Over-the-Top Fears Hold Down Stocks

Wall Street is more concerned than TV moguls about cord-cutting
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Despite scant evidence that large numbers of consumers are “cutting the cord,” concerns that “over-the-top” distribution of video could depress subscription TV revenue is hurting stock prices. The subject came up over and over again this month as analysts peppered top media company executives with questions about digital content delivery during quarterly earnings calls. Media execs mostly insisted that cord-cutting is not affecting business, but the issue isn’t going away.

“For the most part, the quarters for most of these companies were pretty solid [but] the stocks didn’t react overwhelmingly bullishly,” says David Bank, RBC Capital Markets managing director. “There seems to be a mismatch that is explained by the cord-cutting worry.”

Bank says that while cord-cutting isn’t affecting the earnings Wall Street expects media companies to generate, it is affecting the earnings multiple investors use to decide what a stock is worth.

Time Warner, Bank adds, has borne the brunt of the cordcutting concern, partly because of the profi ts generated by subscriptions to HBO. Coincidentally or not, cord-cutting came up in the first question posed to TW management on its earnings call. “We doubt that we’re going to see it, although we’ll all watch for it,” responded Time Warner CEO Jeff Bewkes, who has been pushing his TV Everywhere initiative to ensure that the only people who can watch a show from HBO or Turner Broadcasting online are paying customers.

“I think there has been much ado about very little in terms of all the talk about cord-cutting,” said CEO Philippe Dauman during Viacom’s earnings call. Dauman said the number of subscribers for Viacom’s networks was up. “So we don’t see cord-cutting as affecting our business. The economy, obviously, holds down the growth in distribution. As the economy recovers, we expect to see the number of television subscribers in the U.S. grow at a better clip than it has over the last year and a half or so.”

Walt Disney Co. CEO Bob Iger said his company has had conversations with multichannel providers. “We know that their concern is about cord-cutting and the impact of all this digital distribution on their business, and the sense we get is that the trends they’ve seen very recently, which is a slight decrease in subscription and subscribers, is due mostly to the economy,” Iger said on Disney’s earnings call.

Iger added it is important that the multichannel business remains robust. “We’re looking at the multichannel business in a bullish way, but we feel that we have to very carefully balance that business with our interest as a company to grow revenue on new platforms,” he said. “We’re going to continue to look for opportunities on new devices because we think it improves monetization, but we’re also going to look for opportunities to strengthen our relationship with the multichannel providers and create product that is beneficial to us, to them, and to their consumers.”

The video subscribers that Time Warner Cable lost in the third quarter were not high-speed Internet customers, and the number of subscribers with both video and Internet service actually increased, said Landel Hobbs, TWC COO: “That’s the opposite of what we’d expect to see for cord-cutting.” Hobbs also said that in college towns such as Austin, Tex., and Columbus, Ohio, video connect volume was flat, suggesting that college students aren’t going over the top. “We’ll continue to monitor cord-cutting, but haven’t found evidence where we might expect to see it,” he said.

RBC’s Bank calls the media executive comments reassuring. “I think they actually did a pretty good job making the case that their business doesn’t seem to be very impacted today by cord-cutting,” he says. “I think what they have a harder time doing is to assure investors that the ecosystem will remain intact for perpetuity.” Bank adds that while digital distribution offers opportunities, “unfortunately, right now, the risks seem to be a lot more clear.”

E-mail comments to jlafayette@nbmedia.com and follow him on Twitter: @jlafayette

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