With Fox and Disney reporting Q4/full-2023 earnings Wednesday, media watchers are anticipating some details (pricing, launch date, etc.) regarding Tuesday's announcement of a major sports streaming joint venture. 

Based on Fox's early morning earnings report, we might not end up getting much info today. 

But Wells Fargo Securities analyst Steven Cahall had some interesting predictions that he shared in an investor note. 

Also read: Why ‘Re-Bundling Has To Happen’: Breaking Down the New ESPN, TNT Sports and Fox Sports Streaming JV

For starters, Cahall is in line with most analysts on the bundle's price, pegging it at $40 a month. He believes that many sports fans will complement the service with Peacock and Paramount Plus, which provide more sports plus live NBC and CBS broadcast feeds, respectively. This bundle would provide the vast majority of linear channels featuring major sports league live telecast and run around $58 a month. 

Meanwhile, Disney, Fox and Warner Bros. Discovery have described their JV as an equal measure of 33.333% ownership stakes. But Cahall thinks Disney will control half the economics, simply because its channels supply 52% of the revenue, and conglomerate pays 56% of rights fees to the leagues. 

NBCUniversal said Wells Fargo credit cards are being integrated into its shoppable-TV features on shows including Project Runway, Today’s “Jill’s Steal and Deals” and Shark Tank on CNBC.

Wells Fargo has been named the preferred financial partner for NBCU Checkout, and the bank’s customers will get exclusive benefits when they make purchases on the NBCU TV commerce platform.

Wells Fargo is also sponsoring NBCU content.

“For years, NBCUniversal and Wells Fargo have been working in parallel paths to create the best commerce experience for consumers. This partnership brings together two industries with one vision,“ NBCUniversal Advertising & Partnerships global chief marketing officer josh Feldman said. “And we’re thrilled to continue our strides in blending premium content with innovative commerce in partnership with Wells Fargo, helping fans everywhere leverage the unique benefits only NBCUniversal’s One Platform can offer.”  

Starting Wednesday during the season premiere of Project Runway, viewers will be able to buy hair care products and designer looks from the show via NBCU Must Shop TV ads. Viewers can scan an on-screen QR code to connect to a microsite where they can buy featured products.

Wells Fargo cardholders will have early access to items being promoted on “Jill's Steals and Deals” segments on Today. They will also get special offers to buy items from diverse owners pitching the sharks on Shark Tank, starting in September during Hispanic Heritage Month.

“As we continue to invest in delivering a best-in-class payments experience for our customers, we are excited to expand our commerce solutions through high-value partnerships like NBCUniversal,” Krista Phillips, executive VP, head of consumer credit cards and marketing at Wells Fargo, said. “Thoughtfully developing partnerships is a key component of our business strategy, and we look forward to delivering more simplicity and value to our customers through this new offering.”

According to Wells Fargo's Steven Cahall, Disney selling Hulu is no longer just an alternative counter-theory, existing on the outer fringes of the broader, rampant forward-looking speculation regarding Hulu's fate. It's evolved into a mainstream thesis. 

"Ask 10 investors if they think Disney will sell Hulu, and we think ~7 will answer, 'yes,'" Cahall wrote in a Wednesday morning investor note. 

Certainly, count Cahall among the other ~3. 

"We think investor expectations for Disney selling Hulu have run too far too fast," he said. 

Also read: Hulu at 15: Founding CEO Jason Kilar Recounts the Early Days of the JV Formerly Known as ‘Clown Co.’

Closing 2022 with 48 million subscribers, $10.7 billion in revenue and profitable EBITDA margins, Cahall concedes that Hulu is "an attractive streaming platform for any buyer looking for scale." 

But so much of what Hulu is roots deeply into Disney, he argues. 

"Let's not forget that most of the content comes from Disney: FX, ABC, 20th Century, Searchlight, etc.," Cahall notes. "Buying Hulu from Disney would likely require a content deal for an interim period (or buying those content engines). Those engines also provide content to Disney Plus internationally via the Star tile, so it's tricky.

Then there's the issue of who would buy Disney's controlling stake in Hulu.

Minority owner Comcast is thought by most investors to be the most likely buyer. But Cahall thinks it's more likely that the Philadelphia cable conglomerate exercises a deal clause with Disney that allows it to sell its 30% share in Hulu for around $9 billion. 

