The second half of 2016 might be a tough one for the publicly owned TV companies. Looking at the cable ratings for May, Nomura analyst Anthony DiClemente noted that ratings were down 5% in primetime, following similar drops in April and March.
Despite the falling ratings, he added that TV ad spend is up 6% so far in the second quarter—indicating advertisers still like TV despite what the numbers say are shrinking audiences. “Clearly, TV media has a supply problem, not a demand problem,” said DiClemente in a recent report. “We believe this is in part driven by reversion of ad demand to TV from other digital alternatives.”
But while some media companies will benefit in the short term, over the longer term, live viewing will continue to decline as consumers shift to delayed and on-demand viewing, he said.
Creating more supply is one reason why the TV networks are looking to increasingly use C7 as the ad sales measuring stock vs. the C3 metric used for most of the decade. C7 adds to the supply of eyeballs by counting viewing up to seven days after a show airs—four days more than C3.
Todd Juenger, senior analyst at Sanford C. Bernstein, thinks that many of the trends that have been worrying media company watchers will assert themselves in the second half of the year.
With people—and students—moving during the summer, cord-cutting figures will look bad again, after reasonable declines in the fourth and first quarters.
“That cord-cutting shock last quarter led to the Disney and Time Warner reductions in guidance which triggered two separate significant sell-offs across all media stocks. So watch out if it happens again,” Juenger said.
In a report, Juenger said he talked to smaller cable operators who supported his theory. One said “this summer will be even worse than last.” Another said many ops have “switched focus from growing video ads to growing profitability. Which means it’s no longer a case of growing subs at any cost, which has profound impact on video content and retail prices decisions.”
On top of the cord-cutting situation, Juenger sees ad revenue growth slowing. “As strong as TV advertising has been in (the first half), we expect it will be similarly weak in 2H,” he said.
Juenger cited the Rio Olympics as a factor that will help NBCUniversal while it sucks away audiences and ad dollars from everyone else—especially sports networks. The Olympics’ effect on non-NBC networks’ ad growth will range 2-3 percentage points.
He also pointed out that networks can’t count on cash rolling in from the daily fantasy sports business. A year ago, Fan Duel and Draft Kings spent about $134 million on TV advertising in the third quarter. That represented 44% of the ad growth in the quarter. “Those dollars aren’t coming back this year,” Juenger said.
In a previous report, Juenger noted that even an upfront with relatively strong pricing won’t generate a great deal of incremental revenue. “Basically, this year’s upfront dollars will be replacing last year’s even-higher-priced scatter dollars, while audiences continue to decline,” he said.
Finally, while the elections generate a lot of advertising, most of it is spent locally, which only marginally benefits the big media firms.
With all of that in the background, Marci Ryvicker of Wells Fargo concluded that as far as the TV business is concerned investor sentiment is increasingly negative. “We got the ‘when is it safe to short media stocks?’ question,” she said.
One thing that could boost media stocks could be a bit of summertime M&A. Juenger is skeptical that someone outside the TV industry would want to buy a company that owns networks. Companies such as AMC Networks and Scripps Networks could get rolled up, as John Malone has suggested in the past.
“Despite our skepticism on M&A, that won’t keep the conversation from happening and likely dislocating stock prices,” said Juenger. “We can’t imagine M&A as a basis for being long any particular media stock (except, perhaps, the ‘Malone companies’)—but M&A sure makes it harder to be short out of any of these stocks with the exception of Disney and Fox, which would more likely be seen as ‘buyers’ as opposed to ‘sellers.’”