Wall St. Speaks Out: Can TV Nets Go OTT?

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Can TV Nets Go OTT? Price Analysis Suggests It's Possible but Not Efficient - Tony Wible- Janney/MediaEntertainment

The drop in antiquated ratings, poor TV Everywhere development, threat from a long tail of online content, decline in MVPD homes, and rotation of ad spend to increasingly expensive mobile/online products, threaten the existence of less popular cable networks and pressure all owners to consider selling online bundles. The status quo could be more difficult to maintain as an initial shift of momentum has the potential to create a vicious cycle that may have already started with NFLX. While it is not efficient, our analysis shows consumers may be able to curate a cheap OTT package.

* Looking For A Hedge - Ad revenue and affiliate fees are threatened by audience erosion and a drop in MVPD homes that could accelerate if more OTT content were available. This may ironically trigger TV nets to consider their own OTT services that would manifest the risk. These platforms would provide a hedge if the current ecosystem were not able to maintain the status quo, which is increasingly at risk as the younger demo ages and programming cost escalate. We note that ad revenue may actually thrive in an OTT environment and may allow TV ad sales to bridge over to mobile/online pricing models where ratings are no longer as important as DAU (daily active users).

* Vicious Cycle - NFLX and YouTube have pulled viewers away from TV nets, while also triggering a need for more investment in programming. The rise in costs and drop in ad revenue leads to a greater demand for affiliate fees, which creates an unsustainable pressure for MVPDs - especially when one considers that TV ad revenue effectively subsidizes the cost of a video service by $56/sub/mo. Higher MVPD prices and rising demand for NFLX/YouTube (as per our recent Youth Survey) may perpetuate the cycle.

* Cheaper But Not Efficient - Ad revenue may actually thrive with an OTT transition but subscription pricing needs to consider adoption rates that could be uneconomical for some networks. Parent companies need to bundle their networks. Our conservative analysis suggest many will need to price between $20-$25/mo. to avoid cannibalization, while the more optimistic analysis points to a more reasonable $10 to $15/mo. The prices highlight the economic value of a MVPD package and suggest OTT would dilute earnings if demand cannot support the relatively high price. We note that our analysis does not account for the very real risk that MVPDs retaliated as they have with others.

* UBB (usage based billing of Internet data)Could Trump - The cost of a GB may be the single biggest factor that can shape the media ecosystem. ISPs will inevitably need to move to UBB. A higher rate would make OTT services uneconomical and preserve the status quo. However, high rates would face government scrutiny and the street underestimates the power of online publishers direct appeal to voters. Today's UBB test pricing would not materially affect 1080p cord cutters but would lift a monthly data bill to over $200 with 4K resolutions.

* VIA Long Tail OK - Consumer demand looks to be moving away from long tail cable networks that VIA is identified with. This is a very real risk; however, we estimate VIA would only need to take up pricing on its 10 most popular networks by $0.04/month if it were to shut down its 15 least popular networks, which we estimate contribute $870 million of annual revenue today.

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Tony Wible can be reached at twible@janney.com.

IMPORTANT DISCLOSURES
Research Analyst CertificationTony Wible
I, Tony Wible, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report.
Janney Montgomery Scott LLC ("Janney") Equity Research Disclosure Legend
Individual disclosures for the companies mentioned in this report can be obtained by accessing our Firm’s Disclosure Site.

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