Also read: Disney Might Trade Hulu to Comcast for Hulk, Citi Analyst Says

Then there's the issue of the Disney Bundle -- Cahall thinks Hulu is a pretty good fit, supplying "general entertainment" nutrition to a diet that gets franchises from Disney Plus and sports from ESPN Plus. 

"Exiting domestic streaming general entertainment would mean ceding the market to Netflix, HBO, Apple, Amazon, Comcast, Paramount, etc.," Cahall writes. "If ESPN Plus becomes a bundler of broader sports then ESPN Plus/Hulu becomes an entertainment powerhouse to rival the lucrative pay TV bundle, while Disney Plus could likely stand alone as a global play on DIS's franchise IP."

Also read: Buy? Sell? Analyst Suggests Disney, Comcast Go 50-50 On Hulu

In conclusion, he adds, that selling Hulu is an option, "but unless Disney can get a nice price, it would seem to remove future optionality. Improving company EBITDA via cost reduction and DTC revenue growth is a better way to remove current leverage risks in our view, vs. sale of a successful domestic streaming service. We think investors counting on a Hulu divestiture could be disappointed."

Fixed wireless access broadband could add more than 10 million subscribers in the next five years, driven by programs geared toward rural markets, according to a report by Wells Fargo telecom and media analysts Eric Luebchow and Steven Cahall.

In their report, the analysts predict that total broadband subscriber additions will accelerate to 4.5-to-5 million annually in 2023 and 2024, fueled mainly by FWA and fiber overbuilds. Over the next five years, Luebchow and Cahall predict FWA will rise from 7.1 million total subscribers at the end of 2021 to 17.6 million in 2027. That growth will come at the expense of cable operators, who the analysts predict will watch their market share erode quickly over the next few years. 

While fixed wireless has been around for awhile, Luebchow and Cahall expect competition to heat up significantly in the next three years as federally funded programs spur both wireless and fiber build outs for broadband. In their report, they estimate that FWA would capture 60% of net additions through 2024. Then momentum shifts to fiber overbuilders as new inventory comes on the market. 

“In total, we expect +50 [million] new premises to be connected with fiber through 2027 that will reach [two-thirds] of addressable locations,” Luebchow and Cahall wrote. “The competitive dynamics will make the net add story increasingly difficult for the cable players, as we project cable’s share of industry net adds will fall to ~30-35% in 2023 and beyond (vs. ~94% on average the past three years).”

Wells Fargo estimated that fiber builds passed about 50 million homes in 2021 and would more than double that pace to 102 million by 2027. 

While there has been some concern around the lack of a labor force to build fiber networks the analysts believe that is less of a factor with bigger telcos. 

Initially, Luebchow and Cahall see FWA as being the biggest disruptor, mainly because of its low price -- in some cases as much as 50% lower than wireline broadband offerings -- and adding about 5 million new customers in 2022 and 2023. Fiber will take hold in 2024 and beyond, about the time that many of the build out projects started in the past few years will be completed. While that includes some cable operators -- Altice USA plans to pass 6.5 million homes with fiber by 2025 and Charter and Comcast have extended their fiber reach by about 1 million homes per year over the past few years -- Luebchow and Cahall don’t believe it is enough to reverse the coming share shift.

“The net impact is cable players will have to face stiffer competition within their footprints, and they threaten to be crowded out of a secular story that only has room for [about] 3-5 million net adds per year,” they wrote, adding they expect cable’s share of broadband net additions to drop from 87% in 2021 to 30% to 40% by 2027. 

Cable has punched back by bundling broadband and wireless phone service -- Comcast and Charter are both pairing high-speed data service with mobile offerings at a discount. 

T-Mobile and Verizon Communications have been most aggressive on the fixed wireless front, adding 532,000 FWA customers in Q1, according to Leichtman Research Group.  But so far, most cable companies claim they haven’t seen much impact from the service, which for the most part has been concentrated on less populated areas and has targeted business customers like food trucks and construction trailers. 

At the MoffettNathanson Media & Communications Summit May 18, Comcast Cable CEO Dave Watson said so far, FWA hasn’t been a major competitive factor, but that the company is keeping a close eye on the service.

