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. 

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“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.  

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“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?

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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. 

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“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.  ■ 

Bernstein Research media analyst Todd Juenger returned to coverage of the industry Monday after a three-month sabbatical, upgrading Discovery Inc. to “Market Perform” from “Underperform,” but cautioning that the programmer, which agreed to merge with WarnerMedia in May, has some heavy lifting ahead.

Juenger took a three month sabbatical beginning on July 30, and Bernstein suspended coverage of media companies in his absence.  The analyst, who joined Bernstein in 2012 after heading up TiVo’s Audience Research business, has proven himself to be one of the more insightful analysts covering the programming space. 

In upgrading Discovery, Juenger also announced that he was dropping coverage of AMC Networks “to focus on stocks with broader investor interest.”

Juenger didn’t pull any punches upon his return. Although he increased his rating on Discovery, he lowered his 12-month price target on the stock to $26 from $28, reflecting his concerns about its ability to integrate the WarnerMedia business.

“[W]e continue to have high conviction that these businesses face a long list of very serious concerns, including: the legacy business is facing insurmountable structural pressure, the streaming future is riddled with risk for this set of brands, including the daunting complications of the WarnerMedia integration and rationalization,” Juenger wrote of Discovery. “However, the market seems to also share those concerns, and has driven the stock price down to a level where we can no longer argue the risk/reward for investors skews significantly negative from here.”

Juenger continued that he believed Discovery’s stock price already reflects the market’s belief that it will miss its streaming revenue guidance, cash flow guidance or both. 

“As the closing date approaches, the key question for investors from a catalyst perspective is: if the company takes down their guide, will that be bad for the stock (confirming tougher business conditions and lower financial results) or good for the stock (clearing the overhang, regaining investor confidence in a believable outlook on which to price the stock)?”

In his report, Juenger points out that Discovery WarnerMedia is not yet the “streaming powerhouse” depicted in headlines, but instead relies almost entirely on traditional linear cable network revenue to fund its streaming endeavors. How it manages to keep that linear business generating cash while its streaming business grows will be critical. 

“Ironically, the more successful the streaming service becomes in the market – the more pressure is put on the linear networks, which is the tyranny of the innovator's dilemma,” Juenger wrote, adding that the new entity will have a leverage ratio of about 5 times cash flow, and has promised to use excess free cash flow to lower debt. 

“We think this puts the company in a very difficult box to start from: promises to both invest in streaming and invest in delevering,” Juenger continued. “It also greatly amplifies risk to equity value. Any downturn in either EBITDA/FCF, or the valuation multiple of the stock, will fall sharply on the equity holders.”

Discovery shares were up more than 5% in early trading Monday to $24.70 each. The stock was priced at $24.52, up 4.6% ($1.08 each) at 12:09 p.m. on Nov. 1.  

Juenger also didn’t want to downplay the massive integration issues the combined company will face once the deal closes.

Integration Issues Loom 

“Which departments survive, which get merged or deleted, who stays/who goes, who's in charge, how to design incentives for leaders of the legacy business and the streaming business, and how to align that market by market, region by region and globally,” Juenger wrote. “All while trying to deliver/exceed on financial synergies promised to the investment community. This complex task will not only require significant expense, but also significant management bandwidth and distraction. And employee trepidation, and time. Important decisions cannot be made before the new leadership is installed (otherwise it undermines the authority of the new leadership).”

Juenger also saw some potential bright spots, including overdelivering on streaming growth and potential synergies. The analyst wrote that the market usually forgives other sins if a company manages to add more streaming customers than expected, and so far most streaming services have. 

In addition, Juenger added that if consumers pare down to three or slightly more than three streaming subscriptions, Warner Bros. Discovery will likely be among them. 

“This view would be supported by a belief that HBO would continue its history of putting forth a handful of truly distinctive premium entertainment series every year, and the addition of Discovery's portfolio would add complementary engagement value,” Juenger wrote.

As far as synergies, Juenger pointed to Discovery’s 2017 purchase of Scripps Networks. Less than three months after closing that deal, Discovery raised its cost synergy target from $350 million to $600 million. 

“One could easily expect Discovery will once again exceed the original target,” Juenger wrote. “Which, theoretically, could be additive to the $14 billion EBITDA guidance (or, give the company that much extra room to invest in streaming, or de-lever).”

Bernstein Research said Friday that influential media analyst Todd Juenger will take a sabbatical and that it would temporarily suspend coverage of media companies in his absence. 

“We are temporarily suspending coverage of U.S. Media because the Senior Analyst (Todd Juenger) is going on sabbatical,” Bernstein said in an email message to clients. “We plan to reinstate coverage following the Senior Analyst's return in a couple of months. Effective today, July 30, 2021, our previous reports, ratings, target prices and earnings estimates should no longer be relied upon. Team members can be contacted with requests for pre-existing models and content.”

Juenger joined Bernstein in 2012 after heading up TiVo’s Audience Research business. At Bernstein he made a name for himself quickly with insightful coverage of programming stocks like Viacom (now ViacomCBS), The Walt Disney Co., News Corp (now Fox Corp.), Time Warner (now AT&T), and Netflix. His April 2012 report tying Netflix licensing deals to the precipitous drop in ratings for kids’ programming at cable networks was one of the first to highlight the impact of streaming services on linear TV.

Juenger’s current coverage list includes programmers ViacomCBS, Discovery, AMC Networks, Disney, Lionsgate Entertainment, and Netflix; ratings measurement giant Nielsen; music companies Spotify Technology and Warner Music Group; and video game companies Activision Blizzard, Electronic Arts, and Take-Two Interactive Software.    

