As earnings season for content providers rapidly approaches — most are scheduled to release their quarterly financial results in the first two weeks of November — investors are increasingly wondering if programmers, who have for years exerted their dominance over distributors, are beginning to lose their grip.

Already, two high-profile carriage renewals are in the books — The Walt Disney Co.’s renewal with Altice USA in the New York market and Viacom’s carriage pact with the second largest cable operator in the country, Charter Communications.

Related: Viacom’s Schireson Says Charter Deal Could Be Blueprint

While most analysts had seen those two programmers as prime examples of how quickly the fortunes of once-dominant content providers could change — each were facing shrinking subscriber bases due to cord-cutting and skinny bundles — both were able to hammer out deals without going dark. That seemed especially surprising for Viacom, which already had seen its channels go dark on systems owned by Cable One and Suddenlink (since renewed). Viacom has struggled with ratings declines and was said to be ripe for getting dropped by Charter.

But instead of testing those waters, Charter, according to reports, agreed to carry eight Viacom channels on its most popular tiers, relegating the rest to pricier packages. And perhaps more importantly, Charter extracted a reduction in affiliate-fee pricing some analysts estimated could be between 10% and 15%. That could have been sweetener enough to discourage Charter from experimenting with dropping the channels.

Related: The Pendulum Swings Back

With the Charter deal, Viacom has basically completed the latest round of renewals — MoffettNathanson media analyst Michael Nathanson estimated that Verizon Communications, the National Cable Television Cooperative and one smaller operator are likely next on the renewal calendar for the programmer over the coming three years.

Distributors Gaining Ground
Pivotal Research Group senior research analyst- advertising Brian Wieser said that while it depends on the network, programmers are increasingly getting pushback on carriage of their least popular channels. And unlike in past years, the distributors appear to be gaining ground.

“The writing is on the wall,” Wieser said. “ ‘VH1 Classics for Women, Jazz Version’ as a digital network does not have a future.”

Wieser was joking, but the gist of what he said rings true. The current cast of cable networks was created during a period when distributors wanted more inventory to fill up their 150-plus channel lineups. Also at that time, consumers saw real value in larger channel offerings and were willing to pay for it. Today, less is more as consumers are seeking out smaller bundles of programming.

“I think the future is worse now than what everyone thought it would be a few years ago,” Wieser said.

That shift will likely translate into lower affiliate fee increases and carriage for fewer networks, he said.

“The Discoverys and Viacoms of the world will end up negotiating lower price increases and end up with lower carriage,” Wieser said. He added that fewer channels also means lower costs for the programmer, so they should “end up in the same place.”

Wieser is not alone. Credit Suisse media analyst Omar Sheikh estimated annual subscriber declines for major domestic cable networks of about 2%, while affiliate fee growth would fall from 9% in 2018 to 7% in 2019 and 5% by 2020.

The affiliate-fee erosion comes as the years-long ad market decline continues. In a note earlier this month, Nathanson estimated national TV ad growth will be -10%, with cable down 4% and broadcast down 19% (+1% ex-Olympics).

Wieser predicted a 2% decline in national television advertising, while Sheikh estimated that ad growth would shrink from 4.3% in 2018 to between 2.4% and 2.5% by 2019-20.

Some analysts have predicted that distributors could use this newfound clout to finally break the bundle, or at least cease carrying networks they no longer feel are worth the trouble, but Wieser doesn’t see that happening on a wide-scale basis yet. He pointed to the recent Charter-Viacom and Disney-Altice deals, which allowed the distributors some carriage flexibility.

No Wholesale Exodus
Sources familiar with the Altice-Disney deal have confirmed reports that Altice won’t carry ESPN Classic as part of its Disney deal, in return for raising the minimum carriage bar for its other networks.

Other analysts such as Sanford Bernstein’s Todd Juenger have worked out the math to justify dropping channels. But even Juenger, who has believed the content business has been in structural decline for years, doesn’t predict a wholesale exodus from ESPN, whether the math works or not.

The economics look better as the fees increase. In a recent note Juenger estimated that dropping ESPN and its $11.44 per month per customer in affiliate fees would make sense even if Charter lost 42.5% of its customers. But he didn’t think any distributor was likely to drop bigger content owners.