“It doesn't mean that it's not competitive. It doesn't mean that we're going to take it lightly. We're not,” Watson said at the conference, adding that fixed wireless has some issues around speed and latency. T-Mobile advertises FWA speeds between 33 Megabits per second and 182 Mbps, while Verizon FWA service can range from 300 Mbps to 1 gigabit per second. Watson added that two-thirds of Comcast broadband customers take 300 Mbps and higher.

“We're coming from a position of strength in regards to network performance and WiFi performance in the household and we're not going to stop,” Watson said at the conference. 

In their report, Luebchow and Cahall noted that FWA speeds are lower than cable, but they are more than adequate for the most popular applications like streaming video.

“FWA should not be dismissed and will be a viable competitive threat, particularly in rural areas and for customers that prioritize a lower price vs. higher speeds,” the analysts wrote.  ■ 

In a worst-case scenario for the media world, cord-cutting accelerated in the first quarter, depleting the pay TV universe, while streaming subscriber growth slowed, according to Wells Fargo media analyst Steven Cahall.

Looking at the reports issued by media companies and distributors this earnings season, Cahall calculated that first-quarter pay TV subscribers were down about 4.5% compared to a year ago, 50 basis points worse than in the fourth quarter.

That translates to a loss of about 2.2 million subscribers, or 100,000 more cords cut than in the first quarter of 2020 and 400 more than in Q1 2021.

Also: Disney Grows Streaming Business To More than 205 Million Subscribers

That leaves about 84 million pay TV homes in the U.S., he estimates.

Cahall blamed slower additions among the virtual multichannel video programming distributors (vMVPDs) for the decline. Some vMVPDs have raised prices, resulting in sub declines for Hulu Plus Live and Sling TV.(He estimates that YouTube TV lost 200,000 subscribers).

Also: Netflix Shares Crater Around 25% as Service Loses 200,000 Subscribers in Q1

For all of 2022, Cahall is estimating that pay TV subscribers will be down 5.8%, falling 1 percentage point faster than in 2021.

“While industry sub declines may be worsening we think that is largely expected by investors and companies given all the content going onto streaming,“ Cahall said. ”We don't think traditional Media assets are priced to expect cord cutting to remain stable or improve long-term. We view sub declines that are down mid-single-digits as remaining stable.” 

Also: IAB: Connected TV Advertising Will Rise 39% to $21.2 Billion

Meanwhile, as the media industry turns to streaming, Cahall detected a slowdown in net added customers for subscription and ad-supported VOD. 

Cahall’s figures show direct-to-consumer net adds of 29 million in the first quarter, compared to 42 million in the first quarter of 2021.

The 12 streamers Cahall tracks had 585 million subscribers at the end of the first quarter, up 5.2% from the fourth quarter. But that represents slower growth than the 9.5% increase registered in the fourth quarter.

For the rest of 2022, Cahall estimates that streamers will have net adds of 144 million to reach 701 million subscribers. He sees that increasing to 808 million by the end of 2023.

Subscription and advertising revenue direct-to-consumer services $14.2 billion, up 5% from the fourth quarter and 28% from a year ago. But that compares to the 8% to 9% pace seen since from early 2019 through the first quarter of 2022. 

Adding in revenue for free, ad-supported television (FAST) and connected TV players like Pluto TV, Tubi, Roku (platform) and Vizio (platform), total revenue is $15.4 billion, up 29% in the first quarter of 2022 compared to 41% growth a year ago.

Cahall notes that Netflix still has the largest market share among the DTC services with 38% in Q1. But Netflix’s share as down 2% compared to the fourth quarter and compares to the 47% share it had a year ago, when many new rivals were launching or getting ready to launch. Disney’s market share remained at 15%, while Paramount’s share increased to 7% from 6%. Peacock’s share also increased to 5% from 4%. Share for all other services remained flat sequentially, he said. ■

Wells Fargo Securities media analyst Steven Cahall resumed coverage of Gray Television, giving the broadcaster a positive "overweight" rating.

Cahall, in a note Monday, set a target price of $26 per share for Gray, which closed last week at $20.16.

After a series of acquisitions, Gray is now a large-scale broadcast player, Cahall said.

“We’re bullish on its ability to generate strong free cash flow and deliver relatively quickly, driven by core ads, the midterm elections and net retrans,” he said. “We see scope for GTN to get to more than $30 if deleveraging out performs.”

