and for Jeff at NBC. He’s a superb executive. I like Jeff a lot, we’re good friends."

Zaslav added that he has taken the same stance in other Discovery deals with Scripps Networks and Eurosport, adding that the ultimate goal is to find the best people both inside and outside the company to build Warner Bros. Discovery into the best content company it can be. 

"We’ll do that after we close,” he said.

While Zaslav may or may not persuade Zucker to stay, at the Paley Center conference he seemed more intent on repairing bridges with filmmakers burned by the previous management’s (i.e. AT&T) plan last year to make the entire Warner Bros. 2021 movie slate available in theaters and through its HBO Max service on the same day.  

Warner Bros.’s day-and-date strategy, implemented by most likely outgoing WarnerMedia CEO Jason Kilar, may have boosted HBO Max subscriber rolls but it forced some prominent filmmakers to rethink their relationship with the studio. Kilar insisted at the time that the experiment was only to last one year, and Zaslav spent a lot of time at the Paley conference driving that point home, professing his love for motion pictures viewed outside the home.

“Most of the people in this business got into the business because one day they went to the theater with their Mom or their Dad or their friends, the lights went out, there were no phones, they looked up at the screen and something magical happened,” Zaslav said. “And that’s where movie stars are made. Motion pictures, as you take them around the world, can change the culture. And most of the conversations that I’m having with talent, they want to be on the big screen still.”

Zaslav also stressed that as a pure-play content provider, Warner Bros. Discovery won't be distracted by other product lines.

“We’re not going to be saying, should we be spending money on broadband? Should we be spending money on more cloud? Should we be spending money on more infrastructure or our retail reach?” Zaslav said. “Almost every other media company we’ll be competing with, they’re in other businesses. This is a pure-play storytelling company.” 

Speaking of money, Zaslav said Warner Bros. Discovery is likely to boost its content spend in the future, but  added that the big money being shelled out by other streamers to poach showrunners and content developers from other outlets may be coming to a close.     

“There are a lot of players out there that are writing checks and that will get rationalized over the next couple of years, there will be less,” Zaslav said, adding that in the not too distant future, content creators will migrate to companies that give them the biggest exposure.

Netflix made headlines over the past few years by luring traditional TV and film producers like Shonda Rhimes, Ryan Murphy  and others with huge contracts to create shows for the streamer. Other services like Amazon Prime Video and Apple TV followed suit. 

While Zaslav said that money is important, it won’t be the biggest differentiator, invoking the names of past Warner Bros. chiefs like Steve Ross, Robert Daly and Barry Meyer, who were known for nurturing content creators during their tenures. 

“Ultimately, if that‘s the case, there will be a lot of great talent that will choose to come to Warner Bros. as a place where they will be supported,” Zaslav said.

The New York State Gaming Commission’s decision to approve mobile betting licenses for nine gaming operators — including FanDuel, DraftKings, Caesars Entertainment, Bally Sports and others with strong media ties — could be a big windfall for cable, broadcast and streaming sports channels that have spent the past three years forging relationships with sports books.

The New York State Gaming Commission on Nov. 8 issued 10-year mobile betting licenses to a group including FanDuel, DraftKings, Bally Corp.’s BallyNets; and to BetMGM, a partnership between MGM Resorts International and Entain PLC. The second group consists of Caesars Entertainment‘s Caesars Sportsbook; Rush Street International; Wynn Resorts’ WynnBET; PointsBet New York; and Empire Resorts, doing business as Resorts World.

With the approvals, sports bettors in the state will be able to make wagers through their mobile phones. Previously they could only bet on sports at physical casinos. The impact could be huge. New York state is the biggest sports-betting market in the country by some estimates, and could represent an additional $1 billion annually in wagering revenue. Cable, broadcast and streaming sports channels that have been forging relationships with gaming companies since the U.S. Supreme Court first allowed legal sports wagering in 2018 also could reap big rewards. 

New York residents won’t be able to begin betting on sports through their phones immediately. The state still has a few technical kinks to work out, but most observers believe mobile wagering will begin well before Super Bowl LVI on Feb. 13, the biggest betting day of the year.

In an interview, Lee Berke, sports consultant and president and CEO of LHB Sports, Entertainment & Media, said the initial impact for sports networks will likely be on the advertising side. But networks, which have spent the past three years forming relationships with betting houses, are also in line to reap big rewards when remote betting becomes part of the game broadcasts themselves. 

“As much as sports betting has been legalized in over half the country, New York includes the No. 1 DMA in the country and it’s just going to drive the trend toward the acceptance and the marketing and the development of the sports betting business well beyond where it has been up to this point,” Berke said. “It’s a big moment.”

It’s also a big moment for the state, which will charge each licensee a $200 million one-time fee and tax mobile sports wagering revenue at 51% annually, one of the highest among states that allow mobile betting. But the potential for success in New York is huge. The gaming commission estimated New York would reap about $489 million in annual tax revenue from a $1 billion sports wagering market.

Berke said for the networks, the impact will be seen in programming as well as advertising. He noted that Caesars Entertainment has been involved in a big national ad campaign around its Caesars Sportsbook, which launched in August in 11 states and the District of Columbia — Arizona, Tennessee, Illinois, Indiana, Iowa, West Virginia, Michigan, Colorado, Virginia, New Jersey, Nevada and Washington, D.C. 

“You’ve got Caesars in the middle of a national ad campaign even though half the states don't allow sports betting,” Berke said. “They’re already spending, but when you open up individual states, it’s naturally going to create a lot of additional media spend in those states to reach those audiences.”

Berke also said to expect more betting-focused content to be available on TV. “There is going to be a lot of fallout from the rights finally being awarded,” he said.

In the meantime, the addition of New York to the mobile betting arena should drive interest and revenue.

While the gaming commission estimated about $1 billion in New York  sports betting revenue, mobile could help boost that figure skyward. New Jersey, which has allowed mobile sports betting since 2018, raked in about $1 billion in sports wagering revenue in September alone. Most of that was via mobile bets. 

Some New York legislators have chafed over the lack of mobile sports betting in the state in the past. In an October article in the New York Times, New York State Senate committee on racing, wagering and gaming chairman Joseph P. Addabbo, Jr., a Queens-based Democrat, said the state was missing out on millions of dollars in tax revenue without mobile betting. That same article depicted city residents who regularly bike over the George Washington Bridge to place mobile bets in New Jersey. 

According to the American Gaming Association, sports wagering generated $886.5 million in revenue nationally in Q3, a quarterly low for the year because of a limited number of end of summer games, but still up 153.1% from the prior year. AGA said that combined sports betting and iGaming revenue for the first nine months of the year was up 200% to $5.36 billion.  

Already the marketing deals are starting to grow. On Nov. 9, Madison Square Garden Sports and Madison Square Garden Entertainment unveiled a multi-year marketing partnership with BetMGM, where the sportsbook would receive substantial brand integration inside the Madison Square Garden arena during New York Knicks and New York Rangers games. As part of the deal, BetMGM will also be featured prominently on regional sports networks MSG and MSG Plus during coverage of the Knicks, Rangers, New Jersey Devils and New York Islanders, highlighted by a virtual blue line during Rangers games and commercial spots during game telecasts, the companies said.

FanDuel and DraftKings probably have the biggest relationships with television networks, having inked a deal with Turner Sports in October 2020 to integrate betting information into content from TNT, TBS and Bleacher Report. That pact also included the ability for Turner to collect referral fees if bettors placed wagers through their sites. 

Bally Corp. signed a 10-year, $88 million deal in 2020 with Sinclair Broadcast Group to rebrand that company’s regional sports networks under the Bally Sports name. Bally also launched its mobile betting app, BallyBet, this year in Colorado and Iowa and plans to expand its online gaming reach to other states. In a press release, Bally Corp. chairman Soo Kim said the NYS Gaming Commission approval advances Bally’s footprint and “marks the latest milestone on our journey towards becoming the leading omnichannel gaming provider in the U.S. Above all, we look forward to providing New York's devoted fan base with engaging, best-in-class, sports betting experiences.“

Bally had earlier been rumored to be among the groups that would win approval from the NYS Gaming Commission, and during a conference call with analysts to discuss Q3 results on Nov. 3 (five days before the award was announced), Bally CEO Lee Fenton said that the company was comfortable with its position to gain access to the state, but lamented the proposed high tax rate for participants.

“No one is happy with a 51% tax rate,” Fenton said on the call. “I think that would be true for all of the partners that we‘ve been working with as well. But it‘s a huge state. And therefore, the scale of it means that you can have opportunities.”

Among those opportunities is with Sinclair’s RSNs, which Fenton said Bally’s could leverage within New York and in the outskirts of the state. “So obviously, I think it will change the cost dynamics of all operators that enter that market in terms of how they might address and attack that market. But clearly, New York is not a market that you want to miss out on.”

Other licensees were equally optimistic. 

Wynn Resorts said in a press release the New York state approval, obtained as part of a partnership with the Oneida and St. Regis Mohawk compacted tribes, is the 19th market for its sports betting service, WynnBET.  

“New Yorkers represent a significant portion of the Wynn Las Vegas and Encore Boston Harbor databases, and we look forward to giving those customers more ways to earn and use Wynn Rewards,” Wynn Interactive CEO Craig Billings said in a release. “We also look forward to meeting and engaging with new customers in the state via WynnBET."

Caesars Entertainment, also is a partner with FuboTV for that sports streamer’s Fubo Sportsbook in Indiana and New Jersey. Fubo Sportsbook officially kicked off in Iowa on Nov. 3.

Rush Street Interactive currently operates online gaming in 11 states, including Connecticut and New Jersey. Once it launches its New York Sportsbook, the company said it will be one of only three companies that has online gaming access in all three states. 

Rush Street Interactive CEO Richard Schwartz said in a release that approval from the New York State Gaming Commission validates the company, “the attractiveness of our offerings, and our ability to deliver value and results to our partners. We are pleased to continue our successful track record of securing access in high-barrier-to-entry jurisdictions, gaining market share, and differentiating our platform through the quality of our products, services, and customer service experience."

Dish Network has been pretty adamant over the years in insisting that it can build a state-of-the-art 5G network at a lower cost than any of its competitors, but on Thursday, showed that it all depends on where you’re looking.

In releasing its Q3 results Nov. 4, Dish again insisted that it will cost about $10 billion to build its 5G network, but also revealed that it will spend about $13.6 billion over the long term on tower leases. That, coupled with another delay for the launch of its first market -- Las Vegas --  and the general lack of visibility around the wireless product spooked investors enough to drive the stock down more than 15% on Thursday.

“For a network that is supposedly only going to cost $10 billion to build – and, yes, they haven’t even started really ‘building’ yet – they are already $14 billion underwater,” wrote MoffettNathanson principal and senior analysts Craig Moffett in a research note Thursday.

Moffett added that the tower leases will be spread out over a period of at least 10 years and should be counted as debt, with the bulk of payments coming after 2025.

Also: Dish Signals $5 Price Increase Across Satellite TV Tiers

“This enormous accrued liability will steadily come to the income statement over a period of at least a decade (fully $7.4 billion of the obligation is for periods after 2025),” Moffett wrote, adding that only $1.6 billion of the $13.6 billion in long-term obligations is for capex. 

“By comparison, their $281 million of 5G Network Deployment capex in Q3 is a drop in the bucket,” he continued. “But it is nevertheless nearly 13x what they spent a year ago, and is now starting to be a material drag on free cash flow.”

Dish shares fell as low as $36.44 per share on Nov. 4, down 15.4% or $6.65 each, after the company said it would spend $13.6 billion on long-term tower leases for the network. The company maintained in securities filings that it still expects the 5G network to cost about $10 billion to construct. The stock closed at $37.08 per share on Nov. 4, down 14% each. On Friday, shares rebounded slightly, closing at $37.87, up 2% or 79 cents each.   

On a conference call with analysts to discuss Q3 results Thursday, Dish chairman Charlie Ergen said no one should be surprised about costs rising because Dish is building the network at a lower cost than anyone has ever built a national wireless network before. Dish has been signing on partners for the service for months, including Amazon’s AWS, to help build out the network, which is based on Open Radio Access Network (ORAN) technology that utilizes a series of small antennas and base stations to deliver service via the cloud. But Ergen added that Dish hasn’t been so good at explaining what it is doing.

“We’re not exactly understood by the industry as much, and part of that is because we don’t spend a lot of time going through strategically what we’re doing,” Ergen said on the call. “It’s a complicated story and it’s a little bit easier for us to just go do it and show people, as opposed to trying to explain it.”  

