TV production, long hoped to be the antidote for falling ratings and affiliate fees at cable networks, is expected to grow strongly in the next several years, fueled by an unlikely ally — subscription video-on-demand providers.

SVOD companies such as Netflix, Amazon and Hulu are expected to significantly increase their spending on content this year. According to Morgan Stanley media analyst Ben Swinburne, SVOD firms will spend $15 billion in 2017, up from less than $4 billion in 2012 and led by Netflix ($6 billion), Amazon ($4 billion) and Hulu ($3 billion).

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TV production revenue is a welcome addition as affiliate fees and advertising revenue continues to be under pressure, Telsey Advisory Group media analyst Tom Eagan said. “The better media companies are able to harness studio production.”

TV production has long been the decidedly less glamorous cousin of overall studio revenue, Eagan said. But in recent years, as movie budgets have escalated and box-office receipts have dwindled, TV production has gained in stature and sales.

The big content providers rarely break out specific numbers for TV production, but most said it has become a significant, and growing, part of the overall revenue haul.

Supply for Demand
Fueling that growth is the nearly insatiable appetite of broadcast, cable and now SVOD distributors, for scripted programming. Most programmers are clamoring to meet the demand.

In May, AMC Networks announced a deal with Charter Communications where it would develop and co-produce exclusive content for the cable operator within a specific window.

At its first-quarter earnings conference call shortly after the deal was announced, AMC Networks CEO Josh Sapan said he wasn’t sure whether that deal would lead to others like it, but added that it allows for the expansion of its AMC Studios operation.

Sapan has long been a proponent of owning the content the company’s networks air — AMC Studios produces several shows for its networks including The Walking Dead, Turn: Washington’s Spies and Fear the Walking Dead. But AMC is now seeing the studio as a source of revenue for shows outside of its networks.

“It’s a significantly growing part of our top line, and so we think that being a studio and TV producer will make us important for this ecosystem domestically, both satellite, cable, telco and emerging [multichannel video programming distributors],” Sapan said on AMC’s first-quarter earnings call in May.

Others are seeing the light too. Viacom CEO Bob Bakish touted his Paramount TV Studios deal with Netflix for the show 13 Reasons Why, which has become a social media phenomenon.

Viacom launched its Paramount Television production unit in 2014 and has already exceeded its target of one drama and two comedies on-air within three years. The studio is in production for season two of Berlin Station (Epix) and Shooter (USA Network) and for season three of School of Rock (Nickelodeon) and season three and four for Bajillion Dollar Propertie$ (Seeso). It also is currently in production on The Alienist for TNT and Tom Clancy’s Jack Ryan for Amazon. In the summer, shooting begins for Netflix series Maniac and in the fall for Netflix’s The Hunting.

“Having a successful TV production business attached to the studio provides helpful consistency in cash flows, and I believe it is fundamental to the success of the studio,” Bakish said on the call. “And let’s not forget that this is a low capital-intensive business. We see considerable value here going forward.”

The Price for Rights
In a recent research note, Swinburne pointed to Hulu’s purchase of streaming rights with NBC for the 20th Century Fox Television-produced hit This is Us for an estimated record $2 million to $4 million per episode as a sign of the changing times. That deal, he wrote, “highlights the new reality that the largest syndication dollars are now from SVOD, dwarfing what TV networks/stations are paying.”

Netflix, for example, paid an estimated $1.75 million per episode for Gotham and $2 million per episode for The Blacklist in 2014, records at the time.

“For TV studios, digital dollars now dwarf TV pennies,” Swinburne wrote, adding that combined licensing fees for digital and traditional platforms for syndicated shows is now in the $2 million-per-episode range, at or slightly ahead of historical levels.

But traditional TV’s portion of that average is dwindling. Recent off-network syndication deals for Brooklyn Nine-Nine ($500,000 per episode to TBS) and Black-ish ($800,000 per episode to FX and BET) are a fraction of what they were in the past. For example, TNT purchased Hawaii Five-0 from CBS in 2011 for $2 million per episode.

Broadcast networks plan to air more than 100 scripted series next season, Swinburne noted, and the studios behind those shows will most likely generate more revenue from back-end licensing from SVOD companies than from TV networks.

Eagan isn’t so sure that SVOD licensing will surpass TV network revenue, but said it could be close.

“While we saw viewership and ad dollar substitution for licensing, I don’t think you’ll see the same kind of substitution here,” Eagan said. “It’s probably net-net, but it’s still additive. Is it additive for the company itself? Probably yes.”

The rise of over-the-top television services and a growing cord-cutting trend are applying pressure to cable’s pay TV business as never before.

As the quarterly impact of subscriber losses on legacy cable-TV operators is scrutinized, many investors’ deepest concern is an eventual tipping point at which new, internet-delivered “skinny” TV services will become the dominant viewing option and traditional bundled packages will fade.

While an in-footprint strategy focused on a next-generation video platform helped Comcast buck the trend and actually grow its video subscriber base, most other U.S. cable operators are still consistently losing customers.

Most incumbent MSOs don’t compete directly with other cable operators, a regulatory dynamic that, over many years, has resulted in a mélange of cross-industry policy, tech and marketing organizations such as NCTA–The Internet & Television Association, the Cable & Telecommunications Association for Marketing, the Society of Cable Telecommunications Engineers and CableLabs, as well as joint ventures like Canoe, the cable industry’s advanced-advertising consortium.

Because cable-TV operators are essentially awarded an exclusive franchise to serve an area, they’ve focused their video and broadband assaults on their own footprints and against rivals such as the telcos, satellite-TV providers and overbuilders.

As it becomes more challenging for operators to gain, yet alone retain, video subscribers in their own territories as they fend off old rivals and a fresh phalanx of virtual MVPDs, though, questions are swirling as to when, not if, MSOs will develop their own OTT services to launch beyond their traditional borders.

Such a brash move would create a cascade of consequences for programmers in particular, but it would certainly force other cable distributors to do the same, likely sparking an all-out video Armageddon.

OTT ON THE MARCH
AT&T and Dish Network have no such industry allegiances to worry about, and have already marched ahead with their own OTT TV services — DirecTV Now and Sling TV, respectively. Verizon Communications, meanwhile, has been rumored to be developing a virtual MVPD of its own that could be sold on a nationwide basis.

And though cable operators such as Comcast have stressed that the economics of an OTT TV service simply don’t add up, it’s clear that it and other cable operators are making the necessary preparations to build and deliver an out-of-market service — just in case.

The technology needed to pull this off is the easy part. The more difficult business-facing aspects of building an OTT service are also coming together.

Earlier this year, industry sources confirmed a Bloomberg report that Comcast has already locked in the rights to offer some channels over-the-top on a national basis. However, it was also stressed that a portion of those rights came by way of “most favored nation” clauses in carriage contracts with programmers that ensure that Comcast gets the same terms that are granted to other distributors, including virtual MVPDs. There’s also no clear indication yet that Comcast intends to act on those rights.

And Comcast hasn’t wavered from its position about OTT economics.

“We think we have a lot of opportunity just in our footprint,” Brian Roberts, Comcast’s chairman and CEO, said on the company’s first-quarter earnings call. “It’s a big upside. We continue to believe in what we’re doing. … The second thing, we just haven’t found the business model that works outside. We’ll keep evaluating, keep looking at it, but our success within our footprint is packaging, bundling. So we’ll continue to drive that internally within our footprint.”

