The Day the Bundle Died (Excerpt from August 12, 2015 – Video Media: The Cord Cutting Myth Gets Real)
One by one, media company CEOs have put a brave face on the state of the cable bundle despite the ample evidence of its deterioration. The shrinking number of pay TV subscriptions? “A slow leak that is unlikely to accelerate.” Falling ratings? “Nielson is not counting all of the viewers watching on a time shifted basis.” Weak upfront ad sales? “Ad buyers are simply choosing to hold back their decisions until much closer to the air date.” Ad revenues down year over year? “To be expected after the mid-term election spending in 2014.” Pay no attention to the man behind the curtain – the cable bundle is wise, powerful and eternal!
Or not. Media investors have awoken from a five year coma to discover that cord cutting is real after all. DIS CEO Bob Iger’s admission that even mighty ESPN was facing falling subscriber counts and soft ad sales shook them into a panic. The next day – a Black Tuesday for US media stocks – DIS, CBS, FOX, TWX, CMCSA, VIA, DISCA, and SNI dropped an average of 8.2%. After Wednesday, these 8 companies had shed a collective $46.2B in market cap. Ouch.
Separating out CMCSA and its massive cable system business, the remaining 7 media giants trade at a collective cap weighted P/E of 17.9, still suggesting better than market cash flow growth and ahead of their long term average. Consensus analyst expectations still suggest 4.7% sales growth over the next 5 years, perhaps due for some significant revisions.
Meanwhile, nearly a month prior NFLX CEO Reed Hastings laid out the picture from the opposite angle. Subscriptions were up 17% to 42M in the US, with domestic viewing hours up 40%. Assuming 1.5 viewers per stream, Netflix’s average audience is now bigger than any US network, cable or broadcast, and growing. Around the same time, Susan Wojcicki, head of GOOG’s YouTube business, shared some similarly impressive numbers. YouTube monthly viewership is up 40% YoY, and the total watch time is up 60%, the fastest growth in more than 2 years, to more than 10B hours per month. Mobile, which now accounts for more than half of those viewing, had a 100% jump in ad revenues YoY.
The TV industry’s response has been cautious, licensing live feeds to DISH, SONY and, likely, AAPL for skinny bundle OTT services, but refusing to allow cloud-based DVR functionality. Trends suggest that online linear TV may prove less than popular. Hub Entertainment Research recently reported that 53% of all US video viewing is time-shifted – DVR, on-demand, or streaming – with millennials even less likely to watch linear TV. TWX and CBS have jumped in with on-demand streaming versions of their premium channels, but at price points too high to encourage cord cutting.
We believe network TV is at the beginning of a long squeeze between weakening fees and ad sales on one side and rising content costs on the other. Streaming rivals will have increasingly larger scale, better data, and deeper pockets to buy more of the best content, including the life blood of linear TV – live sports. We acknowledge that the exodus that has begun will take many years to complete, but it is, nonetheless, inevitable. Media players that are diversified away from the cable bundle, e.g. DIS, or already moving to solidify their bona fides as streamers, e.g. TWX, may fare better than others, but all will suffer. Meanwhile, NFLX and GOOG should continue to reap the rewards of their dominance for online video. AMZN and FB have intriguing opportunities in what should be a huge market, but neither is likely to challenge for leadership. We also note that ad hoc live streaming, pioneered by TWTR’s Periscope and the startup Meerkat, is an intriguing extension to the YouTube paradigm and could be the “next big thing” in video.
For our full research notes, please visit our published research site.