Bernstein's coverage of U.S. cable operators, satellite TV and telecom companies, currently handled by senior analyst Peter Supino, will not be affected.  

The fact that Netflix let it leak out that it is taking the first steps toward entering the lucrative video game market less than a week before it is slated to release its Q2 results, left some analysts cautiously enthusiastic. While the prospect of the SVOD giant entering yet another market that it could potentially dominate raised spirits, the timing caused some caution among those who suspected it could be a move to divert attention away from possibly lukewarm quarterly results. 

Investors appeared on the fence as well, with Netflix stock closing at $542.95 each on July 15, down about 1%.

Netflix hasn’t released any details as to how it will attack the video game market, but has confirmed to several outlets that it has hired former EA and Oculus executive Mike Verdu to head up a game publishing team as VP of gaming development at the SVOD pioneer. While Netflix again has issued no details on its plans, Bloomberg reported that the company will make video games part of its service as early as next year at no additional charge. 

The idea that Netflix would eventually get into the video gaming business has been kicked around for years. In a research report earlier this week -- before news of Verdu’s hire -- Canaccord Genuity analysts Maria Ripps and Michael Graham wrote that video gaming is a natural extension of the business, given that Netflix already has several content titles based on video games, and releasing downloadable games could help the company capture a bigger chunk of younger viewers. The analysts noted that the recent extension of its deal with producer Shonda Rhimes included potential gaming and virtual reality content. 

Whatever the plan, the notion that a streaming service with more than 200 million paying customers worldwide is thinking about streaming video games, sent video game retailer GameStop’s stock down 7% July 14, and down another 3% in early trading July 15.  

In a research note, Bernstein media analyst Todd Juenger offered two pros, two cons and two concerns about the notion of Netflix entering the video game space. On the pro side, Juenger noted that adding video games to the product mix enhances Netflix’s overall value.

"If your subscribers are sometimes/frequently choosing video games as an alternative to watching Netflix, then why not offer them that option within Netflix?,” Juenger wrote.

Also on the pro side: an increased value proposition and increased engagement will drive higher penetration, higher ARPU and reduce churn. 

On the con side, Juenger questioned the timing of the leak, a week before earnings, which most analysts expect to be weak, come out.

“The idea that, knowing Q2 results and the Q3 guide will be received as weak, Netflix leaked this story now (before reporting Q2 next week) in order to change the narrative, distract, divert attention from the core business,” Juenger wrote. “Give everybody something else to focus on and talk about.”

Also on the down side is that the move could be seen as a defensive one because Netflix sees that the market for SVOD is getting too crowded.

“Bears could view this expansion into a new product category as a tacit (or not so tacit) validation that management sees the core business reaching the point where growth significantly slows, and therefore the company needs to do something new/extra to keep growing,” Juenger wrote.

As far as concerns, Juenger said moving into a new market could be a distraction for management, when one of the selling points for the stock has been its executives’ laser focus on the core business. Video games could force some to take their eye off the SVOD ball just when the market is filling up with competitors, all bent on gaining audience share.

“Now, having said that, it is possible to walk and chew gum simultaneously, and one could argue that the lines are already blurred between what constitutes on-demand video entertainment versus interactive video game entertainment,” Juenger wrote. “And the IP works in both settings. On the other hand, the track record of legacy video entertainment companies developing their own video games is very poor.”

Other reports have pointed to Google, which in February scrapped its own in-house video game studio -- Stadia Games and Entertainment-- after less than two years. 

Juenger also expressed concern over pricing, adding that if Netflix included gaming as part of its SVOD service, it would probably eventually have to increase the price down the road, risking alienating subscribers who may not want to play video games. Making gaming a separately priced/a la carte option could solve that problem, but Netflix would lose some scale economics in that scenario.

Netflix could offer gaming as part of its Premium Tier only, but Juenger said that flies in the face of the company’s edict that content remains the same across all versions of the product. 

“All of these options raise the very common business tension of balancing flexibility versus simplicity,” Juenger wrote. “The current Netflix pricing model is extremely simple. Three plans, three prices, the only difference is the number of simultaneous streams (and in some markets, a fourth option, one stream, mobile-only). To the extent Netflix tries to give consumers explicit choices and options around how to include video games, or not, in the service, and whether that includes a new form of in-game spending, all creates complexity to the offering which has a proven detrimental impact on adoption (the paradox of choice).” 

Juenger added that on the positive side, Netflix has reams of consumer information on which  to base its approach, and likely has anticipated and addressed most of the concerns around pricing and product design through countless focus groups and research. And in the end, if it doesn’t work out, Netflix can just walk away from gaming.

“To its credit, Netflix has always erred on the side of choosing the risk of moving too fast and bold, rather than the risk of moving too slow and safe,” Juenger wrote. “There is a rather high probability, frankly, that in hindsight, ten years from now, this idea will look like a no-brainer.”

More than a month after saying it would combine with WarnerMedia, creating a streaming and linear content giant called Warner Bros. Discovery with annual revenue of more than $43 billion, market reaction to Discovery Inc. has been tepid at best, with its stock dropping 26% from a high of $39.70 each on May 17 to $29.51 on June 23. At the same time, AT&T stock, which was up about 11% since the Feb. 25 plan to spin off DirecTV  -- has fallen 15% from a high of $33.81 on May 17 to $28.65 on June 23. 

Not exactly the stock performance dreams are made of. 

In a research note Thursday (June 24), Bernstein media analyst Todd Juenger deconstructed the merger, cited by countless screaming headlines as the creation of a “streaming powerhouse” that would combine the best content assets with the best management during the best time ever to be a content company. But according to Juenger, just like in the movies, the reality is a lot different. 

