A combination of continued quarterly subscriber erosion, the shift of their best programming to streaming platforms and declining affiliate-fee growth could help accelerate the demise of linear TV as we know it, according to a MoffettNathanson report.
In a report released Wednesday, MoffettNathanson senior analyst Craig Moffett noted that in the not-too-distant past, when streaming was gaining subscribers at a torrid pace, Wall Street and most of the content industry wasn’t too concerned with declines in the traditional linear-TV business. Now, with streaming growth hitting a rough patch — Moffett described it as “descendent — not necessarily declining, but the bloom is assuredly off the rose” — more attention is being paid to the linear business.
Moffett noted that despite its relatively uncool current stature, linear TV is still paying the bills. Linear TV revenue, at $86.3 billion, is nearly four times that of streaming ($22.6 billion), he said. That could pose problems for content creators as their core linear business — pay TV — is declining at a 6% annual clip, with some major components — cable and satellite — flirting with 10% declines.
Moffett pointed to former The Walt Disney Co. chairman and CEO Bob Iger, who said at the recent Code conference that “linear and satellite TV is marching toward a great precipice, and it will be pushed off. … I can’t tell you when, but it goes away.” Moffett and other analysts have been predicting the demise of the linear TV model for years — last year, former Bernstein and current Wolfe Research analyst Peter Supino estimated that DirecTV would disappear in five years — and others have estimated that given the current rate of decline there was little hope that pay TV would survive 10 years down the road. Now, Moffett says that cable companies, focusing more on broadband and wireless opportunities, seem to have thrown in the towel on video.
The two largest cable companies — Comcast and Charter Communications — don’t see video as the critical piece of the business it once was, according to Moffett. Charter in particular, he wrote, appears particularly frustrated with media partners that make decisions that are increasingly counter to their best interests, like raising prices and shifting expensive programming such as sports to direct-to-consumer products.
Cable operators like Comcast have responded by introducing products geared toward broadband-only subscribers, like Flex, which offers an array of free streaming video options along with easier access to apps for subscription services.
“Both Comcast and Charter have made it clear they are fully willing to let video customers walk, even to the point of helping them with streaming options if they desire,” Moffett wrote.
According to the analyst, with the best scripted entertainment shifted to streaming and regional sports networks (RSNs) falling from lineups, linear is left with news, some sports, reality shows and “scripted leftovers.”
“With more and more must-have sports content now being made available on streaming platforms — not just by Comcast and Paramount on their streaming platforms, but by Amazon and Apple as well — the linear model is hanging by a thread,” Moffett wrote.
That is coupled with the continued erosion of traditional pay TV subscribers, which reached another new nadir in Q2.
Pay TV Erosion Persists
Overall pay TV subscribers fell 6.1% in Q2, with cable, satellite and telco providers all reporting steep declines. Cable TV led the walk of shame with 1.048 million fewer linear TV customers (a 7.8% decline), while satellite TV shed 635,000 subscribers (a 12.5% decline) and telco TV lost 223,000 customers. Overall, traditional pay TV lost 1.95 million customers. Including virtual MVPDs like Sling TV, DirecTV Now and Hulu Plus Live TV, pay TV providers shed 1.9 million customers in the period, according to Moffett.
Pay TV penetration of occupied households fell to 50.5% in the period, its lowest level in 30 years, according to Moffett. And virtual MVPDs, which have previously taken up some of the slack from cable losses, are no longer doing so. Virtual MVPDs showed a gain of just 42,000 subscribers in Q2, with gains at YouTube TV, Philo TV and Vue (an estimated 250,000 subscribers) and DirecTV Now (56,000), barely offsetting losses at Hulu Plus Live TV (100,000), FuboTV (109,000) and Sling TV (55,000).
But while the continued loss of subscribers is concerning — but not necessarily surprising — the continued decline and emphasis on streaming video also is having an impact on network affiliate fees. According to Moffett, aggregate media affiliate fees grew 1% in Q2, its lowest rate since Q2 2020, which was driven by the pandemic. Cable-network affiliate fees were flat (0% growth), but Moffett warned it could be lower because subscriber losses haven’t yet been factored in. Broadcast retransmission-consent revenue growth, impacted by pay TV subscriber erosion for years, was just 8% in Q2, compared to 13% last year.
Retrans, License Fees on the Wane
Moffett has estimated that retrans revenue growth will flatten out to 7% by 2025, but added that affiliate fees could shrink into negative territory as larger content companies like Disney and Fox face possible declines. According to Moffett, Fox’s affiliate fees rose 2% in Q2, Disney’s were up 1% and NBCUniversal’s were flat in the period, but the rest of the sector — Warner Bros. Discovery (-2%), Paramount Global (-2%) and AMC Networks (-7%) — showed declines.
For the moment Moffett is sticking to his forecast that cable network affiliate fees will be flat in 2022 and through 2025, but noted that may be optimistic.
“We are hurtling to the 50 million to 60 million U.S. Pay TV subscriber level that we have always offered as the ‘floor’ due to sports and news,” Moffett wrote. “The question now is whether sports and news will turn out to be the bulwark we’ve always expected.”
Moffett added that regional sports networks are beginning to fade from traditional distribution outlets and vMVPDs, while two of the largest media conglomerates are making their biggest sports properties non-exclusive to the linear bundle. Online juggernauts like Amazon and Apple have already dipped their toes into the sports business, and as the NBA contract comes up for renewal in two years, are expected to at least circle those properties, possibly driving up the price for ESPN and TNT.
“The problem, in other words, isn’t so much demand as it is supply … and where (else) that supply can be found,” Moffett wrote. ■
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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