In September 2022, a few months before he unexpectedly returned to The Walt Disney Co., Bob Iger warned that “a world of hurt” was coming to the linear TV business.
Jeff Shell's Past Lingers Over Paramount's Future
Sitting on stage at The Beverly Hilton’s International Ballroom, Iger told his interviewer, Kara Swisher, that “Linear TV and satellite is marching towards a great precipice, and it will be pushed off … I can’t tell you when, but it goes away.”
It now feels like as of this week, the business has plummeted off that precipice.
On Aug. 7, Warner Bros. Discovery took a $9 billion impairment on its linear cable channels, a move made in part because of the apparent loss of NBA rights and uncertainty around affiliate renewals. A couple days later, Paramount Global took a $6 billion charge on its cable channels, sparked by the valuation associated with the Skydance deal. $15 billion in value, wiped out in an instant.
Cable’s iceberg has been melting for years (Iger, it should be noted, first warned that cable TV may have peaked in an infamous Aug. 2015 earnings call in which he “kind of put everybody’s attention to the beginning of the decline,” Bank of America’s Jessia Reif Ehrlich notes), but what had been a slow melt appears to have turned into almost total collapse.
“The cable networks just are in this horrific, perennial, never-ending decline,” Reif Ehrlich says. “It’s been more abysmal, I think, than almost anybody expected, even just two years ago, when the handwriting was on the wall, we still thought it would be at a slower pace than it’s actually been.”
The decline has been driven by cord-cutting, of course, but in recent quarters the cable business has faced a double whammy: Not only are subscribers declining faster than carriage fees are rising, but advertising dollars are fleeing TV, as the proliferation of ad-supported streaming options provide new places for marketers to spend their budgets.
“Cord cutting has been a headwind for this linear television business over the past couple years, and we’re seeing no real signs of improvement, but the bigger recent challenge around U.S. linear advertising has taken the pressure up a different level, because now you have both of your revenue streams working against you,” says Robert Fishman, a senior analyst at Moffett Nathanson. “So it’s forcing these linear cable networks to really try to figure out what the future of them looks like from a cash flow perspective, given the challenges that they’re facing from the broader ecosystem, and what that does to their top line. So they’re being forced to essentially cut back on expenses to help alleviate, or try to alleviate some of that pressure.”
For the last 30 years, the entertainment business has thrived on the economics of pay-TV, as ever-rising carriage fees and valuable ad inventory combined to create a business model virtually unmatched outside of the tech sector.
But while some of those traditional entertainment companies are diversified (think Disney and NBCUniversal’s lucrative theme parks, or Comcast’s internet business), and others are more targeted (Fox Corp., with almost all revenue connected to sports and news), WBD, Paramount, AMC Networks and others find themselves in a particularly precarious situation.
So what happens next?
According to analysts, the chaos is only just beginning. Cable channels could become the new newspapers: Targets for investment funds looking to milk cash out of them for as long as possible.
Or the cable channels could pursue a rollup, either through an existing company, or through a third-party.
“Somebody will separate their linear assets, and somebody will roll them up,” Reif Ehrlich says. “We have all these — call them stranded cable networks — maybe part of bigger companies, but not an area of investment, not an area of growth. And so if you combine a lot of the cable networks, I think you get rid of corporate overhead. You can get rid of duplicative advertising functions, distribution, there’s a lot of costs by combining. A roll up could be run for cash.”
"Our Billion-Dollar Olympic Lab": What NBC Is Taking From Paris to L.A.
The problem is that the value of cable channels is in flux, as the enormous impairment charges demonstrate. How fast will the pay-TV system disintegrate? And how low can carriage fees go? Until there is more certainty around those answers, investors may hang back, or wait for more opportunistic moments (like, say, a bankruptcy).
“I think all the companies are going to look to explore different possibilities, but it remains to be seen what appetite within the marketplace there is for some of these smaller cable networks and willingness and at what price outside investors want to look at valuing these assets,” Fishman said.
Paramount, despite the Skydance deal, is moving forward to try and cut deals.
“The set of assets that make up Paramount Global today were built up through the rise of linear and while we have strong brands and businesses, we must reshape our portfolio to best compete in the future,” said Paramount co-CEO Chris McCarthy on the company’s earnings call. “The assets under consideration are undeniably strong with exciting futures ahead, but will be better served on their own or as the centerpiece of another business.”
It is with that background in mind that the enormous write-downs can, ironically, give the companies a clearer path forward.
“It gives them some optionality as they think about moving some pieces around,” Reif Ehrlich says, adding that “the asset mix of many of these companies is going to have to change.”
Or as Bernstein analyst Laurent Yoon wrote of Paramount Aug. 9, the “$6 billion impairment charge sounds like a bad headline, but we think the book value of their goodwill is a remnant of prior deals (like WBD), and the impending transaction with Skydance is an opportunity to face the reality.”
Broadcast networks and live sports are in vogue, and entertainment is now firmly a streaming game. And for traditional players streaming is just now beginning to turn into a profitable business.
It is a path forward that may not be as lucrative as the old pay-TV model, but one that can still work. The models just need to adapt.
“There is a very significant other side of the coin here,” WBD CFO Gunnar Weidenfels told analysts Aug. 7. “This is really a distribution ecosystem in transition, not a content ecosystem in transition. And we’re using our content increasingly and increasingly more successfully in the streaming space and less so on the linear side.
“We believe there’s tremendous upside opportunity, both in the D2C business and in the studio business,” he continued. “And it is enough to offset what’s happening on the linear side.”
Now they just need Wall Street to buy in. And that will be no easy task.
“This remains a difficult space in which to invest,” notes Macquarie analyst Tim Nollen, in an Aug. 12 research note.
How the Summer Box Office Went From Tragic to Magic
Most Popular
Comments / 0