Also: Gray Television Names New GMs For Stations Bought From Meredith

As a bigger group, Cahall expects Gray to be able to increase retransmission-consent revenues by 8% annually. He sees Gray getting about $4.43 per subscriber for its Big Four affiliated stations, compared to the $5.85 for Nexstar Media Group stations, $4.40 for Sinclair Broadcast Group, $5.35 for Tegna and $2.92 for E.W. Scripps.

Also: BMO Analyst Initiates Coverage of Innovid With ‘Outperform’ Rating

Cahall sees core advertising revenue down 1% in 2022 because of political crowd-out and political ad revenue of $533 million, slightly ahead of guidance. He puts Gray’s political ad revenue at $16 per household, the highest in broadcast.

In his note, Cahall compares Gray following its acquisition of the Quincy and Meredith stations to Nexstar after buying Tribune Broadcasting. "We see the same playbook in owning Gray," he said "We estimated $600 million in average calendar year 22/23 free cash flow (with upside) that will primarily accrue to equity holders on a currency $2 billion market cap."  

Cord-cutting remains a risk to the industry, but that’s baked into valuations, Cahall said, noting that Gray’s third-quarter subscribers were up modestly year over year. ■

With third-quarter earnings nearly in the books, it looks like cord-cutting was surprisingly slow, according to a report from Wells Fargo analyst Steven Cahall. 

By his calculations, total pay TV subs declined by just 105,000 in the third quarter compared to the second quarter, Cahall said. 

At the same time,  the U.S. subscription video-on-demand (SVOD) market is only a few hundred basis points off of saturation and from here, subscriber growth will be predicated on the expansion of services utilized per household, he said. 

Cahall said the cord-cutting slowdown was helped by gains at the virtual multichannel video programming distributors (MVPDs). Linear subscribers were down 7% while total subs were down just 5%.

On earnings calls, broadcasters said they were seeing declines of less than 5% while on the cable side, programmers report that their fully distributed networks were down  about 3%.

At this point, Cahall expects that pay TV subs will be down 4.8% for 2021 to $85.6 million subscribers, 10 basis points better than last year’s decline.

As pay TV subs are declining, streaming subs are increasing, but not as fast as they had been, or as fast as Wall Street expected.

"Netflix exhibiting minimal sub growth in the United State and Canada is suggestive of this trend,” he said. 

Disney stock dropped on Thursday after the company reported slower growth for its direct to consumer services on Wednesday.

For 2021, Wells Fargo estimates there will be around 317 million direct-to-consumer subs across the U.S., up from 250 million in 2020, Cahall said. That puts penetration at 85% versus 81% last  year.

“Our net/net takeaway is that there‘s less headroom for streaming services to grow than the potential decline in universe pay TV subs,” he said. “Over the next four years we think SVOD households will grow by 8 million while pay TV sub losses will be 18 million.”

That’s not great for the industry from a financial point of view. 

“Since we think that streaming tends to be lower ARPU, the linear to streaming transition still likely means flat/down earnings for the medium-term,” Cahall said.

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

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

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

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

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

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

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

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

Back to Campus, Back to Home Buying

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

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

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

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

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

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

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

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

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

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

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

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

Fueled by the inevitable slowdown of broadband subscriber additions, Wells Fargo media analyst Steven Cahall lowered his estimates on four cable distribution stocks, adding that as penetration rates rise and DSL competition sputters, the sector could be entering a period of diminished profitability.

Cahall reduced his estimates for Comcast, Charter Communications, Altice USA and Cable One on Friday, reflecting the slowing of broadband subscriber additions. While Cahall said that the slowdown is not a surprise: Most cable operators have warned for months that subscriber additions would be lower as pandemic lockdowns disappeared and workers returned to their offices. But Cahall wrote that adding to the pressure is increased penetration of homes with annual household incomes above $25,000 — now at about 100% — and the continued slide of digital subscriber line service. Cahall estimated that slower-speed DSL, a ripe target for cable broadband service, especially in rural markets, has seen its penetration rates dip from 25% about five years ago to 14% today. 

“So there is a lot less low-hanging fruit,” Cahall wrote.