But Comcast is a different animal even among its MSO peers, and has some advantages and initiatives underway that others do not.

X1 is a prime example. That multiscreen, cloud-based platform now serves as the core of Comcast’s next-generation video service. However, Comcast is also getting some out-of-footprint benefits, in terms of both economic scale and product influence, via X1 syndication deals it has forged with Cox Communications and two Canadian operators — Shaw Communications and Rogers Communications.

Comcast is also starting to underpin a new in-footprint skinny TV service with X1 technology. Sources confirmed that Comcast is eyeing a third-quarter commercial launch for Xfinity Instant TV, a managed IPTV service that will feature a range of packages, a cloud DVR service, and initially target broadband subscribers who don’t take a pay TV package from Comcast. Reuters said the app-based offering will be priced starting at about $15 per month and include packages that could sell for up to $40 per month, and allow for add-ons such as ESPN.

With the proper digital distribution rights, it would not seem a difficult thing for Comcast to pivot that handiwork into an OTT product.

But would it make any money? Without the benefits of service bundling, including the latching on of superhigh margin broadband services and newer products like Xfinity Home, a standalone OTT TV service would certainly be less profitable.

As another potential advantage that other MSOs don’t have, Comcast will also get a close-to-first-hand look at how profitable (or not) a virtual MVPD can be.

Hulu, which is partly owned by Comcast’s NBCUniversal, last week launched the beta version of a live TV service that starts at $39.99 per month for a lineup of 50-plus channels, including live locals of the Big Four broadcasters in some markets. The new service, which includes Hulu’s premium SVOD offering, also features some add-ons, including unlimited in-home streaming and enhanced cloud DVR service that allows users to fast-forward through ads in recorded shows, that, when bundled, push the price to almost $60 per month.

Hulu’s live service is just getting off the ground, but the company, which has revenues coming in the door from its millions of SVOD customers, is already costing Comcast big money. In a 10-Q report filed late last month, Comcast disclosed its share of losses at Hulu in the first quarter were $54 million due to higher programming and marketing costs.

Speaking on CNBC, Hulu CEO Mike Hopkins expressed confidence the new OTT service will turn a profit via its mix of live TV, SVOD and advanced ad capabilities.

Dan Rayburn, executive vice president of StreamingMedia.com and principal analyst at Frost & Sullivan, is on board with Comcast’s position about the economics of OTT.

“The economics don’t make sense; we really don’t have to debate that,” he said, pointing out that the content- licensing costs alone are a killer. “People say all you need is big scale. Netflix has 100 million subs … and they’re still not profitable.”

And the new class of virtual MVPDs face the challenge of marketing services that are designed to appeal to cost-conscious cord-cutters.

“With a live, linear service, you can never charge customers enough to make up your costs,” Rayburn said, pointing out that it’s this degree of sticker shock that caused Microsoft to throw in the towel years ago when it was mulling its own OTT TV service.

He also doesn’t believe the current pay TV environment and its battle against cord-cutting and luring in cord-nevers will force cable’s hand to go out-of-market.

He said services like Sling TV, PlayStation Vue and DirecTV Now have hardly put a dent in the market, and that there’s a good reason why they don’t (or rarely do) offer subscriber numbers — because they don’t want Wall Street to figure out the costs of running a service that sells for $20 to $40 per month.

But today’s troubling pay TV trend “certainly makes [cable operators] re-look at how things are packaged and offered,” Rayburn said. “But what’s the benefit to your overall business? I don’t see one.”

Telsey Advisory Group media analyst Tom Eagan also isn’t convinced operators are plotting to offer video service outside of their footprints anytime soon. In an interview, he said any attempts to secure out-of-market content rights are more than likely an effort to keep their options open.

“Who knows what will happen in five years?” Eagan said. “You always want to have as many levers as you can. I don’t expect anything in the next couple of years, but they want to have the optionality.”

So why, then, are all of these OTT TV services entering the fray if there’s no money to be made? Rayburn said the answer is simple — they all are owned by larger companies that can hide the bad economics, or take the hit without getting killed. DirecTV Now is owned by AT&T, YouTube TV by Google, Sling TV by Dish, PlayStation Vue by Sony and Hulu by a handful of major programmers. fuboTV, the sports-oriented vMVPD, is an exception.

TOO BIG NOT TO TRY
“No one is standalone” in that OTT TV grouping, he said. “None of these guys can survive or exist if it wasn’t a big conglomerate that was actually operating it or running it, because the economics don’t work as a standalone business.”

Colin Dixon, founder and chief analyst of nScreenMedia, agrees that rising content costs are making all pay TV services less profitable, but also believes that cable operators going OTT is an inevitability.

“I think they’re all going to end up having to do it — the environment is just ripe for it,” he said, adding that pay TV subs are seeking other video options in increasing numbers. “Even if it’s marginally profitable, it’s still incremental revenue that they get to add to the bottom line. I don’t see how they can resist doing it in the long run.”

Mike Farrell contributed to this story.


SIDEBAR: Cord-Cutting Draws More MSO Blood
If cord-cutting is among the key reasons prompting cable operators to look beyond their borders for video growth opportunities, then consider that box checked — in permanent ink.

It’s now undeniable that U.S. pay TV providers are contending with cord-cutting along with a large group of consumers who have never taken a traditional pay TV package.

Even before all public cable providers reported their first-quarter results, MoffettNathanson issued a report that said the U.S. pay TV industry lost about 762,000 video subscribers in the period, making it the worst-ever Q1 when viewed through the video lens.

“For the better part of 15 years, pundits have predicted that cord-cutting was the future. Well, the future has arrived,” MoffetNathanson principal and senior analyst Craig Moffett declared last week in his Q1 2017 Cord-Cutting Monitor, which found that multichannel video programming distributors were taking it on the chin despite positive new household formation.

First-quarter video losses were more than five times as large as last year’s loss of 141,000, and that the incremental number of cord-cutter and cord-never homes has grown to more than 6.5 million since 2013.
— Jeff Baumgartner

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

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

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

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

BARRIERS GET LOWER

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

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

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

Related:The FCC's New Playbook

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

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

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

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

Related:New Normal: Digital Distribution [subscription required]

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

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

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

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

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

OUTLOOK ON MEASUREMENT

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

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

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

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

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

With the much-anticipated launch of over-the-top service DirecTV Now expected by the end of the month, AT&T believes it has created the pay TV delivery pipe of the future. But for AT&T’s principal video business — satellite-TV leader DirecTV — the new offering might be just another siphon for its dwindling customer base.

DirecTV has already seen customer growth wane after merging with AT&T. The telco has crowed that DirecTV has added about 1.2 million subscribers since the $48.5 billion acquisition closed in July of 2015, but the numbers are a bit misleading. Most of those DirecTV additions are former AT&T U-verse TV customers who have migrated to the DirecTV satellite platform.

In the third quarter, AT&T said DirecTV added about 323,000 net new subscribers, about the same as the 342,000 added in the second quarter and the 328,000 added in the first quarter — but 70% of the third-quarter DirecTV additions formerly subscribed to Uverse. Backing out those former U-verse customers, DirecTV added just 97,000 net new customers in the period.’

INTRAMURAL SKIRMISH?

