It's Not Good When Media's Best Customers Feel Pain
Even if the subscriber trajectory isn't getting too much worse, we have to worry about the destabilizing impact of vMVPDs on traditional stalwart distributors. Linear sub loss means potentially higher video churn, including the unbundling of double-plays and triple-plays. Consumers may stay with their distributor for high speed internet, but the bundling power has been lost and these customers now face lower switching costs on both video and internet deals. Combined with video sub erosion, we believe it lowers the strategic value of the Distributor+Content relationship. The worrying next derivative is if this will degrade to the point of changing industry norms around affiliate agreements. In other words, vMVPDs could accelerate a day of reckoning between Media and Distributors around network carriage and annual network price inflation.
Affiliate Revenue Is ~26% of Media Revenues, and Destabilizing
We estimate domestic subscription revenue for cable+broadcast+premium to be ~26% of CY18 total company revenue for our relevant Media coverage. FOXA has the highest exposure (34%) and DIS has the lowest (20%). Large traditional distributors are the preponderance of this revenue, hence we believe their destabilization is something to worry about. While traditional distributor revenue may simply be porting to virtual distributor revenue for Media companies, we don't think that's a great trade since vMVPDs carry just a 1-month commitment. vMVPD revenue is thus lower visibility so its earnings should garner a lower multiple, in our view. And, long-term content cost inflation is likely even more at risk as/when vMVPDs gain scale.
"Serenity Now ... Insanity Later." Prefer DIS
We see DIS as the best route to avoid these destabilizing trends because: 1) it has the lowest company-level exposure to subscription revenue in Media; 2) along with CBS and FOXA, it's fully represented on vMVPDs; and 3) as it transitions major content assets to DTC, the narrative becomes more centric to Disney execution and less focused on industry trends.
All values in USD unless otherwise noted.
Priced as of 10/26/17 market close, EST (unless otherwise stated).
Link to Full Research Report, Including Required Disclosures and Disclaimer.
® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.
The opinions and points of view expressed in this content are exclusively the views of the author and/or subject(s) and do not necessarily represent the views of MediaVillage.com/MyersBizNet, Inc. management or associated writers.