“The problem, of course, is no [multichannel video programming distributor] wants to risk (yet) touching Disney (or Fox, Turner, CBS),” Juenger wrote. “Rightly or wrongly, the fear is that too many subscribers care too passionately about certain networks in those families.”

INDIANAPOLIS — With the rest of the cable industry focused on the possibility of Scripps Networks combining with either Discovery Communications or Viacom, Sanford Bernstein media analyst Todd Juenger warned that one of the catalysts for a deal — preserving double-digit affiliate fee increases — won’t last too much longer for any cable programmer.

Update: Discovery to Buy Scripps Networks for $14.6 billion

Gross margins on video programming for the average cable operator are about $21 per subscriber per month, after affiliate fees and customer expenses, Juenger noted on a panel at The Independent Show here. Juenger estimated that by 2018, that gross margin would shrink to $15 per month per subscriber.

“If nothing else changes, how long is it until that $20 per subscriber per month goes to zero?” Juenger asked. “The answer is 2023.” In order to maintain profit margins, either affiliate-fee growth must slow down or networks have to be dropped, he added.

Juenger had an answer for that, too. Of the 10 network groups that control the bulk of programming and affiliate fees, he said distributors have several choices.

Weighing Net Losses
The greatest financial impact, he said, would come from dropping The Walt Disney Co.’s networks — including broadcaster ABC and ESPN, pay TV’s priciest network — as Disney charges the highest affiliate fees at $11.49 per sub, per month. But it could also prompt the greatest number of subscribers to switch providers: 43%, by Juenger’s estimate.

Dropping Discovery Communications, Scripps Networks, AMC Networks and CBS would have the smallest subscriber impact — under 10% for each network group — but also the least financial impact. All four networks combined have total fees of less than $4 per subscriber per month.

That leaves Viacom, which has affiliate fees of about $3.50 per subscriber per month and had already been dropped by Cable One, Suddenlink Communications (later restored after its purchase by Altice USA) and several smaller cable operators. Those distributors have lost video customers at a higher than average rate, at least partly attributable to shedding the Viacom channels. Cable One has shed about 20% of its video base in the past two years, compared to 2% to 3% for the rest of the industry. But Cable One was willing to sacrifice what it believed to be less profitable customers and has focused on broadband for years.

For Juenger, it’s a simple case of economics. Ultimately, it comes down to how many subscribers a distributor is willing to lose. According to Juenger’s calculations, dropping Viacom would result in losing about 15% of a distributor’s video base.

“If you can stand to lose 15% of your subscribers, you should drop Viacom,” Juenger said, adding that he wasn’t singling out the company because of some personal vendetta. “If you drop Disney, you’ll have a tougher time maintaining subscribers.

“Everybody has something to break,” he added. “This is why the networks cannot continue to harvest these big price increases. It’s no longer financially viable to carry it.”

But it is just that fear of eroding affiliate-fee growth that is pushing some networks together. Scripps Networks, which has about eight channels including HGTV, Food Network, Travel Channel and CMT, is in merger talks with Discovery Communications. That’s after Viacom dropped out of the running for Scripps, after reportedly readying an offer of $10.6 billion in cash.

The Discovery bid is expected to top $90 per share for Scripps, a 34% premium to its close on July 18, when merger talk first surfaced.

Read More: Complete Coverage of the Proposed Discovery-Scripps Merger

Fighting Scale With Scale
Merger proponents say smaller players need scale economics and added carriage for negotiating leverage. That’s because distributors have also been very active on the M&A front to give them more scale and leverage against programmers.

With big deals like Charter Communications-Time Warner Cable completed, and AT&T’s $108.7 billion purchase of Time Warner Inc. winding through the federal approval process, several other smaller deals have popped up in the past few months. TPG Capital has been particularly aggressive in the space — it snapped up RCN and Grande Communications last year for $2.25 billion, and in May agreed to purchase Wave Broadband for $2.36 billion. Cogeco Cable, the Canadian parent of Atlantic Broadband, agreed to buy Harron Communications’ MetroCast operations for $1.4 billion.

For smaller operators, the main catalyst for deals is to expand fiber and broadband networks. For many, video is becoming a second-class offering — small operators CableOne and Suddenlink Communications were the first to drop a major programmer (Viacom) in 2014.

According to a panel session at last week’s Independent Show, more deals are expected to come.