Despite Altice USA’s admission that broadband adds will go negative in Q3, Cahall didn’t lower his rating on the stock — it stayed at “Equal Weight” — mainly because he doesn’t believe the company has much further to fall. But he did reduce his 12-month price target on the stock to $21 from $34 per share.

Other stocks weren’t so lucky. Cahall reduced his rating on Charter (to “Underweight” from “Overweight”) and his price target to $665 per share from $848. At Cable One, Cahall’s rating fell to “Equal Weight” from “Overweight”, while his price target dropped to $2,100 per share from $2,400. 

He kept his “Underweight” rating for Comcast, but reduced his price target to $41 per share from $49.   

Comcast said earlier last month that it expects broadband growth to soften in Q3, and Altice USA CEO Dexter Goei shook the market when he told a virtual audience at the Goldman Sachs Communacopia conference that the operator would lose between 15,000 and 20,000 broadband customers in Q3. Altice USA stock has been down about 24% since Goei made that statement on Sept. 23, and Cahall said it has in turn caused analysts to take a harder look at growth rates earlier in the year.

Also Read: Did Altice USA Cut Costs Too Much? 

“We're starting to see cracks in the growth story with recent management commentary from our coverage,” Cahall wrote. “Ultimately, we expect growth to decelerate from here as penetration is nearing its peak, competition is beginning to heat up in a meaningful way, and cable capex remains elevated.”

In his note, Cahall said that he now estimates that the Federal Communications Commission’s $3.2 billion Emergency Broadband Benefit program, which offers eligible residents up to $50 per month in broadband discounts, could account for as much as 20% of net broadband customer additions on an annualized basis. That paints a gloomier picture for future broadband growth -- most investors believe 2022 growth rates will be in line with 2019 performance -- Cahall wrote. He added that move churn, which helped operators in the first half of the year, could hurt them in the last half of 2021.

“We expect move churn to be up overall in 2022 due to pent-up demand from the pandemic,” Cahall wrote. “Along with more competition from fiber and fixed wireless, these analyses underlie our cuts to 2022-23 broadband net adds.”

Broadband Slowdown Foreseen

Overall, Cahall expects the cable distribution sector to add about 590,000 broadband customers in Q3, down 21.8% from his previous forecast of 755,000 additions. For the full year, he predicts cable broadband subscribers will rise by 2.9 million (down from his previous estimate of 3.2 million), slipping to 2.4 million additions in 2022 and 2 million by 2023. 

Also Read: How Slow Will the Broadband Slowdown Be? 

Altice USA is expected to take the hardest hit, adding just 6,000 broadband customers in 2021 (down from his previous estimate of 53,000 additions) according to Cahall’s estimates. Growth will pick up in 2022 to 62,000 customers (compared to 72,000 in 2019), slipping to 54,000 in 2023.

Charter Communications is expected to add 305,000 broadband customers in Q3 (down from previous estimates of 341,000) and about 1.31 million for the new year, slightly behind the analysts previous target of 1.375 million additions. At Comcast, broadband adds should be around 295,000 in Q3, down from his previous mark of 395,000 additions. Food the full year, Cahall now expects Comcast to add about 1.44 million broadband customers, in stead of the 1.645 million additions he previously predicted. 

Cable One, a pioneer in the broadband-only strategy that has spread across the sector in the past few years, should add about 10,000 broadband customers in Q3, in line with previous predictions, and full-year adds will be even with Cahall's earlier estimate of 167,000 additions. But growth will slow in 2022 and 2023, with Cahall predicting 31,000 and 32,000 adds for those years, respectively.  

Content is king in the direct-to-consumer streaming wars with The Walt Disney Company in the lead and Steve Cahall, analyst at Wells Fargo sees more deals like the proposed WarnerMedia-Discovery merger on the horizon as media companies seek enough ammunition to compete.

“We think the Discovery-WarnerMedia transaction represents a Media maxim: DTC is a content arms race, and scale is most necessary. More content leads to stronger engagement, which reduces churn, creates pricing power and drives margins. Netflix and Disney are putting this playbook to work, others hope to follow,” Cahall said in a report Tuesday.

“More is better and we expect more media deals that favor content scale,” he said.

In his report, Cahall looked to put a value on each media company’s spending on content and how much their programming library is worth.