Now AT&T is getting ready to unleash yet another competitor in the video market, DirecTV Now. While details have been sketchy, AT&T has revealed that DirecTV Now will have more than 100 live, streaming and on-demand channels and will be priced at $35 per month. The service has landed deals with The Walt Disney Co., Time Warner’s Turner Broadcasting System, A+E Networks, Viacom, NBCUniversal and Discovery Communications, though it still lacks 21st Century Fox and CBS programming.

Early indications are the initial package will include popular channels such as ESPN, Nickelodeon, Cartoon Network and TNT. But there is no clarity yet as to which channels would be included in the $35 entry package — and some concern that DirecTV Now’s appeal to cost-conscious pay- TV subscribers will draw from DirecTV’s base.

DirecTV Now is targeted at the 13 million to 14 million non-video broadband subscribers across the country, but is likely to take a fair share of existing pay TV customers, too.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said swapping U-verse TV customers for DirecTV customers makes sense for AT&T because U-verse TV customers have higher programming costs — about $17 more per month per customer, he estimated. When DirecTV said it would price DirecTV Now at $35 per month, cable investors headed for the exits, fearful the OTT service would severely cut into the overall pay TV base. But that might miss the bigger point.

“By far the most at risk was AT&T itself,” Wlodarczak said. “And swapping consumers with a material margin [DirecTV] to a product with no margin [DirecTV Now], even if it lowers wireless churn or enhances wireless growth, makes no sense. That would encourage AT&T to back off if they cannibalized DirecTV.”

AT&T began migrating U-verse TV customers to DirecTV almost immediately after closing on the DirecTV acquisition. Since the fourth quarter of 2015, U-verse has shed 1.34 million TV customers, while DirecTV has added 1.21 million net new customers.

Wlodarczak believes the U-verse TV conversion will “continue to mask declines in overall satellite for a while. When that effect is over, you are likely to see pretty significant declines in satellite-TV additions in the U.S.” Cable companies, helped by broadband as part of the bundle, will be recapturing share and, to a lesser extent, virtual or digital MVPDs will also encroach on DirecTV and Dish Network, he said.

DIRECTV SUBS: BIG TV WATCHERS

Telsey Advisory Group media analyst Tom Eagan, though, is “not a big believer that we’ll see DirecTV subscribers en masse migrating to DirecTV Now. DirecTV customers are the households that watch the most channels. I don’t think the streaming service is capable of fulfilling that.”

Dish Network’s Sling TV is a test case of how an OTT service might help to erode a satellite sister offering. Dish does not break out Sling TV customers from overall subscribers, but analysts have said they think the OTT service has more than 900,000 subscribers. Some likely came from Dish, and there are analysts who think the Dish drain has had a big impact. Dish CEO Charlie Ergen said in 2015 there was “no question” that after the launch of Sling TV would eat into Dish Network’s satellite base.

In the third quarter, MoffettNathanson principal and senior analyst Craig Moffett estimated Dish Network lost about 320,000 customers while Sling gained about 204,000 subscribers. Over the past four quarters, Moffett estimates Sling has added 517,000 customers while Dish has lost 949,000.

Despite continued declines in the pay TV sector, programmers continued to report strong affiliate-fee increases in the third quarter. The results indicate that live, on-demand and other programming offerings may still have value, but skeptics said programmers are in for a big surprise as old deals roll off.

Content providers for the most part have been losing an average of about 2% of their subscribers in the past several quarters. The losses mainly reflect a growing shift away from traditional television viewing to over-the-top and mobile services such as AT&T’s upcoming DirecTV Now, slated for a mid-November launch, and more-established services like Sony’s PlayStation Vue, Amazon Video and Hulu Plus.

RATINGS SHRINK, FEES GROW

But while fewer subscribers has led to lower ratings and slower ad-revenue growth for most of the major programmers, affiliate fees continue to climb.

While that may just be a factor of different license renewal cycles and higher pricing, it could also mean that the traditional, linear pay TV network has more value than some critics think.

For programmers, the litmus test may be 21st Century Fox, which expects between 15% and 20% of its programming footprint to come up for renewal by the end of the year. 21st Century Fox, parent of the Fox broadcast network and news and entertainment programmers such as Fox News Channel, Fox Business Network and FX, reported an 8% increase in affiliate fees in the fiscal first quarter, up from a 6% increase in fiscal Q4. And the company said that it expects affiliate revenue to continue to grow at that pace or higher as new deals come online.

What intrigued some analysts, though, is that Fox claimed the increased affiliate fees didn’t come from higher pricing, but from greater volume. Fox channels actually added subscribers in the fiscal first quarter, bucking the recent trend.

Fox attributed the subscriber increases to the movement of networks like FX, movie channel FXM and sports network FS2 into broader bundles and new deals with over-the-top distributors.

Fox already has deals with Sling TV, PlayStation Vue, Amazon Fire TV, Apple TV and is reportedly close to finalizing an agreement to be included in DirecTV Now. The programmer, a partner in the online video service Hulu with Comcast’s NBCUniversal and The Walt Disney Co., will also appear in that company’s live streaming service expected early next year.

On a conference call with analysts to discuss its earnings results last week, Fox CEO James Murdoch said that while some of the upcoming Fox News renewals are for older contracts that could see a hefty price increase to align them with other distributors, “the channel is as strong as ever.”

“We feel that the product has enormous amount of value to customers and that’s reflected in its ability to and our ability to continually grow those affiliate fees,” Murdoch said on the call.

It may be a little early to call this a new trend, MoffettNathanson senior research analyst Michael Nathanson wrote in a client note. But he added the Fox difference could be tied to its programming mix — live sports on the Fox network, sports channels like FS1, FS2 and regional sports channels, as well as general-entertainment programming on FX, FXX and Fox.

“We continue to believe that owners of must-have, live, scaled content (like Fox) have pricing power despite the consolidation of the MVPD industry,” Nathanson wrote.

Fox still needs to prove it can grow affiliate fees in the latter half of the year and show some non-programming related cost discipline at its cable networks, according to Nathanson. “The first quarter is a good start in the right direction,” Nathanson wrote.

FOX AN OUTLIER?

Telsey Advisory Group media analyst Tom Eagan attributed most of the Fox subscriber gain to its “emerging networks” like FS2. He added that other programmers probably won’t see the same result because they don’t have as many emerging networks.

Barclays media analyst Kannan Venkateshwar agreed. In a note to clients, he said the growth was due to newer channels like FXM, Fox Business and FS2 getting broader distribution.

“[I]t is not clear how sustainable this trend is given these are likely noncore networks, especially in a skinny bundle world,” Venkateshwar wrote.

Still, Eagan said he believes the next renewal cycle will be difficult for programmers, as distributors point to lower ratings and declining subscribers to push for lower fees.

“For the more independent networks, it’s going to be more challenging,” Eagan said.

Prominent analyst Craig Moffett’s decision to downgrade Charter Communications stock to “neutral” last week was a bit of a contrarian move — most of the other analysts covering the sector rate the stock at a “buy” or equivalent — but it raises an important question about cable distributors overall: how long can the euphoria last?

Moffett still has high hopes for Charter, figuring the company will generate about $30 per share in free cash flow by the end of the decade and should meet integration targets for its recent purchases, Time Warner Cable and Bright House Networks.

Charter’s expected entrance into the wireless market could prove risky — both it and Comcast have said they have exercised their mobile virtual network operator (MVNO) rights with Verizon Communications — but that isn’t expected to have a material short-term impact on the stock.

