The battle to define the future of the TV business begins now.
Wall Street delivered a shock to the media biz’s system last week with a panicky selloff of blue-chip media stocks, sparked by Disney chief Bob Iger’s comments about softening future affiliate revenue for ESPN.
Iger’s remarks were no bombshell. Industryites and Wall Streeters have been parsing the impact of cord cutting and consumers’ embrace of multiplatform viewing options for years. But it came on the heels of several quarters of soft advertising sales across major TV congloms and mounting evidence that even the biggest of the big — the mighty ESPN, no less — is feeling the pain of subscriber losses. And while showbiz heavyweights saw $60 billion in market capitalization vanish inside of 48 hours, shares of Netflix, the company driving the pace of change, hit another record high.
Tuna Amobi, analyst for S&P Capital IQ, predicts the stock volatility will continue now that investors realize the magnitude of the issues that media giants are facing. There’s a whiplash effect, too, as media stocks have generally been Wall Street darlings since the economic recovery began in 2009.
“We don’t think the business model is disintegrating. But I think the price that’s built into a lot of these shares has elevated concerns,” Amobi said. “We could see more pain before it starts to normalize. … The pace at which it accelerated caught us a bit by surprise.”
The jolt of seeing investors stampede for the exits could be the kick in the pants the industry needs to move more aggressively in reinventing itself for the digital age. Biz vets say it’s past time to confront the storms surrounding TV’s core sources of revenue: advertising sales and carriage fees paid by distributors.
Solutions could include a Darwinian reduction in the number of low-profile cable channels and programs, and a radical shift in the way advertising is sold and presented. Wall Streeters are predicting a new consolidation wave — Rupert Murdoch fired the first shot last year in going after Time Warner — to match the bulk-up under way among distributors.
Size and scale also would allow programmers to wield maximum leverage with emerging digital distribs. But if programming bundles are getting skinnier, the old scorched-earth strategy of companies grabbing as much channel real estate as possible is falling out of favor fast. Whereas an outlet with minuscule ratings was once a license to print money, some channels will simply be scrapped to avoid the cost of maintaining them.
“It’s going to be a messy, inelegant process,” FX Networks chief John Landgraf observed. Another industry vet predicted the future path for TV’s largest players will be hammered out over the next five to seven years, with plenty of missteps, false starts and flame-outs along the way.
Landgraf voiced the concerns of many in the television business when, in his remarks at the Television Critics Assn. press tour, he detailed the spike in the sheer volume of original scripted series airing in the U.S. By FX’s count, the number of shows across broadcast, cable and digital outlets will exceed 400 this year — up from about 280 five years ago.
The glut of channels and programs is driving up production and marketing costs. Viewers are overwhelmed with content choices. That environment should ultimately benefit strong, sought-after brands — but only after content owners determine the best way to put their wares in front of viewers: Skinny cable bundles? Over-the-top channel packages? Show by show, like Netflix and Amazon?
HBO and CBS Corp. have been out front in offering their networks as digital-only buys. But it’s not at all clear that the marketplace will embrace a world of dozens of direct-to consumer options.
If nothing else, the selloff is forcing a more serious conversation among CEOs about the need for the biz to evolve. Observers have noted that the spin among execs has shifted in the past year from scoffing at the notion that cord cutting could impact market share to emphasizing that content-rich companies will prosper no matter how programming is delivered.
“Whether there’s a fat bundle, skinny bundle or no bundle at all … we are well positioned to beat this challenge,” Lionsgate CEO Jon Feltheimer said Aug. 7 during the company’s earnings call.
But content-is-king bravado will take the industry only so far. Last week’s market swing is a sign that investors are impatient for companies to address long-term fundamentals. The urgency is clear: As of last year, affiliate fees have overtaken advertising as the single-largest driver of revenue for media congloms, accounting for some 43%. And yet the bleeding continues, with some 566,000 viewers dropping cable, satellite or telco subscriptions in the second quarter of this year, according to MoffettNathanson Research.
Amobi called events a recalibration of investors’ expectations. “It’s a confluence of factors that has made investors think (about valuations), which revolve around the fundamental business model of the bundle,” he said. The pressure Disney acknowledged at ESPN spooked the market, he added. “(It) made investors realize this isn’t going to be a sweet ride forever.”
Todd Spangler contributed to this report.