Also Read: Discovery-WarnerMedia Deal 'Doesn’t Really Change Much', Says Bob Chapek

Cahall puts Disney’s 2024 content value at $47 billion (or $38 billion without sports) to lead the industry. 

The next biggest is Discovery and WarnerMedia at $36 billion. Cahall sees the combination getting to 178 million subscribers by 2024, behind Disney, Netflix and Amazon.

Comcast’s NBCUniversal/Sky content is valued at $34 billion but Cahall notes that not much of Comcast’s content drives DTC businesses.

Netflix’s content value is $28 billion, ViacomCBS is $24 billion and the combination of Amazon and MGM totals $22 billion.

In fifth place, Viacom has some decisions to make, according to the report.

“Even if curtailing licensing and folding in Showtime OTT, the recent mergers of Discovery and WarnerMedia and Amazon and MGM means tougher competition ahead. In our view it's worth considering all the options especially since scaled studios are now proven to be rare gems,” Cahall said.

The report looks at other combinations that would have huge content value, including Warner-Discovery combining with NBCU and Sky ($70.8 billion), Warner-Discovery and Viacom ($60.7 billion), NBCU/Sky plus Sony, Lionsgate and AMC Networks ($46.2 billion) and Viacom plus Sony, Lionsgate and AMC Networks ($35.7 billion).

Eventually, if you spend big on content you can get enough subscribers so that the cost per subscriber starts to come down, as illustrated by Netflix, Cahall notes.

“In short, everyone wants to be like Netflix,” he said in the report. “In 2020 NFLX had $58 in content amortization per average subscriber and from big content spend comes engagement, which reduces churn and drives pricing power through to margin expansion.”

Wells Fargo analyst Steven Cahall expects cord-cutting to get worse in 2021 despite modest improvements in the first quarter.

Cahall said he now expects pay TV  losses to be 6% in 2021, compared to a previous estimate of 5.6%. Cord-cutting was 5.1% in 2020 and 5% in the first quarter.

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

“The outlook for pay TV sub declines is as cloudy as ever. We think Q1 trends were modestly better than 4Q20 and 2020 primarily due to less bad satellite losses. Yet, the biggest linear MVPDs are flagging elevated churn while vMVPD subs fell slightly sequentially,” he said in a report Wednesday.

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

Cahall noted that direct-to-consumer streaming service subscribers additions are running ahead of expectations and that the streamers will be adding more content in the second half of the year, possibly feeding that trend and spurring cord-cutting.

At the same time Charter and Comcast said on their earnings calls that they expect video sub losses to remain elevated, which would offset continued improvement by the satellite providers.

Cahall said higher cord cutting shouldn’t have a big impact on local broadcast companies, which are looking at better core advertising revenue, potential reverse comp relief from the networks and deregulation.

Fox and AMC Networks would be most at risk among the media stocks because of accelerated cord-cutting because they have fewer direct-to-consumer assets than their rivals, he said.

The decline in cable network affiliate fees in the last quarter has been blamed on the sharp fall-off in pay TV service customers, but Wells Fargo Securities’ media analyst Steven Cahall notes that direct-to-consumer streaming offerings from networks could be having an impact on rates. 

In the second quarter, affiliate fee growth ranged from an 11% decline at AMC Networks to a 2% gain at Discovery. In a note to clients, Cahall said that he believes in addition to video subscriber declines, corporate strategies are playing and will continue to play a role in future affiliate fee softness.

“We think those network operators that choose to take their content DTC will face rate pressure from distributors in renewals,” Cahall wrote.

Overall cable network affiliate fees were down for the first time ever in Q2, according to MoffettNathanson media analyst Michael Nathanson, to -3% after a 1% gain in each of the prior three quarters. According to Nathanson, overall affiliate fee growth has been spiraling downward since Q1 2014, when rates increased by 12%.

Nathanson attributes most of that decline to the erosion of video subscribers. In his report, Nathanson noted that traditional video subscribers fell 8.3% in Q2, compared to a 7.6% decline in Q1.

“With cord cutting at record levels, price increases are no longer enough to offset distribution declines,” Nathanson wrote.