First, Juenger took issue with calling the merger the creation of a streaming powerhouse. That, he said, couldn’t be further from the truth because despite their streaming offerings -- Discovery Plus and HBO Max -- both companies “are almost entirely cable network companies.” And that, he said, isn’t any better either.

Juenger noted that all of the funds to support their streaming efforts come from traditional linear network affiliate fees and advertising revenue, both segments which are in sharp decline. And he added any unanticipated disruption to that side of the business -- accelerated cord cutting, a drop in ad revenue, a recession -- would put the entire streaming strategy at risk.

“Ironically, the more successful the streaming service becomes in the market – the more pressure is put on the linear networks,” Juenger wrote. “Which is the tyranny of the innovator's dilemma. (And also important to investor expectations about earnings and multiple. The more bullish one is on streaming, the more bearish one must be on legacy. And vice-versa). “

Adding to the potential injury is that both companies have networks with their own specific risks. Discovery’s networks, according to Juenger, have the highest operating margins in the industry (60%), but the risk is that any downturn in revenue would fall directly to the cash flow line at a very high rate.

WarnerMedia’s Turner networks like TNT and TBS, as general entertainment channels have “no specific content proposition, differentiation, or reason to exist in an increasingly on-demand world,” according to Juenger and rely on a handful of sports rights to keep distribution and pricing. Its news networks like CNN , he added, aren’t in control of their content cycle, adding to volatility. 

“With all these structural and specific risks to the linear networks, the new company will emerge with roughly 5x financial leverage (and a promise of using excess FCF to de-lever),” Juenger wrote. “We think this puts the company in a very difficult box to start from: promises to both invest in streaming and invest in de-levering. It also greatly amplifies risk to equity value. Any downturn in either EBITDA/FCF, or the valuation multiple of the stock, will fall entirely and sharply on the equity holders.” 

Adding to the pressure is the longer the merger takes to complete, the higher the risk of entropy at the operating companies, especially HBO Max, Juenger wrote, adding that HBO and Discovery were late to the streaming game as it is. 

By the time this deal closes, another year will have passed, and Netflix, Disney, Amazon, Apple, Paramount, et al are not going to stand still,” Juenger wrote. “Additionally, there is a risk of entropy during the next year as the deal works its way towards closing.”

And there is precedent for that. Juenger pointed to the Disney Fox merger. In months between the Dec. 14, 2017 announcement of the deal  to its close on March 20, 2019,  Fox lost much of its key management talent and according to Juenger,  those that remained were “in a state of paralysis.”

“All momentum had been lost, and Disney was left with a big operational turnaround project,” Juenger continued. “We think it is highly likely this same dynamic sets in, particularly at HBO.”

Over the past several years HBO has had multiple owners, multiple leaders, and multiple strategies, the analyst said. While returning to the hands of a media owner -- Discovery -- should put some smiles on employee faces, Juenger wrote they may not last for long. 

“[I[t's not fertile ground for stability when your company has been treated like a foster child being shopped from one temporary home to another over the past many years,” he wrote, adding that the combined entity’s plans to extract $3 billion in synergies from the union over time will add to the malaise. 

“The employees will see that $3 billion synergy number and wonder who is going to lose their jobs (and if they keep their job, how it will change),” Juenger wrote. ”One couldn't blame any of these employees for considering other employment options. The best talent will be ripe for the picking by other entertainment companies.”

Aside from the operational issues, how the combined company plans to price its streaming services will be a key to their success. Juenger has touched on this notion before, and with HBO Max priced at about $14.99 per month ($9.99 for an ad-supported version) and Discovery Plus priced at $6.99 per month for its ad-free version and $4.99 for an ad-supported offering, he doubts it will be a simple mash-up of prices. 

Neither Discovery or WarnerMedia has commented on potential pricing, but Juenger estimated it will likely be about $15 per month for a combined offering. 

Juenger was quick to admit that the market will forgive pretty much any operational shortfalls if the streaming service exceeds expectations, especially on the subscriber front. And so far he said history points to streaming products -- ranging from majors like Netflix and Disney Plus and smaller operations like CBS All Access and Starz to niche players like Shudder and Acorn -- outperforming predictions. 

“Of course, all this recent streaming adoption came in the middle of a stay-at-home pandemic,” Juenger wrote. “Which, we think, did accelerate the overall consumer adoption of streaming in a meaningful and lasting way. But we also expect some shakeout as the world settles back down.”

Earlier this month, researcher Parks Associates said that 46% of U.S. broadband homes subscribe to four or more streaming services, a number that Juenger predicts will be whittled down to three, with the services offering the most content value for the lowest prices the obvious winners. 

“The bullish view of Warner Bros Discovery is either that they will be among those top three global services, or that consumers on average will subscribe to more than three,” Juenger wrote, adding that HBO’s history of introducing compelling series every year, coupled with Discovery’s reality content and international presence could be enough to move the bull case forward. Or he wrote, the legacy pay TV service could last longer than expected, or subscribers could have a higher tolerance for price increases than originally perceived. 

Or better yet, Warner Bros. Discovery, as the new company is called, will become the streaming powerhouse its new owners believe it is destined to be. 

Comcast’s NBCUniversal is the biggest cash spender when it comes to non sports content, according to a new report from Todd Juenger, analyst at Sanford C. Bernstein.

According to Juenger’s accounting, NBCU’s spending, including Sky reached $22.5 billion in 2020. 

The combination of Warner Bros. and Discovery would be second at $14 billion, followed by Disney at $13.2 billion, Netflix at $12.5 billion, ViacomCBS, at $11.5 billion and Amazon tied at $11.5 billion. 

