For more than 20 years, the business of owning cable TV channels was seemingly too good to be true.
Todd Juenger, senior media analyst for Sanford Bernstein, crunched the numbers and found that entertainment giants with big cable TV footprints — think Disney, Fox, ViacomCBS, NBCUniversal, Discovery and AMC Networks — generated astounding 30%-40% returns on invested capital for decades.
“We looked at the S&P 500 trying to find companies that consistently delivered returns like that and it was less than 10 — basically no other sectors could claim that kind of return,” Juenger told Variety in a rare interview.
But a market that rich was also ripe for upstart competitors to take big bites out of those gaudy profits. In the simplest terms, Juenger sees the rise of Netflix, Amazon and other streaming contenders as the logical evolution of the content business after the growth of high-speed internet leveled the playing field for video distribution. Netflix didn’t need to go through Comcast, DirecTV and their ilk to beam programming into America’s smartphones and laptops.
Nonetheless, the MVPD cash cow remained a sacred cow to most entertainment conglomerates. Over the past decade, affiliate fees — the monthly carriage fees paid out by MVPDs to channel owners — surpassed the revenue those channels generated from advertising sales for the largest cable brands. That made entertainment companies even more focused on protecting those fees, the profit engine that has been the biggest driver of showbiz earnings across the sector.
The industry response to the steady advance of cord-cutting was to re-create the cable bundle in a low-cost version distributed via broadband, free of the hassles of cable boxes and installation appointments. The pitch was that the new breed of digital MVPDs would offer a smaller clutch of channels at a lower cost.
But the biggest programmers used their clout to ensure that most of their own channels were included in digital MVPD services. The former partners in Hulu — Disney, Comcast and 21st Century Fox — ensured that most of their family of networks were included in Hulu’s launch bundle in order to use that as leverage against other digital MVPDs to do the same. The upshot was that the new bundles couldn’t carry a low price without generating big losses. YouTube TV earlier this month announced a $15 price hike taking effect in August that will bring its basic service to $65 a month.
“While all the consumer research suggested that there was real demand at sub-$40 prices, the consolidation of the media sector, which re-created big TV bundles, and the high annual escalation of programming costs worked in tandem [in the past few years] to create a massively unprofitable business with increasingly limited consumer demand,” MoffettNathanson analyst Michael Nathanson wrote July 13 in a note on digital MVPDs.
Juenger and others see the need for an honest reckoning of how TV will evolve, with sports, news and other time-sensitive programs airing live on traditional channels while on-demand and commercial-free increasingly becomes the format of choice for scripted content.
“The path between getting there and where we now is going to be really hard,” Juenger says. “Nobody is going to volunteer to sacrifice their own distribution to skinny down a [virtual MVPD] package. This only continues to drive the vicious cycle of programmers asking for higher fees and MVPDs agreeing to pay that ransom and then pass it on to the consumer. And none of that is good for the underlying health of the channel-based linear business.”
One of the biggest and swiftest shifts in the media economy in recent years has been the reevaluation of the intrinsic value of cable channels. USA Network has been more profitable for NBCUniversal than has NBC. The same is true, exponentially, for ESPN and ABC. By the mid-1990s, launching TNT was seen as a smarter business move by Ted Turner than buying CBS in 1985, as he tried to do.
But in short order, investors began to see channels that don’t own their own shows as merely renters of programming — middleman distributors destined to be outmoded by streaming platforms.
Juenger has been critical of some of the strategic decisions made by entertainment conglomerates at a moment of clear transition for the industry. But he acknowledges that the galloping growth of Netflix, a nimble newcomer with the enormous benefit of a cost structure amortized across a global customer base, has put entertainment companies in a tough position of managing a melting ice-cube while they adapt operations for the streaming future.
“What are you supposed to do,” he says, “if you have a business that still generates high margin and lots of cash but is going down and being replaced by a new version of an entertainment product that I would argue is better for consumers in every conceivable way?”