The collapse of traditional pay-TV services continues to accelerate. In the first quarter, subscriber counts for the cable, telco, and satellite-TV services from companies like Comcast, AT&T, and Dish Network fell at about an 8% annualized rate, accelerating from declines of 5.4% last year and 3.3% in 2018.
The cable and telecom analyst Craig Moffett, co-founder of the research boutique MoffettNathanson, has been chronicling the snowballing cord-cutting trend for many months now. In part, his thesis has been that the industry is a victim of sports inflation as non-sports fans abandon ship.
“By now, the vicious cycle of sports inflation will be familiar to almost all readers,” he writes. “Stop us if you’ve heard this: non-sports fans are defecting from the bundle...which starves sports networks of distribution, and therefore affiliate revenues...which leaves them with no choice but to raise prices...which must inevitably be passed along to consumers...forcing even more non-sports fans to defect from the bundle. And so on.”
While the return of major sports after a long Covid-19-prompted lapse could slow the trend, Moffett sees a second even more damaging trend unfolding—the shift of quality content from basic cable networks to subscription and ad-supported streaming services, like AT&T’s (ticker: T) HBO Max, Comcast’s (CMCSA) Peacock, Walt Disney’s (DIS) Hulu and Disney+, Netflix (NFLX), and a growing list of others.
“Call it the cycle of content redirection,” he writes. “As more and more people leave the traditional ecosystem for direct-to-consumer substitutes, programmers are increasingly moving their best content to their DTC platforms. This redirection not only makes the substitutes better and better, it simultaneously starves the traditional ecosystem of fresh content, making the traditional ecosystem less and less appealing...forcing even more people to defect from the bundle. And so it goes.”
He points out that a key driver for the trend is that Wall Street has gone ga-ga for direct-to-consumer services. “Disney has already been crowned a winner for its bold commitment to growing Disney+, notwithstanding their exposure to precisely the secular decline of traditional networks that the new DTC model is racing to replace,” he writes. Moffett notes that Disney is shutting its linear networks in Europe and moving the new live-action version of Mulan to a pay-per-view model for Disney+ subscribers. While the company saw a 42% drop in June-quarter revenues, the stock rallied 10% on growth in Disney+. And he notes that a similar dynamic played out at ViacomCBS (VIAC).
Meanwhile, Moffett also notes that the virtual cable bundles created to offer a cheaper alternative to traditional pay TV are collapsing. Those services—known as virtual MVPDs (multichannel video programming distributors)—have ratcheted up prices to the point where they offer only a modest price advantage over traditional cable. He notes that since their launch in mid-2018, services like YouTube TV were priced in the $35 range. But YouTube TV recently upped its price to $64.99 a month, prompting some subscribers to shift to cheaper services or give up on the segment altogether.
Moffett says the problem with the business is that while they still offer some price advantage, the services don’t address another issue: bundling of channels that people don’t want. “By replicating the same sports and entertainment bundle that customers were fleeing when they left their legacy distributors, the vMVPDs fell into precisely the same trap as their legacy distribution peers,” he writes. “‘Live’ streaming of pre-recorded entertainment programming is an obvious oxymoron, and customers have gotten the joke. Live sports were arguably the last best reason for choosing a vMVPD over a sampling of [subscription] services. In Q1, sports stopped, and they didn’t return in Q2. (Whether their partial return in Q3 is enough to make a difference remains to be seen...we sort of doubt it.)”
Moffett says it remains to be seen if the market continues to be charmed by subscription video models. “Whether the market’s currently bullish view on this latest lifeboat turns out to be right or wrong remains to be seen, but the new narrative isn’t lost on the companies themselves,” he notes. “Faced with the fading fortunes of their legacy cable networks, and stupendous valuations for their DTC alternatives, companies are being given no choice but to begin redirecting content from one to the other.
“They know full well, of course, that this will only seal the fate of the cable networks they are increasingly abandoning.”
Write to Eric J. Savitz at eric.savitz@barrons.com
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Cord-Cutting Accelerates. Many Traditional Cable Networks Won’t Survive. - Barron's
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