The issue is whether Charter’s success and potential are already baked into its stock price.

“Given Charter’s strong [year-to-date] performance, it is now more difficult to see significant near-term upside for Charter’s stock,” Moffett, the MoffettNathanson principal and senior analyst, noted.

TARGETED AT $305

That said, Moffett still has one of the highest 12-month price targets (at $305 per share) on Charter, one of several distribution stocks that have performed well this year.

In the past 10 months, Charter shares have risen 27.3%, from $202.50 per share to $257.86 on Oct. 11. That’s only slightly behind Liberty Broadband, the vehicle that holds cable legend John Malone’s 27% interest in Charter, up 29.9% for the year.

The top performer so far this year is Cable One, up 35% to $584.80, mainly on speculation it could be a takeover target in an expected consolidation wave.

Comcast is in third place, up 15.1% to $64.96 per share on Oct. 11.

Even slower-growth stocks like AT&T, which purchased DirecTV in July 2015 and lost about 391,000 Uverse TV customers in the second quarter, and Verizon, which has seen customer additions for Fios TV product slow down, have seen their stocks rise.

Shares in AT&T are up about 14% so far this year to $39.33 from $34.41, while Verizon has risen 9% to $50.30 from $46.22.

Cable stocks have been on a phenomenal run since 2013, when Charter and Malone first goosed the market with their initial pursuit of Time Warner Cable. After a brief hiccup — the attempt by Comcast to buy TWC that was later abandoned — Charter sealed the deal last May.

Cable distribution stocks were up 50% in 2013, 15% in 2014 and 10% in 2015. So far this year, despite two fewer stocks in the mix, the sector is up about 25%. (Charter absorbed Time Warner Cable and Altice USA took in Cablevision Systems.)

Programmers, by contrast, have been hit hard due to uncertainty around over-the-top services, skinny bundles and falling ratings and ad revenue.

After a strong run in 2013, when the sector was up 52%, programming stocks began to slide in 2014 (down 1.7%) and fell 15.4% in 2015. So far in 2016, programming stocks are down 4%.

CASH RISE IN LATE 2017?

Other analysts still see runway for Charter. Telsey Advisory Group media analyst Tom Eagan raised his 12-month price target to $302. Eagan said new pricing and packaging slated for select TWC and Bright House markets in the second half of the year should be completed system-wide by mid-2017. Cash flow, expected to reach $13.96 billion by the end of this year, should rise to $15.3 billion by the end of 2017, according to Eagan’s estimates, fueled by cost synergies ($600 million in 2016 alone) and customer growth.

Eagan predicted Charter would add about 30,000 residential video subscribers and 1.75 million high-speed Internet customers in 2017.

Pivotal Research Group CEO and senior media & communications analysts Jeff Wlodarczak, who has had a “buy” rating on Charter since it came out of bankruptcy in 2009, still sees plenty of upside in cable stocks going forward, fueled by their broadband dominance. Wlodarczak also has a $350 per share target price on Charter.

“My cable thesis remains unchanged,” Wlodarczak said. Cable’s position as the primary provider of high speed Internet service to residential and commercial customers should allow cable companies to continue to “take data share, raise prices and create a halo effect for phone and TV additions,” he said.

As Wall Street still waits for more consolidation among video distributors, many such companies are eyeing deals to buy content assets that they had jettisoned just a few years ago to unlock hidden value.

So-called vertical integration, the marriage of distribution and content under one corporate roof — owning the pipe and the water — has always looked better on paper than in practice. For pay TV providers, owning a large block of the content they make available to customers would seem to lead to lower programming costs and greater exclusivity.

But operators found out the hard way several years ago that isn’t necessarily the case. As the industry grew, Federal Communications Commission programming- access rules made it virtually impossible to have truly exclusive content. With that need to make carriage deals as arm’s-length transactions, limiting any possibility for deep discounts, there was little value in keeping programming and distribution together.

Several companies cut the vertical cord by spinning off content assets over the past two decades, including AT&T and Liberty Media in 2001; Cablevision Systems (now Altice USA) with both MSG Networks (2010) and AMC Networks (2011); Viacom and CBS in 2006; and Time Warner Inc. and Time Warner Cable in 2009.

The rationale behind each split was varied, but the transactions shared a common theme: Unlocking the value of content that was hidden inside what was, at the time, a lower-growth distribution business.

As the industry moves toward an over-the-top model, where mobility and slimmed-down content packages rule the day, some believe that putting those assets together makes more sense.

Viacom and CBS will probably be the first to inch toward reconciliation, as both have put together committees of independent directors to look into a combination, with the blessing of largest shareholder National Amusements. Some analysts see that as more of a horizontal move, as CBS and Viacom both produce programming. Nonetheless, some are beginning to warm up to the idea of putting distribution and content together again.

CONSOLIDATION’S NEXT PHASE

The change of heart comes just as phase one of a continued consolidation wave among distributors winds down. In the wake of megadeals like Charter Communications’s acquisitions of Time Warner Cable and Bright House Networks; AT&T’s purchase of DirecTV; Altice USA’s purchases of Suddenlink Communications and Cablevision Systems; and even Comcast’s abandoned attempt to buy TWC, the thought is that the industry will now turn its M&A attention toward content.

The big difference is Internet video, which has changed attitudes toward vertical integration, Barclays analysts Kannan Venkateshwar and Amir Rozwadowski noted in a recent report.

“In our opinion, distributors have the ability to subsume all content under their aggregation umbrellas, which makes the whole concept of cable networks irrelevant,” the Barclays analysts wrote.

There have already been a smattering of content/distribution deals: Verizon Communications purchased a 24.6% stake in digital content producer AwesomenessTV in April, and Comcast purchased DreamWorks Animation for $3.8 billion in TV in August, to name two.

Technology platforms that help further monetize video also have been a focus with Comcast’s purchases of Visible World and investments in BuzzFeed and Vox Media, and Verizon’s AOL and Yahoo buys. Others could follow suit.

“We would not be surprised if other distributors were to potentially embrace larger opportunities in the content arena over time,” Venkateshwar and Rozwadowski wrote.

There appears to be no shortage of candidates. Speculation has been high that AT&T, fresh off its $48.5 billion purchase of DirecTV last year, is on the hunt for more content.

Not everyone is convinced that vertical integration is making a comeback, though. Telsey Advisory Group media analyst Tom Eagan said that while there could be a few horizontal deals on the horizon — Viacom and CBS being the prime example — he doesn’t expect to see any moves toward vertical integration.

“I think there has definitely been some MVPD horizontal integration, and there’s definitely been some content integration, i.e. Lionsgate and Starz. But we haven’t seen any vertical integration since Comcast-NBC,” Eagan said.

CONFLICTS ARISE

Even Comcast’s 2011 purchase of NBCUniversal — vertical integration’s shining star — now has a slight tarnish because Comcast is conflicted in certain transactions, Eagan noted. For instance, increased retransmission-consent fees benefit the content side of the business, but could hurt the operation’s cable portion.

“There’s more of an internal conflict,” Eagan said.

Comcast has claimed that retrans fees from NBC went from $0 when it bought the broadcast network in 2011 to an expected $800 million this year.

MoffettNathanson principal and senior analyst Craig Moffett also doubted the chances for a vertical-integration wave. In an email, he said the economic theory behind the vertical-integration concept is guaranteed supply or guaranteed distribution. Neither notion applies to media, he said.