Also: Dish Wireless: Strong Stomachs Required

Dish now expects to launch its first 5G wireless market, Las Vegas, in the first quarter of 2022, the third delay in what was originally expected to be a Q3 and later a Q4 launch of the product.  Dish CEO Erik Carlson said on a conference call to discuss Q3 results that Dish is beta testing the service with ''friendly users” (mainly its own and vendor employees) in that market currently.

“I think about it as a pre-production environment or a development environment until fairly recently,” Carlson said of the Las Vegas network. “Just getting the radio software and the core network software to work well together and be reliable. …Vegas is coming along. We’re in beta test mode and we’ll progress that in the course of the next 90 days and look forward to launching Vegas sometime in the first quarter of 2022.”

On the conference call, Dish said it had about 42 markets under construction, including Las  Vegas.

Other analysts weren’t as down on the wireless business. In a note to clients Friday, Barclays Group media analyst Kannan Venkateshwar said while the higher costs and the slight Las Vegas launch delay probably contributed to Thursday’s stock decline, it is the general lack of visibility around its biggest potential growth product (wireless) that has many investors worried.  

“The bigger issue with Dish is that it is a story stock with very little by way of milestones beyond small data points around network build,” Venkateshwar wrote. “In that context, management's commentary during the call may have introduced some degree of pessimism around the pace of network build.” 

The analyst added that while Dish doesn’t seem to be affected by supply chain issues yet, the time-sensitivity associated with its market launches and regulatory deadlines do put the company in a bit of a predicament if equipment vendors were forced to prioritize. 

Adding to the concern is the possibility that Dish may have to seek outside financing in the future. Venkateshwar believes that Dish is likely to need external financing in 2022, and the company didn’t rule out the possibility of an equity raise, which may have rattled investors. Even if Dish was merely keeping its options open, taking on more debt -- which would likely be high interest due to declining free cash flow and a leverage ratio north of 5 times cash flow -- should be a cause for concern. 

Venkateshwar also mentioned the accelerated decline of Dish’s prepaid wireless business. Boost Mobile lost another 121,000 subscribers in Q3, its fifth consecutive quarter of decline. Boost has shed more than 1 million customers since Dish closed its purchase in July 2020. 

Although Venkateshwar said the losses aren’t surprising given the transition from the Sprint network to T-Mobile, “it does highlight the challenge of scaling a facilities-based service from scratch.”

In his note Venkateshwar wrote that he expects continued subscriber losses at Boost wireless adding that investors appear to be underwriting what they believe is significant execution and capital structure risk. At the same time, he wrote that the lack of visibility and round the network build out and additional needs for funding, make it difficult to keep the story going. 

“Therefore, while the [share price] move yesterday may have been excessive, it is not a stock that can be defended on valuation because investors don’t even have an outline of a business model or ultimate capital structure yet,” Venkateshwar wrote. “As a result, volatility is likely to be a constant feature in this stock in the coming months.”

Sinclair Broadcast Group CEO Chris Ripley tried to deflect attention away from the mastodon in the room during an earnings conference call with analysts on Wednesday, telling them that although the broadcaster has secured direct-to-consumer rights with just four Major League Baseball teams less than six months before it is supposed to launch a DTC service, it will have the necessary deals in hand in time. 

“We do think we have critical mass in terms of rights to launch a product,” Ripley said on the earnings call. “And that’s what we intend to do.”

Maybe he‘s right. Maybe Sinclair will craft renewal deals with 10 other baseball teams over the course of the next 20 weeks that include DTC, linear and authenticated rights for more money. 

Maybe the teams, anxious to keep the money spigot from the linear RSNs flowing, will work out some kind of deal for DTC rights that will be beneficial for all, instead of taking advantage of Sinclair's desperation and make them pay through the nose. Maybe the teams, which though the league has hinted that it may keep DTC rights for itself, have changed their minds.

And then again, maybe not.

After months of telling investors and analysts not to be concerned about their ability to secure the necessary rights for its 2022 direct-to-consumer service, it came as a bit of a shock when Ripley said it only had secured those rights with four baseball teams. The Sinclair CEO said that in the past the company has obtained those rights as part of larger carriage negotiations. Ripley didn’t say which 10 baseball teams it needed to obtain rights from — some outlets have speculated the teams Sinclair does have deals with are the Detroit Tigers (77-85), Kansas City Royals (74-88), Milwaukee Brewers (95-67) and Miami Marlins (67-95), all but one with losing regular season records in 2021 —  or when it expected to reach those deals. Sinclair has said it will launch the DTC service in the first half of 2022, likely around April, the start of the MLB regular season. 

The revelation also seems to contradict Ripley’s earlier comments when he said during a Q1 earnings conference call that the company had DTC deals with the “vast majority” of its teams. In hindsight, it appears that Ripley was mainly talking about linear rights with all its teams — baseball, basketball, hockey and whatnot — and not DTC rights.

LightShed Partners principal Rich Greenfield, a vocal critic of Sinclair’s RSN strategy, wasn’t amused.

“Amazing how many times Chris Ripley has misled investors publicly,” Greenfield said in a tweet Wednesday. Later, he expressed doubt that Sinclair will be able to secure DTC rights with teams as they re-up their linear deals, adding that he believes teams are “moving in a different direction.”  

Sinclair’s RSN dilemma comes a few weeks after Major League Baseball commissioner Rob Manfred told an audience at the CAA World Congress of Sports that the broadcaster not only didn’t have sufficient rights to launch its own DTC service, it didn’t have gambling rights from the teams. And Manfred didn’t seem to want to give either of those rights up too easily.  

”We’ve been very clear with them from the beginning that we see both those sets of rights as extraordinarily valuable to baseball, and we're not just going to throw them in to help Sinclair out,” Manfred said at the conference, according to Sports Business Journal.

Gambling rights are an important component of Sinclair’s future RSN success, and maybe Manfred’s comments are merely a negotiating ploy on behalf of the league. But not everybody thinks so.

In the Q3 conference call, Ripley seemed to brush off any notion that the league may be positioning itself to launch its own direct-to-consumer product, adding that the RSNs have linear and authenticated digital deals with teams that would make such an endeavor highly unattractive. 

“What’s important to note is that we have exclusive local rights for our teams,” Ripley said on the conference call. “And those rights cannot be infringed upon by any other party to launch a direct-to-consumer product without significant ramifications. So we continue to negotiate in good faith with all interested parties to make direct-to-consumer a reality.”     

Sports consultant Lee Berke, president and CEO of LHB Sports, Entertainment & Media, said that isn’t so cut and dried because generally team deals are subject to league policies.

That could be as simple as striking a deal with teams to show 140 games on a regional basis, but a league agreement takes that down to 120 games nationally. So it is unclear whether Sinclair’s current deals would prevent teams from launching a regional DTC service but allow a national one. 

“Those are the sorts of things that do happen,” Berke said, adding the same holds true for the NHL and NBA. “It has to, because you are striking a balance between what you can sell nationally and what you can sell locally. So, for them to say, ‘We have a critical mass of rights,’ that’s subject to what the league wants you to have.”

Also read: Sinclair RSNs: Timing is Everything 

Adding to the uncertainty is the obvious animosity between MLB and Sinclair. Berke and other sports executives have said that Manfred’s scathing public criticism of the broadcaster was unprecedented and points to a relationship where the owner of the content has little incentive to help out its distributor.

Even NBA commissioner Adam Silver, who has been generally mum about rights deals in the past, seemed to lash out at Sinclair at the Oct. 12 CAA conference, telling the audience that he believed the RSNs are probably worth half of what the company paid for them two years ago.

“They paid $10 billion, it’s not clear it’s a good deal with $5 billion,” Silver said of the Sinclair RSNs at the conference, according to The Streamable. The Sinclair RSNs are also in negotiations for rights with 16 NBA teams. 

Manfred also criticized Sinclair for publicly airing its debt issues with the entity that holds its RSNs, Diamond Sports Group. Diamond Sports has been trying for months to restructure its $8 billion in debt, and in September said it was seeking another $600 million in financing from its bondholders for the DTC launch.  At the CAA World Congress of Sports, Manfred said Sinclair’s debt issues have cast a negative pall on the RSN space. 

During Wednesday’s conference call with analysts, Ripley said Diamond Sports has “ample” liquidity for the next 12 months, and that it is in “discussions with various commercial partners regarding financing.”

And when asked if MLB’s biggest concern with Diamond Sports is its debt, and could be solved by cleaning up its balance sheet, Ripley agreed. 

“I think getting additional financing would be helpful for all parties,” Ripley said. “I mean, that’s sort of undeniably true. And I think you’re spot on in that observation.” 

And then there is the question of whether Sinclair will be able to hammer out 10 rights deals with 10 different teams in time to launch the DTC network. Ripley didn’t say when those deals would come up for renewal.

According to one sports executive who asked not to be named, it is highly unlikely that renewals for all 10 remaining MLB teams were set to expire between now and April, so that means Sinclair will have to renegotiate existing pacts with the teams. 

“The teams have all the leverage,” the sports executive said, adding that clubs don’t have much incentive to open up existing agreements to negotiate DTC rights before they come due. “Why would they do that? What are they getting?”

The executive added that even if Sinclair agreed to terms that were highly favorable to the teams, the sheer number of deals to be done could pose its own problems.  

“That’s an incredibly ambitious task,” the sports executive said of trying to negotiate 10 rights deals by April 1.  

While Ripley appears confident those deals will be reached quickly, negotiations with Dish Network for Sinclair’s TV stations and RSNs continue to drag on. Dish’s carriage deal originally expired in August, was extended to September and currently is in the midst of a long line of one-week extensions as the parties have failed to reach a compromise. Many analysts believe that Dish has had the upper hand in talks since the beginning, and is in no hurry to reach a deal unless the terms are extremely favorable to the satellite TV giant. So, to believe that MLB teams that essentially hold the key to Sinclair’s DTC streaming future will rush to complete a deal to help out the broadcaster may be a bit naïve. 

But talks with Dish are apparently ongoing. Ripley said Sinclair and Dish are in “very short-term renewals at this point,” adding that the company does not comment on “live negotiations.”

Dish Network is scheduled to hold a conference call with analysts at noon Nov. 4 to discuss Q3 results. Perhaps it will add some further clarity to those negotiations.   

However, as part of its Q3 results, Sinclair reduced Diamond Sports’ full-year cash flow guidance by 12%, a move that some analysts took to mean they don’t think they’ll be able to reach a Dish agreement this year.  

And though Cahall agreed that with about $476 million in cash, Diamond Sports has enough liquidity to last 12 months, he added it is going to be a tight next few months for RSN business. 

About half of that cash will be tied up in sports rights payments, bond interest payments and distributor rebates in the first half of 2022, Cahall wrote in a research note, adding that the “real crunch” will occur in Q4 2022. In the meantime, Cahall wrote that Diamond Sports’ unsecured bonds are trading at about 26 cents on the dollar. 

The analyst wrote that investors, once most concerned about the debt restructuring, are now hyper-focused on direct-to-consumer streaming rights. 

“We think it's too close to call,” Cahall wrote, adding that without a direct-to-consumer product, “it's tough for us to see a financial future for Diamond.” 

Berke added that despite Sinclair’s RSN difficulties, the value of sports content remains high, which could raise optimism that a deal can eventually be done. But there will also have to be some changes. The sports business isn’t what it used to be. 

“This is not a crisis of the value of the content — ratings still do well,” Berke said. “But it’s a crisis of the distribution of the content. It’s a fact that the business model is outmoded. All of that needs to be addressed. The easier path is to negotiate this out. But it has been two years, and they have yet to work it out.”

Sports Illustrated used to have a tongue-in-cheek feature in the magazine that offered some absurd factoid about the sports world under the headline This Week’s Sign That the Apocalypse is Upon Us, like how in 2016 if you were in Cleveland and asked your iPhone, “Which Way is Sadness?” Siri directed you to FirstEnergy Stadium, home of that city’s often-maligned NFL franchise, the Browns. But they had nothing on Wells Fargo media analyst Steven Cahall’s Nov. 1 report that stated this: The reason for the current slowdown in broadband subscriber growth could be that cable customers are too happy with their service provider.

Now I am not doubting the Wells Fargo report at all — it makes perfect sense. It’s just that in 30 years of covering this industry — 23 at Multichannel News — I never thought I would see the day that growth would slow because customers like their cable company too much. 

Broadband growth definitely slowed in Q3, with Comcast reporting 300,000 high-speed internet additions — in line with estimates — and Charter Communications adding about 265,000 customers, well below analysts’ predictions. While most expected broadband additions to taper off as the pandemic waned, for some the slowdown is happening faster than expected.   

