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Cable Under Fire: Plunge in Ratings Could Spell Trouble for Top Nets

Steve Burke is not an executive prone to exaggeration. If anything, the NBCUniversal CEO is known for his understated style in public settings.

So when Burke made a blunt statement about ratings growth potential for the Peacock’s domestic cable channels during Comcast Corp.’s Oct. 23 earnings call, heads turned on Wall Street and in media biz circles.

“The fact of the matter is, the next five or 10 years in basic-entertainment cable, as it relates to ratings, are going to be much more difficult than the last five to 10 years,” Burke said. “Our big cable channels, particularly when sold as a portfolio, are very attractive and very powerful. I just think it’s unreasonable to assume that the ratings for those businesses are going to grow if you look over a five- or 10-year period.”

The biggest surprise generated by Burke’s comment was not the forecast itself, but the fact that a top CEO was baldly articulating the sentiment among media-biz watchers that the halcyon days of growth for the largest ad-supported entertainment cablers is coming to an end.

Virtually all of cable’s top entertainment outlets have suffered double-digit ratings declines so far this year — drops that are particularly pronounced in the C3 ratings (live broadcast, plus three days of playback on DVR after the original airing) that are the currency of advertising sales.

Illustration by Brian Miller for Variety

For this year’s third quarter, C3 ratings among adults 18-49 were down 8% across the board for the major groups — with steeper drops of 22% across the A+E Networks cablers (A&E, History, Lifetime); 14% across the NBCUniversal cable cluster; and 13% for both Disney’s cablers and those of Time Warner, notably TNT and TBS. These and drops at other networks follow a steady rate of declines in the past few quarters, according to research by MoffettNathanson. 21st Century Fox’s cable group was the only one to buck the trend in the quarter, thanks to the success of “The Simpsons” 12-day marathon on FXX.

But the headwinds that Big Cable faces are much stronger than what might be deemed as a cyclical drop in viewership. In short, the most established players — think USA Network, Syfy, TNT, TBS, A&E, Lifetime, MTV, Discovery, FX, AMC, ABC Family, among others — are starting to grapple with the issues of audience erosion, rising programming costs and heightened competition for ad dollars that have bedeviled the Big Four broadcast nets for more than 20 years.

“The overriding impact we see as programmers is that there is an almost unstoppable trend for technology to facilitate consumer discretion and choice,” said Josh Sapan, president-CEO of AMC Networks. “Because of that, you have to be certain to have something that has deep appeal for the people you’re trying to reach.”

Nobody’s suggesting that basic cable has suddenly become a bad business. But Wall Street’s bearishness on domestic growth prospects for cable has amounted to a sharp 90-degree turn after years of fawning over the sector. Showbiz’s largest congloms — Disney, Time Warner, Comcast, Fox and Viacom — are deeply dependent on the reliable cash flow from cable channels (see chart) at home and abroad to pump up earnings. Cable execs are accustomed to leading divisions that are the heroes of quarterly-earnings reports.

“The (ratings) declines at most of the cable networks were nothing short of staggering,” according to a MoffettNathanson analysis that spotted double-digit dropoffs at the conglomerates that own some of the biggest portfolios of channels. Combined, these companies were down a collective 8% in the third quarter. Only Fox managed to dodge the trend, which MoffettNathanson attributed to the success of “The Simpsons” marathon on FXX.

As such, investors’ focus on the challenges ahead has undoubtedly played a part in the recent drop in share prices for most of the congloms and pure-play cable entities, including Discovery Communications, AMC Networks and Scripps Networks Interactive.

Some of the ratings declines can be chalked up to time-shifted viewing and measurement systems unable to keep pace with the new ways that people watch television. That’s money left on the table. But the prolonged downturn for many channels indicates more fundamental weaknesses specific to each outlet.

The overall softness in the TV advertising market isn’t helping to brighten the picture, either. Where cable was once the upstart disruptor, snatching market share from broadcasters, now the largest cablers are feeling the pinch of ad dollars migrating to digital platforms. Cable’s upfront advertising haul slid 6% this year from 2013 to $9.6 billion, the first drop in four years, according to the Cabletelevision Advertising Bureau.

Some of those lost upfront dollars will shift to the scatter market, but that remains a pricing challenge for nets that are suffering ratings declines.

The industry’s response to the anticipated roller-coaster ride ahead is evidenced in many ways. Turner Broadcasting is implementing a mass staff cut of about 1,500 positions, through buyouts and layoffs, which are part of a larger cost-cutting initiative at Time Warner. This overhead-shaving comes as the company has vowed to increase annual spending on programming for TNT and TBS to $1 billion by 2018, up from $500 million in 2013.

AMC, the flagship of AMC Networks, abruptly pulled the plug on four reality series last month, and scrapped other unscripted development as it refocuses programming resources on the dramas that are the cabler’s bread and butter. The shift is expected to result in the departure of at least one programming exec.

