The past five years has seen every major Hollywood giant lean into streaming entertainment, pulling programming budgets from broadcast and cable channels and funneling them into wholly owned streaming services. But there also have been exceptions: sports and news, which TV executives have long argued hold the legacy pay TV bundle together. Warner Bros. Discovery CEO David Zaslav, for example, told Wall Street analysts this past summer that linear TV is “a cash generator and a great business for us for many years to come.”
So while such cable channels as TNT, Syfy and Comedy Central have dialed down their original entertainment output and reduced budgets for everything from staffing to marketing, with efforts focused on streaming, channels like ESPN and Fox News have stayed the course, benefiting from their ability to generate strong cash flows from their linear businesses (Zaslav has called live news “critical” to the pay TV business).
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There are now early warning signs that the growth — or at least the steadiness — that news and sports channels have had over the past few years is ending.
For years, cable channels (and in particular news and sports channels) have used steadily rising carriage fees and advertising growth to offset cord-cutting. But with cord-cutting only growing, and with a tough ad environment, times may be changing.
In every quarter over at least the past four years, Fox Corp. has seen its cable affiliate revenue (the carriage fees pay TV operators pay for access to channels like Fox News and FS1) rise compared with the year-earlier period. But last quarter, the company’s fiscal Q2 marked the first time that the affiliate revenue declined on a yearly basis. It was a small drop, albeit a significant one. “Affiliate fee revenues decreased slightly by $13 million as contractual price increases essentially offset the impact of net subscriber declines,” Fox said in its report. In other words, its cable channels were charging higher prices, but those gains were more than offset by cord-cutting. On the company’s earnings call, Fox CFO Steve Tomsic told analysts that “we are in the early days of our next distribution renewal cycle,” suggesting that price increases could help mitigate those issues, but whether subscriber declines can be offset remains to be seen.
It was a result that saw Goldman Sachs’ Brett Feldman reaffirm his “sell” rating on the company “as we continue to look for more visibility regarding the long-term growth potential and costs of Fox’s digital initiatives and the extent to which they could offset increasing pressures on its core linear networks businesses as cord-cutting headwinds intensify.”
The results were similar at Disney, which saw its U.S. cable revenue decline only slightly, by about 1 percent, citing lower carriage fees but partially buoyed by lower programming costs (because of the timing of its new NFL deal). NBCUniversal, too, reported that were it not for the World Cup, cord-cutting would have resulted in its media division being down nearly 2 percent. CNN has already had to dramatically cut costs, laying off hundreds of employees and shutting down some departments, and NBCUniversal has had layoffs at its news divisions as well.
And in the sports world, executives are beginning to grapple with the rocketing cost of sports rights, with similar implications. ESPN “is going through some obviously challenging times because of what’s happened in linear programming,” Disney CEO Bob Iger told analysts Feb. 8. While Iger said he wants ESPN to stay in business with the NBA (the next major league with rights renewals coming up), he added that the menu of promising sports deals is likely to slim down. “I’ve had long conversations about this with [ESPN chief] Jimmy Pitaro, and we’ve got some decisions that we have to make coming up,” Iger said. “And we’re simply going to have to get more selective.”
Zaslav has also signaled that Turner Sports, which has NBA, MLB, NHL and March Madness rights, will reevaluate its portfolio. While the NBA has been a staple of TNT’s lineup since 1989, Zaslav told analysts Nov. 3, “We don’t have to have the NBA.” He added that while he would like to cut a new deal, it would need to be “a deal for the future, it can’t be a deal for the past.”
It all makes for a perfect storm. Sports and news have been the safest bets in linear TV, and suddenly they don’t look so safe anymore. With companies now pivoting streaming services to focus on profitability, the fate of linear TV is even more uncertain, as the desire to salvage that cash flow grows. The linear business is “in crisis,” Naveen Sarma, senior director at S&P Global, wrote in a late January report: “What the networks [with sports] get in topline support they give up in higher programming costs that are likely to grow even as revenues come under greater pressure. Conversely, linear TV networks without sports are increasingly experiencing weaker advertising and affiliate fee revenues but have a greater ability to control programming costs.”
While it isn’t all doom and gloom (Moody’s analyst Neil Begley forecast Feb. 10 that linear TV “will take years to melt”), the challenges will only grow starker and the need to control costs more urgent. In the end, streaming, as Iger told analysts as it relates to ESPN, is (as Thanos was fond of saying) “inevitable.”
This story first appeared in the Feb. 15 issue of The Hollywood Reporter magazine. Click here to subscribe.