“Markets are strong across the board. We’re seeing that in the checks the private equity guys are writing,” said CoBank senior vice president Ted Koerner at a TIS session moderated by DH Capital co-founder and chairman Joe Duggan.

As the weather gets hotter, pay TV customers could be shedding their television subscriptions — along with their long pants and sweaters — in greater numbers, according to Sanford Bernstein media analyst Todd Juenger.

Juenger took a deep dive into the trend of pay TV customer “seasonality,” the annual summer decline in monthly video subscriptions as customers purportedly moved to summer residences or to more permanent homes. Summer is traditionally the most popular time of the year to move, primarily because it allows parents to settle in before the school year starts.

On a conference call, of which the analyst provided a transcript to clients, Juenger conceded that the seasonality phenomenon is nothing new. But what he found in his research is that summer pay TV disconnects could be a trigger for cord-cutting because, unlike in past years, the customers who cancel service in the summer don’t seem to be coming back. He pointed to last summer, when pay TV subscriptions rose substantially in the second and third quarters.

TRIGGERED LOWER GUIDANCE

Juenger said year-over-year pay TV subscriptions declined by 0.6% in the second quarter of 2015 (compared to a gain of about 1% in Q2 2014) and by 1.4% in the third quarter (compared to a 0.9% gain in Q3 2014). That sharp decline, he said, helped to trigger decisions by The Walt Disney Co. and Time Warner Inc. to reduce subscriber and financial guidance, which, in turn, fueled even more cord-cutting fears.

Cord-cutting wasn’t as bad in Q4 2015 and in the first quarter of this year, when video subscriptions were down about 0.9% and 0.4%, respectively. But Juenger said he sees the signs.

“We have a theory that summertime is now always going to be the worst time for cord-cutting, because that’s when people move and that’s their chance to cut the cord,” he said. “We have serious concerns that this summer is going to look like last summer.”

Not everyone agrees.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said seasonal churn is commonplace in the pay TV business, and he sees no correlation with cord-cutting.

“I doubt it is that material of a driver,” Wlodarczak said.

Telsey Advisory Group media analyst Tom Eagan pointed to recent gains in the cable-subscriber universe — both Charter Communications and Time Warner Cable reported full-year video subscriber gains, while Comcast has consistently improved losses and reported a gain of 53,000 video customers in the first quarter, its best Q1 showing in nine years.

“If you look at the numbers, they continue to be pretty good,” Eagan said, adding that the summer is usually when churn is highest, and that’s likely to remain so. “Video is looking better than it has ever looked.”

The key to any increase in cord-cutting would be how attractive the alternatives are, Eagan said. While there have been some changes in products like Sling TV, which is testing a multistream service that includes regional sports networks, for the most part over-the-top offerings don’t offer the same value as pay TV.

“They [OTT] are nominally more attractive, not materially more attractive,” Eagan said.

Juenger argues that distributors aren’t the only ones affected by cord-cutters. With a declining subscriber base, network affiliate fees also fall. Couple that with an expected dip in advertising revenue growth and it could indeed be a long, hot summer for programmers.

Most networks have guided to slower growth in the second half of the year, Juenger noted, so that is not a surprise.

“The issue is how fast it will slow down,” Juenger said, adding that the Summer Olympics will be good for NBC’s ad sales but bad for every other network. He added that the loss of fantasy-football ad money — several states are deciding whether daily fantasy sports sites like FanDuel and DraftKings are gambling operations, or games of skill, which has caused a pullback in advertising on TV — and what he thinks will be the replacement of higher-priced scatter ad revenue with lower-priced upfront inventory all “conspires for an advertising slowdown.”

ACCOUNT REVIEWS CITED

Eagan said his main concern about the ad market is how much it will be driven by the slowdown of last year. In 2015, he said, several advertisers put their accounts up for review, which had an effect on total ad revenue.

“There was a slowdown in spending because of all the account reviews,” Eagan said. “To a degree, the significantly higher agency changes are catching up with us now.”

As a result, Eagan predicted that ad revenue could rise by the mid-to-high single digits for most programmers in 2016, compared to 1% to 8% declines in the prior year.

But that growth will depend on the company, Eagan said. In a research note last week, he predicted that ad sales would dip 2.5% for CBS in the second quarter, rising to 4% growth in the third quarter and 5.8% in the fourth quarter. At 21st Century Fox, ad revenue should spike 10.5% in the second quarter — fueled by Fox News Channel and the presidential election — and 11.9% in the third quarter before settling to 0.7% growth in the fourth.