Analysts have been trying to wrap their heads around the cause of the slowdown for days, after both Comcast and Charter reported that broadband subscriber additions slowed in Q3. For Comcast, the slowdown was almost exactly as expected: 300,000 additions, compared to estimates it would add between 295,000 and 305,000 high-speed internet customers. Charter was a bit of a surprise by coming in lower than expectations. Some estimates were for as high as 350,000 additional broadband customers in the period.

What has puzzled some analysts is this: Everyone expected growth to be lower than it was in pandemic-fueled 2020 because people are beginning to go back to work and school and  maybe don’t need as robust an internet connection at home. High penetration rates for broadband service — about 85% by some estimates — also was expected to be a factor for the simple reason that having fewer consumers without service probably means that fewer new customers will sign on. At the same time, cable companies are saying they see a lot of runway for growth ahead, and predict they will end 2021 with around the same growth rates as 2019.

But given the Q3 data for Comcast and Charter, that probably means Q4 growth will be even slower than Q3. Comcast added 1.4 million broadband customers in 2019, and to meet that goal will have to add about 292,000 high-speed internet customers Q4. Charter has said that now it may be a better idea to compare this year to 2018, when it added about 1.3 million internet customers, meaning in Q4 it will likely add about 251,000 broadband customers. 

In a research report last Friday, MoffettNathanson principal and senior analyst Craig Moffett wrote that much-slower Q3 growth is probably due to a series of factors, including 0% new housing growth and fewer moves.

“Broadband growth will inevitably slow as full penetration is achieved,” Moffett wrote. “And, yes, fiber expansion will mean more of Cable’s footprint will be overlapped by a competing service. That, too, will dampen broadband growth. But all that has been in everyone’s numbers for a very, very long time.”

Back to Campus, Back to Home Buying

But in a research note Monday, Cahall wrote that he believes there is more to the story. 

According to Cahall, new home sales are up 18% so far in 2021 compared to 2019 and up 7% in Q3 2021 vs. Q3 2019, while rental market reports show that segment is returning to pre-pandemic levels, as first-half 2021 applications were up 13% vs. the same period in 2020 and students are returning to college campuses.

“So what's happening?” Cahall asked. “Well, we think that customer churn is low because broadband customers are pretty happy, many having upgraded during the pandemic.”

In addition, Cahall wrote that while consumers are still moving, gross additions and deactiviations may be less because those customers might be staying with their current cable provider. But that elation is a two-way street.

“Cable's subs are happier, but the competition’s subs are happier too,” Cahall wrote, adding that low-income programs like the Emergency Broadband Benefit program may be contributing less. 

At the same time, telco high-speed internet additions are improving. Cahall wrote that in 2019, AT&T, Verizon Communications and Lumen Technologies lost about 417,000 broadband customers. This year he believes those three companies will add 240,000 high-speed internet customers or more. At the same time, cable broadband growth is rising at a less accelerated rate.

Cahall is not alone in his estimates that telco fiber builds could vault that sector ahead in the broadband wars. In October, Bernstein media analyst Peter Supino wrote that he believed telcos like AT&T, T-Mobile and Verizon could chip away at cable’s broadband lead. 

Cahall estimated Comcast’s and Charter’s combined broadband subscriber additions will drop from 2.81 million in 2019 to 2.66 million in 2021 (down by about 150,000), while 2022 combined growth will be more than 400,000 subscribers lower than 2019 figures. 

“Whether its fiber or lack of low-hanging fruit from DSL, we think Telco trends hurt Cable growth + valuation, and portend badly for potential ARPU implications,” Cahall wrote.

In his note, Cahall predicted that cable residential broadband growth would rise by about 2.1% annually between 2021 and 2025, from 76.2 million customers to 81.5 million customers, while telco broadband subscribers would climb at a 15.8% annual clip from 15.99 million in 2021 to 29.45 million by 2025. At the same time, legacy DSL subscribers would fall at about a 14% rate, from 16.4 million in 2021 to 8.7 million in 2025, according to Cahall.   

“Whether the recent headwinds are move churn or Telco something else, we think the overhang on sentiment is real and will persist,” Cahall wrote, adding that no matter how you slice it competition is coming in 2022. That competition will likely take the form of fiber rollouts by AT&T, Lumen and T-Mobile, which said recently it expects 500,000 5G broadband customers by the end of 2021. Verizon, which has given guidance for over $1 billion in fixed wireless revenue by 2024, which could translate into between 1 million and 2 million broadband customers.

“While it’s tough to know where, we think the fact that these 5G rollouts are guidance mean the Telcos have high conviction in some share gains,” Cahall continued.

Charter Communications’ dismal Q3 broadband subscriber performance — it missed analysts’ consensus growth estimates by nearly 30% — may seem like the harbinger of bad things to come, but influential analyst Craig Moffett believes that the real culprit in the slowdown may be sluggish household formation. 

Charter stock was down as much as 6% ($41.60 each) to $667.07 per share in early trading Friday after it said it added 265,000 broadband customers in Q3, 29% below analyst consensus estimates of 344,000 additions and 31% off its Q3 2019 mark of 351,000 adds. 

In a research note Friday, MoffettNathanson principal and senior analyst Moffett wrote that while the quick reaction is that the growth phase has ended for cable’s most important product, he believes it is tied to a slightly more arcane reason — declining new household formation. 

In his report, Moffett noted that Comcast “missed” its broadband subscriber growth targets by about 80,000 customers in Q3, adding that would work out to around 250,000 for the full year. Charter’s deceleration, he wrote, is about the same. Considering Comcast passes 60 million homes and Charter passes 54 million, those “misses” work out to about 0.4% of total broadband subscribers for both companies. 

At the same time, new household formation, once  increasing at about 1% per year prepandemic, actually fell during the past year, the result of a combination of supply chain and labor shortages that have reduced additions to housing stock. According to Moffett, “supply is simply not keeping up with demand.”

Also Read: Punching a Hole in Convergence Apocalypse Theory 

Given that new housing formation has accounted for up to one-third of all broadband additions over the past few years, “When new household growth is zero, of course broadband growth will slow,” Moffett wrote. 

Add to the mix that broadband penetration is about 85% of the country and the slowdown in subscriber additions looks all the more inevitable. 

The good news is that the sluggishness does not seem to be due to increased competition. Analysts have said fiber buildouts by AT&T and T-Mobile and other carriers will still take years to complete, so their effect has been minimal at best. And Charter chairman and CEO Tom Rutledge said on a Friday conference call with analysts to discuss Q3 results that the competitive market is basically the same as it has been for years.

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

“We’re seeing the same effect where there are no wireline competitors as we do with wireline competitors in terms of net adds proportionally to 2019,” Rutledge said on the call. “So we’re seeing the competitive environment doesn’t appear to be significantly different than it has been — it’s always been a competitive environment.” 

With competition not yet a factor, that leaves other economic factors like new household formation and consumer mobility as possible reasons for the slowdown. Moffett added that there is precedent — he pointed to 2017, when cable operators anticipated a slowing of broadband growth due to sluggish household formation. When new household formation recovered in 2018, so did broadband subscriber growth.

Also Read: How Slow Will The Broadband Slowdown Be? 

This year, because of higher broadband penetration rates, is a little different, but Moffett added the same tenet holds true — as more houses get built, broadband rates will rise. 

On the conference call, Charter executives seemed to agree that low customer mobility and sluggish household formation were big factors in the sluggish broadband performance. 

“How that unwinds is unclear,” Charter chairman and CEO Tom Rutledge said on the call. “It's a very unusual market situation — sheltered in place, so to speak. All the friction of the market came out, that used to exist — people in transition — and they settled into subscriptions. When the market remobilizes, so to speak, I think there will be continued pressure on growth because of the pull-forward of all of that activity. But I think the fundamental opportunity for growth and long-term growth is the same, and our ability to take share out of the market is still the same.” 

Charter is now saying that full-year broadband subscriber growth will look more like 2018 than 2019, the year that many of its peers have used as a target for overall additions. That new benchmark implies that Q4 broadband additions at Charter will be even lower than Q3, or about 251,000, according to Moffett.

Also: How Long Is Comcast’s Broadband Growth Runway, Really? 

At the same time, financial metrics have soared as broadband grows and video shrinks. Cash flow margins rose to 40.2% in Q3, an increase of 80 basis points from a year ago. At the same time capital intensity is declining, even as the company continues to edge-out to grow its addressable footprint. In Q3, capital intensity including wireless was 14.2% and 13.8% ex-wireless. Consensus estimates were for capital intensity to be about 15.4%.

“Broadband growth will inevitably slow as full penetration is achieved,” Moffett wrote. “And, yes, fiber expansion will mean more of Cable’s footprint will be overlapped by a competing service. That, too, will dampen broadband growth. But all that has been in everyone’s numbers for a very, very long time. The harder-to-forecast swing factor appears to be the rate of overall market growth, i.e. new household formation. Charter, for their part, seems content to use the opportunity to keep doing what they’re doing, raising margins, lowering capex, producing cash and buying back stock.”  

Comcast’s Q3 performance may turn out to be a bit of a double edged sword after all — on one hand, its 300,000 broadband subscriber additions came in at or above most analyst expectations, but its full year guidance implies that the fourth quarter may be a little worse than expected. 

Analysts initially cheered when Comcast said it had added 300,000 broadband subscribers in Q3, slightly better than consensus estimates of a gain of 296,000 customers. Strong gains in revenue (up 7.4%) and cash flow (up 10.3%) added to a feeling that perhaps the expected broadband slowdown won’t be as severe as earlier expected. 

Comcast cable CEO Dave Watson added to those good feelings on the Q3 earnings conference call Thursday morning, telling analysts that he sees a strong growth trajectory ahead.  

“The fundamentals of the business are very strong and there’s a very long runway of growth for broadband,” Watson said on the call. “We haven’t changed our view on the long-term trajectory of the connectivity business. I’m just as confident and optimistic about the prospects of this business than I’ve ever been.”

Watson pointed to Comcast’s past consistent performance — adding 1 million or more broadband customers each year for the past 20 years — and noted this year is no different. For the first nine months of 2021, Comcast has added a total of 1.1 million broadband customers, behind the 1.4 million added during the same period in 2020, but ahead of 2019’s nine-month pace of 963,000 additions.

“Our focus has not wavered,” Watson said. “While current visibility and overall current activity creates a little bit of modest risk, we still believe full-year net adds will be around 2019 levels.”

Watson was quick to point out that 2019 was Comcast’s second-strongest year in terms of broadband growth (2020 was No. 1), so to return to that pace points to continued momentum for the service. 

But Watson also noted that Comcast is adding fewer low-income broadband customers, which some analysts found surprising given government programs like the Emergency Broadband Benefit program (EBB), which subsidizes high-speed internet service for qualifying homes. And some pointed out that using 2019 as a goal implies that Q4 additions will be a lot lower than that same period two years ago. 

Comcast added about 1.4 million broadband subscribers in 2019, so hitting that target implies that the cable company will add about 292,000 high-speed internet subscribers in Q4 2021, according to MoffettNathanson principal and senior analyst Craig Moffett. That’s a big departure from Q4 2019, when the company added 442,000 broadband customers, and implies that the momentum may not be as strong as they think.

In a research note, Moffett wrote that in the “middle six months” of 2021 (basically Q2 and Q3) Comcast’s broadband subscriber growth was actually stronger than in the same period in 2019. According to Moffett, Comcast added 654,000 broadband customers in Q2 and Q3 this year, and 589,000 subscribers in Q2 and Q3 of 2019. 

Whether that slower implied Q4 growth (about 292,000 additions or greater) is due to “continued weakness in new household formation, slower incremental penetration gains or simply botched messaging is unclear,” according to Moffett.

Barclays Group media analyst Kannan Venkateshwar also noted that the 2021 guidance “implies that Q4 is trending significantly lower than 2019 levels,” and was somewhat concerned about the slowdown in low-income customers. In a research note, Venkateshwar wrote that decline implies that the low-income segment “contributed more than usual to growth over the last year due to government support programs, something we have flagged as a risk for some time.”

The Barclays analyst added that Comcast’s record low churn means that the slowdown isn’t due to competition, which could change over time.    

“The fact that the slowdown is largely on account of slower origination rather than higher churn means that the competitive impact of telecom isn’t being felt yet,” Venkateshwar wrote. “This, along with the fading impact of macro support programs, means that 2022 net adds may be further below the 2019 level than 2021.”

