Herd on the Street

A combination of fear, loathing and uncertainty converged on cable programming stocks in two extremely volatile days last week, sending investors stampeding toward the exits in a massive market correction that some analysts said could be a sign of things to come.

The Walt Disney Co. chairman and CEO Bob Iger inadvertently sparked a sell-off after his comments during an earnings conference call on ESPN refuting some reports that said the Worldwide Leader in Sports had shed 3.2 million subscribers in the past 12 months (he said losses were “modest”). More importantly, Disney took down guidance for its cable networks (of which ESPN is a huge part), stating that instead of high single-digit percentage operating-income growth through 2016, the cable segment would report mid-single-digit percentage growth.

Iger’s comments came just as the market was digesting a flurry of negative news: a sector-wide slump in ratings and ad sales; the growing popularity of over-the-top video; the resultant increase in cord-cutting; and, worst of all, no currency to measure that viewer shift.

It was enough to create a mini-panic in the media sector of the stock market. At one point, every major cable media stock was down at least 10% on Aug. 5. The media sector lost a combined $60 billion in market capitalization during the period, according to Bloomberg.


“Yesterday was probably one of the most challenging days media investors have ever had — literally,” RBC Capital Markets media analyst David Bank told CNBC Aug. 6.

He wasn’t really exaggerating. The one-day drop for the sector on Aug. 5 was one of the worst since 2008, when the advent of the Great Recession sent shares across all sectors down by double-digit percentages. When the market closed on Aug. 5, Discovery Communications led a parade of losers, falling 12.1%; followed by Disney, down 9.2%; Time Warner Inc., down 9%; Viacom, down 7.5%; AMC Networks, down 7.2%; and 21st Century Fox, down 7%.

The declines also bled into non-programming stocks. Comcast, which owns programmer NBCUniversal but derives more than 60% of its revenue from its cable-distribution operations, fell 5% on Aug. 5 to $59.81 per share. Other cable distributors followed suit, with Charter down 1.5%, Time Warner Cable down 1% and Cablevision Systems down 1.2%.

The bloodbath continued on Aug. 6, with Viacom plunging 14.2% ($7.31 each) to $44.10 per share after reporting a sharp 9% decline in domestic ad revenue in its fiscal third quarter. For the other stocks, the losses weren’t as heavy, but they continued, with Fox down 6.4%; AMC Networks down 4.2%; Disney down 1.8%; and Time Warner Inc. down 1%. Discovery gained some ground, up 3.5% on Aug. 6, but not enough to erase the previous day’s losses. The stocks began to claw back on Friday, with Viacom and Fox up about 3% each and others rising about 1%.

Investors have been skittish about over-the-top video, declining ratings and falling ad revenue before, but those fears seemed to reach a peak after hearing Iger talk of possible weak spots in what most had believed was ESPN’s otherwise impenetrable armor.

Bank told CNBC that Iger’s comments were among the biggest factors in the selloff. Coupled with Disney’s stature as one of the most broadly held media stocks in the world, they created a perfect storm.

“I think the average media investor knew there was some vulnerability to the cable bundle,” Bank told CNBC. “But if even ESPN is vulnerable, if the gold standard is vulnerable, then maybe everybody else is vulnerable.”

But BTIG media analyst Rich Greenfield, who has warned of the perils of OTT and SVOD to the distribution sector for years, said the worst has yet to come.

“I would just stay away,” Greenfield told CNBC of Disney on Aug. 5. “As you look at the future, the cable bundle is starting to become unhinged. Consumers are just giving up on multichannel television.”

Bank added that Iger’s comments were nothing new to longtime media investors. The possible effects of cord-cutters, over-the-top competitors and poor ratings have been hot topics for years. And today’s sell-off could be tomorrow’s buying opportunity. Already the stocks started to claw back slightly on Friday, with Viacom and Fox up about 3% each and others rising about 1%.

But the 48-hour stretch between Aug. 5 and Aug. 6 seemed to feed into a growing herd mentality among media investors, who stampeded away from what they perceive as a danger.

In a note to clients, MoffettNathanson principal and senior analyst Craig Moffett said the sell-off is another indication of a change in sentiment among media investors. Whether it’s based on fact doesn’t really matter.

“Almost every investor with whom we have spoken has described an almost palpable sense that sector sentiment has changed, some would say perhaps permanently,” Moffett wrote.


After years of hearing that “content is king,” some believe sentiment is beginning to shift gradually toward distributors, which have had their own pressures with over-the-top services and cord-cutting. But while the change in viewing habits, up to now, has mainly affected cable operators, satellite and telco-TV service providers, investors are beginning to realize that the disintegration of the pay TV bundle could have an equally devastating effect on programmers.

Distributors are not taking the threat lying down. Content companies, which have offset ad revenue and ratings declines by cutting distribution deals with OTT players, are now beginning to feel the pushback from pay TV distributors.

Charter Communications CEO Tom Rutledge recently told analysts that when content companies make the programming they sell to cable companies available in other spaces in pursuit of ancillary revenue, they risk diminishing the value of those offerings.

“No trend goes unchecked forever,” Rutledge said.

Dish Network chairman and CEO Charlie Ergen said although distribution is gaining some leverage, Netflix is the “most powerful content aggregator in the world today,” mainly because of its cost structure.

Netflix pays for programming at a fixed price, while Dish pays on a per-subscriber basis. That disparity, Ergen said recently, has caused Dish to change its approach to content deals.

“We have to now look at each content deal and decide whether, long-term, that content-to-content deal makes sense for us,” Ergen said on a recent call with analysts. “When somebody comes in and says, ‘I want a double-digit rate increase,’ and they’ve had double-digit viewership declines, we don’t think that math works for us.”

The shift in viewing habits — people are watching more programming on different devices and platforms inside and outside the home — has been going on for years, as has the cry for a new measurement metric to track just how many people are watching. Measurement companies are responding: Nielsen is expected to unveil its Total Audience Measurement product by the end of the year, and ComScore and Rentrak both have products tailored to tackle the change, but so far nothing solid has been released. If the programming sector sell-off continues, will that speed development of a new measurement currency?

“The primary beneficiaries of the sell-off of the entertainment stocks are the measurement stocks,” Telsey Advisory Group media analyst Tom Eagan said. “Essentially, declines among the programmers might finally convince them to come to an industry consensus on a crossplatform metric or currency.”

CHART: To see how major content stocks fared during the downturn, click here.