The election, he said, could also impact local TV advertising.

“A lot of the regional advertisers that would spend locally, and spend higher on a CPM basis, can’t go local because of the elections,” Eagan said. “That should continue for the balance of the year.”

AT&T’s plans to phase out its U-verse TV service in favor of satellite giant DirecTV makes sense on the surface, as the move allows the telco to take full advantage of the larger distributor’s cheaper programming deals. It also could open a window of opportunity for some cable competitors, according to analysts.

AT&T has indicated that satellite TV will become its primary traditional pay TV offering by the end of the first quarter of 2016, according to Sanford Bernstein analyst Paul de Sa. The move will allow the company to take better advantage of DirecTV’s programming contracts, de Sa said — the satellite service has 19 million customers vs. 6 million for U-verse.

It also potentially frees up 20 megabits per second of wireline capacity that could be used for broadband service. While some U-verse TV subscribers probably won’t switch to DirecTV, the company thinks that number will be negligible.

AN OPENING FOR CHARTER

Not de Sa though. In a report, the Sanford Bernstein analyst mapped out what he thinks could be a golden opportunity for Charter Communications, which has a largely rural footprint and the greatest exposure to U-verse TV at 29%. While Charter is expected to complete its merger with Time Warner Cable by the end of the first quarter, which would reduce its U-verse exposure to about 26% of homes passed, the analyst believes the opportunity is still there.

De Sa noted that Charter also is susceptible to the more aggressive DirecTV promotional activity that is expected as AT&T transitions away from U-verse TV. But he believes at least for the short term, the tradeoff is to Charter’s advantage.

De Sa thinks that de-emphasizing U-verse TV will ease the competitive pressure in those markets — reducing video competition from four providers to three — and he believes a “material number of subscribers will shift to cable rather than take a DirecTVbased bundle.”

While AT&T could aggressively discount DirecTV service in its U-verse TV territories to make its package more palatable to consumers, de Sa believes that won’t happen for at least the next 12 to 18 months, as AT&T concentrates on post-merger integration, deploying its planned unified satellite/managed IP platform and neutralizing overall content costs.

“We are inclined to think that the opportunity for cable outweighs the risks,” de Sa wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak wasn’t too convinced that AT&T would scrap U-verse TV, but he did see an opportunity for cable to assert its best-in-class broadband chops.

“Cable is all about leveraging their best in class fixed broadband,” Wlodarczak said. “AT&T is relying on inferior technology to try to leave more bandwidth to increase their U-verse DSL speeds. Cable should inevitably take back the vast majority of DSL subs.”

Telsey Advisory Group media analyst Tom Eagan added that moving U-verse TV subscribers to DirecTV will free up more capacity for broadband, which could make the product more compelling, rather than less.

“I’m not sure necessarily that Charter is going to win out on that because it has the largest satellite exposure,” Eagan said. “Anything that enhances DirecTV’s competitive market share isn’t necessarily a good thing for Charter.

“At the same time, AT&T also is aggressively marketing its wireless service, last week unveiling an offer that gives new and existing AT&T wireless customers who have or add DirecTV or U-verse TV unlimited video streaming, data talk and text for $180 per month. Couple that with up to $500 in discounts for DirecTV customers who are not current AT&T wireless subscribers to add that service, and the phone giant appears to be laying the groundwork for an aggressive quad play.

Eagan said the wireless moves could be a test of the viability of the quad play of voice, video, data and wireless, which up to now has fallen flat in the U.S. market.

MAKING A QUAD PLAY

In the past year, however, several cable operators have hinted at future wireless products including Comcast, which in October activated its mobile virtual network operator (MVNO) agreement with Verizon Wireless.

Eagan said that while the quad play has had more success in Europe — Virgin Media and Liberty Global have made inroads with their respective wireless offerings — in the U.S. it could have more value as a retention tool. He added that Virgin Media offered free cellular minutes to subscribers who took all four products.

“It was a low-cost way to combine the various services,” Eagan said. “What we saw was that the lowest churn of any customer anywhere was the quad-play customer.”  

SIDEBAR: The U-Verse Multiverse

Cable operators could see a window of opportunity open as AT&T transitions its pay TV customers to DirecTV. And the operators with the biggest exposure to the service could have the biggest chance to benefit.