The Wells Fargo analyst acknowledged that separating DTC, licensing fees and the impact of subscriber declines from programmers’ balance sheets can be difficult. But in his report he estimated that content companies like The Walt Disney Co., Fox Corp. and Discovery showed modest positive growth in affiliate revenue in Q2 -- basically a mid-to-high single digit increase in affiliate fees offset by a 5% to 7% decline in subscribers. In comparison, AMC Networks and ViacomCBS appear to have had -4% and -3% affiliate fee growth, respectively, not including the impact of subscriber losses.

Cahall wrote that differences in content -- Disney with ESPN and Fox with its sports networks and news channels, which traditionally fare stronger than entertainment networks -- could explain the disparity. But he noted that Discovery has no domestic sports or news and managed a 2% rise in affiliate fees during the period. Cahall added that the difference is DTC strategies,

“AMC Networks and ViacomCBS are shuttling more content to their SVOD/DTC services and we think distributors are noticing, and negotiating lower linear rates since the content is no longer exclusive,” Cahall wrote. While Disney and Fox have been even more aggressive on the DTC front -- Disney Plus has more than 60 million subscribers and is considered to be the model for DTC offerings -- Cahall added that both are keeping most of their cable content separate from streaming.

Discovery said on its Q2 earnings call with analysts that it will beef up its own DTC offerings in the coming months, but Cahall doubted it would be too disruptive.

“We’d argue they’re doing OK in the bundle so maybe rocking the affiliate fee boat isn’t the best approach," Cahall wrote.

As cable network affiliate rates have fallen, both Cahall and Nathanson noted that retransmission consent fees have continued to rise strongly.

According to Nathanson, Fox had the biggest increase in retrans fees in Q2 (22%), followed by ViacomCBS (17.1%), Disney (13.3%) and NBCUniversal (6.7%). Cahall noted that station groups also saw sharp retrans fee increases, led by E.W. Scripps (up 27%), Tegna (18.6%), Gray TV (9.5%) and Sinclair Broadcast Group (4.3%).

In his note, Cahall estimated that gross retrans revenue would rise between 15% and 20% over the next couple of years.

With the Major League Baseball season about to belatedly begin, analyst Steven Cahall of Wells Fargo calculates that regional sports networks will cost Sinclair Broadcast Group $130 million in cash when the baseball, hockey and basketball seasons end.

Sinclair’s RSN Group, called Diamond Sports, will get money back from the sports teams networks carry.

Cahall figures that Diamond pays about $1.9 billion in sports rights, 62% of those going to baseball teams. Diamond will get no money back from the NHL teams, minimal money from the NBA teams and a good chunk from baseball teams, which are playing just 60 games in this shortened season, fewer than the 142 games they promised to MVPDs.

In total, Cahall estimates Sinclair and Diamond will get back $693 million of the $1.9 billion in sports rights.

According to Cahall, only the largest distributors get rebates from Diamond’s networks, which will deliver about 64% of the games they contracted for, resulting in an $823 million rebate to the MVPDs.

That leaves Sinclair and Diamond out $130 million.

“With cord cutting also accelerating, we think Diamond remains a high-risk asset for an eventual restructuring, which remains a distraction to Sinclair’s equity,” Cahall said in a research note. He rates that stock “Underweight,” but “would turn more positive if Sinclair were to exit the RSN business, especially in light of accelerating cord cutting.”

With the Major League Baseball season about to belatedly begin, analyst Steven Cahall of Wells Fargo calculates that regional sports networks will cost Sinclair Broadcast Group $130 million in cash when the baseball, hockey and basketball seasons end.

Sinclair’s RSN Group, called Diamond Sports, will get money back from the sports teams networks carry.

Cahall figures that Diamond pays about $1.9 billion in sports rights, 62% of those going to baseball teams. Diamond will get no money back from the NHL teams, minimal money from the NBA teams and a good chunk from baseball teams, which are playing just 60 games in this shortened season, fewer than the 142 games they promised to MVPDs. 

In total, Cahall estimates Sinclair and Diamond will get back $693 million of the $1.9 billion in sports rights.

According to Cahall, only the largest distributors get rebates from Diamond’s networks, which will deliver about 64% of the games they contracted for, resulting in an $823 million rebate to the MVPDs. 

That leaves Sinclair and Diamond out $130 million. 

