Media stocks were smacked Thursday as the NBA’s suspended rest of season focused investors on a potential ad slump and accelerated cord cutting with trading halted temporarily for the second time this week as the market plunged.
“The only reason to have a multichannel video bundle is literally disappearing, at least temporarily,” said analyst Richard Greenfield of LightShed Partners.
“While we do not expect consumers to rush to cut the cord immediately, a prolonged sports outage could lead to a meaningful acceleration in cord-cutting and will certainly negatively impact gross adds,” he said – particularly as “the most ambitious non-sports general entertainment content has migrated” to OTT services like Netflix, Amazon Prime Video, Hulu, Disney+ and others.
“A slowdown in advertising spending would be an unwelcome negative shock to media companies currently fighting against a steepening trend of cord cutting,” agreed analyst Michael Nathanson of MoffettNathanson. “In many ways, a slowing economic backdrop and disruption due to coronavirus could not come at a worse time for the sector.”
In late morning trade, Disney was down 8.2%, ViacomCBS down 11.6%, WarnerMedia parent AT&T down 5.7% and Comcast off 3%. Netflix was down 5%. Sinclair Broadcast Group was down 11%. AMC Entertainment is down 24% The DJIA is down 7.7%. A circuit breaker that automatically halts trading for 15 minutes when the market loses more than 7% was triggered at the open, an unusual event that has no happened twice this week. Another halt would be triggered at a 13% decline.
Last night, the NBA suspended the rest of the 2019-2020 season after a Utah Jazz player tested positive for coronavirus.
In a note dissecting the potential fallout of basketball and potential suspensions in other sports, Rich Greenfield of LightShed Partners notes that NBA media rights holders – in this case Disney’s ESPN and ABC, AT&T/WarnerMedia’s Turner and an array of Regional Sports Networks – must still pay the leagues rights fees even if games aren’t aired. The NCAA has announced March Madness will go on without fans but if the tournament is canceled it would impact the ViacomCBS’ CBS Networks, and its owned and affiliated stations, and Turner.
The NHL and the MBA were reportedly holding conference calls today to asses the situation.
Greenfield said the NBA is required to “make media rights owners whole over the remainder of their contracts through other forms of value” such as additional games, incremental digital rights but the calculations are complicated and may take some time.
In the NBA’s case, most ad revenue comes from the playoffs when ratings surge versus regular season games.. Losing the playoffs would mean a big hit for ESPN/ABC and TNT. RNSn would be hurt less since advertising is a smaller part of their revenue pie and they have limited exposure to the playoffs, Greenfield said. With most games completed, it is still possible playoffs could happen later this year.
However, the RSNs could be in trouble if a meaningful portion of the MLB season is cancelled, which might put affiliate fees in jeopardy. Weather considerations make it hard to push baseball season later. Greenfield said Sinclair’s Diamond Sports for instance “may be heading for a liquidity crisis even sooner than we anticipated with major upcoming affiliate negotiations (such as Comcast) likely to be far more difficult if the RSNs are not airing live sports events.”
Broadcast and cable nets and RSNs must air a minimum number of games or their affiliate fees/retrans fees are reduced. With the NBA regular season over 79% complete as of today, they have likely met their minimum threshold, Greenfield said.
As for the advertising market in general, one silver lining may be political ad spend, which could potentially make up – or at last in part – for shortfalls in traditional advertising this year.
It all depends on what form the current crisis takes. In a report yesterday, ratings agency Moody’s Investor Services said it expects a severe advertising hit if the coronavirus spreads widely in the U.S. . Yet, because of the nature of the disruption, the duration could be short — unlike the longer consumer-led recession during and following the 2008-2009 financial crisis. That was caused by systemic problems in the U.S financial system.
In this case, Moody’s said it estimates the economic impact on advertising would be similar to what occurred after 9/11 – temporary, but broader as it impacts international markets as well. Back then, “advertising and spending resumed relatively quickly when the threat passed, particularly national advertising.”