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The Real Reason Wall Street Walloped the Media Business

The sky is falling in the media business, but there’s more than one poultry metaphor that explains this week’s stock-market meltdown.

Yes, the absence of any imminent threat that would otherwise trigger this hysteria should invoke Chicken Little. But chickens are also coming home to roost in this beleaguered sector; long pent-up anxiety over its increasingly wobbly fundamentals was bound to be released sooner rather than later.

The two-day tumble of the media stocks was clearly an overreaction, because while the impacted companies reported nothing on their quarterly calls this week to inspire confidence in them, the selloff was way out of proportion to the scale of their bad news.

Another way to understand the panic is that the existential angst Wall Street has been feeling about the media sector for quite some time was just begging for any excuse to be vented. That came, improbably enough, via a seemingly minor recalibration that Disney declared for its affiliate-fee projections.

To some degree, you have to give Wall Street credit for paying attention to the details; you might have thought it would have taken a more spectacular flameout to send stocks plummeting, like a huge movie bomb or a pay-TV provider pulling the plug on a cable channel. But Disney’s adjusted estimate became a lightning rod because affiliate fees are the most important revenue stream in the media mix, and Disney has the most powerful cable brand in ESPN, which is dependent on that stream.

If anything, the stock selloff may be further fueled by concerns over the state of the sports network, which has been getting socked by bad buzz in recent months related to increasing talk of the sky-high expense of its TV-sports rights and the defections of some key on-air talent. The latter issue is really a rounding error in the grand scheme of ESPN’s business, but rights costs are a more valid concern.

That said, any media-industry analyst worth his salt has been saying for over a year now that the growth of affiliate fees was going to be tapering off in the long term because of the inevitable contraction of the pay-TV market, which makes this week’s sudden selloff all the more mystifying.

Still, there was something about the mighty Disney confirming that truth in even moderate fashion that must have really hit home for a Wall Street already on edge about media stocks. The drubbing that Viacom stock suffered Thursday only validated how deep that skepticism is.

A troubling narrative about the media business has been gathering steam for many months: TV ratings are declining precipitously across the board, particularly among younger demographics. Why that’s happening is attributed to many factors, from the inadequacy of measurement capabilities to capture viewing that is spreading across platforms to the cannibalization of eyeballs by Netflix, which would hit the TV business even harder were subscription VOD services not funneling billions in license fees to TV content providers.

Regardless of the root of the ratings problems, the declining audience is triggering advertising-revenue losses that are being compounded by the inroads digital juggernauts like Google and Facebook are already making on Madison Avenue. The only revenue stream more important than advertising is affiliate fees, which are pretty solid for the foreseeable future. Cord-cutting is a real but glacially slow force that will hit affiliate fees in time, though that’s where this week’s meltdown mystery deepens: Neither the declines reported by the pay-TV distributors this quarter nor the competition from over-the-top alternatives that are still quite new suggest there’s been any dramatic acceleration of consumers ditching cable and satellite.

Media companies can boast all they want about a particular movie franchise succeeding or a new theme park opening, but these are all ancillary to pay TV, which is where the media business lives and dies in varying degrees, depending on the conglomerate.

Even when the stocks rebound, pay TV is the cloud that will be hanging over the media business for many years to come. The conglomerates will do their best to tout increasing diversification, international growth and innovations in addressable advertising, but they won’t do much to dispel the primary concern anytime soon. This is the new normal, so let’s all get used to it.

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