He noted that, according to company reports and other sources, only Disney and Amazon, and to a lesser extent Netflix, increased non-sports cash content investment over the past three years.

Juenger said he put together the report because to many investors spending is a key to success as the TV industry turns to streaming. He looked at cash spending, rather than amortization. 

“We understand the more important investment analysis is forward-looking estimates," said Juenger. "But it's impossible to create and debate forward estimates without a rigorous and commonly agreed baseline to start from." 

Also Read: ‘We Can Compete With Netflix, Disney,’ Says David Zaslav

But when it comes to streaming, not all content is created equally, particularly when it comes to sports.

Juenger said he excluded sports spending because unlike most other entertainment programming, it is watched live, the media company doesn’t own the content and the rights are usually country specific.

Another factor that needs to be taken into consideration is how much content each company needs to program their linear networks. 

“A commonly expressed view is that legacy TV networks companies can simply migrate the monetization of their content investment from linear networks to streaming. The flaw in that logic is, those companies still must program the networks, 24/7. They can, and should, apportion less to linear. But this will drive lower advertising and distribution revenue,” Juenger noted.

Juenger also said that some content is shared across channels, such as movies, which sometimes appear first in theaters, then on streaming services. Similarly some TV content starts on a streaming service, and then runs on a traditional linear network. 

Bernstein media analyst Todd Juenger said Tuesday that Netflix could be readying widespread price hikes across Western Europe this year, in line with its earlier increases in the United Kingdom, Germany, Japan and Argentina.

Juenger tracked Netflix pricing across 50 countries and said the SVOD giant’s strategy is pretty clear -- increase pricing every two years; raise charges aggressively for its Premium package, moderately on its Standard plan and rarely on its Basic plan. He added that on average, the price increases are in the mid-single digits.

“After very little pricing activity in 2020, evidence is growing that we will see widespread pricing increases in 2021,” Juenger wrote in a note to clients, pointing to “significant” price increases in Q1 in the U.K., Germany (bringing pricing in line with Austria and Ireland); Japan and Argentina. 

Netflix raised pricing for its Standard plan in Canada by about $1 per month and by $2 per month for its Premium plan in early October and three weeks later raised pricing for Standard and Premium plans in the U.S. by similar levels. Juenger estimates that Austria, Ireland and Germany could prove to be similarly “leading indicators” for price hikes in Europe, “perhaps a more gradual roll-out across the Continent rather than one uniform, lockstep pricing change.”

In the United Kingdom, Netflix raised prices for its Standard plan by $1 per month (11%) and by $2 per month for its Premium plan (17%) in January. That same month German customers saw pricing for the Standard plan rise 8% and 13% for the Premium plan. In Japan, Netflix said in February that it would raise prices for the Basic and Standard plans by 13% each. The biggest percentage hikes were in Argentina, where Netflix said in Q1 that  it would raise pricing for all tiers --  Basic (40%), Standard (44%) and Premium (49%). Juenger added that the increases in Argentina were likely due to high inflation rates in Latin America and efforts to account for the decline in exchange rates compared to the U.S. dollar over the past year. He said that Netflix rates in Argentina are roughly 60% lower than in the U.S., in U.S. currency.

Netflix has been under some pressure recently as some analysts have pointed out that the service has lost as much as 31% of its global market share (despite gaining 40 million customers) given the increase in competition from new streaming services like Disney Plus, HBO Max, Paramount Plus and Peacock. 

On Tuesday, Netflix stock was up as much as 2.5% ($13.49 each) to $554.16 each in early trading, a day after  Evercore ISI Group internet analyst Mark Mahaney assumed coverage of the company, upgrading his rating on Netflix stock to “outperform” and raising his price target on the stock to $665 per share. Mahaney was encouraged by Netflix’s large cash position, which enables it to invest in more content, which in turn leads to more subscribers. Adding to that strength is Netflix’s massive platform coupled with a global recommendation algorithm that the analyst wrote has the power to transform good content into global sensations. As an example he pointed to shows like The Queen’s Gambit, which he wrote on its own made “chess cool again.”  

“Simply put, a dollar spent at Netflix arguably creates more marketing power than any other platform, generating greater leverage and potentially more subs,” Mahaney continued.

Walt Disney Co. investors heartened by the 10 million users the entertainment conglomerate signed on to its streaming service Disney+ in its first hours won’t ever see that level of growth again, according to Sanford Bernstein media analyst Todd Juenger.

In a research note Friday, Juenger wrote that he believes Disney+ subscriber additions have peaked, comparing them to similar stages in the evolution of other streaming video giants Netflix and music service Spotify.

Disney+, fueled in part by free offerings of the service to customers of distributors like Verizon Communications, signed up 10 million users in its first hours of existence on Nov. 12, and ended December with about 26.5 million users. Since then the growth of the service has slacked off a bit -- Disney said most recently that Disney+ had about 28.6 million users as of the beginning of February -- but is still on a path to reach 40 million users in its first year.

“Among the many aspects that make the launch so fascinating and unusual, is the fact that Disney+ has probably already achieved its peak absolute net adds, in the first quarter of its existence,” Juenger wrote. “In other words, there will probably never be another year where Disney+ (or, in fact, the entire suite of Disney OTT services) adds as many subs as it did in the first year (or, frankly, in its first quarter).”

That is different from Netflix and Spotify, which according to Jeunger took about 9 years for growth to level off. And it is for that reason that the analyst believes that applying a Netflix-like multiple to Disney stock is a mistake.

