There was a ton of news beyond revenue and adjusted net income during the second-quarter earnings season.
TV-sector companies made announcements that reflect how their top managers think about changing business models and embarked on new strategies that will shape the industry going forward.
Wall Street has been sour on the outlook for the still highly profitable cable network business, with pay TV subscribers deteriorating, more viewing shifting to digital platforms and advertising revenue flat.
Credit Suisse media analyst Omar Sheikh said he expects subscriber losses to pick up in the second half of the year as virtual distributors ramp their marketing for the start of the NFL season. Sheikh sees traditional distributor subscribers falling by 3% to 3.5% year over year in the second half while vMPVD subscribers increase by 55% to 60%. That would leave the pay-TV business declining at a 1.9% rate by the fourth quarter.
If you’re in the TV business, what do you do? If you’re Discovery Communications you announce a deal to build scale by acquiring Scripps Networks Interactive. Or, if you’re The Walt Disney Co., you change strategy and take your Disney and ESPN content direct to the consumer via streaming.
The smart money on Wall Street congratulated Scripps Networks and its shareholders for getting out while the getting was good. Ditto for Time WarnerInc. and its shareholders.
“This shotgun marriage is a clear sign that the cable network industry has seen the future, and that future requires deep cost cutting and increased scale to mitigate both the current-headwinds and the inevitable painful changes that lie ahead,” analyst Michael Nathanson of MoffettNathanson Research said.
On the other hand, shareholders in AT&T and Discovery Communications should brush up on their Latin. “Caveat emptor,” Nathanson added.
Nor was Sanford Bernstein media analyst Todd Juenger a fan of media mergers. “We favor companies that have the least number of superfluous networks, the lowest affiliate fees relative to their importance, unique advertising propositions, and meaningful brands,” he said. “But we fear the entire sector will struggle to work until the content owners take concerted action to reclaim on-demand viewing from the SVOD services and use it to protect affiliate fees.”
Disney Goes BAM
While Wall Street had been urging Disney chairman and CEO Robert Iger to embrace going direct to the consumer, the decision to buy a bigger stake in Major League Baseball’s BAMTech and stream its brands filled analysts with uncertainty.
“If there is any company that can pull something like this off successfully, it is Disney,” Wells Fargo media analyst Marci Ryvicker said.
“Unfortunately, there are too many unanswerable questions,” she added. “How does this impact Disney’s upcoming affiliate renewals? How should we think about pricing — especially since it sounds like Disney is targeting market share over premium pricing? What will the investment spend be? Why doesn’t this include ABC? Will Disney have to investment spend have to make significant technological investments to support BAMTech’s innovation?”
Barclays analyst Kannan Venkateshwar warned that streaming was not necessarily salvation. “Most media companies are looking at OTT as a defensive mechanism to solve for the loss in legacy distribution due to cord-cutting/shaving,” he said. “We believe just taking content that works on TV and plugging it into the internet is unlikely to be enough.”
The darling of earnings season was CBS and its always bullish chairman and CEO Les Moonves.
“We are not only capitalizing on the changes in our industry, but we are shaping the direction of these changes as well,” said Moonves, announcing fast growth of CBS and Showtime OTT products and plans to launch a streaming sports channel.
“CBS is seeing no subscriber erosion — with CBS pretty much on every single distribution platform (except Sling), this should not be a surprise,” Wells Fargo’s Ryvicker said. “By the way, this is exactly why we like the broadcast business model better than cable nets.”
But some wondered what CBS’s next move would be buying another company, such as CNN or Viacom, or selling to a bigger fish.
“Most likely, CBS just stays the course, continuing to grow retrans and hold together everything else, artfully shuffling the pieces around and timing licensing deals so that the totality appears intact, while the rest of the world around them becomes more desperate,” Bernstein’s Juenger said.
With Disney going over the top, “the MVPDs also now face a tough decision. View this as an upsell partnership? But watch your back when Disney reaches the inevitable pivot point and decides to go around you,” said Bernstein’s Juenger.
Despite the pressure on distributors, there was no shortage of companies rumored to be interested in buying Charter Communications, the No. 2 cable operator.
MoffettNathanson principal and senior analyst Craig Moffett found that bemusing.
“It has been easier to count the companies that haven’t reportedly considered an offer for Charter than to keep abreast of those that have. We still haven’t heard from ExxonMobil. Nor from Procter & Gamble. And surely it is only a matter of time before Tesla weighs in,” the analyst said, maybe half-kidding.
“What is most surprising about the flurry of reported suitors — first Verizon, then SoftBank, now Altice – isn’t that they are considering deals, it is instead that the market takes them all seriously. None are credible,” Moffett said.
“Let’s put a finer point on it. The only reason John Malone would be willing to swap his equity in Charter for equity in Altice would be if he believed, with real conviction, that Altice could simply manage the asset better than Charter’s current management,” Moffett said. “It is not a knock on Altice to suggest that there is simply no way that Liberty would believe that. Next.”
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