Watson wouldn’t give 2022 guidance on the call, again pointing to strong fundamentals and the continued, consistent momentum of the broadband business. 

But Comcast chairman and CEO Brian Roberts said the reduction in churn is proof that broadband is a very stable business.

“That’s what’s so great about the 32 million broadband customers that we have — we have a recurring business,” Roberts said on the call. “Maybe there was a pull forward, maybe there's a slowdown, time will tell. We’re looking at how we grow EBITDA, how do we grow margins, how do we maintain and offer more product connectivity, what more can we do with broadband, what will broadband be in the next five years." 

“It’s not some change in market conditions that we’ve all been reading about,” Roberts continued. “While it may be coming and there may be some of that, I actually think it’s the disruption of the pandemic coupled with a large percentage of Americans [that] have broadband. The question for us going forward is how do we continue to grow the value of that broadband and obviously therefore grow the value to our shareholders.”  

Investors appeared a little confused. Comcast stock was down about 5% ($2.55 each) in early trading Thursday to $49.89 per share, but rebounded later in the day to $52.74 (up 1%). As of 12:26 p.m. Oct. 28, the stock was trading at $52.26, down less than 1% or 18 cents per share. 

While broadband concerns are likely driving confusion, those fears could be all for naught. Moffett noted in his report that Comcast is notorious for reporting results that are “almost always precisely as expected, plus a smidge for good measure.”

So any fear of an even deeper slowdown could simply be a case of the “botched messaging” that led up to today’s Q3 pleasant surprise. 

Former Rogers Communications chairman Edward Rogers fired the latest salvo in his family’s ongoing Succession-like drama, filing a lawsuit in a Canadian court to uphold his decision to reconstitute the telecom giant’s board, a move family members strongly opposed.

“This is Canada’s Succession right now,” Richard Powers, an associate professor at the University of Toronto’s Rotman School of Management, told CBC News earlier this week, referring to the HBO show. “The fact that it's playing out in the media makes it all that more intriguing.“

According to a statement by the Rogers Communications board of directors, the British Columbia Supreme Court will hold a hearing on Nov. 1 to hear submissions by the company and the Rogers Control Trust (the Rogers family entity that controls 97% of the telecom company’s voting stock) regarding the legality of Edward Rogers’s attempt to replace five members of the Rogers Communications board. Edward Rogers, who also is chairman of the Rogers Control Trust, has argued that his action is compliant with British Columbia law and corporate bylaws. His family, sisters Martha Rogers and Melinda Rogers-Hixon and his mother Loretta Rogers have argued that the action is invalid because it was done through a written resolution and not a formal meeting of shareholders. 

“The company welcomes the opportunity for the Court to consider the importance to shareholders and all stakeholders of conducting a shareholders meeting to change the board of directors,” Rogers Communications said in a statement.

The ongoing Rogers family soap opera surfaced back in September, when it was learned that Edward Rogers was maneuvering behind the scenes to replace Rogers Communications CEO Joseph Natale with his confidant, chief financial officer Anthony Staffieri. But according to reports in the Toronto Globe & Mail, that plan — which also included the ouster of nine other Rogers executives -- was brought to light prematurely when Staffieri accidentally pocket-dialed Natale while discussing the corporate coup attempt with former company legal counsel David Miller. Natale contacted an independent director at the company, which triggered an emergency board meeting on Sept. 26, where the majority threw its support to Natale and his team. Three days later, on Sept. 29, Staffieri resigned as CFO and was replaced by long-time Rogers finance executive Paulina Molnar.

But it didn’t stop there. The Rogers board of directors, at the urging of board member and Loretta Rogers, moved to oust her son Edward as chairman, replacing him on Oct. 21 with long-time lead director and chair of the board’s corporate governance committee, John MacDonald. Not to be outdone, Edward Rogers fired five independent members of the 14-member board on Oct. 21 and replaced them with nominees of the Rogers Control Trust, which moved to return him to the Rogers Communications chairman seat.

“We are in the unusual position in which there seems to be two boards of Rogers Communications, the board we knew last week and Edward’s new board. A very confusing situation,” McMaster University business professor Marvin Ryder said in an interview.

Drama Coincides with Deal-Making

The turmoil also comes as Rogers Communications is winding through the government approval process for its $20 billion takeover of Shaw Communications. Rogers had hoped the deal would close in the first half of 2022, and on Sept. 28 the Canada Competition Bureau issued a Request for Information asking for input regarding the effect of the merger on mobile services, residential and business broadband and the supply of programming to television service providers. 

In an email message to Multichannel News, Canada Competition Bureau senior communications advisor Jayme Albert said the agency is aware of the media coverage of the governance issues at Rogers, but that it is concentrating on competitive issues.

“The Bureau’s objective in its review of the proposed Rogers/Shaw merger is to investigate whether it is likely to result in a substantial lessening or prevention of competition,” Albert wrote in the email message. “The Bureau is focused on assessing the impacts of the proposed transaction on mobile wireless, wireline internet and broadcasting services, as indicated in the Bureau’s recent public Request for Information. As the Bureau is required by law to conduct its work confidentially, I am unable to comment further.”

Ryder, the professor, said while the government may not be considering the Rogers management turmoil in its approval process, the family imbroglio could have other effects on the Shaw deal.

“This whole Shaw takeover is very much in question,” Ryder said. “I can almost guarantee you that other potential suitors for Shaw, assuming the deal was done, they just disappeared into the woodwork. Now that this is all back on the table, I guarantee you the Shaw family is getting phone calls.”

Ryder said potential suitors could include smaller Canadian telecom companies like Telus and American companies like Verizon and T-Mobile. 

Shaw representatives did not respond to a request for comment.

Ryder added that while Natale isn’t the perfect CEO — Rogers’s performance has been steady, even though the pandemic when its competition was adding hundreds of thousands of subscribers — his real value could be in securing financing for the Shaw deal. Now with the family’s dirty laundry being aired almost daily in the Canadian press, that could give some potential lenders pause.

“Rogers, in the last year, has not had tremendous performance,“ Ryder said, adding that although the company has added about 175,000 new wireless subscribers in Q3, its total revenue and profitability hasn‘t risen much. “Me, as a business school professor, knowing that we've been on a rollercoaster because of COVID, I'm not sure I would be upset with performance like that.”

Ryder added that while other telecom companies performed better as customers stayed home during the pandemic, “I’m not sure that's enough to have triggered all of the drama we've seen over the last week-and-a-half.”

According to reports, in the Oct. 26 suit Edward Rogers said he lost confidence in Natale’s ability to lead Rogers through the Shaw deal and that his mother agreed with him, speaking before the board in late September to back up her son’s assertion. Loretta Rogers, in a statement, said she had been given inaccurate information by her son and board member Alan Horn, and after hearing from independent directors, changed her mind and backed Natale.  

Sparring Siblings

Ed Rogers’s actions also have opened a rift in the family, with his sisters Melinda Rogers-Hixon and Martha Rogers and his mother coming out publicly in support of Natale. 

In an Oct. 24 statement, Roger-Hixon, Martha and Loretta Rogers, along with board members MacDonald, John Clappison, David Peterson, Bonnie Brooks and Ellis Jacob, said they “unequivocally support Joe Natale as CEO and support his management team,” adding that they remain board members and constitute a majority of board members of the company. “No other group of individuals has any authority to purport to act as the Board of Directors of Rogers Communications.”

In a series of tweets, Martha Rogers lambasted her brother, saying his self-reappointment as chairman “should be taken as seriously as if he appointed himself King of England.” She also likened his behind-the-scenes meetings to playdates with the “Old Guard,” adding that her late father, Rogers Communications founder Ted Rogers, would “be so disappointed to see how Ed and his puppet masters are behaving, destroying the company he built.”   

While the battle is headed to court, that might only delay the inevitable: Martha Rogers said in later tweets that the family would “spend every penny defending the company, employees & Ted’s wishes, nothing you can do will deter us. Bring. It. On.”  

Bloomberg opinion columnist and former Goldman Sachs investment banker and M&A lawyer Matt Levine wrote that the Rogers sisters and their mother may have won the battle in removing Ed from the Rogers board, but lost the war.

“Edward Rogers lost at the board but won at the trust, meaning that he will eventually get to kick his sisters and mother off the board, reinstate himself as chairman and fire the CEO, but meanwhile his sisters and mother and the CEO probably have a few months to run the company and try to head him off,” Levine wrote.

Ryder wasn’t convinced the outcome would be that simple, adding that although Ed Rogers may have his own backers on the Trust board, Loretta Rogers’s influence should not be underestimated. The 82-year-old widow is the daughter of late British politician and Governor of Bermuda John Roland Robinson, who gave Loretta $450,000 shortly after she married Ted in 1963 to help finance his son-in-law's business endeavors. 

“Part of Ted Rogers’s success was his wife,” Ryder said. He said Loretta Rogers’s money was what helped her husband Ted form the company in the first place. “It’s really her money that is the backbone of Rogers.”

It appears that the ongoing soap opera is far from over. Just how it ultimately plays out will depend on how long Ed Rogers can hold on to his board support and how long the companies are willing to let this Canadian version of Festivus (the airing of the grievances) continue.

Netflix managed to impress Wall Street with better than expected subscriber performance in Q3, silencing its critics for the time being and causing at least one analyst to wonder if the streaming video pioneer could knock The Walt Disney Co. from its perch atop the media landscape.

Netflix added about 4.4 million subscribers in Q3, ahead of its guidance of 3.5 million additions. That performance comes after a Q2 when the streaming giant added just 1.54 million new customers and caused some industry pundits to speculate that the company was headed for a prolonged subscriber slowdown, exacerbated by the pandemic and increased competition from other streaming services. 

The subscriber beat comes shortly after another streaming juggernaut, Disney Plus, said last month that its fiscal Q4 customer additions would be in the single-digit millions, well below past quarters. But as analysts are changing their perceptions about Disney and its streaming service, at least one believes that Netflix, which earlier this year announced plans to enter into video game production and has ongoing forays into merchandising and film and TV production, could replace the Mouse House as the premier entertainment conglomerate. 

In a research note Wednesday (Oct. 20), Barclays Group media analyst Kannan Venkateshwar noted that about eight years ago, Netflix co-CEO and chief content officer Ted Sarandos’s goal was to “become HBO faster than HBO becomes us.” 

With a strong content slate expected to drive subscriber increases through Q1 2022, growth opportunities in Latin America, strong margins and the company’s unique approach to content, Sarandos may have been selling himself and the company short nearly a decade ago, according to the analyst.   

“Now HBO isn’t even in Netflix’s rear-view mirror,” Venkateshwar wrote. “Management framing of new opportunities seems to indicate that the benchmark now may be to surpass Disney’s flywheel.”

The Barclays analyst pointed to Netflix's entrance into gaming earlier this year and that other new business lines like merchandising — which he estimated is a $5 billion annual business for Disney — and the way the company sees its content as “continuous experiences” across video, gaming and live entertainment platforms, only adds to the momentum.

“This in turn could make Netflix’s business model and engagement almost impossible to replicate for most, except maybe some of the gaming platforms,” Venkateshwar wrote. 

The comparisons to Disney weren’t lost on Netflix management either. On Netflix’s quarterly video interview call, chairman and co-CEO Reed Hastings said while it could take several years, the plan is to integrate interactivity, gaming, and consumer products into its content.  

“Maybe imagine three years from now and some future Squid Game is launching, and it comes along with an incredible array of interactive or gaming options and it‘s all built into the service,” Hastings said. “And then, of course, you've got your off-Netflix aspects, the experiences that we're building out, consumer products, all of that coming together. 

“So a company like Disney is still ahead of us in some of those dimensions of putting that whole experience together, but boy, are we making progress,” Hastings continued. “And so exciting over the next three to five years, kind of closing that gap. And hope to pass them on that spectacular all-around experience.”

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

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

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

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

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

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

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

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

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

Some See Structural Issues

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

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

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

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

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

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

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

A Changing Content Game

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

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

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

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

The theory that the recent spike in fiber builds by telcos, coupled with lower prices for 5G and broadband products will pull cable companies into an ever-descending vortex of spending and price-cutting — the so-called Convergence Apocalypse theory — could be one of the reasons for the rapid decline of both telco and cable stocks in the past few months. But in a research note Thursday, MoffettNathanson principal and senior analyst Craig Moffett said that despite the threat of telco fiber overbuilds, cable still has a clear advantage.