USA Network did a similar about-face with its half-hour comedy development, which also led to the departure of a programming exec. NBCU’s cornerstone cabler is enjoying its most profitable year ever, but the comedy decision was made in order to plow more money into high-end, ambitious dramas — the kind that spur binge-viewing, and draw big bucks from SVOD outlets.

Moreover, USA and TNT are among the networks dealing with a serious case of “Breaking Bad” envy: Both nets are redoubling efforts to develop edgier dramas that command a mix of critical buzz, rabid fandom and must-watch serialized plots. That’s seen as the type of content with greatest value in a world where more and more viewers are cherry-picking shows from time-shifted and on-demand platforms.

But there are quiet concerns in the biz that broadcast and cable networks may be getting too dependent on the gusher of licensing money from subscription VOD and international buyers, which might slow down in the coming years. These revenue streams are crucial at a time when programming costs are spiking amid the overheated demand for talent, above and below the line. The days of cable dramas being produced for less than $2 million an episode are long gone, industry veterans say.

David Zaslav, prexy-CEO of Discovery Communications, sees the growing investment in high-end content as money well spent. He noted that Discovery’s group of channels spent about $500 million on programming when he joined the company in 2007; this year’s bill will rise to $2 billion. But it’s a competitive imperative, he argues.

It’s hard to underestimate how crucial cable channels are to the bottom line at even the most diversified of media empires. While international networks may not be feeling the drag threatening their domestic counterparts (40% of earnings from Discovery’s channel business is overseas), advertising and affiliate sales make for an incomparably potent combination.

“In the near term there’s never been a better time to be in the business, if you own your own content,” Zaslav said. “Ten years ago, if you had pretty good content that was on brand, that was good enough. Today, with so many choices, it’s more important to have bigger content, more authentic characters and better storytelling. You need better creative people in order to break through.”

With all the upheaval and the reallocation of resources, nothing is generating more jitters than the uncertainty about continued growth of the affiliate-fee revenue that is the lifeblood of basic cable.

In the dual revenue stream model, the coin collected from carriage deals outpaces advertising sales for almost every major channel. Last month, Nomura Securities analyst Anthony DiClemente released a provocative projection that for every 1 million subscribers lost by traditional multichannel video program distributors, the TV industry’s largest congloms would collectively lose about $600 million in affiliate-fee revenue.

The hope is that the new crop of over-the-top entities that offer a limited cable-like bundle of channels will fill the void (see sidebar). But at present there’s no crystal ball clear enough to determine if those services will be complementary or cannibalistic to the old order of MVPDs that shell out $34.92 billion annually in domestic affiliate fees for basic cable channels, according to SNL Kagan.

Some biz vets are skeptical that new services will take a meaningful bite out of the traditional MVPD biz.

“We’ve seen stability in the bundle,” said Denise Denson, exec VP of content distribution and marketing for Viacom Media Networks. “We haven’t heard from consumers that they want to buy only five to 10 networks.”

The industry has been watching the dispute that has played out during the past few months between Viacom and smaller cable operators serving rural areas. Viacom is known for its aggressive bundling of two dozen channels, including little-watched spinoffs of MTV, VH1, Nickelodeon and CMT.

A group of 60 cable operators representing about 900,000 subscribers dropped Viacom channels entirely this summer. In September, carriage negotiations broke off with Suddenlink, the nation’s seventh-largest operator, representing 1.4 million customers. Viacom’s standoff in the sticks is seen as an example of operators starting to push back at the channel bouquets that top programmers were able to develop in more advantageous times.

Turner Broadcasting CEO John Martin recently predicted a Darwinian thinning of the channel herd in the coming years as financial pressures weigh on programmers and distributors alike. He made a veiled reference to Viacom in discussing Turner’s focus on a having a half-dozen powerhouse entertainment brands: TNT, TBS, Cartoon Network/Adult Swim, Boomerang, TCM and TruTV.

“There are too many networks in existence today in the United States. You would not want to be the owner of a small niche network where you’re getting an affiliate fee, and consumers don’t give a crap about it — which is why we never did that,” Martin said during Time Warner’s Oct. 15 Investor Day event. “One of our competitors has 14 networks that are below the top 60. Goodbye. The big are going to get bigger.”

Whether there will be a true bloodletting of channels in the coming years remains to be seen. It’s already clear that even as the largest players invest more money than ever in programming, growth ambition is likely to be tempered in the short term while the distribution free-for-all is sorted out, and as advertising sales models adapt to the new ways people watch TV.

Those cable-biz vets with long memories caution that although the current environment seems chaotic, the subscription TV biz has, from its earliest days, thrived in the face of change.

“There have been so many years that have felt like revolutionary times in our industry,” said Viacom’s Denson. “It doesn’t happen as quickly as you think it will, but it’s still exciting. It’s more inspiring for us than concerning.”

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