Right after I write about cable stocks doing well, partially due to less clamor about cord cutting, the issue is back in the press. Two things are driving the spike in cord cutting interest. First, Aereo won the first round in its battle with broadcasters. Second, there is the high-profile retransmission dispute between Viacom
(VIA) and DirecTV
(DTV). Coming up shortly, the broadcasters' court case against Dish Network’s
(DISH) ad-skipping Hopper service will take center stage.
Interestingly, this surge in cord-cutting commentary is not hurting the cable and satellite stocks. Instead, investors are focusing on content providers. The risk to retransmission fees for broadcasters from a widely deployed and legal Aereo is a pretty direct link to the economics of broadcasters. Retransmission fees are growing rapidly and fall to the pretax income line at virtually a 100% margin. CBS
(CBS), News Corporation
(DIS), and Comcast
(CMCSA) are theoretically at risk (listed from most exposed to least exposed).
A difference in this new bout of angst about cord cutting and TV economics is that content providers are bearing the brunt of the worries. There appears to be growing concern that the gravy train of ever-rising retransmission and affiliate fees is coming to an end. This is where the DirecTV-Viacom dispute comes in. Historically, Wall Street has always believed content providers win when affiliate fee or retransmission disputes arise. The rapid growth in programming expense for distributors and the equally rapid increase in affiliate and retransmission fees for programmers support this view.
Is it possible we have reached the tipping point in the growth of affiliate and retransmission fees? Has the debate about cord cutting actually raised viewer awareness of alternative, over-the-top technologies to an extent that it has shifted negotiating weight toward distributors? Have distributors suffered so much margin compression – programming expenses rising two or three times as fast as cable and satellite bills – that they are willing to suffer subscriber losses to stabilize industry profitability? Are distributors no longer reliant on multichannel TV subscriptions for growth in earnings and cash flow thanks to the rise in broadband, telephony, and small and mid-size business opportunities? Do multichannel TV distributors believe that the hedge from offering broadband Internet is enough to offset the loss of some subscribers to cord cutting?
I think we will hear a lot of discussion about these big-picture issues on upcoming earnings calls. June quarter results, third and fourth quarter guidance, and advertising trends will definitely dictate short-term movement in stock prices. However, these big-picture questions about the future of TV’s economic system will ultimately determine whether investors will pay a reasonable price for industry earnings and cash flow. Remember, earnings and cash flow is still growing. The question is not only whether growth will continue, but what will investors pay for the growth?
This column was previously published by SNL Kagan on www.snl.com.
Entermedia is a long/short equity hedge fund focused on media, communic=
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