Hot August Write-Downs: Big Media Can’t Hide From Hard Decisions on Cable Valuations Any More
It may not have registered on the scale of the Moon landing, the “MASH” finale or the denouement of “Survivor” Season 1, but this was an incredibly momentous week for the business of television.
The parade of second quarter earnings reports for major showbiz conglomerates made it crystal-clear that there is no more avoiding the 800-pound gorilla on the balance sheets of Big Media. It’s been a long time coming that the valuations long applied to old-fashioned cable channels have to be slashed by double digits.
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And that’s what happened this week with Warner Bros. Discovery taking its eye-popping $9.1 billion write-down on the valuation of its core cluster of advertising-supported channels (think TNT, TBS, Cartoon Network, Discovery, Animal Planet, Food Network). Paramount Global did the same thing a day later, slicing $6 billion from the valuation of its MTV group outlets (think MTV, VH1, Comedy Central, Paramount Network). AMC Networks buttoned up the week Friday by taking a $97 million charge to reflect the diminished returns coming from BBC America and its international cable channels.
To be clear, the decision to take these charges doesn’t mean those outlets incurred billions of dollars in losses in the March to June span of the quarter. To use WBD as an example, it means that $9.1 billion is the calculation made to reconcile past profit projections with the harsh reality of the actual revenue and earnings being generated. The level of profit that these channels can reasonably expect to churn out has evaporated in recent years, so the write-down has the effect of lowering everyone’s expectations. It’s bitter medicine for competitive C-suite types to take given that it is a form of admitting defeat. But now there will be far less pressure to find ways to prop up struggling assets or convince Wall Street that cord-cutting is really not a big problem. Because it is. Every time a customer drops traditional video service from Comcast or Charter or another MVPD (multichannel video program distributor), Hollywood feels the loss. It’s simple math – MVPDs pay channel owners a monthly carriage fee based on the number of subscribers who pay them for the service. Fewer cable subscribers overall means lower affiliate fees overall.
In other words, Hollywood’s legacy media conglomerates have to get real. You can’t run episodes of “Ridiculousness” all day on MTV and expect Comcast, Charter, DirecTV, YouTube TV and the like to pay Paramount Global the same fee that MTV commanded when it was riding high with signature original series a la “The Osbournes” and “The Real World.”
The impact of these lowered valuations is significant in numerous ways to the ongoing functions of company. It influences the company’s stock price and market capitalization. It affects a company’s ability to take on debt, its credit rating and interest rates, and the scope of its ambition for mergers and acquisitions.
The reckoning that started this week will undoubtedly be addressed by other media giants. Disney, which also reported earnings this week, did not take a formal write-down on cable TV assets. The Mouse House delivered to investors a much brighter picture of the financials around its direct-to-consumer unit. The build-up of Disney+, Hulu and ESPN+ has cost Disney some $7.1 billion in losses in since January 2022. The nadir came in the fall of 2022 with the $1.4 billion quarterly loss that got Bob Chapek fired and ushered Bob Iger back in as Disney’s CEO.
But even with streaming losses narrowed to $19 million for the quarter and new signs of life at the box office (thank you, “Deadpool and Wolverine” and “Inside Out 2”), Iger still faced hard questions from Wall Streeters about slowing activity at its theme parks. The resilience of Disney’s Experiences businesses has provided the pixie dust for Disney’s numbers in recent quarters. The anxious tone of analysts queries about the demand horizon on Disney’s earnings call said it all. Streaming is growing, but it’s not growing fast enough to offset the decline in traditional linear cable channels that once seemingly had a license to print money, namely ESPN and Disney Channel.
The financial adjustments on linear assets at WBD and Paramount are the long-awaited second shoe to drop following Hollywood’s get-real moment for streaming growth potential that rocked the industry two years ago. The jolt came in April 2022 when Netflix’s dizzying rate of subscriber growth came to its inevitable end. As Netflix appeared to plateau at around 230 million-250 million worldwide subscribers, Disney, WBD, Paramount and Comcast were forced by business gravity to moderate lofty ambitions of amassing as many as 500 million-plus paying customers around the world.
