The subject of “cord cutting” has long been enmeshed in the ongoing dialogue regarding the future health of television consumption in the U.S. While cable television networks are perhaps most at risk from declining subscriber rolls, broadcast television companies also face a pending conundrum — retransmission consent revenue that could collapse, should cable TV services wither away.
The latter topic is a key reason why extending retransmission consent regulations established by Congress some 30 years ago to virtual MVPD services such as YouTubeTV is a key desire of TV station owners and the NAB.
Based on a Wall Street analyst’s assessment of the pay-TV market by examining Q3 revenue reports from MVPDs, ensuring broadcast TV gets their “fair share” in compensation from vMVPD may be the most vital long-term goal for the industry. Why? “There is no light at the end of the pay-TV tunnel.”
That’s the sober conclusion of Jeffrey Wlodarczak, Principal and Internet/Media/Communications Analyst at New York-based Pivotal Research Group.
In his “3Q Scoreboard” report, released Wednesday, the telecommunications companies he tracks are at peak broadband penetration. The bigger takeaway? “Cable grew a modest 10,000,” in terms of subscribers, during the third quarter. Pivotal expected 70,000, and Wlodarczak explained that this reflects “very low move churn, high broadband penetration and competition.”
While broadband services will continue to attract consumers, the “moderately worse” Q3 pay TV net losses — which notably include vMVPDs — indicate that a sub 50% pay penetration level is in sight.
How bad are the subscription declines? Pivotal totals roughly 1.4 million fewer customers to MVPDs year-over-year. Wlodarczak has some advice for impacted companies. “Given video EBITDA margins are rapidly approaching zero, the need to invest in customer premise equipment, availability of internet-based alternatives that play to cable’s data strength and the consumer hate associated with annual video price increases, cable will likely continue to back off pushing traditional large video packages (and may be better positioned being a Roku-like streaming aggregator or entering into a relationship with Hulu or YouTube TV to deliver TV to their consumers).”
This only emphasizes the desires of the broadcast TV industry to bring retransmission consent to the vMVPD world.
Additionally, “increasingly high” costs associated with pay-TV, increased commercial loads and cheap entertainment alternatives have ravaged the direct broadcast satellite business; Dish’s Q3 subscriber loss was a surprise to analysts, sending the company’s stock tumbling as a new CEO was named as part of Dish’s combination with EchoStar. Then, there’s the assessment from Wlodarczak that with “ever lower margin traditional distributors are less incentivized to push the product.
Pivotal crunched the numbers, and it estimates that at the end of the third quarter there were 16.5 million vMVPD subscribers. Assuming 75% have dropped traditional Pay TV, this implies PayTV penetration with vMVPDs is at 51.3% — down 1.3% sequentially.
Given that trend, Pivotal expects Pay TV penetration to drop below 50% “around the start of 2024.”
What does this mean for cable stocks? “There’s a nice opportunity,” Wlodarczak concludes, thanks to leaders such as Comcast and Charter Communications investing in broadband opportunities for their customers. The pay-TV stock outlook? It “remains awful,” Wlodarczak declares, calling Dish a “call option” while noting that, “for players significantly exposed to PayTV, the outlook remains awful given trends continue to worsen with the key to survival a successful direct streaming strategy.”
Thus, in Pivotal’s assessment, Disney “still appears expensive” even with its share erosion seen across the last two years. For Paramount, its 8.2X EBITDA valuation “is fundamentally puzzling” — with Pivotal calling it “the player probably most at risk to PayTV’s continued implosion, with a very weak direct offering.”
