TV Ecosystem Is “Finally” Fraying Analyst Says In Downgrade Of Big Media Stocks

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This month’s earthquake in media stocks — the industry lost $43.2 billion of its market value, or more than 10%, in August — isn’t just an isolated event, Wells Fargo Securities’ Marci Ryvicker says this morning in a report that’s sure to be widely read in the C-suites.

“After going through one of the worst earnings seasons we have ever had outside of the Great Recession, it’s time to re-assess our entire coverage universe as clearly both fundamentals and sentiment have changed,” says the respected, long-time fan of media content providers.

Ryvicker downgraded Diversified Media to “market weight” from “overweight.” She moved to the sidelines on CBS, Disney and Fox (she was already neutral on Viacom), leaving Time Warner as the only Big Media company she recommends. In mid-day trading Viacom is -2.9%, CBS is -1.8%, Disney is -1.6%, Fox is -0.8%, and Time Warner is -0.6%.

The key issue is whether programmers are about to lose their power to bundle pay TV, requiring cable and satellite customers to pay ever growing prices for channels they don’t want.

“What seems to have really shaken the market is the fact that we are FINALLY seeing the fraying of the television ecosystem in affiliate fees – which is just tough, as subscription revenue is supposed to be the most stable and the highest margin of any media-type revenue stream,” Ryvicker says.

Disney rattled investors on August 4 when it lowered the financial forecast for its cable networks, acknowledging that subscriptions had slipped for ESPN — much of it due to cord cutting and other forms of consumer rebellion against the high-priced pay TV bundle. Fox followed suit, lowering its profit forecast, while Time Warner, CBS and Viacom “implicitly’ guided down” when they reported Q2 earnings that beat analyst expectations “yet they didn’t guide higher” for the targets they expect to hit for the full year.

Pay TV network companies must worry about how many of their channels will make it into the emerging so-called skinny bundles, including the ones offered by Dish Network’s $20-a-month Sling TV streaming service. Cable, satellite and telco video providers lost 458,000 subscriptions in Q2 if you include Sling. If you take Sling out, Ryvicker figures the decline would come to more than 1 million.

“Our sense is that LIVE broadcast programming WILL BE INCLUDED in skinny bundles,” Ryvicker says. But “the more expensive CABLE SPORTS PROGRAMMING – WHETHER IT BE NATIONAL OR REGIONAL NETWORKS – might not!”

Ryvicker’s report stands out as investors wonder whether the 3 1/2 year boom in media stocks is over, or just on pause.

This morning Pivotal Research Group’s Brian Wieser  concluded that the market reaction has been “generally too severe.” Content companies should see their pay TV subscription revenues grow by high single digit percentages. People like television so much that “even in a world of cord-cutting or cord-shaving, it seems difficult to imagine that consumer spending might decelerate vs. historical levels.”

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