Now with the cable write-downs, Hollywood has to confront the fact that the good old days of double-digit annual advertising and affiliate fee growth are not coming back. That’s why the sober news of the Paramount write-down was accompanied by the sad news that another 15% of the company’s U.S. workforce, or about 2,000 staffers, will be laid off. Paramount can no longer justify carrying that much overhead for assets that are melting ice cubes – still profitable now, but shrinking rather than growing.
The perfect storm of bad news around the pay TV sector has also been magnified by the fact that M&A activity is not a ready solution to the problem. The marriage in 2022 of what was then WarnerMedia and Discovery was a huge bet that both companies would do better in hard times by amassing more market share in cable rather than less. But after eight straight quarters of double-digit advertising declines across the combine WBD cable group, as noted by MoffettNathanson’s Robert Fishman this week, hopes for a significant turnaround have faded. “The appetite among advertisers to spend on linear cable networks outside of sports (and to a lesser extent, news) has simply gone away as eyeballs exit the ecosystem and digital alternatives grow in sophistication and reach,” Fishman wrote in a note after weak Q2 earnings set WBD’s stock price to an all-time low.
Paramount Global’s recent decision to accept Skydance Media’s takeover offer came after the company ran out time to grow the Paramount+ platform to offset the decline in cable. Some of the layoffs announced this week were in preparation for the Skydance transaction that is expected to close next year. But even without a pending merger, Paramount would have little choice but to shed jobs after slashing the outlook for channels that have traditionally been labor-intensive to operate.
The shifting fortunes of the pay TV industry were also reflected in the news that Broadcasting & Cable magazine will end its run soon (entirely, not just in print) after more than 90 years as a weekly business magazine. (Full disclosure: I was proudly on the B&C masthead from 1995 to 1997). The demise of the magazine that was such a staple of radio and TV stations for years sparked a wave of nostalgic “Remember when” reflections among those in the close-knit community. So many people found their first jobs in TV by perusing the listings in the back pages of B&C.
It wasn’t hard to see the dramatic turn coming for cable. Variety called it four years ago with our “RIP Cable TV” cover story in June 2020. But seeing the numbers crunched in dollars and cents still feels like a moment for mourning a once-proud sector.
There’s much to study and learn from in this tumultuous time in media. In the 1990s and early aughts, the cable business seemed invincible as it brought the multichannel revolution into America’s living rooms. In my time at B&C, the “Broadcasting” side of the house was seen as the dinosaur, the outmoded medium that would eventually be supplanted entirely by cable.
Nearly 30 years later, ABC, CBS, NBC and Fox are in better shape than TNT, USA Network and other one-time pillars of basic cable lineups. For sure, heavy-duty sports rights are the glue that keep them healthy. But the other big reason why the Big Four are not going away is that they still benefit from the uniqueness of the broadcast network model. As it was in the days of William Paley and David Sarnoff, broadcast TV is built on the foundation of a local-national partnership between networks and their 150-plus affiliate stations around the country. Local stations deliver local news and programming during the day, switching to network-provided programming at night. All of those affiliate stations spread out across the 210 TV markets in the U.S. measured by Nielsen means that ABC, CBS, Fox and NBC can be seen free just about anywhere in the country with a TV set and a digital antenna.
The 180-degree turn for cable in recent years is a good reminder that the invisible hand of the market is always moving. Nothing stays the same for long.
When AT&T struck its ill-fated deal to buy Time Warner in 2016, TNT and CNN were gold-plated assets in the Turner division, which in total was valued more highly than HBO at the time. As it happened, cable channels, particularly those focused on general entertainment, were easily replaceable by streaming platforms once consumers got comfortable with the technology and the on-demand format. The local-national broadcast network construct – with its enviable reach and regional specificity — is not so easily replicated. There’s a lesson there in how to measure staying power and lasting value.
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