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Media Congloms on Pay-TV Shrinkage: What, Us Worry?

The pay-TV business is in decline, and the growing tide of cord-cutters helped spook Wall Street into a major selloff of media stocks in August.

But to hear top execs from big media conglomerates tell it, the investor panic was overwrought — and the TV networks in their own portfolios, at least, will enjoy continued revenue growth in the years ahead.

Top brass from Disney, CBS and Time Warner voiced a similar refrain at this week’s Bank of America/Merrill Lynch 2015 Media, Communications & Entertainment Conference. The execs insisted that subscription TV remains healthy, and each claimed their own company will thrive despite the headwinds:

  • Disney COO Tom Staggs: “I think, yes, the market overreacted. We feel good about where we sit. ESPN continues to be one of the most important and valuable brands in programming.”
  • CBS chief Leslie Moonves: “We’re not selling 30 channels that people don’t want to pay for… Everybody has to have CBS.”
  • Time Warner CFO Howard Averill: “We continue to be really well positioned. We think the biggest and best networks are going to gain share and become more valuable… At Turner, we are seeing modest sub losses that are in line with the industry… (but) we’re confident we’ll accelerate (affiliate) fees into the mid-teens into 2016-17.”

Their message to the Street: Some networks may be sweating bullets about cord-cutting or cord-shaving (downgrading to smaller channel bundles), but ours will be just fine.

Are these guys in denial? Cable and satellite TV operators posted their heaviest losses ever for the second quarter of 2015. MoffettNathanson estimated a drop of 566,000 net subscribers for the period, while SNL Kagan put it even higher at 625,000. True, that’s less than 1% of the total U.S. households that subscribe to TV. But the bloodletting may get worse in the months ahead, as more consumers scrap pricey pay-TV packages for a diet of Netflix, Hulu and other over-the-top services delivered via Apple TV, Roku or other devices.

The sky-is-falling narrative punished media stocks last month, pushing Disney, Time Warner, Viacom and others down by double digits, although the investor panic also stemmed from broader macroeconomic trends like worries over China’s economic growth. The sector hasn’t recovered, and perhaps may not return to the high valuations anytime soon: Since Aug. 4, Disney shares are down 16%, CBS is off 17%, Viacom has dropped 18% and Time Warner is down 19%.

And while media bigwigs keep saying everything is pretty much hunky-dory in the traditional pay-TV space, at the same time they’re hedging their bets if — or maybe when — the bundle really starts to implode.

Time Warner’s HBO has launched the direct-to-consumer HBO Now service, as have CBS and its Showtime premium network and Viacom’s Nickelodeon. Disney hasn’t pulled that specific trigger (yet?), but it’s worth noting the Mouse House was first in line in cutting a deal for ESPN and other nets to be distributed on Dish Network’s Sling TV skinny OTT service.

Here’s how Averill put it: “On the one hand, we want to make sure we strengthen the (existing) ecosystem” by providing distributors additional in-season VOD rights and investing in new advertising programs, he said. “At the same time, we are getting better at identifying (audiences) outside the ecosystem.”

The trick for media companies is to grow the entire pie, in terms of viewers and revenue, instead of just shifting those from the pay-TV column to the OTT side. For HBO Now, Averill said he’s confident the service is not cannibalizing the current business, with a “de minimis” number of subs having canceled traditional HBO or pay-TV packages in favor of the OTT offering.

Some analysts think the large, entrenched players aren’t moving quickly enough. Sure, most Americans will continue to pay cable, satellite or telco companies for an $80-plus-per-month bundle, with live sports a key anchor, BTIG Research’s Rich Greenfield wrote in a blog post Friday. But media companies, facing an torrent of new OTT options like the newest generation of Apple TV, are running out of time to shift gears.

“Legacy media management teams need to immediately shut down capital return initiatives (dividends/share repurchase) and focus on transforming their business models, no matter how painful in the near/intermediate term,” he wrote.

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