Cable stocks have been hit hard as investors have been thrown into a tizzy after two top companies warned of slower than expected broadband subscriber growth in the third quarter. The first tremor was  caused by Comcast chief financial officer Mike Cavanagh on Sept. 14, when he told a virtual audience at the Bank of America Media, Communications & Entertainment conference that the cable operator was seeing a “little bit” of a slowdown in broadband subscriber adds in late August. Comcast stock fell more than 7% that day and the rest of the sector — Charter Communications, Altice USA and Cable One — saw their shares dip between 3% and 4%. 

The real impact came a few weeks later, when Altice USA CEO Dexter Goei said at the virtual Goldman Sachs Communacopia conference on Sept. 23 that broadband additions would  be negative in Q3 — to the tune of 15,000 to 20,000 in subscriber losses — blamed in part on what he said was a sluggish back-to-school period. 

Also Read: How Slow Will The Broadband Slowdown Be? 

Altice USA stock fell 13% to $22.06 per share on that day, and has had a steady decline ever since, closing at $17.62 each on Oct. 13. Other stocks like Charter Comcast and Cable One also felt the pain, as analysts began to rethink their models to account for what they saw as an accelerated slowdown in growth. At the same time, some analysts were rejiggering their outlooks on telco stocks, especially those that have made commitments to expand their fiber networks like AT&T, Verizon Communications and Frontier Communications. 

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

In a research note Thursday, Moffett wrote that both the cable and telecom sectors are getting crushed in the market. Cable distribution stocks are down 16.8% since Sept. 1 and telco stocks like AT&T, T-Mobile, Verizon, Frontier and Lumen Technologies have fallen a collective 10.5%, mainly due to the belief that as telcos build out more fiber and lower prices for broadband, cable subscriber additions will suffer. Conversely, as cable companies drop prices for wireless service, as Comcast did it in August and Charter did earlier this week, that will lead to a long-term slide in telco wireless customers. 

“In this dystopian converged future, there are no winners,” Moffett wrote. “There is only mutually assured destruction.”

But like any other good conspiracy theory, there is some truth to the thesis — telcos are expanding fiber builds and cable operators are dropping wireless prices — and some not so truthful assumptions. For example, Moffett believes that “Convergence Apocalypse” adherents are forgetting a few key components of the thesis, particularly timing and coverage. 

According to Moffett, telcos have targeted an incremental 5 million homes with fiber overbuilds this year, or about 4% of the country. Next year that effort will expand to an additional seven million homes, or 5% of the U.S. By Moffett’s estimates, the percentage of cable plant overbuilt by fiber will grow from 30% currently to about 55% in the next decade. 

“The delays in passing a home, subsequently making the broadband service available for sale, and then actually connecting it, make clear that the competitive impact of this year’s tranche of homes newly passed will only begin to be felt next year, and even then only modestly (we’ve heard arguments that Comcast’s warning of “a little bit of a slowdown” in their Q3 numbers is an early sign of the new fiber overbuilds, but that is not remotely plausible),” Moffett wrote. “And recall that new homes passed in 2020 were the lowest in a decade; it will be at least a few more years before the rolling average of homes passed over the trailing four years or so is meaningfully above average.”

Moffett believes the immediate impact will be on wireless, as cable’s ability to bundle mobile and broadband service at lower prices has the potential to take significant share from the telcos. 

Cable can offer broadband throughout its footprint and wireless on a national scale. Telcos are limited in terms of bundling on which parts of the country they offer fiber broadband. For Verizon, that’s about two-thirds of its footprint or 11% of the country and for AT&T, about one-third of its footprint or 13% of the U.S. T-Mobile, Moffett wrote, has no fiber at all. 

What has been holding  cable wireless back in the past has been pricing, but that changed six months ago when Comcast dropped its family wireless plans to $30 per line per month for four lines or more of unlimited service. Charter introduced its new pricing -- $29.99 per month per line for two or more lines of unlimited service -- and it could be a game changer for the company.

Also Read: Analyst Says It’s Time to Take Cable Wireless Seriously 

According to Moffett, both the Comcast and Charter wireless plans are cheaper than those of AT&T, Verizon or T-Mobile, although the traditional telcos offer steep handset discounts the cable companies do not. But that is likely to change.

And then there is the cost.

According to Moffett, telcos are spending up-front, at-risk incremental dollars for their fiber builds, so in order to get return on that investment, they will have to achieve high penetration rates and high average revenue per customer. And while payback periods are typically between six and 10 years, if they fail to hit those targets or costs rise, the periods extend or become unattainable. In contrast, cable wireless is a variable cost business — operators only pay their mobile virtual network operator (MVNO) contract when their customers are using the service. As long as they price the service above that variable cost, they make a profit. 

Moffett pointed to a report he did years ago that argued that cable companies had the advantage in the coming convergence climate, a tenet he says holds true today. 

Why Wired Nets Hold an Advantage

“The argument was simple: it costs vastly more to put wires under a wireless network than it does to put a wireless network on top of wires,” Moffett wrote. “He who has the best (most ubiquitous) wired network will win. That cable doesn’t even have to bother building out facilities in low-value places — they can let Verizon spend that money on their behalf — only makes their advantage all the more dramatic.”

The analyst added that as the cable industry sees the mobile product as the best way to protect its broadband offerings, they will respond to increasingly aggressive telco fiber buildouts with equally aggressive wireless pricing. That strategy already appears to be working. Moffett estimated that cable is capturing as much as half of all wireless net additions within their broadband customer base even at the old pricing. 

Moffett added that the pressure on wireless could force telcos to make a decision — cut their dividend or reduce capital spending. That’s what AT&T was faced with in 2019. It cut capital spending and halted its fiber build in favor of the dividend, then reversed course in 2021, slashing its dividend and recommitting to improving the network.

But in the end, success in the wireless and broadband business is going to come down to price.

“[O]perators will have to pay customers, in the form of a discount, for the disadvantage of forced choice,” Moffett wrote. “Cable’s cost structure and infrastructure advantage allows for them to do that. Verizon’s and AT&T’s do not.”

In a research report Monday, Sanford Bernstein media analyst Peter Supino wondered aloud what many investors and analysts have been quietly thinking: Is Altice USA’s plan to possibly ease back on its share-repurchase program aimed at conserving capital or just a way for the company to test how low the market will drive its shares?  Supino appears to favor, at least for now, the latter scenario. 

“We see a good and better than consensus probability that the company is testing the equity markets with its communications,” Supino wrote in a note to clients Monday, adding that Altice USA appears to be strongly capitalized and doesn’t have a debt maturity due until 2025, yet says it may de-lever instead of repurchasing its shares.

Adding to the confusion is that Altice USA has been an aggressive purchaser of its stock in past years at relatively high prices — it paid about $2.3 billion for 18% of its outstanding shares last year at an average price of about $36 each. 

“A company so focused on its own resilience and ability to arbitrage debt and equity markets should not be deterred by a subscriber net add shortfall,” Supino wrote. “Is this formerly risk-seeking executive team suddenly feeling afraid of failure? We doubt it very much.”

Altice USA shares have fallen hard and fast in the past two weeks, after CEO Dexter Goei told an investor conference that it would report negative broadband subscriber growth in the third quarter, and that it was halting its share repurchase program as it awaited the impact of its new growth strategy, essentially increasing capital spending to build out its network and boost gross subscriber additions. 

Analysts have been speculating for months that Altice USA may go private as its stock price declined. In early September, MoffettNathanson principal and senior analyst Craig Moffett wrote in a research report that Altice could sell off its Suddenlink operations in the Midwest and buy the remainder of its public float for less than $8 billion.  After Goei said at the Goldman Sachs Communacopia conference that it expected to lose between 15,000 and 20,000 broadband customers in the third quarter, other analysts concluded that going private could be an attractive option.  

Sparking a Share-Price Slump 

Altice USA stock fell 23% between Sept. 22 and 29, reaching a new 52-week low ($19 per share) on Sept, 28. The shares have begun to rebound in subsequent trading -- the stock closed at $20.02 each on Oct. 1, and were trading as high as $20.25 each in early trading Oct. 4, but are still 20% behind its close of $25.26 on Sept. 22. So far this year, Altice USA shares are down about 45%.     

Also Read: How Slow Will the Broadband Slowdown Be?

Supino added that the panic around the expected broadband subscriber losses may also be unfounded, because it appears that the bulk of the hit is occurring in Altice USA’s Optimum footprint, specifically in areas where it competes against Verizon Communications’ Fios. 

According to Supino, in the non-Fios Suddenlink footprint, which accounts for about 70% of its total homes passed, it is adding broadband subscribers.

Supino noted that Fios overlaps about 20% of Optimum’s territory and added about 200,000 broadband subscribers during the past four quarters, meaning that the competition accounts for about 40,000 customers lost inside the Optimum footprint. Adjusting for its Morris Broadband purchase in February, which added 35,000 customers, and consensus has fallen by about 65,000 customers for Altice USA. So a 25,000 subscriber shortfall to Q3 consensus estimates for the rest of the footprint — about 7 million homes passed for both Optimum and Suddenlink — doesn't seem that bad.

“Not that we disagree with the company’s intent to invest more in foregone pricing, sales/marketing, and capacity,” Supino wrote. “But if this ice cube is melting, it appears set to keep shareholders afloat, or cool, or whatever metaphor seems apt, for a long time.”

And that all of this is happening during one of the most uncertain periods for subscription-anything businesses — the pandemic — is all the more reason for investors to exercise patience as Altice USA evaluates its options, Supino wrote, adding that dismantling the company could be a viable option.   

Also Read: Did Altice USA Cut Costs Too Much? 

“Altice can unlock massive value in a breakup of the company,” Supino wrote, adding that Charter Communications, the remaining pure-play cable operator, trades at around 11 times cash flow while recent private cable transactions have had multiples ranging from 12 to 14 times for and infrastructure assets have commanded even higher values. 

Floating Sale Scenarios

Supino estimated that if Suddenlink were sold for about 12 times cash flow, or a 4.5-times-cash-flow premium — its current market value — Altice could hold Optimum for a net equity value of about 6 times cash flow. And since nearly all of Altice USA’s programming costs serve its Optimum customers, combining that asset with Comcast or Charter, which could drive those costs down even further, would make such a deal even more attractive. 

That, of course would all depend on Altice USA’s desire to do so, and so far the company has given no indication that that is its intended path. Goei has said publicly that it expects to continue to build its fiber network and hopes some initiatives that began last month like increasing the speed of its Optimum Advantage affordable broadband product, and rebranding its products under the Optimum name, will help boost subscriber rolls in Q4. 

But if the ultimate goal is either to go private at a premium — some analysts have suggested that $30 to $45  per share could be a good price — to sell the company outright, or even to keep investing in the business to grow, Supino’s call for investor patience doesn’t seem like such a bad idea. 

Altice USA shares fell another 10% Friday as investors continued to rush for the exits after CEO Dexter Goei said the company would have to increase spending as Q3 broadband additions enter negative territory, causing some to call into question the company’s past aggressive cost-cutting strategy. 

Altice USA shares traded as low as $19.74 each on Friday morning (down 10.5%, or $2.32 per share), after a 12.7% decline on Thursday when Goei said at the virtual Goldman Sachs Communacopia conference that the company would lose between 15,000 and 20,000 broadband customers in the third quarter. The stock closed at $20.59 each on Sept. 24, down 6.7%, or $1.47 per share.  

“If perchance Altice USA CEO Dexter Goei MEANT to destroy his own stock yesterday, he could hardly have been more thorough,” wrote Bernstein media analyst Peter Supino in a note to clients Friday. “After stating that Altice would miss consensus broadband net additions for the third time in four quarters, Goei described a different operating and financial trajectory with less broadband ARPU growth, more operating expenses, more capital expenditure, and less share repurchase (maybe, probably, for now). This may have been the most thoroughly negative outlook we have ever heard.”

While operators have repeatedly warned that the COVID-fueled growth rates of 2020 will slow down in 2021, Goei’s comments hurt all the more because not only did they highlight that broadband performance not only could slow down but could turn negative, and that capital spending, on the decline as the focus of the cable business has shifted toward broadband, could rise. 

Also Read: Analysts Search for Meaning in Altice USA Leadership Change 

Goei didn’t say how much he expected expenditures to increase at the Goldman conference. Altice USA also is in a different situation than other operators because it is in the middle of a five-year fiber upgrade plan started in 2017. Already the company expects to pass about 1.5 million homes in its footprint with fiber by the end of the year, mostly in areas where it competes with Verizon’s Fios service. Whether it will extend that buildout to its renaming 1.5 million homes in the future remains to be seen. 

“Ultimately, we do believe that fiber is the technology, the winning technology going forward as opposed to improvements in DOCSIS technology," Goei said at the Communacopia conference, but he added that it is getting harder to find technicians that know how to build fiber networks.    

