Media stocks took a pounding Wednesday after a series of earnings calls focused investors on the risk that the pay-TV bundle could be unraveling.
The wave started with the Walt Disney Co. on Tuesday when CEO Bob Iger tried to address concerns that falling subscriber numbers were forcing ESPN to cut costs in order to maintain its profitability.
By Wednesday, when four big media companies reported earnings, executives were peppered with questions about the sustainability of affiliate revenue growth.
When the dust cleared, nearly every big media stock was down. Discovery—which bragged about its new distribution pact with Comcast—took the biggest hit, down 12%. Disney was down 9%, Time Warner off 8%, Viacom fell 7%, Scripps Networks dove 5% and CBS and Comcast slid 4%. (Ominously, Netflix was up 2%.)
“Questions about the death of Pay TV are now front and center even if the size and pace of declines are likely being overstated by press and Street commentary,” said Michael Nathanson of MoffettNathanson in a report released late Wednesday.
Nathanson says the media sector has been hit by two negative waves. The first is a weakness in advertising revenue caused by lower ratings which are the results of changing consumption patterns as digital alternatives proliferate. Marketers are also shifting the ad dollars to digital alternatives. While several media executives pointed to a strengthening scatter market in the second and third quarter, “we believe signs of ad improvement in the 3Q will likely be ignored as the narrative of Facebook and Google winning the long-term game is hard for many investors to ignore,” Nathanson said.
The vulnerability of distribution revenue is the second shoe to drop. Affiliate fees represent 43% of the industry’s revenue growth. Affiliate fees grew 10% in 2014 but Nathanson forecasts that the growth rate will shrink to 7% by 2020.
“If the traditional Pay TV ecosystem were to unravel at a faster rate, however, then estimates would have to come in even further,” he said. A 1% slowdown in growth would have a big negative impact on earning for the media companies, ranging from 8% at Disney to 18% for AMC.
There was other bad news from the media sector. CBS, which has consistently beaten Wall Street estimates the last few years, came in only in line with expectations for the second quarter. And 21st Century Fox, as long anticipated, lowered its guidance for 2016 to mid-single digit earnings growth.