Content is king; delivery, not so much.

Photographer: Ernst Haas/Hulton/Archive/Getty Images

Getting Worried About Cable TV

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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For decades, cable television seemed like an unending source of profits for the entertainment industry. This week, investors seem to have decided that its days of limitless munificence are over.

Every day, another entertainment giant or two reports earnings, and every day markets react with dismay. It isn't that the earnings are so bad: This morning Viacom’s results met expectations and Twenty-First Century Fox’s beat them. But the continuing decline in the number of pay-TV subscribers -- both cable and satellite -- is raising fears that these companies’ profits will be under pressure in the future. Which results in this remarkable stock chart:

Yes, the Dow Jones U.S. Broadcasting & Entertainment Index, which hit an all-time high just three weeks ago, has retraced all of its gains for the year in just the past two days. There has been no dramatic new information released during this period, just a dramatic reassessment of what cord-cutting and streaming will mean for the big entertainment companies -- most of which have big cablenetworks.

This was a major topic during Disney’s earnings call on Tuesday. ESPN, of which Disney owns 80 percent, is the emperor of the cable TV universe and the most valuable media property (depending on how exactly you define media property) on the planet, bringing in billions of dollars from subscriber fees and billions more from advertising. But ESPN has lost millions of subscribers during the past year (as have other cable networks) as Americans -- especially younger Americans -- turn from the traditional pay-TV bundle to new ways of getting their entertainment. The analysts who follow Disney kept asking Chief Executive Officer Bob Iger about the issue Tuesday until he let loose with this:

We actually believe that with Disney, ABC, ESPN, our other products, we’re really well positioned. We’ve been among the first, if not the first, to offer our product on new platforms even if it’s somewhat disruptive. We still believe in the expanded basic service for years to come, but we’re going to take advantage of opportunities. And it’s just hard to say when something either feels too disruptive, too fast or not. But when we see it, we’ll tell you about it.

Iger’s argument is sort of like the one media veteran Michael Wolff makes in his new book, “Television is the New Television”: yes, the business of delivering video entertainment is changing as new viewing devices (tablets, smartphones) and new delivery methods (streaming) become mainstream, but the basics remain the same. TV and movie companies just aren’t being disrupted in the way that print media enterprises have been.

That sounds about right, at least so far, but it doesn’t mean TV and movie companies are going to make money in the same way they did before. Netflix’s gangbusters earnings report July 15 provided the backdrop to this week’s disappointments. Its subscriber numbers are still growing, rapidly. That’s good news for people who make TV shows and movies -- as Disney’s Iger put it Tuesday, “Netflix has become a really important partner to us in buying our off-network product.” But it also means that the subscriber-fees-plus-advertising business model that has been so good to the cable networks may give way to a multiplicity of business models, some of them perhaps less lucrative.

In his first earnings call as the CEO of Twenty-First Century Fox -- home of cable networks Fox News, Fox Sports, FX and National Geographic Channel -- James Murdoch made the case this morning that all these changes are going to be great for his company. The rise of “over-the-top” services that bypass the cable bundle to give broadband subscribers access to TV was an opportunity, he said, not a threat:

It drives innovation across the…subscriber universe and creates new headroom for growth into what we previously called the kind of broadband-only households, which really become part of the pay TV universe through these services, which we think is a positive.

Investors didn’t seem to agree -- as of midday today, Twenty-First Century Fox’s stock price was down more than 10 percent from Wednesday’s close. Another way of looking at cable’s predicament is to compare the performance of CBS and Viacom, which split up at the beginning of 2006. The idea was to let Viacom’s youth-oriented cable networks soar while stodgy old CBS plodded along. You’ll never guess what happened next:

Viacom channels such as MTV, Nickelodeon and Spike now look especially vulnerable to the switch away from cable, which is most pronounced among younger viewers. That, and its Comedy Central channel has just lost its biggest star, with Jon Stewart taping his final "Daily Show" tonight. CBS, which consists of a broadcast network and a half (CBS plus part of the CW), a few cable channels (Showtime, the Smithsonian Channel, CBS Sports Network), a TV-production arm and a book publisher (Simon & Schuster), didn’t have the greatest of quarters -- ad revenue was down -- but it’s doing OK. “The heart of our strategy is to create must-have content and position ourselves for the broadband future,” CEO Les Moonves said in the company’s earnings call Tuesday. Content is still king. It’s the distribution method that’s going through some changes.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net