Nets Hope Virtual Ops Can Stem Losses

As if there were any lingering doubts, the two largest cable-network groups confirmed what many analysts have been saying for months (and years): Cord-cutting is real, pay TV subscribers are declining at a faster pace than expected and content providers aren’t really sure what to do about it.

21st Century Fox was the last major programmer to release results last week, and they showed that having the most-watched network in the country — perennial ratings winner Fox News Channel — isn’t enough to stop the bleeding.

Fox is losing about 1.5% of its pay TV subscriber base to cord-cutters, cord-nevers and skinny bundles, compared to about 3% for peers such as The Walt Disney Co. and Time Warner Inc.

Overall, pay TV networks had been losing about 2% of their subscriber base in past quarters.

Fox echoed what other big programmers have said in the recent past: the losses could have been worse if not for deals with over-the-top providers like DirecTV Now, Sony PlayStation Vue and Sling TV, which (depending on who you listen to) have either already taken over the pay TV distribution business or are about to.

The reality lies somewhere in between. 21st Century Fox CEO James Murdoch told analysts the impact of over-the-top providers such as DirecTV Now and Sling TV has been small so far, mainly because they have only been in existence for a short period of time. As other OTT services emerge — Hulu Live has just launched and YouTube TV debuted in April — Fox believes they could have a broader impact going forward.

Murdoch was light on details, though, saying it’s still “early days” for OTT carriage and that Fox’s success with new distributors can be tied to continued investment in its brands.

Not every analyst was convinced Fox had the solution to subscriber declines. In a research note, Sanford Bernstein media analyst Todd Juenger said it was more likely that minimum subscriber clauses in its distribution agreements are propping up Fox’s numbers.

“It’s a head-scratcher how Fox claims to have lost only -1.5% subs from their fully distributed cable networks, about 125 [basis points] better than Disney — unless Fox is benefitting from minimum guarantees that Disney is not,” Juenger wrote. “But minimum guarantees aren’t sustainable without subs.”

In a client note, Morgan Stanley media analyst Ben Swinburne said Fox’s younger-skewing networks such as FX, national sports channels FS1 and FS2 and its regional sports networks, “which have very high carriage minimums,” helped to temper losses.

Juenger said ratings at the Fox networks outside of Fox News are nothing to cheer. Overall, household rating were up 6% in the period but ratings among persons 2-plus rose 5% almost solely on the back of Fox News.

On the analyst call to discuss fiscal third-quarter results, Fox chief financial officer John Nallen said the most interesting aspect of the new OTT providers is that they are finding different segments of the audience to serve.

“So between DirecTV Now and Sling TV, YouTube obviously Hulu, and PlayStation Vue they all very different services and we think this is incredibly important because … many of them are designed to replace traditional MVPDs’ subscriber numbers and losses, but they’re targeting entirely new segments of U.S. households, segments that have broadband now but potentially don’t have traditional MVPDs,” Nallen said, adding that inspires confidence that the services will help stem declines and “will actually grow the universe quite significantly over time.”

At Disney, where the falloff in subscribers was first evident at flagship sports network ESPN in 2015, chairman and CEO Bob Iger also said OTT has helped temper customer losses, emphasizing again that it was still early on that front.

Iger was encouraged by the trend — ESPN plans to launch its own direct-to-consumer offering later this year, using content and rights currently not being exploited on the ESPN linear networks — but stopped short of saying the solution lies in bypassing traditional distributors all together.

On the Disney earnings call, Iger pointed to Disney’s direct- to-consumer offering — which some analysts have said is too narrowly focused to make a meaningful dent in sub losses — and its foresight in identifying the problem two years ago.

BTIG media analyst Rich Greenfield, a frequent critic of Disney and ESPN, said just identifying the problem isn’t enough. Despite the declines, he said, “their seemingly reckless spending on long-term sports rights” does not seem to be in sync with those comments.

Greenfield blogged that Iger’s apparent dismissal of emerging skinny bundles that exclude sports — the Disney chief said launching a new platform without ESPN would be “very challenged” — could be a dangerous move.

Greenfield noted that the fastest-growing package in the largest virtual MVPD (Sling TV with an estimated 1.3 million total customers) is one without live sports. And more are expected to come.

“With ESPN sub losses increasing and without meaningful rate increases, it is not hard to see ESPN’s revenues entering secular decline in the not too distant future,” Greenfield wrote. “On top of accelerating sub losses, it will be hard for ESPN to maintain high-single-digit rate increases as existing distribution deals come up for renewal given the rapidly deteriorating MVPD landscape, unless they enable far greater packaging/tiering flexibility (which we do not see happening).”