Investors have puzzled over why Disney stock has underperformed the S&P 500 Index since the Disney+ launch (it is down 5% while the S&P has risen 9% in that time frame). But Juenger pointed to the rise in Disney stock prior to its November launch -- particular after its April investor meeting where Disney unveiled its price-point for the streaming service. Disney added about $50 billion in market capitalization on two days -- the day after its April Investor Day and the day after the Disney+ November launch. That works out to about 3 times Juenger’s 2020 revenue estimate for Disney.

But other investors have wondered why, given the accelerated growth of the Disney + service, why the stock doesn’t warrant Netflix-like multiples.

In his note, Juenger estimated that by 2028 Disney+ will reach the same level of subscribers as Netflix and Spotify did in their ninth year -- about 140 million. But he added that while Netflix especially warranted high revenue multiples because of the runway in front of it being the basic inventor of SVOD, such is not the case for Disney+. He estimated that Year 9 subscribers as a multiple of Year 2 subscribers would work out to be 6.5 times for Netflix, 25 times for Spotify and 2.5 times for Disney+.

“The market has applied (much) higher revenue multiples to Netflix and Spotify, early in their development, because the market (rightly) expected so much more growth ahead of them,” Juenger wrote. “Even today, the market expects Netflix and Spotify net sub adds to stay roughly flat, in absolute, before eventually fading into a gradual decline. That's not true, in our strong view, for Disney+.”

That doesn’t mean that Disney+’s rapid subscriber growth is a bad thing. Instead, it is more of an example of the growing maturity of the streaming market and the strength of the Disney brand. Unlike Netflix and Spotify in their early days, consumers did not need to be educated on what Disney is, or what streaming video means.

“Hence, if you like SVOD and you like Disney – why wouldn't you be expected to sign up, immediately?” Juenger wrote. “On the flip side, however, it also begs the other question – why would it not be true that pretty much any consumer who is a strong candidate for this product, would sign up right away? Said in the extreme, maybe everybody who should ever be expected to sign up for Disney+, will do so almost immediately. Of course we don't believe the case is that extreme.” 

Walt Disney Co. investors heartened by the 10 million users the entertainment conglomerate signed on to its streaming service Disney Plus in its first hours won’t ever see that level of growth again, according to Sanford Bernstein media analyst Todd Juenger. 

In a research note Friday, Juenger wrote that he believes Disney Plus subscriber additions have peaked, comparing them to similar stages in the evolution of other streaming video giants Netflix and music service Spotify. 

Disney Plus, fueled in part by free offerings of the service to customers of distributors like Verizon Communications, signed up 10 million users in its first hours of existence on Nov. 12, and ended December with about 26.5 million users. Since then the growth of the service has slacked off a bit -- Disney said most recently that Disney+ had about 28.6 million users as of the beginning of February -- but is still on a path to reach 40 million users in its first year. 

“Among the many aspects that make the launch so fascinating and unusual, is the fact that Disney Plus has probably already achieved its peak absolute net adds, in the first quarter of its existence,” Juenger wrote. “In other words, there will probably never be another year where Disney+ (or, in fact, the entire suite of Disney OTT services) adds as many subs as it did in the first year (or, frankly, in its first quarter).”

That is different from Netflix and Spotify, which according to Juenger took about 9 years for growth to level off.  And it is for that reason that the analyst believes that applying a Netflix-like multiple to Disney stock is a mistake.

Investors have puzzled over why Disney stock has underperformed the S&P 500 Index since the Disney+ launch (it is down 5% while the S&P has risen 9% in that time frame). But Juenger pointed to the rise in Disney stock prior to its November launch -- particular after its April investor meeting where Disney unveiled its price-point for the streaming service. Disney added about $50 billion in market capitalization on two days -- the day after its April Investor Day and the day after the Disney Plus November launch. That works out to about 3 times Juenger’s 2020 revenue estimate for Disney.

But other investors have wondered why, given the accelerated growth of the Disney Plus service, why the stock doesn’t warrant Netflix-like multiples.

In his note, Juenger estimated that by 2028 Disney Plus will reach the same level of subscribers as Netflix and Spotify did in their ninth year -- about 140 million. But he added that while Netflix especially warranted high revenue multiples because of the runway in front of it being the basic inventor of SVOD, such is not the case for Disney+. He estimated that Year 9 subscribers as a multiple of Year 2 subscribers  would work out to be 6.5 times for Netflix, 25 times for Spotify 25x and 2.5 times for Disney Plus. 

“The market has applied (much) higher revenue multiples to Netflix and Spotify, early in their development, because the market (rightly) expected so much more growth ahead of them,” Juenger wrote. “Even today, the market expects Netflix and Spotify net sub adds to stay roughly flat, in absolute, before eventually fading into a gradual decline. That's not true, in our strong view, for Disney Plus.”

That doesn’t mean that Disney Plus’s rapid subscriber growth is a bad thing. Instead, it is more of an example of the growing maturity of the streaming market and the strength of the Disney brand. Unlike Netflix and Spotify in their early days, consumers did not need to be educated on what Disney is, or what streaming video means.

“Hence, if you like SVOD and you like Disney – why wouldn't you be expected to sign up, immediately?” Juenger wrote. “On the flip side, however, it also begs the other question – why would it not be true that pretty much any consumer who is a strong candidate for this product, would sign up right away? Said in the extreme, maybe everybody who should ever be expected to sign up for Disney Plus, will do so almost immediately. Of course we don't believe the case is that extreme.” 

ANAHEIM, Calif. — Sports teams and networks could find themselves in a spot in the next five years, as the windfall in rights fees expected as online players like Amazon and Facebook enter the fray could force distributors to make tough decisions on which channels to keep, according to Sanford Bernstein media analyst Todd Juenger.