In a research note, Barclays media analyst Kannan Venkateshwar wrote that he believes Altice USA’s problems go beyond infrastructure. 

“We believe costs may have been cut too deeply in areas such as customer support and billing, which may need to be built back to match the footprint expansion,” the analyst wrote. “This is why the turnaround in operations may take a while to materialize.”

As far as its stock, Venkateshwar noted that Goei also said the company will slow its share repurchase program, a key component of its valuation. He added that Altice USA’s track record for multiple guidance cuts in the past two years and its inability to meet its short-term goals have threatened its credibility, which has also pressured the stock.

“Overall, we believe Altice USA is back to where it was at the time of its IPO with respect to gaining investor confidence,” he wrote. “It took management a couple of years of execution to gain investor attention post IPO, and in many ways, the company appears to be back in that cycle. Consequently, we do not see any good reason to recommend the stock.” 

Altice USA burst on the U.S. cable scene about six years ago, when it’s former parent Altice NV purchased Suddenlink Communications and Cablevision Systems in quick succession. Led by then chairman Patrick Drahi, an admirer of US cable legend John Malone, Altice USA believed it could squeeze profit out of what many said was a rapidly maturing industry by slashing expenses and imposing European-style cost discipline to the bloated U.S. cable business. 

While most analysts doubted that ability, Altice made good on that promise by removing $900 million in costs from its former Cablevision and Suddenlink businesses, later going public in 2017. But now, with its stock price falling sharply — it reached a new 52-week low Friday — some analysts are wondering if the company may be better off increasing its leverage to buy its remaining publicly traded shares, effectively abandoning the public markets altogether. 

At the Communacopia conference, Goei said that beefing up leverage is an option, but at least for the next three quarters, the focus will be on righting the ship. 

“We’ve got decisions whether we want to releverage the balance sheet at some point in time if we’re not getting rewarded for what we’re doing from an investments perspective, that we really believe in the medium-term results,” Goei said. “But I don't think that's a decision for us to make today.

“I think we’re focused, given the management changes, on making sure that all arrows are pointing in the right direction towards reinvesting in our business or accelerating our business, and that's what the focus is going to be over the next three quarters,” he continued. “Thereafter we can have discussions around what to do with our balance sheet, depending on how the market sees us.”

Also Read: Model Behavior

Goei said in part the Q3 loss was due to lower than expected gross adds and an “underwhelming”  back-to-school period And while some analysts noted the inherent seasonality of Q2 and Q3 in the cable business — typically that’s when customers move to summer homes and college students go off to school -- others weren’t buying it. 

“Explanations proffered by operators thus far for lower gross adds don’t really make much sense to us, especially given that telecom companies are actually seeing trends improve,” Venkateshwar wrote. “While some have blamed weaker back-to-school origination, most colleges in the U.S. are operating at close to full capacity and therefore it is not clear where this slowdown is coming from.”

Venkateshwar warned that “there are more shoes to drop,” pointing to eviction moratoriums expiring, fading unemployment insurance increases and the potential fallout from non-pay churn.

“[T]here is an unusual lack of visibility across cable industry unit growth trends, and given the fact that almost the entire residential revenue topline growth now depends on broadband relationships and the high proportion of fixed costs on the broadband side, valuation in the space could have more downside to reflect this uncertainty,” Venkateshwar wrote. 

A few days after Comcast chief financial officer Mike Cavanagh’s admission that the No. 1 cable operator’s broadband growth trajectory was “a little bit” light in the latter part of August sent cable stocks into a tailspin, some analysts that cover the sector tried to inject some context into the  conversation, with most stressing that investors should remember that while broadband growth is expected to slow, it’s still growing.

Cavanagh, speaking at the virtual BofA Media, Communications & Entertainment conference Tuesday, said that Comcast had seen “a little bit of a slowdown” in broadband growth in late August, which sent the stock down 7.3% to $55.59 for the day. Comcast’s slide affected other cable distribution stocks that day. Charter Communications shares closed at $761.86, down about 4%, or $31.21 each on Sept. 14, while Altice USA shares fell 3% (82 cents) to $26.61 and Cable One dipped 4.1% ($81.84 each) to $1,908.16 per share. 

Stocks fared a little better in the next two days. Comcast closed at $57.28 on Sept. 16, gaining back about 3% of its losses, while Charter closed at $765.24, Altice USA at $25.94 and Cable One at $1,963.85 per share. 

It didn't help that Cavanagh’s Tuesday comments were a little confusing. He basically said at the conference that if Comcast were to add together its Q2 2021 and Q3 2021 broadband additions, they would be about 10% better than its combined Q2 2019 and Q3 2019 additions. That comes after the company had increased its full year guidance during its Q2 earnings call, saying that it expected broadband additions in the mid-teens percentages in 2021. 

Cavanagh added that Comcast still expects full year 2021 broadband additions to be ahead of 2019.

In a research note Sept. 15, Bernstein media analyst Peter Supino estimated that the Sept. 14 stock slide cost Comcast about $20.1 billion in equity value, adding that Q3 broadband performance will likely be about 100,000 subscribers behind analysts’ consensus estimates. 

Supino pointed out that 100,000 fewer subscriber additions is just a small fraction of Comcast’s total 31.4 million broadband subscribers.

So analysts, who had anticipated a second quarter growth slowdown that didn't come -- Charter Communications also exceeded Q2 expectations and at that time had to redo their estimates -- will have to to rethink them again.

Supino wrote that he discussed the market with several of the largest ISPs, adding those conversations had three common threads -- broadband churn generally remains low and stable, gross additions are below normal and there is no apparent reason for a material shift in Comcast's share of gross adds; and the pandemic has changed the seasonality characteristics of Q2 and Q3.

“With fewer students in residence at colleges, historical models may overestimate 2Q disconnects and 3Q reconnects,” Supino wrote. “With Comcast's geographic diversity and heavier exposure to college towns, we think college schedules are the bigger change factor. This explanation also aligns with the timing of the deviation from plan.”

Barclays Global Research media analyst Kannan Venkateshwar wrote in a Thursday research note that while COVID helped drive big gains in 2020 as the virus forced most Americans to work and learn from home and as cities and towns are beginning to open back up, the pandemic is making visibility for the sector difficult. 

“This volatility and lack of visibility over a relatively short time horizon appears to have been driven by a change in connect behavior due to Covid, with weaker back to school connect trends and less seasonal disconnect/connect 2Q/3Q activity,” Venkateshwar wrote. “However, there are other factors such as non-pay disconnect trends which have still not normalized, and with the lapsing of stepped-up unemployment benefits, disconnect moratoriums, and eviction moratoriums, there could be additional factors to consider in Q4.”

Venkateshwar estimated that Comcast would add about 1.37 million broadband customers in 2021, below the 1.8 million it added in 2020 and slightly ahead of the 1.32 million added in 2019. For Charter, which added 2.1 million broadband customers in 2020, the decline will be a little more dramatic -- Venkateshwar estimates it will add 1.37 million customers in 2021, ahead of the 1.28 million added in 2019. Altice USA is expected to add less broadband customers in 2021 (3,700) than in 2019 (7,200). The company added about 134,000 broadband customers in 2020.

The Barclays analyst also expects the downward growth trajectory to continue in 2022. He estimated that Comcast would add 1.1 million broadband customers in 2022 and Charter should add 1.2 million. Altice USA is expected to do a little better in 2022 with 6,500 broadband additions, but they will still be below 2019 adds of 7,200. 

Comcast's Xfinity Flex product, launched in 2019 to attract broadband-only customers to on-demand and SVOD video offerings, may have missed its biggest opportunity by being late to the streaming game, but could still more than double its subscriber base by 2025, according to Bernstein media analyst Peter Supino.

In a research note, Supino estimated that Flex, which is available to Comcast broadband-only customers at no extra cost and offers more than 10,000 free movies and shows, access to apps like Netflix, Disney Plus, Amazon Prime and Hulu, as well as on-demand pay-per view content, has about 1.9 million active monthly users. That base could have been four times that amount if it had launched earlier in the streaming cycle, Supino estimated, but the analyst still believes the service could grow to about 5.6 million monthly active users over the next four years.

“Had Comcast been early with Flex, we think it would presently serve 6-8 million homes rather than its current [less than] 2 million monthly active users,” Supino wrote, adding that while the service is competitive, it’s not superior to other services. “However, Flex should continue to gain market share, however quietly, by targeting cancelling Xfinity video subscribers who keep Xfinity Internet service, as well as the minority of new Internet subscribers who have neither an SMD nor a recent vintage smart TV.”  

Supino predicts that the shift toward streaming video will continue over the next few years, with streaming media devices (SMDs) from Roku, Amazon, Google and Apple, connected TVs and smart TVs dominating the distribution sector.  

In his note, Supino estimated that of an estimated 117 million internet households in 2025, 100 million will be connected via SMDs or connected TVs. The rest, he wrote, will access entertainment via tablets, laptops and smartphones.

Those 17 million households, coupled with an estimated 10% of existing broadband households (about 10 million homes) that may experiment with a new service  and 4 million non-broadband, non-TV households in the footprint gives Flex a potential pool of about 31 million customers to mine. Taking into consideration Comcast’s existing broadband market share of about 24.2% and assuming 50% usage/uptake rate, Flex could add about 3.7 million customers at the low-end, and 4.8 million additions on the high end.

“With the ~3.7M potential net adds, Comcast can expect to have ~5.6M users by 2025,” Supino wrote, adding that with an estimated ARPU of about $45, Flex could earn annual revenue of around $250 million by 2025.

Supino also believes that Flex can help Comcast’s Peacock streaming service as a promotional tool.

“The cost of promotion on Flex should be vastly lower than in third party environments in which Peacock competes with larger streaming players for sign-ups and engagement,” he wrote. “For example, we believe that Roku gained a 10% share of Peacock's advertising inventory in the companies' 2020 carriage negotiation.” 

Influential media analyst Craig Moffett took a deep dive into Altice USA Wednesday, issuing a 39-page report that says with broadband growth behind its peers and doubts that its rural markets can take up the slack, one way to unlock its value would be to take the company private. 

Altice USA stock has been battered over the past few months, dropping more than 20% since July 28 when it released Q2 results that showed zero broadband subscriber growth at a time when its larger peers are watching their high-speed data rolls rise. In his report, Moffett, principal and senior analyst at MoffettNathanson, noted that despite that sluggish performance, Altice USA’s sum-of-the-parts valuation indicates that Wall Street perhaps has the cable company all wrong. 

While Moffett admitted that Altice USA has a “broadband pricing problem,” that there is some doubt that efforts to boost broadband customers in its more rural Suddenlink footprint will offset subscriber declines in its more metropolitan Optimum footprint, even conservative valuations of its four major geographies indicate a much higher value for the company than Wall Street has assigned. 

“There’s a price for everything … and, to put it bluntly, this ain’t it,” Moffett wrote. “Altice’s current valuation is simply too cheap, and by a huge margin.”

The notion of going private at latest appeared to be attractive to some investors. Altice USA shares were up nearly 4% ($1.05 each) in early trading Sept. 8 to $28.19 per share. The stock was priced at $27.94 at 12:57 p.m. Wednesday, up 3% or 81 cents each.

Given the high valuations for recent private cable deals, including Altice’s own  purchase of Service Electric Cable of NJ  (10 times consensus cash flow) and its March  agreement to buy North Carolina broadband provider Morris Broadband (24 times), Moffett assigned an 11.7 times multiple to Suddenlink, a 10.1x  multiple to legacy Optimum systems and a 14.6 times multiple to its Lightpath division, pushing the combined company’s estimated trading multiple to 10.8 times forward looking cash flow. At that multiple, Moffett estimated that Altice USA stock should be priced at $51 per share, nearly double its Sept. 7 close of $27.25 each. 

Moffett added that to take Altice USA private, the company would have to pay a premium to its current stock price, but at $30, $35, $40 or even $45 per share, that option would appear to be a bargain.

Going private is nothing new for cable operators, and usually is driven by the perception that the public market is severely undervaluing assets. Mediacom Communications was the last major publicly traded cable operator to go private in 2011, and has had tremendous success as a private company. In 2004, Cox Communications went private in a deal valued at $8.5 billion, and hasn’t looked back since. 

The analyst added that in one scenario, Altice USA could sell off its Suddenlink division at an 11.7 times multiple (implying a selling price of $22.7 billion) and Lightpath for 14.6 times cash flow (implying a $1.57 billion sale price), while retaining the Optimum business by purchasing the remaining public float. Moffett estimated that at a $35 per share take out price and the sale of Suddenlink and Lightpath, Altice USA could take itself private — debt free — for about $7.9 billion. At $45 per share, the total cost would rise to $10.3 billion.

