Wall Street Turns Off TV: How to Fix the Stock Slide
As Hollywood congloms lose $60 billion in three days, analysts chart a path to combat cord-cutting and skinny bundles: Take back the content, says one, "starting with Netflix."
A version of this story first appeared in the Aug. 21 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
When Walt Disney sneezes, the rest of Hollywood catches a cold. On Aug. 5, Viacom's stock dropped 8 percent in a single day, even though the conglomerate didn't do anything. But the day before, Disney, parent of powerhouse ESPN, had warned of slower growth in its media networks business. Over the next three days, roughly $60 billion was stripped from the value of leaders in the entertainment sector as investors panicked over perceived weaknesses in the TV business.
Viacom's stock plunged further than others because it followed Disney's news Aug. 6 with the disclosure that its domestic ad revenue declined 9 percent year-over-year at its ailing networks, including MTV, Nickelodeon and Comedy Central, which lost Jon Stewart that same day. Viacom's stock drop has renewed howls from observers that CEO Philippe Dauman should be replaced, a call that would have to be made by Sumner Redstone, given that the ailing 92-year-old executive chairman controls about 80 percent of Viacom's voting shares.
Viacom's specific issues aside, some investors now are looking for bold moves to fix vulnerabilities in TV, in particular cord-cutting and the emergence of "skinny bundles," new pay TV offerings that provide fewer channels at a lower price. "Sector sentiment has changed — some would say permanently," warns Craig Moffett of MoffettNathanson. Echoes Todd Juenger of Sanford C. Bernstein, "No one wants to get back involved until they find a bottom." Because of cord-cutting, Juenger expects 1 to 2 percent subscriber erosion per year for fully distributed networks. Morgan Stanley's Benjamin Swinburne adds that the mini-crash is evidence that the market is fully aware that "cord-cutting is real."
And so are skinny bundles, most notably Sling TV from Dish Network, a $20 service for 23 channels including ESPN, AMC, TNT, HGTV, CNN, ABC Family, Disney Channel and Cartoon Network. Gone are the "long tail" of little-watched networks whose carriage fees prop up conglomerates. Apple is working on a competing service with about 25 channels, as is Verizon. "The industry lost 240,000 subscribers this quarter as skinnier bundles start," notes Amy Yong of Macquarie Capital.
Swinburne also predicts a ripple effect on networks and producers spurred by the drop in stock values: "Distributors are going to become much more aggressive pushing back on content costs," he says, adding that ratings erosion and the availability of content online "is increasing the risk of a major network group getting dropped completely by a major distributor."
So what should be done? Dauman has chosen to downplay the challenges, saying the stock drop "has been way overdone" and Viacom will return to growth next year. Lionsgate CEO Jon Feltheimer told investors Aug. 7, "Whether there's a fat bundle, skinny bundle or no bundle at all, … we are well positioned to beat this challenge."
Some of the bolder ideas come from Juenger, who argues that "TV networks essentially outsourced the on-demand viewing business to the SVODs, starting with Netflix," a company now sporting a $52 billion market cap built on content from Viacom, Disney and others. Solution? Stop it. "At all costs, you must protect affiliate fees and the bundle," wrote Juenger in an open letter to 21st Century Fox CEO James Murdoch on July 31. The letter was a plea to save television. "Please take back all the on-demand rights to your content and make on-demand access freely and easily available to pay TV subscribers as a privilege of their pay TV subscriptions. Signal what you are doing, and why, clearly to all your peers."
Juenger also suggests that Hulu owners Comcast, Fox and Disney stop charging $8 for Hulu Plus and instead make it available to pay TV subscribers. Also, give all content to Comcast's Xfinity service to keep it away from Netflix. "It doesn't matter how much Comcast pays for it, if anything … just don't force viewers outside of the bundle to watch your content on-demand." If the networks make on-demand viewing easier for pay TV subscribers, "consumer complaints about being forced to overpay for a bundle will greatly dissipate," writes Juenger. "Netflix is a bundle, too. You can't only buy House of Cards and nothing else, and we don't hear anybody complaining about that."
The skinny bundle is a phenomenon born of the fact that U.S. households have been paying for an average of 194 channels while only watching 17 of them, according to Nielsen. As for cord-cutting, MoffettNathanson says the number of households that have dropped pay TV (coupled with new households that never bothered to subscribe) has grown to 2 million. The pay TV sector was shrinking at an annual rate of 0.1 percent a year ago, though this year it has shot up to 0.7 percent. And several analysts are encouraging conglomerates to hedge bets with investments in digital media. Viacom has kicked the tires on the likes of Funny or Die, CollegeHumor and The Onion, while Comcast is considering stakes in Vice Media, BuzzFeed and others.
Even without these steps, the industry isn't in as dire shape as the recent stock plunge suggests, though analysts presume that many low-margin channels likely will disappear not only from the Viacom collection but from others. "A slow drip of video subs lost still allows for stable or even modest growth in financial measures," says Steve Birenberg of Northlake Capital Management. And Juenger notes that if one could purchase Netflix, Amazon Prime Video, Hulu Plus and the few other cable channels they desire a la carte, it would likely run more than $80 a month, negating most of the benefit over the traditional bundle.
Disney CEO Robert Iger obviously concurs. "We believe the expanded basic package will remain the dominant package of choice for some years to come," he said Aug. 4, "because of the quality and variety it represents for a price that is generally considered fair."
Iger also suggested Aug. 4 that ESPN could go direct-to-consumer some day and it would be "an extremely good business." In such a scenario, Disney would probably have to charge about $30 a month and capture 20 million subscribers in order to replace the 95 million subs who, unbeknownst to them, are essentially paying $6.55 a month to receive ESPN in their bundles, whether they watch it or not. Richard Greenfield of BTIG believes Iger is bluffing in order to make sure skinny bundles don't exclude ESPN.
"At worst, he is actually ready to pull the final linchpin holding the cable bundle together, thereby accelerating global thermonuclear war leading to a dramatic drop in ESPN's profitability and likely the profitability of everyone else associated with the multichannel ecosystem," Richfield wrote on Aug. 11. "No matter what media company senior executives say, we believe they simply are not well-positioned to go to direct-to-consumer any time soon."