Juenger, making a presentation at The Independent Show, said that for most distributors, the rising cost of sports has been a conundrum: live games drive TV ratings, but a shrinking number of consumers consider sports channels to be must-have.

Some 40% to 60% of viewers don’t care about sports, Juenger said, and that indifference is global. Even in soccer-mad England, where the English Premier League is available a la carte, only about half of video subscribers pay for it, according to Juenger. In the U.S., the Super Bowl may draw an audience of 150 million people, but that still means half of the country isn’t watching.

“Do you think they want to pay you $100 a month for a video service that is mostly based on sports when they can have Netflix for $10 and Amazon for free?” Juenger asked. “I say no.”

TV Sports Costs Are Rising Fast

That is becoming increasingly evident in the subscriber erosion over the past seven years at the premier sports channel, ESPN. According to Juenger, ESPN has lost about 13 million subscribers since 2011. At the same time, overall sports programming costs have increased by $10 billion.

The trends are not good among younger viewers. According to millennial market researcher Ypulse, the percentage of 13-to-36-year-olds in the U.S. who say they watch sports live on TV is down to 63%, from 86% two years ago.

“They [ESPN] are asking you guys to pay 7% escalators each year,” Juenger said. “You’ve still got 87 million households paying for sports, but only 60 million want it. I don’t think you can continue to get money from people for sports they don’t want to watch.”

Some analysts believe the advent of legal sports betting — approved by the U.S. Supreme Court in May — could help boost ratings and draw in viewers who may have not watched live games in the past. Others aren’t so sure.

Pivotal Research Group media analyst Brian Wieser said in a recent client note that live sports viewership is largely driven by big events. When those tentpoles are taken out of the mix, viewership shows a steep decline.

“In contrast to news, sports has struggled generally, although the genre still remains an important source of viewing of traditional TV,” Wieser wrote. “In aggregate, it represents an outsized source of costs, revenues and strategic leverage between networks and distributors.”

Adding to the pressure is that programming margins are pretty anemic already, and could drop to zero in the next five years. According to Juenger, Disney’s deals for NFL Monday Night Football and Major League Baseball expire in 2021, while its National Basketball Association pact ends in 2024-25. Fox’s MLB deal also ends in 2021, and its NFL pact expires in 2022.

“Does anybody think that Amazon, Facebook and Google have no interest in this?” Juenger asked. “In the next round, they are going to be knocking at the door, and they are going to be bidding more, not less. So your network partners are going to be faced with this decision, ‘Do I try to outbid Mark Zuckerberg and try to pass it on to you guys, or do I walk away from sports?’ ”

Operators have three choices, Juenger said: Keep every channel, pass along the increases to consumers and continue to lose subscribers; keep paying high fees, don’t raise prices and make up the difference on broadband (as large operators like Comcast are doing); or make a tough decision and start dropping networks.

“You can’t keep paying everybody more money on the network side, to resell a multichannel video product that you will be reselling at a loss,” he said. “So the calculus you have to do is, ‘Who am I paying that my consumers care about the least?’”

Juenger added that it would be hard to drop Disney, which has ESPN but also Disney Channel, ABC and Freeform, and after its mega-deal with 21st Century Fox closes, will include FX, FXX and National Geographic. But other segments are experiencing similar declines to sports, and that may offer relief for some operators.

Cut Back on Kids’ Fare?

Viewership in the children’s segment was down 28% in the last quarter — its worst in history — after already having fallen by half in the past six years, Juenger said. The only business segment that has had a similar drop in the past six years is national retailer Sears.

“Why are MVPDs continuing to force every household to pay for five or six kids’ networks, when the data says only 40% of households have kids at all, and among the 40% that have kids, they aren’t watching?” Juenger continued. “Because of the Internet being able to distribute video at scale now, consumers have alternatives.”

That could play into the trend, especially among smaller cable operators, to offer broadband-centric packages that emphasize access to SVOD offerings like Netflix and Hulu rather than traditional content bundles, he added. “Maybe there is a better solution for you [consumers] than a $90 cable package with 150 networks of which you only want three,” Juenger said.

Like other virtual MVPDs, YouTube TV is a money-loser.

That’s the bad news. “Even worse, there doesn’t seem to be an obvious path to not losing money,” Bernstein analyst Todd Juenger explained in a Weekend Media Blast analysis on YouTube TV issued Friday. “The financial model doesn’t scale.”

YouTube TV doesn’t break down its financials publicly, but Juenger estimates that YouTube TV is losing about $5 per month per sub, but readily admits that the toughest assumption in making that calculation is the CPM on the product. Given the current, relatively small size of YouTube TV’s sub base, that’s not a material number for a deep-pocketed company like Google and its parent, Alphabet.

Even at 1 million subs, YouTube TV, which is also exposed to annual price inflators from programmers, would lose $60 million per year. “Not even a rounding error for Alphabet,” Juenger noted. “No analyst would even bother modelling it.”

But what if the losses grow to $10 per sub and YouTube TV pulls in 5 million subs. “Now we have a loss of -- $600mm OI. Material yet? How about 10mm subs, now we exceed -$1bn in OI losses. Surely, that would catch investors’ attention.”

With that as the backdrop, it’s clear that YouTube TV’s financial overhang is greater the more successful it becomes from a subscriber basis.

“Google knows this. So what is their plan?” Juenger asks, holding that he doesn’t believe it’s their intention to lose money on every YouTube TV sub indefinitely.

