Hollywood can’t avoid tough cable TV decisions

It may not have made as much of an impression as the moon landing, the “MASH” finale or the end of the first season of “Survivor,” but it was an incredibly important week for the television industry.

The parade of second-quarter earnings reports for the major entertainment conglomerates has made it clear that there is no longer any way to avoid the 800-pound gorilla on Big Media’s balance sheets. It has long been known that valuations applied to old-school cable channels must be cut by double digits.

And that’s exactly what happened this week, when Warner Bros. Discovery took a stunning $9.1 billion writedown on the valuation of its core cluster of ad-supported channels (think TNT, TBS, Cartoon Network, Discovery, Animal Planet, Food Network). Paramount Global did the same a day later, cutting $6 billion from the valuation of its MTV outlets (think MTV, VH1, Comedy Central, Paramount Network). AMC Networks ended the week Friday by taking a $97 million charge to reflect reduced profits from BBC America and its international cable channels.

To be clear, the decision to impose these fees does not mean that these outlets incurred billions of dollars in losses during the March-June quarter. In WBD’s example, it means that the $9.1 billion figure is calculated to reconcile earnings forecasts with the harsh reality of actual revenue and profits. The level of profit these channels could reasonably expect has evaporated in recent years, so the write-off has the effect of lowering everyone’s expectations. It’s bitter medicine for competitive C-suite types, given that it’s an admission of defeat. But now there will be much less pressure to find ways to prop up struggling assets or convince Wall Street that cutting cable isn’t really a big deal. Because it is. Every time a customer drops a traditional video service from Comcast, Charter or another MVPD (multi-channel video programming distributor), Hollywood takes a hit. It’s simple math – MVPDs pay channel owners a monthly transmission fee based on the number of subscribers who pay them for the service. Fewer cable subscribers generally means lower affiliate fees.

In other words, Hollywood media conglomerates need to get real. You can’t air episodes of “Ridiculousness” all day long on MTV and expect Comcast, Charter, DirecTV, YouTube TV and the like to pay Paramount Global the same fee that MTV charged when it was riding high on original series like “The Osbournes” and “The Real World.”

The impact of these lower valuations is significant in many ways for the ongoing functions of a company. It affects the company’s stock price and market capitalization. It affects the company’s ability to take on debt, its credit rating and interest rates, and the scope of its M&A ambitions.

The reckoning that began this week will undoubtedly be weighed on other media giants. Disney, which also reported earnings this week, did not formally write down its cable assets. The Mouse House gave investors a much clearer picture of the finances surrounding the direct-to-consumer unit. Building Disney+, Hulu and ESPN+ has cost Disney about $7.1 billion in losses since January 2022. The low point came in the fall of 2022, with a $1.4 billion quarterly loss that led to the firing of Bob Chapek and the reinstatement of Bob Iger as Disney’s CEO.

But even with streaming losses narrowing to $19 million in the quarter and new signs of life at the box office (thank you, “Deadpool and Wolverine” and “Inside Out 2”), Iger still faced tough questions from Wall Streeters about the slowdown in theme park activity. The resilience of Disney’s Experiences business has provided magic dust for Disney’s numbers in recent quarters. The anxious tone of analysts’ questions about the demand horizon during Disney’s earnings call said it all. Streaming is growing, but it’s not growing fast enough to offset the decline of traditional cable channels that once seemed to have a license to print money, namely ESPN and the Disney Channel.

The financial adjustments to the linear assets at WBD and Paramount are the long-awaited second shoe to drop after Hollywood’s true moment for streaming growth potential that shook up the industry two years ago. The jolt came in April 2022, when Netflix’s breakneck subscriber growth inevitably came to an end. Just as Netflix seemed to be hovering around 230 million to 250 million subscribers worldwide, Disney, WBD, Paramount, and Comcast were forced by business gravity to temper their lofty ambitions of amassing more than 500 million paying customers worldwide.

Now, with the cable write-offs, Hollywood is facing the fact that the good old days of double-digit annual growth in advertising and affiliate fees are not coming back. That’s why the sobering news of Paramount’s write-offs was accompanied by the sad news that another 15% of the company’s U.S. workforce, or about 2,000 employees, will be laid off. Paramount can no longer justify such large overhead costs for an asset that is melting ice cubes—still profitable, but shrinking instead of growing.

The perfect storm of bad news surrounding the pay-TV sector has also been compounded by the fact that M&A activity is not a ready-made solution to the problem. The 2022 marriage of then-WarnerMedia and Discovery was a huge bet that both companies would do better in tough times by amassing more cable market share, not less. But after eight consecutive quarters of double-digit ad declines across WBD’s cable group, as MoffettNathanson’s Robert Fishman noted this week, hopes for a meaningful turnaround have faded. “Advertisers’ appetite to spend money on linear cable networks outside of sports (and, to a lesser extent, news) has simply disappeared as viewers’ eyeballs leave the ecosystem and digital alternatives become more sophisticated and far-reaching,” Fishman wrote in a note after weak second-quarter earnings pushed WBD’s stock price to an all-time low.

Paramount Global’s recent decision to accept Skydance Media’s takeover bid comes after the company ran out of time to ramp up its Paramount+ platform to offset a decline in cable. Some of the layoffs announced this week were in preparation for the Skydance deal, which is set to close next year. But even without the merger, Paramount would have had no choice but to lay off workers after the outlook for its traditionally labor-intensive channels was downgraded.

The changing fortunes of the pay-TV industry were also reflected in the news that Broadcasting & Cable magazine would soon be ceasing (completely, not just in print) after more than 90 years as a weekly business publication. (Full disclosure: I was a proud masthead for B&C from 1995 to 1997.) The demise of a magazine that had been such a staple of broadcasting for years has sparked a wave of nostalgic “Remember when” musings among those in the tight-knit community, so many found their first TV jobs by browsing the back pages of B&C.

It was easy to predict that a dramatic turnaround was coming for cable television. Diversity We called it four years ago in our June 2020 “RIP Cable TV” cover story. But seeing the numbers translated into dollars and cents, it still feels like a moment to mourn a once-proud sector.

There is much to study and learn in these turbulent times for media. In the 1990s and early 2000s, the cable business seemed invincible as it brought the multichannel revolution into American living rooms. During my time at B&C, the “broadcast” side was seen as a dinosaur, an outdated medium that would eventually be completely replaced by cable.

Nearly 30 years later, ABC, CBS, NBC, and Fox are in better shape than TNT, USA Network, and other former mainstays of basic cable. Certainly, solid sports rights are the glue that keeps them healthy. But another important reason the Big Four aren’t going away is that they continue to benefit from the uniqueness of the broadcast network model. Much like in the days of William Paley and David Sarnoff, broadcast television is built on a foundation of local-national partnerships between the networks and their 150-plus affiliates across the country. Local stations provide local news and programming during the day, switching to network-provided programming at night (among other key parts of the day, like morning news and weekend sports). All those affiliates spread across 210 U.S. television markets measured by Nielsen mean that ABC, CBS, Fox, and NBC can be watched for free almost anywhere in the country with just a TV and a digital antenna.

The U-turn for cable TV in recent years is a good reminder that the invisible hand of the marketplace is always moving. Nothing stays the same for long.

When AT&T made its ill-fated deal to buy Time Warner in 2016, TNT and CNN were gold-plated assets in the Turner division, which was then valued higher than HBO. As it happened, cable channels, especially those focused on general entertainment, were easily replaceable by streaming platforms once consumers became comfortable with the technology and on-demand formats. The local-national structure of broadcast networks—with its enviable reach and regional specificity—is not so easy to replicate. There’s a lesson here in measuring durability and value.