As a long-time observer of the ever-evolving entertainment landscape, it feels like I’m watching a slow-motion train wreck unfold before my eyes with the current state of linear TV. The recent $15 billion impairment charges on cable channels by Warner Bros. Discovery and Paramount Global have sent shockwaves through the industry, and it seems we’re hurtling towards the precipice that Bob Iger warned about just a year ago.
In September 2022, a couple of months prior to his surprising re-entry into The Walt Disney Company, Bob Iger forecasted that the traditional television industry would encounter significant challenges, predicting a period of hardship or difficulty.
From the plush seats of The Beverly Hilton’s International Ballroom, Iger expressed to Kara Swisher that traditional television broadcasted via linear methods and satellites is inexorably heading towards a massive cliff edge. He predicted that this antiquated system will eventually vanish – though he couldn’t specify the exact timeline, it’s simply a matter of time before it fades away.
It now feels like as of this week, the business has plummeted off that precipice.
On August 7th, Warner Bros. Discovery wrote off $9 billion from their linear cable channels, a decision partly influenced by the perceived loss of NBA rights and doubts over renewing affiliate agreements. Just a few days later, Paramount Global recorded a $6 billion charge on their cable networks, stemming from the evaluation linked to the Skydance deal. In just a flash, $15 billion in value was erased.
For several years now, the iceberg representing cable TV has been melting (Iger, in fact, had cautioned back in an August 2015 earnings call that cable TV might be reaching its peak, as Bank of America’s Jessica Reif Ehrlich points out; this warning seemed to signal the start of decline). However, what was initially a gradual meltdown now seems to have accelerated into near-total disintegration.
“Reif Ehrlich remarks that cable networks have been experiencing an alarming, continuous, seemingly endless downfall. He finds this decline to be worse than most anticipated, even as recently as two years ago, when signs were already evident, we still believed the fall would happen at a gradual pace compared to the reality.”
The drop is primarily due to cord-cutting, yet it’s important to note that the cable industry has been hit by a twofold challenge recently. Firstly, the rate at which subscribers are leaving is outpacing the increase in subscription fees, and secondly, advertising revenues are shifting away from traditional TV as an abundance of streaming platforms offering ad-supported content attracts marketing budgets.
“The trend of cord cutting has posed significant challenges for linear television businesses over the past few years, and there’s no indication of this situation improving. However, a more pressing issue has surfaced recently in the form of difficulties with U.S. linear advertising, making matters even more complex because both revenue sources are now working against these networks. As a result, these linear cable channels are compelled to reconsider their financial future, given the hurdles they face from the broader industry. This introspection affects their overall income and forces them to reduce expenses in an attempt to lessen some of this pressure.”
Over the past three decades, the entertainment industry has prospered based on the economic structure of pay-TV, with escalating subscription costs and lucrative advertising space leading to a business strategy that’s scarcely rivaled in any other sector, except for technology.
However, while certain traditional entertainment companies like Disney and NBCUniversal have diversified their portfolios through successful theme parks and internet businesses, respectively, and Fox Corp. focuses on sports and news-related revenue streams, Warner Bros. Discovery (WBD), Paramount, AMC Networks, among others, find themselves in a particularly vulnerable position.
So what happens next?
Based on expert predictions, the turmoil appears set to escalate further. Cable networks might soon resemble newspapers, attracting investment firms seeking to squeeze maximum profits from them over an extended period.
As a passionate enthusiast, I can suggest that cable networks might consider a consolidation strategy, either by teaming up with an existing company or bringing in a neutral party to help streamline operations and expand content offerings.
“Reif Ehrlich suggests that some individuals will divide their linear assets (cable networks) and others will merge them. These cable networks are often overlooked by larger companies in terms of investment or growth. By consolidating several cable networks, corporate expenses can be reduced, duplicative functions like advertising and distribution can be eliminated, leading to cost savings. Essentially, a merger could generate cash.”
The value of cable channels is currently uncertain, as large impairment charges indicate. How quickly will the pay-TV system crumble and how low can subscription fees drop? Until we have clarity on these questions, investors might choose to be cautious or wait for favorable conditions such as a company’s bankruptcy.
“Fishman stated that most businesses may consider various opportunities, yet the demand in the market for smaller cable networks is uncertain. He also mentioned that it’s unclear how eager and affordable external investors would be to assess these assets.”
Paramount, despite the Skydance deal, is moving forward to try and cut deals.
“During a recent conference call discussing financial results, Paramount Global’s co-CEO Chris McCarthy stated that the current collection of assets was amassed during the growth of linear services. While we have robust brands and businesses, he emphasized the need to restructure our holdings to remain competitive in the future. He suggested that some assets, which are undeniably powerful with promising futures, may be more effective independently or as a key component of another business.”
Keeping their past in perspective, significant reductions could unexpectedly provide these companies with a more defined route for future progress.
“Reif Ehrlich notes that this decision provides them with flexibility regarding the arrangement of certain elements, and furthermore suggests that the composition of assets for many of these firms will likely need adjustment.”
As analyst Laurent Yoon from Bernstein put it on Aug. 9 about Paramount, “The $6 billion impairment charge may seem alarming at first glance, but we believe that the book value of their goodwill primarily stems from past deals (such as WBD), and the upcoming transaction with Skydance presents an opportunity to confront this reality.”
The trend currently favors broadcast networks and live sports, while entertainment has moved predominantly towards streaming platforms. Traditional players are only recently discovering that streaming can be a lucrative venture. (Paraphrased)
Moving ahead might not offer the same financial success as the traditional pay-TV approach, but it’s a viable option. What’s needed is for the models to evolve and adjust to this new path.
“Gunnar Weidenfels, WBD’s CFO, mentioned to analysts on August 7 that there is a crucial aspect to consider: this situation is not about a content ecosystem shifting, but rather a distribution system undergoing transformation. Moreover, we are effectively leveraging our content in the streaming sector more and more successfully, while its relevance on the traditional linear platform diminishes.”
As an ardent supporter, I firmly trust that we stand to gain significant growth potential, not just in our Direct-to-Consumer (D2C) endeavors but also within our studio operations. This promising outlook is robust enough to compensate for any challenges we may encounter on the traditional linear platform.
Now they just need Wall Street to buy in. And that will be no easy task.
According to Macquarie analyst Tim Nollen, as stated in his research note dated August 12, this area continues to be challenging for investments.
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2024-08-13 23:55