Google hasn’t provided those details, but Juenger speculates on a handful of items – some more disruptive than others -- that could be part its plot to improve the business as it moved further down the road:

1. Google believes consumers will “fall in love with the product,” giving it the green light to eventually raise the price enough to generate a profit. Notably, it already has raised the baseline price of YouTube TV following the recent addition of networks from Turner. But raising prices will be difficult, Juenger said, because of video competition and “reference points” from SVODs such as Netflix and Amazon.

2. Google believes its ad model will prove so superior, they will generate CPMs will in excess of what Bernstein has modeled, and spread across Google’s video inventory in a way that helps put YouTube TV in the black.

3. Google believes their advertising model will prove so superior, TV networks will turn over national inventory for Google to sell. But Juenger says it’s unlikely that networks will cede the rights to any of their premium inventory (or semi-premium or dubiously-premium inventory) to a third party.

RELATED: YouTube Seeks TV Ad-Vantage

4. Google believes they will gain enough subs and importance in the marketplace to push back on TV network price demand, and possibly drop overpriced or unwanted networks. Juenger points that that this one is probably folly, as no MVPD, virtual or otherwise, has been able to pull this off.

5. Google has ambitions to get into the live TV business themselves and try to own the economics. If that’s to happen, Juenger sees it most likely in sports, by Google forming its own "network(s),” and acquiring sports rights. Rights for the NFL, MLB and NHL will be coming up in 2021/2022 timeframe, he points out. 

It's unclear what Google has in mind, but Juenger sees YouTube TV taking some of these paths to help the financials of the OTT TV model pay off, or at least pay better.  

The profit made by U.S. TV networks might shrink by 41% to $22 billion by 2025, according to analyst Todd Juenger of Sanford Bernstein.

Juenger said his fairly dire assessment is based on a set of relatively benign assumptions.

He posited pay TV subscribers falling to 82 million in seven years from about 97 million now. That includes virtual MVPDs growing to 18 million subs from 5 million now.

He also assumed affiliate fees per subscriber will increase at a 5.7% compounded annual growth rate, while chalking up a 1.5% annual decline in advertising revenue. Programming costs are expected to rise 6.4% while other expenses increase 1.2%.

"Many investors will disagree with the various line items, but we think it's fair to say that none of these assumptions are aggressively punitive," Juenger said. "And, very importantly, we are not including the impact of a recession, which hurts advertising by definition and, we think, will be a cliff event for cord-cutting (surely there will be a recession between now and 2025)."

The drop in earnings will reduce the enterprise value of the TV network business, currently $317 billion, by $130 billion, a loss the size of the current enterprise values of CBS, Viacom, Discovery, AMC Networks, Lionsgate, Sinclair Broadcast Group, Nexstar and Tegna combined.

“This report focuses only on the conventional TV network profit pool," Juenger noted. "It does not consider the upside/offset from new direct-to-consumer models. 

"Although, frankly, if we included those efforts, even over the (long) time frame of this analysis, it would cause cash flow to further decrease, not increase,” Juenger added.

He said building direct-to-consumer businesses will be expensive and not everyone will succeed. And for those that do succeed, margins will be lower than the current TV business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Illustration by cpuga/Getty Images.

The Walt Disney Co. and 21st Century Fox held earnings calls last week, but quarterly returns weren’t among the most pressing questions from analysts.

Most of all, Wall Street wondered aloud if the two iconic companies would merge. As deal speculation swirled around both media giants, executives seemed eager to highlight the success of their cable and content properties while acknowledging the changing landscape.

Fox stock surged nearly 15% after reports that it had held talks, since ended, to sell off its 20th Century Fox studio, cable networks FX and National Geographic Partners, and its 39% interest in European satellite TV company Sky to Disney. In that scenario, Fox would have kept Fox News Channel and Fox Business Network, and its regional sports networks, broadcast operation and TV stations.

On Fox’s fiscal first-quarter conference call, executives were quick to point to the success of their cable operations — revenue at the cable unit was up 10% in the period, and affiliate fees rose 11%. Fox said the gains were due to growth across the portfolio.

But despite that success, Fox left the door to any possible deals or divestitures slightly ajar.

“We told you many years ago that innovative disruption would come to our industry,” 21st Century Fox co-executive chair Lachlan Murdoch said on the call. “We moved early to jettison our thin brands and went deep with investments for our rich distinctive brands, when many market pundits were skeptical of this approach.”

Whether that means more “thin brand” paring is due or it was just an attempt to give analysts historical perspective is open to interpretation. But Fox was adamant it has the scale and the assets to execute on its strategy.

At Disney, which escalated the cord-cutting conversation two years ago when it revealed flagship sports network ESPN was losing subscribers, some evidence suggested that erosion may be slowing. On a conference call with analysts Nov. 9, Disney chair and CEO Bob Iger said subscriber losses at ESPN were “not as deep” as they had been in prior quarters, in part because of deals with new over-the-top service providers.

Disney’s fiscal fourth-quarter results were mixed. Iger pointed to two-week Nielsen data that showed when live consumption of sports includes streaming and OTT platforms, ratings rise 25% to 29%, an encouraging trend. But broadcast revenue was down 11% in the quarter, and cable revenue was flat.

While neither Disney nor Fox did much to totally squelch speculation, it appears that the lines drawn in the initial reports — that Disney was doubling down on content and Fox was throwing in the towel — are much more nuanced.

Iger said Disney’s focus is on monetizing high-quality programming, and though he conceded that “some improvement from a quality perspective would be helpful,” he also pointed to the company’s strong production and creative capabilities. Disney has a live-action Star Wars series in development as well as midseason shows that should attract audiences.