“What’s left is mostly just exclusivity, and unless you believe that the program-access rules are going to sunset, exclusivity is illegal,” Moffett wrote. “I get the appeal on a superficial level, and I even get the grass is always greener argument, but the historical evidence for real synergy between content and distribution is extremely thin. If the program access rules do sunset, however, then it’s a completely different ballgame.”

Eagan was also skeptical of the earlier idea that that content companies would seek to combine in an effort to battle larger distributors, such as Charter Communications, which more than quadrupled its size after purchasing Time Warner Cable and Bright House Networks.

“The old-media model was getting beachfronts,” Eagan said. “Every new cable-network channel was a new beachfront to growing higher ad fees and more affiliate revenue. That’s not the game anymore. If you don’t have great content, it doesn’t matter if you have another beachfront.”

Still, AT&T is reportedly in the hunt for more content, and has kicked the tires on several media properties over the past year, including Starz (which was purchased by Lionsgate in June for $4.4 billion) and Yahoo (purchased by Verizon in July for $4.8 billion). According to a Bloomberg News report, AT&T CEO Randall Stephenson has a list of 40 to 45 companies that he constantly monitors, including peers and potential targets, as he plans his next move.

Adding more content seems to fit in with AT&T’s mobility strategy, which is further proffered by its planned launch of a new over-the-top service, DirecTV Now, later this year. DirecTV Now will have more than 100 live and on-demand channels targeted at younger viewers. AT&T has signed several content carriage deals in the past few months to fuel the service, including with NBCU, Disney, Discovery Communications, A+E Networks, Turner Broadcasting System and Scripps Networks.

MOBILE MOVES

Both AT&T and Verizon have been active in the deal market and see mobility as the future of the distribution business. While Verizon has focused more on digital assets for its mobile go90 service, AT&T could take a more traditional route, with some analysts predicting that Time Warner Inc. could end up in its crosshairs.

Time Warner and AT&T officials declined to comment.

Time Warner has arguably been in play since 21st Century Fox abandoned its unsolicited $80 billion offer for the programmer in 2014. Since then, Time Warner has launched HBO Now, a standalone OTT product for its flagship premium channel HBO, and set an Oct. 19 launch date for FilmStruck, with the Criterion Collection.

But along with cable networks like TBS, TNT, CNN and Cartoon Network, Time Warner also creates a large number or movies and television shows through its Warner Bros. Studios arm. Warner Bros. Television Group produces such cable and broadcast TV hits as The Big Bang Theory, The Flash, Gotham, Rizzoli & Isles, Shameless, Supergirl and Westworld.

Time Warner would attract a high price — Venkateshwar has estimated that a deal could be done for about $97 billion, including assumed debt — which could limit the players willing to make a bid.

Perhaps fueling the deal speculation is the relative sluggishness of content stocks over the past year, as uncertainty around OTT, skinny bundles and declining subscribers have sent some investors for the exits. Disney, which had its stock price rise fourfold between 2010 and early August 2015 from about $31 to $121.69, saw a 20% decline later that month, after it was revealed that its flagship ESPN network had lost about 7 million subscribers over the past few years. While Disney stock over the long haul is up by about three times its 2010 levels, it hasn’t fully recovered from the August 2015 dropoff. Shares were at $92.59 on Oct. 4.

Other content stocks have fared the same: 21st Century Fox, Discovery Communications, and Viacom are all down in the double-digit percentages from last August.

At the same time, distribution stocks — bolstered by continued broadband growth, consolidation speculation and a resurgence in video subscribers — have been on the rise.

Granted, consolidation has reduced the number of publicly traded distributors from six to four with the acquisitions of Time Warner Cable and DirecTV. But the four that remain are up a collective 30% since August 2015, driven by Charter’s consolidation-spurred 28% rise and a 5% gain at Comcast, currently the only vertically integrated cable operator.

Comcast first announced its plans to purchase a 51% stake in NBCUniversal — including the NBC broadcast network and 16 cable channels such as USA Network, Syfy and Bravo — in 2009. In 2013 it went all in, buying the remaining stake in the programmer from General Electric for about $16 billion.

In the past five years, Comcast has managed to rejuvenate NBCU’s content business, with the broadcaster atop the current TV-season ratings among 18-to-49-year-olds for the third straight year and cash flow nearly doubling from $3.7 billion in 2010 to $6.4 billion in 2015. The content side has also helped fuel Comcast Cable’s on-demand efforts.

Nowhere is that more evident than in Comcast’s August airing of the 2016 Summer Olympic Games from Rio de Janiero, where it offered more than 7,000 hours of content through live broadcasts on NBC and 11 cable channels; on-demand, through its X1 platform; and streamed online. Though overall ratings were down for the 2016 Olympics, Comcast still made about $250 million from the Games.

The Barclays analysts see even more synergies for Comcast as the nation’s largest cable operator moves into the wireless business. Comcast has activated an MVNO agreement with Verizon that would allow it to resell that carrier’s wireless service under its own brand, and has said it expects to launch a product next year.

BOON FOR WIRELESS?

Venkateshwar and Rozwadowski believe that wireless, with its heavy video component, could make content ownership even more important.

“Over the last few years, however, with mobile broadband, smartphones, Internet video streaming, and e-commerce becoming mainstream, as well as consumers and advertisers starting to look across platforms for content, the ecosystem finally is at a place where cross-platform monetization is more achievable,” the analysts wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said it makes sense for Comcast to continue to dip into the content trough, but doubted other distributors would make the plunge.

“It may make sense for Comcast to bolster its existing NBC operations to do deals and potentially realize substantial synergies,” Wlodarczak said. But Comcast and Charter might do better to set their sites on a wireless carrier such as T-Mobile, he argued, adding that such a play would eliminate the telcos’ only advantage over cable and could present huge synergies by allowing the MSOs to offload wireless traffic onto their own WiFi networks.

“The good news for cable is that getting into wireless is a lot easier than the RBOCs getting into cable’s core business, super-fast terrestrial broadband,” Wlodarczak said.

Having a big brother can be a very good thing for an independent cable network.

The proof is in the numbers — all of the independents that showed the biggest gains in carriage over the past six months have been in some way connected to a much larger content provider or distributor, like ESPN, Comcast or Sinclair Broadcast Group.

Among indie networks, Sinclair’s Tennis Channel had the biggest gain in subscribers between 2015 and 2016, according to SNL Kagan, adding 14.1 million customers. In second place was BabyFirst TV, with an increase of 10.2 million customers.

Rounding out the Kagan list is Boomerang (7.2 milion), FM (7.2 million) and beIN Sports (6.9 million). BabyFirst is one of the minority-controlled networks launched by Comcast as part of the conditions surrounding the FCC approval of its purchase of NBC Universal. Boomerang is owned by Turner Broadcasting (Time Warner Inc.), FM is part of Fuse Media — which includes cable network Fuse and is owned in part by MSG Networks — and beIN Sports is part of beIN Media Group, which operates 34 channels in 33 countries.

The big brother trend was prevalent between 2014 and 2015 as well, according to Kagan, when SEC Network (launched by ESPN) added 38.8 million homes. That year BabyFirst came in second again, with 10.2 million additions. It was followed by Univision Deportes (part of Spanish-language broadcaster Univision Communications) with 8.5 million, Comcast-launched minority channel Aspire (owned in part by NBA legend Earvin “Magic” Johnson) and Fusion (owned by Univision Communications), each with 8.5 million additional homes.