Moffett stressed that going private is not something he is suggesting that Altice USA will do, but is something they could do. And there are also several possible iterations of the going private option, he wrote.

“The takeaway here is that, even with a meaningful premium, the current valuation is so  cheap that it creates enormous optionality,” Moffett wrote, adding that Altice USA has been doing its own “modified take-private” for years.

Moffett noted that since separating from Altice N.V. in 2018, Altice USA has made about $7.7 billion in share repurchases, reducing its total shares outstanding by about 38%. Excluding the ownership stake held by Altice N.V. chairman Patrick Drahi, and Altice USA has reduced  its public float by more than half.   

“Indeed, it may be the case that Drahi would conclude that it is more attractive to simply stay the course and retire shares until the remaining float is so small that almost any premium paid to complete the job would be financially immaterial,” Moffett wrote. He estimated that Altice USA, if it maintains its leverage target of 4.5 times to 5 times cash flow, would buy back about $8.5 billion of its stock through 2025.

“Altice could go private, sell select assets — we highlighted Suddenlink just because we suspect it would be so easy to sell — and own what's left for... well, for nothing at all,” Moffett continued. 

Wireless subscriber growth has been off the charts over the past year, with second quarter increases nearing records as mobile service providers like AT&T, Verizon and T-Mobile blanket the market with free offerings. But as subscriber numbers have surged, MoffettNathanson principal and senior analyst Craig Moffett wrote in a research report that those new customers are a volatile bunch, meaning the industry may soon have to decide whether to keep heavy promotions going just to maintain the status quo, or risk losing them by turning off the promotional spigot.

According to Moffett, the wireless industry has added about 8 million new customers in the past 12 months, 5 times the annual population growth rate. They’ve been able to do that via heavy promotions that offer free handsets and reduced charges for customers that take on an extra line, whether they need it or not. That has resulted in a big increase in promotional cap ex. As an example, Moffett pointed to AT&T, which added about 920,000 prepaid and postpaid wireless customers in Q2, its fastest customer growth in years, as balance sheet liabilities tied to promotions rose sharply to $4 billion in Q2 2021 compared to $2.5 billion in the same period in 2020. That leads to the question of whether AT&T will be able to pull back its promotional efforts once that growth begins to slow. Moffett doubts that AT&T, or any other provider, will be able to do so. 

“Cheap lines and free phones inevitably promote low quality phone net additions,” Moffett wrote. “To keep those lines from churning, or to replace them when they do, the companies now dependent on promotions to bolster growth will need them even more to maintain it.”

AT&T isn’t the only wireless service provider aggressively pricing its service. T-Mobile, Verizon and even cable companies have all slashed prices and are offering potential customers free handsets and other perks to boost subscriber rolls. Dish Network, which is scheduled to launch its first wireless market -- Las Vegas -- in Q4, is also expected to be aggressive on price and free offerings to attract customers.

Also Read: Eureka, AT&T Is a Phone Company Again

While cable has been aggressive on pricing, it has basically stayed away from the heavy promotions offered by incumbents, Moffett wrote. In the past, cable companies like Comcast, Charter and Altice USA have accounted for about 30% of overall new wireless subscriber additions, rising slightly to 31.9% in Q2. That, Moffett wrote, is still impressive considering cable companies only market wireless to their broadband customers (about half of U.S. households), and don't match the rich promotions of the incumbents.  

And though Verizon, which began matching AT&T’s aggressive promotions in June, said it would pull back those offers in late July, the company has indicated that it will be as promotional as needed to maintain parity, according to Moffett. 

In Q2, AT&T added 751,000 postpaid wireless customers, more than twice analysts consensus estimates of a gain of 352,000 subscribers. Verizon added about 275,000 postpaid customers in the period, besting consensus of 185,000 additions and T-Mobile added 627,000 postpaid subscribers, besting consensus of 598,000 additions.

Over the past four quarters, T-Mobile, AT&T and Verizon have added 3.2 million, 2.9 million and 723,000 wireless subscribers respectively, while cable operators have seen their total additions rise about 55% to 6.5 million from 4.2 million in Q2 2020, according to Moffett. Overall, total phone subscriber additions peaked at 2.6% in Q2 2021.

According to Moffett, that overall phone subscriber growth will begin to slip in Q3 to 2.2%,  leveling off to 1.4% by 2025, still well ahead of 2021’s population growth of 0.34%. 

“The industry’s recent super-normal growth informs every industry metric. It has flattered every operator,” Moffett wrote. “...Strong subscriber growth has been a welcomed offset for what has otherwise been rather anemic growth for revenues and EBITDA, particularly for Verizon and AT&T,” Moffett wrote. “If, as we expect, industry subscriber growth normalizes, the backdrop won’t be nearly so flattering.”  

Whatever you think about Sinclair Broadcast Group's planned direct-to-consumer offering, slated for next year, one thing is certain: in the near term it really doesn’t mean that much. A more pressing deal, and one that may have even broader implications to the broadcast giant, could be answered in the next few weeks -- its carriage deals with No. 2 satellite TV service provider Dish Network.

Sinclair's retransmission consent agreement with Dish expires on Aug. 15, and many have expected that carriage of the RSNs will become a big part of that negotiation. Dish represents about 8 million subscribers for Sinclair, and the company has said in Securities and Exchange Commission filings that it is counting on the revenue from that Dish deal to keep its engines humming.

“The Dish deal has become overly important,” sports consultant Lee Berke, president and CEO of LHB Entertainment & Sports, said. “There is no question it is an issue, but now everybody is focused on it.”

The jury is still out as to just what Sinclair is willing to do to ensure that carriage. Some have speculated that the broadcaster could allow Dish to place the RSNs on tiers -- long a bone of contention between programmers and distributors -- and/or offer the satellite TV giant an equity piece of its DTC offering. So far, neither side is saying anything officially about the talks. 

Also Read: Sinclair’s Streaming RSNs and Warner’s CNN Plus May Be Pay TV’s Biggest Disruptors

Dish has pushed for tiering sports networks before -- it was one of its reasons for dropping the Sinclair RSNs in 2019.

In an interview in 2019, Dish executive VP Andy LeCuyer didn’t say the “T-word,” but it was pretty clear what the company wanted. 

“We think the RSN content should be sort of like a ticket to the ballpark. Fans who love and want that content should be the ones who pay for it, not forcing the vast majority of other subscribers to subsidize it, ” LeCuyer said in that 2019 interview. 

Dish declined to comment on the current negotiations with Sinclair, but perhaps the company will have more to say when it releases its Q2 results on Aug. 9.

Now, with the negotiating ball clearly in their court and the pressure to make a deal squarely on Sinclair, it could be Dish’s best chance ever to make that happen.  

And though Dish chairman Charlie Ergen has been critical of Sinclair’s sports networks in the past, Dish could be open to a deal, especially after it ended a three-year blackout of premium channel HBO on July 29. Dish let HBO go dark on Oct. 31, 2018 claiming high prices and retaliation by HBO parent AT&T over Dish’s objection to its merger with Time Warner Inc. When the dispute was settled, Dish subscribers were allowed to purchase HBO’s streaming service HBO Max at a 20% discount ($12 per month for one year) and get sister premium channel Cinemax, for $10 per month. 

Sinclair apparently baked in the Dish deal in a proposal to its bondholders to restructure about $8 billion in debt at its Diamond Sports Group unit, the vehicle that houses its RSNs. In an 8-K filed with the Securities and Exchange Commission in June, Diamond Sports estimated its revenue would be between $3.07 billion and $3.249 billion in 2021, and analysts have estimated that about $400 million of that would come from Dish. 

According to the 8-K, Sinclair said the talks with bondholders were ongoing, but the companies were “unable to reach a definitive agreement at the time.”  Some analysts took that to mean bondholders wanted to see how the Dish talks panned out before committing to a deal, which according to some reports included a proposal to get bondholders to invest an additional $300 million to $500 million in Diamond Sports.

On its conference call to discuss Q2 results on Aug, 4, Sinclair CEO Chris Ripley chafed when an analyst characterized the proposed restructuring as “unsuccessful,” adding that he saw it as more of a move “towards a deal that is amenable to both sides.”  

He added that Sinclair didn’t want to do just any agreement, but wants the right agreement. Just what that is, he didn’t say.   

To be fair, Ripley is really in a difficult place. He can’t say anything about ongoing talks with bondholders or distributors because of non-disclosure agreements and as a result, investors and onlookers assume the worst. Only time will tell the true story, but unfortunately time is running out. 

Sinclair stock has been battered over the past two years, rising as much as 46% to $61.81 per share in the days after it said in May 2019 that it would buy the Disney RSNs. The stock has been on a downward slope practically ever since, closing at $31 each on Aug. 6, down about 1% for the year and priced at about half what it was in May 2019. 

Ripley was frustrated about the stock performance, devoting a good portion of his opening statements on the conference call to what he said was a “significantly undervalued” stock.

During the presentation he went through a sum-of-the-parts valuation of Sinclair, pointing out its warrants for Bally stock -- part of its deal to sell branding rights to the RSNs in 2020 -- that are worth about $600 million at current prices and would cost Sinclair about $60 million to execute; a $1.2 billion tax shelter benefit that also came out of the RSN buy; the $1.7 billion  value of its licensed broadcast spectrum; and finally, $200 million in non core businesses and equity stakes in companies like antenna maker Dielectric and 5G solutions provider Saankhya Labs. And that’s not even including the value of its core TV broadcast and cable networks businesses. 

“When you put even a conservative valuation on our 185 TV stations, Tennis Channel, stadium, news on STIRR and RSNs and account for the net debt of Sinclair, you will get a per share value that is more than double the current level of where our stock is trading today,” Ripley said.

But there are a lot of factors to considering share prices, and right now Sinclair is in the middle of a transition. In a research note, Wells Fargo Securities media analyst Steven Cahall noted that Sinclair's investor base has shifted from broadcast-centric to a broadcast/media/gaming hybrid, which has caused some confusion. . 

“Investors are recalibrating, and we think, not sure quite what to do with the new Sinclair,” Cahall said in a research note. “Things have not gone well for the RSNs, leaving no equity value, consuming management resources (e.g., potential restructuring, loss of sports during coronavirus) and non-stop estimate revision risk. We also think the RSNs can drag TV retrans as SBGI supports the whole portfolio in future deals.”

So, in other words, all eyes are on the Dish deal.    

At the moment, Dish appears to be in the best negotiating position. The old threat that keeping the channels off will lead to subscriber losses means little because any such declines have already happened. Dish has little to lose by not carrying the RSNs, and therefore could force some concessions in negotiations that Sinclair might otherwise reject. Some believe that Dish could be allowed to put the RSNs on a separate tier as well as receive a small ownership interest in the DTC offering.

Allowing RSNs on a tier could affect future negotiations with other distributors, but some observers believe that Dish is enough of an outlier that Sinclair will be able to keep its other deals intact. 

“I don’t think you can lump all of the RSNs together and say this is a bellwether,” said one sports exec who asked not to be named, adding that while tiering isn’t optimal, he’s more worried about allowing distributors to cherry pick which RSNs they want to carry. But he also conceded that shifting to a tier-model would shave linear carriage at least in half. 

The rest of the RSN business is somewhat insulated in its ownership. Comcast and AT&T own the NBC Sports RSNs and Root Sports RSNs respectively, so if they were going to get placed on a tier, many believe it would have happened already. Others like MSG, SNY and YES Network are in major markets where tiering may not have that huge an impact.   

“Sinclair is going to do whatever it has to do to get this deal done,” the sports exec said. “They’re going to be as creative as they can get. If they have to shave off certain RSNs, if they’ve got to tier, they're going to do whatever they can.”

Ever since the second streaming video player came on the scene -- that means anyone after Netflix -- folks in the press and pundit game have been quick to characterize every move, every deal and every programming strategy in the online video segment as another salvo in the so-called "Streaming Wars."

That particular metaphor has been troublesome for a number of reasons. And at the Media+Tech Collective (formerly the Rocky Mountain Cable Association) virtual fireside chat July 22, MyBundle.TV founder and CEO Jason Cohen said what I have been thinking about for a long time. Cable operators who have been de-emphasizing video for years in favor of higher margin broadband service don’t want fewer streaming players, they want as many as they can get.