“With cord cutting also accelerating, we think Diamond remains a high-risk asset for an eventual restructuring, which remains a distraction to Sinclair’s equity,” Cahall said in a research note. He rates that stock “Underweight,” but “would turn more positive if Sinclair were to exit the RSN business, especially in light of accelerating cord cutting.”

NEW YORK — Broadcast station group stocks, on the rocks over uncertainty around potential deals and deregulation, could be on the rebound, Wells Fargo media analyst Marci Ryvicker said, and the resurgence could spell some bad news for cable operators.

Broadcast stocks had been on a roll late last year, when investors, buoyed by the election of business-friendly President Donald Trump, helped drive shares up 25% to 35% between Nov. 9 and the end of the year. When the benefits of one-party control over the presidency and Congress didn’t come as fast as expected, stock prices suffered.

Since the beginning of the year, shares in publicly traded station groups like Sinclair Broadcast Group, Nexstar Media Group, Tegna and Tribune Media have been relatively flat.

Ryvicker, speaking at the broadcast-centric TVB Forward conference, blamed the sluggishness on disappointment over the lack of movement on the regulatory front and a lack of substantial merger activity.

So far, only Sinclair’s pending $3.9 billion purchase of Tribune has emerged, and it has underwhelmed, she said, partly because of Tribune’s asset mix with several The CW and My Network TV affiliate stations and a small cable network, WGN America. “Wall Street did not like the Tribune stock,” she said. “They didn’t like the assets.”

A finished Sinclair-Tribune deal could help open the M&A floodgates, though, and continued deregulation, especially a relaxing of local ownership rules, should heighten the deal-making, Ryvicker said.

Bigger station groups could give broadcasters more muscle in retrains-mission-consent negotiations with cable operators. Ryvicker said retransmission prospects were not a cause for worry, and relationships between affiliates and their networks are strong.

Broadcast investors also have been spooked by developments outside the industry, particularly declines in pay TV subscribers. Pay TV and broadcast networks are separate industries and have separate issues, but they often trade in tandem, even with radio.

“Investors tend to invest in bundles,” Ryvicker said. “If they are nervous about media as a whole, it’s called a risk-off trade. They start trading everything and anything that is media related.”

Disney sparked jitters two years ago by saying its flagship sports network, ESPN, had shed about 3 million subscribers. That number has risen to between 5 million and 6 million and put pressure on the entire programming sector, not just pay TV networks.

Disney also faced the first test of ESPN’s power on Oct. 1, when its deal with Altice USA systems in the New York area was up for renewal. Altice was expected to reject Disney’s demands for higher rates and broader carriage, and to allow ESPN and Disney’s ABC station in the market to go dark.

Ryvicker sees pay TV erosion continuing, estimating total pay TV subscribers will fall from 97 million in 2016 to 82 million in 2022.

While that could hurt broadcasters, who rely on retransmission-consent revenue from operators to fill their coffers, Ryvicker thinks the slack will be more than taken up by virtual multichannel video programming distributors (vMVPDs) such as Hulu, DirecTV Now and Sling TV, which have begun to include broadcast stations in their offerings. In that same time frame, she estimated, vMVPD subscribers will rise from 1.86 million to 15.9 million.

“Broadcast is in the bundle,” she said, and retransmission-consent revenue will be “totally fine.”

Telemundo's latest campaign, “Conversemos de Tus Finanzas," is meant to empower Hispanics to reach their financial goals and knowledge.

The six-week initiative is based on Wells Fargo's “Conversations” platform, featuring money management content, informational segments and more. Segments shown include, Un Nuevo Día, Al Rojo Vivo and Noticiero Telemundo, which will expand on valuable financial information.

“At Telemundo, we are dedicated to empowering Hispanics, and our collaboration with Wells Fargo is a unique and innovative way to connect with our audience to encourage them to reach their economic goals," said Executive Vice President of Advertising Sales, NBCUniversal Hispanic Group, Mike Rosen in a release.

The campaign will incorporate social media as well as web-spots from Telemundo.com’s finance section. Wells Fargo also provides a plan to budget, manage finances and build credit.

The collaboration was made in response to Wells Fargo's commitment, which includes bilingual online tools, Spanish Text Banking, Spanish account statements, Spanish-language call centers, Spanish-speaking bankers in stores across the nation, and more.

For more information about the campaign and footage, click here.