Pay-TV Sector Faces a Meltdown Heading Into a Rough Earnings Season

“Whoever is winning at the moment,” George Orwell noted, “will always seem to be invincible.”

For years, the pay-TV biz was an unassailable empire, impervious to encroaching internet invaders. Now it’s on the verge of what could end up its worst quarter yet — and just as rumblings grow louder regarding consolidation among media companies looking for greater scale and negotiating power against distributors.

The extent of the damage to the pay TV ecosystem in the quarter will become apparent with earnings reports starting to arrive this week. On Tuesday, AT&T posted a record loss of 351,000 traditional TV subs, including 156,000 DirecTV satellite customers. The telco also netted 152,000 subscribers for DirecTV Now, but the internet-delivered service is sold in cheaper, smaller bundles — and with the rise of over-the-top TV, many networks are getting left out.

If other operators report similarly ugly results, the urge to merge could intensify as media companies look to increase shareholder value.

Scripps Networks Interactive, home to lifestyle channels including Food Network and HGTV, has held discussions exploring a merger with both Discovery Communications and Viacom, according to reports last week. Meanwhile, John Malone may be in the mix: Univision Communications held early talks with his Liberty Media after the mogul indicated he was interested in acquiring a stake in the Spanish-language broadcast giant, per The Wall Street Journal.

The prospect of consolidation in the sector should boost investor confidence in media stocks because mergers and acquisitions always trump fundamental challenges, says Tuna Amobi, a senior equity analyst at CFRA Research. “Expect M&A on the content side to return as part of the conversation,” he adds.

M&A can’t come quickly enough considering how bad those fundamentals are looking going into the second quarter, a seasonally weak period. Cable, satellite and telco ops will shed upwards of 1.6 million subscribers in the quarter given current trends, RBC Capital Markets estimates — nearly double the amount lost in the previous quarter and year-ago. Even factoring in virtual providers like Hulu and Sling TV, the sector stands to drop 1.1 million customers. That could make jittery investors flee, conjuring memories of the meltdown that flattened media stocks two summers ago, triggered by a downward revision of Disney’s affiliate-fee projections.

“This acceleration in cord-cutting is precisely what media investors fear most,” RBC analyst Steve Cahall wrote in a research note last week.

What’s worse, the overall shrinkage doesn’t even tell the whole story, says BTIG Research analyst Rich Greenfield, because individual networks are increasingly getting stripped out of cheaper skinny bundles. In the first quarter, “you started to see declines for ESPN and others that hit 3%,” he says. “The question for everyone is: Is there any reason to believe it’s going to stabilize?”

In short, the value of the 100-plus pay-television package is on the wane. Ratings continue to drop, and TV advertising is stagnating (notwithstanding the strong results networks have touted coming out of the 2017 upfronts, which analysts interpret as a shift in spending from scatter into upfront markets). The vicious cycle is fueled by more affordable alternatives: You can buy CBS, HBO, Showtime and other networks a la carte online. Monthly bundles from Hulu and YouTube TV, priced at $20-$35, debuted in the second quarter.

The shift to smaller TV bundles has forced the biggest pay-TV distributors to hammer together their own skinny offerings.

The faster subscriber numbers dwindle, the less traditional operators are going to care about their video businesses, says Greenfield: “You’ve got more and more bundles without sports [networks], smaller bundles developing at both existing operators and new players — it’s really spooking investors.”

There’s also the growing bucket of exclusive content procured by Netflix, Hulu and Amazon — providing more entertainment bang for the buck among a growing number of consumers. Hulu, for one, last week unveiled a massive new agreement with 20th Century Fox Television Distribution that will add nearly 3,000 episodes to the streaming service, including every episode of “How I Met Your Mother,” “Burn Notice,” “Bones” and “Glee,” as well as exclusive rights to all 11 seasons of “MASH” and the full “NYPD Blue” library.

Netflix extended its hot stock streak last week on its big second-quarter numbers, and shares shot to record highs — giving the streaming giant a market cap of more than $80 billion and making it bigger, for the first time, than Time Warner. Jeff Bewkes once dissed Netflix’s chances of domination as being as likely as “the Albanian army” taking over the world. Today Netflix, which streams content in 190 countries, is more valuable than the house that Bewkes built.