"I think the war metaphor is the wrong one," Cohen said on the virtual fireside chat.
"It's a revolution against the set-top box. Obviously, 'Cut the Cord,' took off, but it really should be 'Ditch the Box.'"

It’s been clear for awhile now that operators are moving toward a time when they will eventually abandon, or severely curtail, their video offerings in favor of aggregating programming apps and packaging them in ways that simplify the selection process for consumers. For their trouble, cable operators would likely take a cut from the fees the programmers charge consumers.

It's a concept that has been batted around the industry for awhile, and it doesn't really take a genius to figure out if the traditional video business is dying at the hands of the streamers, the next logical step is aggregating the streamers. 

Already there are companies doing just that. Cohen launched MyBundle.TV in 2019, offering to find the right streaming services for subscribers based on their viewing habits and desires. MyBundle.TV partners with broadband providers -- WideOpenWest and CenturyLink are just two -- as well as some streaming services to help consumers navigate the growing number of streaming services.

And there are others, like Redbox -- which is planning to go public soon -- Amazon -- through its Amazon Channels -- Roku, Apple TV, Struum, TiVo (with TV Match Scores), all getting into the aggregation game. 

There are currently about 75 million pay TV customers in the U.S., a number that has been steadily shrinking over the past 10 years. Cable operators, with about 47 million subscribers, have shed about 4 million customers between 2018 and 2020. At that pace, the industry would reach zero by 2045.

Bernstein media analyst Peter Supino has predicted that the satellite business would dwindle to nothing in five years. Others have said that pay TV will never likely reach zero, but it could get close as consumer viewing habits change and streaming just becomes more convenient. But whoever you believe, it’s pretty evident that the traditional video business is not a fun place to be nowadays. 

Cable operators have been de-emphasizing video for several years -- every major operator has more broadband customers than video customers. Comcast, which held on to the video mantle the longest, had 31 million broadband customers and 19.4 million video customers as of March 31. Charter Communications had 29.2 million broadband customers and 16.1 million video customers as of March 31. Even smaller size operators like Altice USA (4.2 million broadband and 3.1 million video subscribers), have been focusing on high-value video customers -- those that take the highest programming tiers -- as they let less profitable ones cut the cord.  In cable, just as in streaming, broadband is king.

And the kingdom is growing. More and more streaming services are signing on every day, and Cohen expects their rolls to increase, in part because of aggregators like his that make it easier to navigate the crowded landscape.   

“The world doesn't have to be just Netflix, Amazon and Hulu,” Cohen said. “If aggregators like us didn’t exist -- it’s not just us, there are others -- it would be.

“We very much think we’re expanding the streaming markets,” Cohen continued. “So we think of the streaming market as not a war, it’s going the other way. There are going to be more and more players that are going to be able to build a business.”

Cohen named some up and coming streamers like FrndlyTV, which offers 19 channels like the Hallmark Channel, CuriosityStream, Weather Channel, UPTV and LocalNow, for $5.99 per month, but said Sinclair Broadcast Group’s plans to launch a direct-to-consumer version of its Bally Sports RSNs in 2022, could be “really interesting.” 

Also Read: Sinclair’s Streaming RSNS and Warner’s CNN Plus May Be Pay TV’s Biggest Disruptors 

Sinclair has said it would launch the direct-to-consumer offering in 2022, and reports have speculated that they would charge about $23 per month for the service. Sinclair has disputed that figure.  And while the venture into standalone streaming RSNs has had its share of controversy, no one has denied that some type of streaming offering is necessary. 

“They need to have a direct-to-consumer offering, and consumers want it,” Cohen said, adding that MyBundle.TV customers have been asking for more sports. He pointed to a recent survey of MyBundle.TV users who had selected an RSN as a channel they would be interested in, 71% said they would continue to pay for a regional sports network even if their team was out of playoff contention early in the season. 

The MyBundle.TV survey involved 1,712 respondents, all people who had used the service and indicated that they needed their local RSN. Cohen said 29.5% of the respondents had cable/satellite TV, 51.5% had a vMVPD, 6% stream but have no Live TV and 10% stream but use an antenna or Locast for local channels. The respondents were asked if their team was performing poorly during the season and they could cancel at any time, would they?

According to Cohen, 71% said, "No way - I'll watch at home with a paper bag on my head until the last game;" 13% said “Yes - but after 3/4 of the season”; 12% said “Yes- but after half the season;” and 4% said “Yes - but after 1/4 season.”

Although the respondents all appeared to be heavy sports fans and were already interested in paying for RSNs, it is contrary to conventional wisdom that predicts many RSN customers would drop the channel if their team was out of contention at mid season. 

The respondents weren’t asked if they would keep the service for the full year, just until the end of the season, which in baseball lasts about five months. Still, that could be encouraging news for Sinclair and other RSN owners considering the leap into direct-to-consumer offerings. 

Cohen said MyBundle.TV also asked those respondents that have already cut the cord how much they would pay for a direct-to-consumer RSN service in season, 16.7% said they would pay $31 or more, 8% said $26-$30, and 8% said $21-$25. Rounding out the survey, 11% said they would never pay for it, 25% said $1-$10, 17% $11-$15, and 14% said $16-$20.

For respondents that had cable or satellite TV, MyBundle.TV asked if they were to drop their cable or satellite service and could subscribe to a service that just offered their local sports teams, how much would they pay for it. Cohen said 23% said they would pay $21 or more per month for that sports service, while 6% said they would pay $31 per month or more. 

“There is definitely a market for people who will pay $20 per month or more,” Cohen said in an interview. “The question is, is the market big enough to offset if it disappeared from cable tomorrow.” 

Cohen said later that he was most impressed with the 71% figure because it shows that people are interested 

“That’s a big deal. Because if you can get someone to pay $20 per month, are they going to pay for one-and-a-half months or five months? I would venture that that’s going to be the difference maker on the business model,” Cohen said in an interview.

While the sample did only include people who wanted their local RSN -- which he said is also the target market for these DTC services -- it also presents options for offering different packages of games at different prices. 

“Sports fans are sports fans,” Cohen said. “If I was building the product, there is probably a world where for $20 a month you get access to every game and for $10 a month you get access to half the games. Maybe those fans who said the most they would pay is $10 a month are people who aren’t watching 162 baseball games and they'd love the opportunity to catch a game a week. I think there is definitely going to be an opportunity for there to be classic price discrimination to get that net even wider for Sinclair.”

While on the surface, Dish Network's new mobile virtual network operator (MVNO) deal with AT&T looks like many other similar agreements of the past few years, at least one analyst thinks the transaction is a game changer for the satellite TV company.

In a note to clients Monday, MoffettNathanson principal and senior analyst Craig Moffett noted that the AT&T deal will give Dish the ability to become a Mobile Network Operator/MVNO "indefinitely," potentially letting it off the hook for fulfilling its federally mandated requirements to provide wireless service to the rest of the country after 2023.

"The issue here is duration," Moffett wrote.

Dish has been laying the groundwork for its wireless service for years using its own spectrum and some from other sources -- in 2019 it agreed to buy wireless spectrum and the Boost Mobile prepaid business from T-Mobile for $5 billion -- for what it claims will be a state-of-the-art 5G service based on ORAN technology. The company said its first market will go live in Las Vegas in the third quarter. 

Although it already has an MVNO agreement with T-Mobile, part of the larger deal where Dish acquired about $3.6 billion in spectrum licenses and the Boost Mobile prepaid wireless business for $1.4 billion from the carrier, that resale agreement was set to expire in 2027. In addition, T-Mobile plans to shutter its 3G CDMA wireless business on Jan. 1, a move that Dish, which relies on that network for Boost Mobile, has said would be a financial hardship. 

According to the latest agreement, AT&T will make its network available to Dish for 10 years, with a two-year transition period, pushing the expiration date to 2033. In a research note, MoffettNathanson media analyst Craig Moffett wrote that is a key part of the deal, because until now it was becoming increasingly doubtful that Dish would be able to meet federally imposed deadlines on its wireless buildout. 

Dish is under the gun to make its network available to about 70% of the country by the end of 2025, but Moffett noted that was never really a concern.

“After all, the first 70% of the population lives on just 2.9% or so of the U.S. by landmass,” Moffett noted. “ It has always been what would come after that that mattered.”

Moffett wrote that table stakes for wireless coverage in the U.S. is about 95% of the country.

“Without an MVNO agreement to fall back on, Dish would have to build that out themselves by 2027, when the T-Mobile deal was slated to expire… and the next 25% of the country occupies nearly ten times the landmass of the first 70%,” Moffett wrote.

Moffett added that even if reaching 70% of the population with its network won’t be that hard, it depends on the definition of coverage -- does it  mean merely enough to meet minimum Federal Communications Commission requirements, or service that is sufficient enough to satisfy customers? 

“The latter definition of coverage is vastly more demanding than the first; it means fill-in facilities in every airport, stadium, convention center, and congested downtown area, and every dead spot along every highway,” Moffett wrote. “Under the T-Mobile agreement, Dish had until 2025 to satisfy the FCC, but only two more years afterwards to satisfy the much more exacting demands of customers. That was always the real challenge.”

While AT&T will reportedly receive $5 billion for its trouble, Moffett believes it has sacrificed its future competitive position for short-term wholesale revenue. Because the Dish deal is similar to the MVNO agreements Comcast and Charter have struck with Verizon, Dish will  be able to build out its own facilities in dense areas, which have a low cost and high return, and leave the low density areas, with higher costs and lower returns, to AT&T

“We can’t stress enough what a windfall this is for Dish.  And what a terrible decision it is for AT&T,” Moffett wrote, likening the deal to Orange’s 2016 decision to strike an attractive MVNO deal with MasMovil in Spain. “Today, five years later, MasMovil has taken double-digit market share, and Orange is shrinking by more than 10% annually.”

Moffett added that the AT&T deal doesn’t solve Dish’s CDMA problem because AT&T has never had a CDMA network. But that just proves the real impetus for the deal was in its duration. 

Not every analyst shares Moffett’s view.

In a research note Monday, JP Morgan media analyst Phil Cusick said that the general consensus among telecom execs is that they want to be the provider of choice when an MVNO moves into the market. Whether AT&T struck a deal with Dish or not, it wouldn’t change that situation. 

“...the negative to the industry came when Dish bought spectrum over the last 10 years, or when it agreed to replace Sprint, not today,” Cusick wrote.

Cusick, who downgraded Dish to “underweight” in June,  also wasn’t convinced the deal was that big a windfall for Dish.

“We don’t see this as a huge change for Dish’s prospects, but rather that getting a rural roaming deal and longer-term MVNO are each pieces of the puzzle that Dish needed in building a network over time,” Cusick wrote. “It is interesting that Dish shares were off as much as Verizon shares Monday, likely indicating that there was still some hope of Dish selling assets rather than building a network.” 

Dish shares were down about 1% (41 cents) on July 19 to $39.04 each. The stock closed at $40.87, up 4.7% on July 20.

Verizon shares were down 1.1% (62 cents) on July 19 to $55.84 per share. The stock closed at $55.62, down 0.4% (22 cents) on July 20.  

Some have speculated that the deal really is a precursor for a future combination with AT&T’s DirecTV satellite TV business. Moffett said that is probably unlikely, but in the end won’t matter that much, adding that addressing the 2027 expiration was more important than ensuring the future of the declining satellite business. 

Barclays Research analyst Kannan Venkateshwar wrote that there could be several reasons behind doing the deal for AT&T -- one he said, was to limit Dish’s capacity to invest in building out its network by spending big on the MVNO. 

“Strategically, the move is also interesting given that the expectation among some investors was likely the opposite i.e. that Dish would be a scaled MVNO service provider to others rather than being an MVNO user itself for the next decade,” Venkateshwar wrote. For AT&T, he said the additional money from the agreement will help provide another cash flow source to get to its goal of $20 billion in free cash flow after its WarnerMedia deal. 

But Moffett again pointed out that in giving Dish the breathing room it needs to meet its federal requirements and a network deal that virtually allows it to pick and choose where it can spend the most for the largest return, AT&T has basically breathed new life, wittingly or unwittingly, into Dish. 

“Again, the big takeaway here is that AT&T has all but assured Dish’s survival, and as a much more disruptive and dangerous competitor than would otherwise have been the case,” Moffett wrote. “AT&T has been signaling recently that they want more wholesale business when they can get it, so perhaps we shouldn’t be surprised. They clearly decided that the short term gain of additional wholesale revenue was worth that risk. But they’d be well advised to be careful what they wish for. We see their decision to extend this deal to Dish as a catastrophically bad one. Dish and its investors should thank their lucky stars for AT&T’s strategic blunder here.”