DOJ probe could lead to job losses, market cap drain
A prominent Wall Street media analyst has issued a dire warning to the TV industry, cautioning that government interference could risk the loss of 1 million U.S. jobs, hundreds of TV channels and hundreds of billions of dollars in market capitalization.In a report issued Friday, Laura Martin with Needham & Co. likened the U.S. government to a “bull in the proverbial china shop” due to the potential damage that could result if federal intervention was enacted to boost new market entrants in video distribution, a move she deemed unnecessary. The warning comes barely a week after a Wall Street Journal report suggesting that the Department of Justice was investigating whether cable companies were engaged in anti-competitive practices toward upstarts like Netflix and Hulu. While the DOJ has yet to confirm any activity, the department reportedly is looking into everything from broadband pricing to affiliate agreements. “We believe that the government should trust that Silicon Valley entrepreneurs with 150 IQs can solve the puzzle of how to steal a portion of the $150 billion annual revenue from TV incumbents,” she wrote. Martin advocates the classic economic theory of the “invisible hand,” which stipulates that free market forces should sort themselves out to the consumer’s benefit rather than being regulated. “What troubles us the most about government intervention into an ecosystem where the invisible hand is working is the employees they put at risk,” she said. Martin calculates that private and public media companies employ about 1 million workers in the U.S. — far more than the tech companies who she believes that the government seems more inclined to protect. She characterizes the average TV-business employee as middle-class citizens who mostly live in rural America and not always have college degrees — in stark contrast to the ranks of tech workers who have graduate degrees and reside in large cities. Needham data shows that Disney has the most employees among public media companies, with 156,000. NBCUniversal parent Comcast is a close second, with 126,000. In addition, Martin calculates the impact so-called cord-cutting could have on the major public content companies should 1 million households cancel their multichannel video subscription. While Disney would face the highest loss in such a scenario — $763 million — it would actually lose less than 1% of its market cap. CBS would be the most exposed, at 3.1% of its market cap. Martin also cites FCC research suggesting that if any federal investigation leads results the imposition of a la carte channel distribution, she calculates an aggregate loss of $300 billion in market capitalization. She estimates that advertising revenue would drop by approximately 75% while subscription revenue would decline 15-20%. In addition, she estimates the cost of content companies going direct to consumers at $5 billion. Martin offers an equally grim outlook on the number of channels that would survive in an a la carte scenario. “We estimate that only 5-10 hit channels would be profitable enough on a stand-alone basis to survive unbundling, implying that 125 channels would become uneconomic to produce,” she wrote. YouTube, Netflix, AOL, Yahoo and Hulu get high marks from Martin for establishing a parallel video economy she predicts will impact the mainstream TV distribution system. But she notes that these companies need to improve picture quality, content discovery and content length to gain parity on existing players.