“Our intention as a company is to take advantage of opportunities that exist out there today for good television and to produce more of it,” Iger said.

That could point to a deal with Fox, or another programmer. FX is known for high-quality content, and Fox’s TV production studios have cranked out perennial hits like The Simpsons and Family Guy for its broadcast unit, as well as Modern Family for Disney’s ABC.

Deal Wouldn’t Be Disney Cure-All
But not everyone was convinced that a Fox deal would solve Disney’s problems. BTIG media analyst Richard Greenfield, a staunch critic of Disney over the years, wrote in a blog post Nov. 7 that Disney should focus more on companies like Activision for gaming, Spotify for mobile subscriptions and Twitter “to capture the SportsCenter of the future.”

Sanford Bernstein media analyst Todd Juenger, another critic of the pay TV content model, said in a research note that “the chances of a Disney-Fox deal, as described, are very low.”

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.”

The Walt Disney Co.’s decision to take its powerful content direct to consumers via streaming puts its traditional distributors in an unprecedented place.

Already, traditional pay TV subscriptions are falling. Disney said Tuesday (Aug. 8) during its earnings call that ESPN’s subscriber total was down 3.5% -- a big bite for a network that makes about $7 per month per sub.

“There are many investors who believe that Disney, more than any other company, is responsible for holding what's left of the bundle together,” said analyst Todd Juenger of Sanford C. Bernstein, in a research note.

“Those that hold that view have been waiting for Disney to drop this bombshell, signaling the end of the bundle as we know it," Juenger added. "Did Disney just do that? The answer depends on how much you want to take the (scant) descriptions of these services at face value.”

Related: Losing Disney Movies May Not Hurt Netflix: Analyst

To Marci Ryvicker of Wells Fargo, Disney's announcement led to many unanswerable questions.

"The ESPN service sure sounded to us like management is positioning it (for now, at launch) as an 'add-on' service that would mostly sit on top of the existing ESPN linear networks and deliver extra value and features," Ryvicker said in a note. “How does this impact DIS's upcoming affiliate renewals (CEO Bob Iger did state that he has NOT had conversations with the cable distributors on these services just yet)? How will peers and partners react?”

MCN Flashback, July 27, 2015 > Report: Iger Says ESPN Could Go Direct to Consumer in Five Years

Iger indeed said during the earnings call that Disney had not discussed its plans with its distribution partners. He seemed to think there would not be a backlash.

“As we enter a new round of distribution negotiations, we have all the confidence in the world in our ability to strike deals that are favorable to the company, given the strength of the product that we offer, particularly the strength of the brands,” Iger said.

“If you look very specifically at ESPN, we still see it as a must-have service for the multichannel providers because of the array of product that ESPN has licensed, and what they produce is original programming for the service,” Iger said. “We have seen, as I think that many of you have, a pretty interesting and dramatic increase in -- I'll call it 'app-based media consumption.' Much of it is on over-the-top, direct-to-consumer services.”

How will cable operators react?

“The MVPDs also now face a tough decision," Juenger said. "View this as an upsell partnership? But watch your backs when Disney reaches the inevitable pivot point and decides to go around you.

“Disney makes it sound like they want to position this as a win/win: ‘Upsell your subscribers to new levels of service,’" Juenger continued. "On the other hand, all it will take is a flip of the switch, and Disney can cut the MVPD out of the equation entirely. We can't think of much upside for the MVPDs to be combative with Disney at this stage, at least for the big MVPDs.”

Related > Making the Right Moves: Distributors Strategize in a New Era of Programming

There will be even more pressure on small distributors who are not making money on video and might exit that business to keep making money on high-speed internet.

“But we think the MVPDs will certainly be trying to think of ways to protect themselves against the inevitable future date when Disney goes completely direct,” Juenger said.

Read more at broadcastingcable.com.

Netflix shares are down more than 3% Wednesday morning in the wake of news that The Walt Disney Company will stop distributing new release movies to Netflix in 2019 as it prepares to launch new direct-to-consumer OTT offerings, but concerns about the effect that decision will have on Netflix’s ability to gain and retain subscribers is overblown, an industry analyst says.

“There is no dispute, Disney and Pixar movies are fantastic collections of entertainment content. The Netflix service, or any service, is better off having them (at the right price),” Todd Juenger, analyst with Bernstein Research, said in a research note issued Wednesday. “However, there is evidence from Starz that losing Disney movie output doesn't necessarily have any visible impact on subscriber growth, as long as the entirety of the service is a good value proposition to consumers.”

RELATED: Disney Set to Launch Direct to Consumer Services

Juenger recalls that Starz lost rights to Disney movie output beginning in 2016 as Netflix acquired them in a three-year deal that expires at the start of 2019.

“Since then, there has been no discernable impact on Starz subscriber acquisition, churn, or net paid subs,” Juenger added. “If losing Disney movie output hasn't impacted Starz, then it shouldn't impact Netflix.”

Related: Disney's Streaming Move Creates New Questions for Distributors

He also points out that the change in Netflix’s rights structure with Netflix only affects the OTT provider in the U.S. (Netflix doesn’t have international rights to Disney movies, save for some countries where it has independent one-off deals), and that most of Netflix’s growth is now coming way of its international expansion. In fact, Netflix’s international subscriber base has surpassed its U.S. base following a strong Q2.  

Juenger said Netflix has about two years to plan for the change, adding that there’s no current impact on Netflix’s rights to Disney’s TV content, including Marvel-branded series.

“The idea that Disney wouldn't be willing to engage with and create/license content for Netflix over time, we think, is a very low (essentially zero) probability,” the analyst wrote.

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.”