‘A LITTLE BIT OF MUSCLE’

“Sinclair has a little bit of muscle,” Telsey Advisory Group media analyst Tom Eagan said regarding independent networks hooking up with larger companies. “Tennis Channel had very little leverage.”

Tennis Channel was available in about 37 million homes in February, one month before it closed its deal to be purchased by Sinclair for $350 million. Five months later Tennis Channel said, on the eve of its coverage of the U.S. Open tennis tournament, it is available in 47 million homes and is on a path to grow that to 60 million by mid-2017.

Fueling that growth is its relationship with Sinclair, which has been one of the more aggressive broadcasters regarding retransmission-consent negotiations with distributors. With Sinclair’s added heft — it owns, operates or provides services to 173 stations in 81 markets — Tennis Channel has reached carriage deals with several additional distributors, including Charter Communications, Dish Network, Suddenlink Communications, Cable One and Frontier Communications.

Last month, on a conference call to discuss quarterly results, Sinclair executive vice president and chief operating officer David Amy said the Charter deal alone — which wasn’t expected to kick in until mid-August — would add about 1 million homes to Tennis Channel’s rolls.

Tennis Channel is carried on the expanded basic or digital basic packages on Bright House, Charter, Dish Network, Frontier, Suddenlink and Cable One, with similar rollouts planned in the months ahead for AT&T U-verse, Buckeye, Comcast, DirecTV, Mediacom Communications, Cincinnati Bell and WideOpenWest.

Other broadcasters have turned to creating their own pay TV channels to boost revenue and make their overthe- air content more compelling. Tribune Media converted former superstation WGN into WGN America in 2008 and began collecting cable-carriage fees for it in 2014, and Sinclair launched American Sports Network in 2014 and sci-fi network Comet TV in 2015.

Having that extra content doesn’t always translate into more carriage and heftier fees. Tribune found that out on June 13, when Dish Network declined to renew its Tribune retransmission-consent agreement covering 42 Tribune stations in 33 markets and including WGN America. That dispute was ongoing at press time. (Note: Dish and Tribune Media resolved their dispute and Tribune stations and WGN America were restored to Dish on Sept. 3.)

This article was updated on Sept. 8 to correct factual errors concerning the ownership of the Boomerang channel, the conversion of WGN into WGN America and a reference to the Ring of Honor wrestling program.

The one-month anniversary of the retransmission-consent dispute between Tribune Media and Dish Network passed with little fanfare last week. And though both sides claim they are still negotiating toward a settlement, some analysts believe that the end to the spat will be more a question of endurance than of compromise.

About 42 Tribune stations in 33 markets went dark to about 5 million of the satellite-TV provider’s customers on June 12, after the parties couldn’t reach a retransmission-consent agreement.

Dish has claimed that Tribune is asking for more than double the old rate for its stations and cable network WGN America, while Tribune has countered that its requested rates are in line with what comparable distributors have already paid and reflect the value of its content.

AT LOGGERHEADS

In an interview last week, Dish senior vice president and deputy general counsel Jeff Blum said the satellite company has been distributing free over-the-air antennas to Dish customers in the affected areas. Dish has also proposed several extension scenarios that would put the stations back on the air during talks and, once a deal was reached, the terms would be retroactive, Blum said.

Tribune has rejected those offers as self-serving for Dish, counterin with a longer extension proposal, which the satellite company rebuffed.

Adding to the acrimony is that broadcasters are beginning to buy pay TV networks — Sinclair Broadcast Group held up its retrans negotiations with Dish last year by trying to secure carriage for a cable channel it didn’t yet own, which turned out to be Tennis Channel — but managed to eventually work out a deal.

Tribune only owns one pay TV channel, WGN America, which was originally a superstation feed of WGN-TV in Chicago before it converted to a cable network in 2014. The network’s fees are low, though. Last year, SNL Kagan estimated WGN America attracted 8 cents per subscriber per month. Retrans fees are much higher, usually in the range of $1 to $2 per subscriber, per month.

PAST BATTLES

Tribune has had some retrans scuffles in the past. It went dark to DirecTV customers in 2012 for about four days and was blacked out to Cablevision Systems customers in the New York area in 2012 for nearly two months.

That willingness to wait it out until the other guy blinks may be a key component of the negotiations, Telsey Advisory Group media analyst Tom Eagan said.

Tribune said it is still in contact with Dish and hopes a deal can be reached, but it isn’t ready to blink just yet. The broadcaster has balked at Dish’s offer of baseball- style arbitration — it says that carriage deals are too complicated and nuanced for that type of settlement.

Eagan sees Dish with a slight edge in talks for two reasons: It isn’t as concerned with subscriber losses as other pay TV operators, and its lack of a broadband service could prevent Tribune from blocking out online access to programming for Dish subscribers.

“Management, and to a degree the Street, doesn’t care so much about subscriber growth,” Eagan said in an interview. “It isn’t that big a driver of the stock.”

Eagan said he sees Dish’s willingness to sacrifice subscriber growth for a more favorable rate as endemic to its overall strategy. It isn’t just negotiating for this deal, it is negotiating for future deals, too.

“I don’t know what broadcast-station group renewals come up after this, but they [Dish] are trying to draw a line in the sand,” Eagan said.

RISKY STRATEGY

But pay TV subscribers are fickle. In 2013, Time Warner Cable dug in its heels during a summer dispute with CBS, a period thought to be ripe for a blackout — there are no major sporting events, reruns rule the broadcast airwaves and most people spend more time off the couch. A month later — after Time Warner Cable had lost 300,000 basic-video customers, the worst quarterly subscriber loss in its history — CBS had its deal at terms close to what it had originally asked for.

No one is expecting a similar fate for Dish in this go-round. Eagan said times are different, the markets are smaller and there were fewer over-the-top alternatives in 2013. Tribune stations offer news, sports and weather information via individual station apps and websites, and viewers can access broadcast-network programming streamed online through their respective websites and apps.

“While that poses a risk for the operator in general because they have substitutes, but it also makes it easier for them [subscribers] to not leave the operator if they suddenly lose a programmer or a channel,” Eagan said.

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.”

A decade after the split that was supposed to unlock the hidden value inside Viacom, some pundits are calling for the home of MTV Networks to put the old band back together by recombining with broadcaster CBS in an aggressive move to restore value and clout to the once-powerful cable networks.

Recent moves by Sumner Redstone, Viacom’s ailing top shareholder, to possibly oust CEO Philippe Dauman and the board of directors have brought the conversation to the fore.

But many say stitching Viacom and CBS back together would be a long, costly process that might make both weaker rather than stronger.

SpringOwl Asset Management hedge fund manager Eric Jackson has been one of the loudest proponents of reconstituting the old Viacom, combining the broadcast and cable assets and placing CBS chairman and CEO Les Moonves and his team firmly in charge.

Jackson pins most of Viacom’s woes on executive chairman and CEO Philippe Dauman and thinks a CBS-Viacom recombination would offer cost savings and greater efficiencies, as well as the obvious changes in management.

TARGET: NEW MANAGEMENT

Viacom might indeed rise out of the ashes of its current predicament — but possibly too late for Dauman. “Investors will value other management taking over,” Pivotal Research Group senior research analyst, advertising Brian Wieser said in an interview. “You could literally put anyone in the CEO spot.”