MSO                             % of Total Footprint

Charter. . . . . . . . . . . . . . . . . . . . . . 29%
Time Warner Cable . . . . . . . . . . . .26%
Comcast . . . . . . . . . . . . . . . . . . . . 26%
Cox . . . . . . . . . . . . . . . . . . . . . . . . .21%

Despite being ignored for years, landline voice service — once the cornerstone of cable’s triple-play bundle — is on the decline, but it’s not quite dead yet.

In fact, a new analysis from Sanford Bernstein telecom analyst Paul de Sa indicates cable can count on that revenue for quite a few more years.

Landline telephony has been almost an after thought in recent years, a service considered to be more of a retention tool than a product that brings in customers, like broadband or even video to an extent.

That is evident in buy-rates: Over the past five years, telephony adds for the four publicly traded operators have lagged broadband additions by a ratio of almost 2 to 1.

“By now, residential wireline voice service should have ceased to be,” de Sa wrote in his report. “There seems to be little reason why any consumer would pay $30 a month or more for a phone line.”

But the data shows a different trend, he noted. According to the National Center for Health Statistics National Health Interview Survey (NHIS), which obtained information from 21,517 households, more than half of the homes surveyed had a landline.

And the trajectory suggests landline service might not disappear for at least another decade or more, according to the data.

Landline voice customers won’t trend to zero at least until 2026, de Sa estimated, adding that he thinks there probably will always be a customer segment that retains a landline for emergencies or because wireless service is spotty.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak agreed that landline telephony still has some life left, but added that ARPUs will continue to decline.

“Overall, traditional fixed phone growth is likely to continue to decline but I imagine it will last longer than people think,” Wlodarczak said.

That could have similar implications for pay TV and telephone company digital subscriber line (DSL) service.

According to NHIS, wireless-only homes are generally younger: 71% of respondents aged 25 to 29 didn’t have a landline, compared to 19% of those older than 65.

But they also were less affluent: 67% of renters were wireless-only subscribers, compared to 37.3% of homeowners. Adults in poverty (59.3%) and near poverty (54.4%) were more likely than higher-income adults (45.7%) to live in a household with only wireless phones.

The Sanford Bernstein analyst had three reasons for voice’s slower-than-expected decline:

Inertia: The opportunities to buy residential telecom services are few: Mostly when a new household is formed, due to a change in address or because of unacceptably high levels of frustration with the current provider.

“The answer to the question of why households still have residential voice (or DSL or pay TV) in the face of new alternatives that appear to offer superior value propositions may just be that they’ve had it in the past and there’s no particular reason to change,” he said.

Segmentation: While usage patterns vary differently among households, the behavior of a particular segment is unlikely to be representative of the entire base. The NHIS data shows differences in voice penetration around age, household makeup and income, just as value propositions for slower, cheaper DSL service compared to cable broadband, or pay TV (with traditional or “skinny” bundles) compared to over-the-top video, will probably continue to be appealing to a large population segment.

Pricing and retention strategies: Voice ARPU has declined over the past decade, but that is largely due to segment-specific offers like bundling, instead of mass repricing. According to de Sa, there are ways to keep customers and maintain penetration rates by offering products with different price points (like varied amounts of long-distance minutes for voice, different speeds for broadband and different channel bundles for pay TV) and through discounts or other promotions when subscribers call to disconnect.

“As with mobile, the cost of these retention efforts is generally invisible to investors relying on reported financials, only being revealed in the long term as the offers work through the base,” de Sa wrote. “Metrics such as net adds and churn can therefore be misleading from a value-creation perspective, though they garner attention and drive stock movements around the quarter.”

Telephone Line

Cable telephony customer adds for the four publicly traded cableoperators (Comcast, Time Warner Cable, Charter and Cablevision) have lagged broadband by a nearly two-to-one margin over the past five years. (Figures in thousands)

                                 2010           2011             2012              2013                2014              Total

Telephony Adds. . . . 1,602. . . . 1,022. . . . . . 1,003 . . . . . . . . . 776 . . . . . . . 1,088 . . . . . . 5,410

Broadband Adds . . . 2,064 . . . 1,897. . . . . . 2,039 . . . . . . . . . 1,791 . . . . . . . 2,236. . . . . 10,027

SOURCE: Company reports