“I don’t think the sky is falling,” says Amobi. “But traditional TV is still losing subscribers to online video.”

Pay TV’s downward spiral is renewing chatter about consolidation. Discovery, Scripps and Viacom are in particularly difficult positions to navigate the changing TV tides, according to Brian Wieser, senior research analyst at Pivotal Research Group, especially relative to conglomerates that own broadcast networks, including Disney, Fox and CBS. “Discovery, Scripps and Viacom each lack sports programming or much in the way of other high-end original content on their core U.S. networks,” Wieser wrote in a note to clients last week.

UBS analysts say a Discovery-Scripps tie-up would have significant synergies, resulting in $150 million to $250 million in annual savings while potentially enhancing the combined entity’s leverage with distributors.

M&A action could also get a kick once AT&T’s takeover of Time Warner closes; analysts say there’s a good likelihood it will go forward. Time Warner was the biggest media stock gainer in 2016: Its share price increased 52% last year, versus 12% for the S&P 500, largely because of the AT&T deal.

For traditional media companies, says Amobi, “2017 has been about resetting expectations. You don’t get a sense of the euphoria that has driven these companies in years past.”

Popular on Variety

More Biz

  • Harvey Weinstein

    Weinstein Can Get a Fair Trial in Manhattan, Says D.A.

    The Manhattan District Attorney’s office argued on Friday that Harvey Weinstein can get a fair trial in Manhattan, and blamed the producer’s defense team for much of the pre-trial publicity in the case. Weinstein’s attorneys have asked an appellate court to transfer the case — which is set to begin on Sept. 9 — to [...]

  • Leonardo DiCaprio Madonna

    Leonardo DiCaprio, Madonna Call for Action on Amazon Wildfires

    As wildfires rage at an alarming rate in Brazil’s Amazon rain forest, celebrities are using their platforms to bring awareness to the deforestation’s impact and to call for action. In the past week, stars like Leonardo DiCaprio, Madonna, Cara Delevingne and Ariana Grande have taken to Instagram to express their frustration with the lack of [...]

  • 'The Durrells' TV Show

    Greece Sweetens Production Incentives as Struggling Country's Economy Rebounds

    It’s taken the better part of a decade for Greece to show signs of recovery from the crippling crisis that almost pushed it out of the Eurozone. Now, with the economy slowly on the mend, the government is doubling down on efforts to jump-start the local film industry, giving a dramatic overhaul to the incentive [...]

  • Warner Music Group Partners With Audiomack

    Warner Music Group Partners With Audiomack

    Warner Music Group announced it has entered a partnership with the music streaming and discovery service Audiomack, marking the platform’s first licensing deal with a major label. According to the announcement, the two companies will work together on content concepts and explore ways to break emerging artists, connecting music fans with rising talent before they [...]

  • Scooter Braun Congratulates Taylor Swift on

    Scooter Braun Congratulates Taylor Swift on ‘Brilliant’ Album and Campaign

    Two days after Taylor Swift fired off the latest salvo in her battle with Scooter Braun, the manager congratulated the singer on the campaign around her “brilliant” new album, “Lover,” which arrived last night. The message came after Swift said she will be re-recording songs from her first six albums, which are now owned by [...]

  • David Koch Obit

    David Koch, Libertarian Activist and Billionaire Philanthropist, Dies at 79

    David Koch, brother of Charles Koch and one of the owners of Koch Industries, the second-largest private company in the U.S., has died at 79. According to the New York Times, Charles Koch announced the news of his brother’s death in a statement. Though he did not attribute to David’s death to a particular cause, [...]

  • Beverly Hills Realtor Accused of Stealing

    Beverly Hills Realtor Accused of Stealing From Usher, Adam Lambert

    A Beverly Hills real estate agent has been arrested on charges of stealing from the homes of celebrities, including Usher, Adam Lambert and “Real Housewives” star Dorit Kemsley. Jason Emil Yaselli, 32, is accused of encouraging an accomplice, Benjamin Ackerman, to enter homes during open houses in order to steal from them. Ackerman allegedly sold [...]

More From Our Brands

Access exclusive content