Wall Street’s top candidate would be Moonves, who has overseen a huge resurgence at CBS in the past 10 years, while Dauman has seen Viacom’s value diminish. The biggest question, Wieser said, is if Moonves wants to take on the daunting task of reviving Viacom or would rather continue on his current path of growing’s CBS assets.

Under Moonves, CBS stock has more than doubled in price, to $55.17 from $26.64 per share, over the last 10 years.

CBS expects retransmission-consent revenue to reach $1 billion by year-end (up from “tens of millions” after the 2006 Viacom split) and to more than double to $2.5 billion by 2020.

Moonves has been quick to the attack on the over-the-top front, launching CBS All Access, which last year attracted an estimated 100,000 monthly subscribers. CBS has projected it could have 4 million customers by the end of 2020.

Moonves has deflected merger talk, saying on a 2015 earnings call, “We’re feeling pretty strong about ourselves and don’t need any partners.”

One roadblock could be finding an acceptable premium for Viacom, which currently has an enterprise value of about $29 billion, about the same as CBS’s EV of about $32 billion.

Wieser said a Viacom-CBS combination makes sense on some fronts and there could be tons of synergies across the board, but Moonves and CBS would have to articulate their vision for the company for any recombination to work.

Viacom still has value in that its Nickelodeon networks reach more kids than any other programmer, Wieser said. In the music arena, MTV Networks could recapture some of the lost mojo in that sector with new programming introduced at the most recent upfronts. “It really comes down to whether there is a fundamental belief in the durability of the assets,” he said. “I believe there is value in the assets, but it’s understandable why some don’t have that view.”

Others, like Telsey Advisory Group media analyst Tom Eagan, think the risks would outweigh the rewards, adding that Viacom’s problems could also be solved with time and the move toward Total Audience Measurement.

Total Audience, which is beginning to emerge from ratings companies Nielsen and comScore, potentially will track all viewership all of the time, even those elusive viewers who watch content on every device but their TVs.

CROSS-PLATFORM ELEVATION

One of Viacom’s biggest problems has been declining ratings at its youth-oriented networks, which have driven ad sales down and made the company vulnerable in affiliate-fee negotiations.

“The inclusion of more cross-platform measurement is going to help Viacom,” Eagan said. “You could arguably say it will help them more than any other cable-network group, because so much of their viewership is off-linear. But they need to be able to monetize it.”

Wieser wasn’t so sure that Total Audience would be Viacom’s magic bullet. He believes the company’s problems are much deeper, even more than its failure to develop shows its core audience wants to see and the loss of talent like Comedy Central’s Stephen Colbert and Jon Stewart.

“The fundamental problem Viacom has is, it has a controlling shareholder,” Wieser said. “Investors never seem to care [about that] until things go badly.”

About one year after abandoning its effort to become the uber-dominant distributor in the country when it walked away from its $67 billion purchase of Time Warner Cable, Comcast has turned its attention to programming, with its NBCUniversal unit's $3.8 billion deal to buy DreamWorks Animation, a move that will help boost its content library while potentially seeding its theme park business with new characters to build attractions around.

In DreamWorks Animation, NBCUniversal gets access to a film library that includes Madagascar, Kung Fu Panda, Shrek and How to Train Your Dragon, as well as a growing TV production arm that has churned out programming like Dawn of the Croods, Turbo and more for Netflix and other distributors. In NBCU, DreamWorks Animation finally gets the deep-pocketed parent that can help it produce more films and, with its cable and broadcast networks, provide another outlet for content.

Reaction to the deal was mixed. DreamWorks stock soared 24% (up $7.75 each) on April 28 to $39.95 per share, while Comcast shares fell 15 cents each (down 0.24%) to $61.15 per share.

Some analysts criticized the deal as being too pricey – it represents a 50% premium to DreamWorks’s stock price before rumors of a sale began to surface. Others said the benefits included additional theme park revenue from high-profile attractions and potential cost-savings on the animation side. NBCUniversal’s animation arm – Illumination Entertainment, under which DreamWorks would fall after the deal closed – farms out production of most of its animated movies to Japanese companies for a third of the price that DreamWorks pays.

“[T]o us, this deal makes a lot of sense, less because of the added animation heft to Illumination Entertainment (the studio that created The Minions) but more for what it could mean for the Universal Theme Parks,” Telsey Advisory Group media analyst Tom Eagan wrote in a note to clients. “It's easy to imagine a Shrek, Kung Fu Panda or Madagascar ride at the Universal parks."

BTIG Research media analyst Rich Greenfield took another approach, arguing in a blog post that DreamWorks has been on the block for at least three years, hasn’t traded above $40 per share since 2010 (the Comcast deal values the shares at $42 each) and has no other potential bidders besides NBCU.

“While we believe Comcast acquiring DWA is a mistake, [Comcast chairman and CEO] Brian Roberts clearly believes the acquisition is a good use of Comcast’s capital,” Greenfield wrote.

The analyst added that what could be attractive to Comcast is DreamWorks's 51% stake in Awesomeness TV, but said he believes that is overvalued, too – Verizon bought a 24.5% stake in the short-form video company earlier last month for about $159 million. And Verizon plans to develop content with AwesomenessTV for its go90 mobile video service, a potential Comcast competitor.

“DreamWorks will help us grow our film, television, theme parks and consumer products businesses for years to come,” NBCUniversal CEO Steve Burke said in a statement. “… The prospects for our future together are tremendous.”

DreamWorks will be headed by Illumination Entertainment CEO Christopher Meledandri, wile current CEO Jeffrey Katzenberg will become chairman of a new digital arm – DreamWorks New Media, comprisig the company’s ownership interests in Awesomeness TV and NOVA. Katzenberg will also serve as a consultant to NBCUniversal.

After a year dominated by news of a rise in pay TV subscriber losses, the emergence of “skinny bundles,” falling ratings for programmers and the continued consolidation of cable distribution, several top analysts said they believe 2016 will be a year when the media business begins to sort out its top priorities.

Telsey Advisory Group media analyst Tom Eagan believes ratings measurement — especially Nielsen’s release of its Total Audience Measurement product — could be a game-changer by offering accurate viewer data across content platforms. Falling ratings have hammered networks across the board as younger viewers move to mobile devices to watch content. With the ability to track those viewers, Total Audience Measurement could change that.

“Maybe we’ll see ratings be flat to up in 2016,” Eagan said. “We’ll know some of that when they roll this [Total Audience Measurement] out and when we see negotiations start in earnest for the upfronts in April. We may actually see a slowing down of the ratings declines, which have been occurring for the past three or four years.”

Being able to accurately measure viewing across all platforms and devices will be the final nail in the coffin for the old media business model, Eagan added.

“The old media model on the content side, which was roll out as many cable networks as you can because you’re going to get affiliate fees, is no longer the model,” he said. “You don’t want to have any weak links in your media stable.”

THE DISTRIBUTION DEALS

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said obtaining regulatory approval for the biggest merger deals of the year — Charter- Time Warner Cable and Altice’s purchases of Cablevision Systems and Suddenlink Communications — will be the top stories of 2016, but for a different reason than most suspect.

Wlodarczak said the industry will watch the Altice deals closely on the cost synergy fronts. Altice has said it believes it can squeeze $900 million in costs from Cablevision and another $215 million from Suddenlink, figures some analysts have said are too high. (The Federal Communications Commission gave the nod to Altice’s Suddenlink acquisition on Dec. 18.)

“If they do have the magic cost-cutting bullet, then others in the industry can implement the same strategies to boost EBITDA [earnings before interest, taxes, depreciation and amortization] margins,” Wlodarczak said.

As far as Charter, Wlodarczak said cable operators will be watching closely to see if bringing CEO Tom Rutledge’s business strategies to the combined entity will eventually drive low double-digit cash flow growth in 2017 and beyond.

The emergence of skinny bundles — smaller programming packages for cheaper prices — also made a big splash this year, with Verizon Communications’s FiOS TV Custom TV package, and are expected to continue to be news in 2016. FiOS Custom TV includes 45 channels — minus ESPN — for $54.95 per month initially, stepping up to $84.95 per month after a year. Subscribers also can choose from other programming packages, grouped by genres like Lifestyle, Entertainment, News & Info, Pop Culture, Kids and Sports, for an additional $10 per month.

Skinny bundles caused a bit of a stir at first — ESPN sued Verizon over dropping it from the Custom TV lineup — but haven’t really taken hold yet, mainly because existing programming contracts make it hard for distributors to break up the existing “fat” bundle. And several cable CEOs have said customers may come in inquiring about skinny packages, but the vast majority end up taking the full product suite.

Still, some over-the-top services like Dish Network’s Sling TV, which offers about 23 networks (including ESPN) for $20 per month in a single stream, have claimed success. Others, like Verizon’s go90 mobile-only service and Sony’s PlayStation Vue, are still searching for a market.

Eagan said skinny bundles could end up diluting demand for OTT.

CORD-CUTTING, SHAVING

Subscribing to skinny bundles “is the same as cord-shaving, but it’s voluntary cord-shaving,” Eagan said. “I think it will help offset the popularity of some of the OTT bundles.”

The emergence of more OTT players coincided with an acceleration in cord-cutting in Q2 and Q3, but cable operators were largely spared, due mainly to cable’s dominance in the broadband arena.

The rollout of DOCSIS 3.1, expected in the second half of the year and offering cable customers 1 Gigabit-per-second to 10-Gbps speeds, should help solidify that dominance, Wlodarczak added.

With cord-cutting not as big a concern for cable operators, MoffettNathanson principal and senior media analyst Craig Moffett said he believes the biggest overhang on the stocks will be the fear that Comcast or other operators will participate in the upcoming federal spectrum auctions as buyers.

“In the past, dalliances with wireless have been a significant negative for the stock, and we suspect some of the recent weakness in the shares owes to fears of reckless spending on either spectrum itself or on a network thereafter,” Moffett wrote, adding that it “is honestly not something we worry too much about.”

After a seasonally weak second quarter, analysts and investors hope better broadband subscriber results and continued improvement in basic video-customer growth in the third quarter will lead to better days for the sector.

Pay TV took a beating in the second quarter, as steady basic subscriber performance by cable companies was off set by greater telco and satellite losses. Like the previous period, the third quarter also is seasonally weak, as students return to campus in September, but analysts are optimistic that stronger broadband growth will off set any video declines.

“The good news about Q3 which, like Q2, is a seasonally weaker time of the year (all the additions are weighted to September) is that whatever the results, Q4 trends should be seasonally stronger, so they will likely be able to point to solid Q4 trends,” Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said. “The overall focus, though, for cable investors should be on data subscriber results, which is clearly the key in the cable investment thesis.”

EARNINGS CALENDAR

Comcast, Time Warner Cable and Charter Communications are slated to be the first two out of the box with third-quarter results — Comcast is scheduled to release earnings on Oct. 27 with Time Warner Cable and Charter following on Oct. 29.

Both cable giants managed to report strong second-quarter customer growth — Comcast reduced its basic-video losses to 69,000 from 144,000 in the year-ago period, while keeping broadband customer additions relatively stable (180,000 in Q2 2015 vs. 203,000 in Q2 2014.)

Time Warner Cable, which is currently winding through the regulatory approval process in its $78.7 billion merger with Charter, reported some of its best quarterly subscriber growth in years in the second quarter — basic-video losses were down to 45,000 (compared to a loss of 152,000 in the prior year) and residential broadband additions were 172,000, nearly triple the 67,000 adds in the prior year. The consensus is that both companies will continue on that path in the third quarter.

Telsey Advisory Group media analyst Tom Eagan said the momentum of the past few quarters should continue for cable operators.

“We expect the numbers to be better than last year,” Eagan said of third-quarter results. He added that satellite TV providers DirecTV (now part of AT&T) and Dish Network are expected to continue their subscriber slide. And while telcos are expected to report video gains, growth is likely to be slower. That was evident last week when Verizon Communications said it added 42,000 FiOS TV customers in the third quarter, compared to 112,000 additions in the same period last year.

Charter lost about 33,000 basic-video customers in the second quarter, on par with the 29,000 it lost in the prior year.

In a note to clients, Morgan Stanley media analyst Ben Swinburne wrote that he expects third quarter pay TV subscriber losses to be slightly higher than last year — 90,000 compared to 55,000 in Q3 2014. But he expects cable to fare much better in the period — he predicts overall cable customer declines of about 110,000 compared to 345,000 last year.

All eyes will be on Time Warner Cable, which has dramatically changed its subscriber fortunes in the past year, Eagan said.

“They were one of the worst performers last year in terms of customer loss,” Eagan said. “Now [TWC chairman and CEO] Rob Marcus has said most recently they expect to add subscribers this year. That’s probably the biggest turnaround.”

The Charter deal is supposed to close by the end of the year and is currently winding through the regulatory approval process. While some analysts believe that the actual closing will take a little longer, possibly lasting into the first quarter of 2016, Eagan said investors are confident the transaction will be completed. He noted that the spread between Time Warner Cable’s trading price and the Charter offering price has narrowed from 7.2% to about 6.8% in the past few days, “which shows that the market feels better about the deal closing.”

Several companies have come out in favor of the deal and even its opponents said they would change their stance if certain conditions — mainly involving net neutrality and access to content — were adhered to. The Federal Communications Commission is shifting its focus away from distributors that could potentially restrict access to over-the-top video to another aspect of the industry, Eagan said.

“We think the sector most impacted by the FCC in 2016 is going to be content, not cable,” Eagan said, adding that the agency will be especially interested in retransmission-consent fees and network nonduplication rules that prevent distributors from importing distant broadcast signals into local markets.

NOT MUCH OTT IMPACT

The analyst added that fears of over-the-top video taking a chunk of cable subscribers for the most part have been unwarranted and that SVOD services like Netflix and Hulu, as well as OTT offerings like Sling TV, have proven to be a complement to the pay TV subscription.

“Every five to seven years there’s a new competitor — first it was satellite, then it was telco and now it’s over- the- top,” Eagan said. “I think, ironically enough, OTT will be less of a competitor than satellite and telco were to cable. You’re seeing those customers already being pay TV customers or they were never pay TV customers in the first place. OTT isn’t a replacement. ”

That could change if over-the-top offerings offer more channels at an affordable price, though.

“I would say cable has to get significantly worse or more expensive or OTT service has to get significantly better or cheaper for them to take material market share,” Eagan said. “I don’t think we’re quite there yet, especially with the average viewer watching 149 hours a month.”