DTCs and Legacies  

The recent streaming turmoil raises big questions about where the direct-to-consumer business sits relative to a legacy TV business that remains  a cashflow cow, despite persistent cord cutting, rising inflation, and a looming recession. With Wall Street’s Netflix freakout infecting the entire sector in recent weeks, the benefits of the legacy video business become more apparent. At the 9th annual MoffettNathanson Media & Communications Summit this week, for example, Charter Communications Chairman and CEO Tom Rutledge argued that “having a good video business is important for a lot of reasons,” noting the power of bundling to amplify broadband and wireless products. “Television needs to be broadly distributed,” he said. “Sports rights need to be broadly distributed… Over the long term, we can use video to make the total value of all the services we provide better than the alternatives.” 

Rutledge has touted legacy video for years, but even some content owners agree. At the same conference, Fox CEO Lachlan Murdoch noted that Fox’s purposeful absence from the general-entertainment SVOD space means that “we are focused on the MVPD ecosystem” and “super serving those distributors.” And we should recall that Fox gave up the SVOD ghost in 2019 when it sold off its valuable entertainment IP to Disney so it could focus on sports, news, and broadcast TV (although it later bought Tubi as an AVOD play that’s expected to bring in $1 billion annually within a couple years). Fox zigged when others zagged, and just might be starting to feel validated. Said Murdoch: “We’ve been very happily on the sidelines watching this bloodbath in the SVOD market.” AMC Networks Interim CEO Matt Blank, meanwhile, argued that FAST-live channels are “built on the backs of the linear business” and “driven by strong relationships with our commercial partners and advertisers.” In other words, linear TV and streaming are starting to converge.

Meanwhile, Warner Bros. Discovery – which has talked up the combined streaming potential of HBO Max and discovery+ since closing the $43 billion deal marrying AT&T’s WarnerMedia to Discovery Inc. – held an Upfront event for advertisers in NYC this week without even mentioning streaming or its AVOD plans. 

With WBD’s stock down 30% over the last month, dragged largely by Netflix’s recent subscriber losses, it’s no wonder that streaming suddenly gets less stage time. And also interesting this week: Paramount Global moved “Yellowstone” spin-off “6666” off of its planned debut on Paramount+ to, gasp… the linear Paramount Network? It’s enough to make you think we’ve time traveled back to the early 2000s. But then again, the same day that Paramount gave a nod to linear, indie content provider GAC Media announced it will launch a family-oriented AVOD in the fall. Let’s keep all this in perspective…

Next? Short-term fluctuations on Wall Street certainly don’t tell us much about long-term macro trends. And the shift from traditional TV to streaming took years to gestate and didn’t really kick into high gear until the late 2010s when the success of Netflix and Hulu nudged several laggards to launch their own direct-to-consumer SVODs. The recent destruction of market value, starting with Netflix and infecting most big entertainment companies with SVOD businesses, won’t reset the clock. And this isn’t necessarily the start of a new era for legacy TV. It could be nothing more than  a blip. And perhaps a buying opportunity.

After all, cord cutting remains rampant, with MVPDs reporting around the same subscriber attrition in Q1 2022 that they have experienced for years. And if anything, the pressure on SVODs has simply shifted focus to ad-supported streaming, not back to old-school cable and broadcast. Ad money continues to flow from linear TV to AVOD alternatives, with digital media accounting for 56% of total ad spending in the U.S. in April, up from 51% in April 2021 and 43% in April 2020, according to MediaPost. That growth is only likely to accelerate as Netflix and Disney+ get into the AVOD game later this year. The explosion of FAST channels makes it even more likely that more and more ad money will flow to digital. As for traditional pay TV, let’s wait for cord cutting to truly reverse (or at least level off sustainably) before writing its comeback story, either on the subscription or advertising side. 

So while it’s possible that the next couple of years could create certain realignments that bolster some traditional TV elements, a return to the old glory days seems highly unlikely, especially with the feds about to dump $65 billion into broadband as part of the Infrastructure Act, and new fiber and 5G fixed wireless access networks sprouting up everywhere. With 4K streaming soon available across every nook and cranny of the U.S., it’s likely that fewer and fewer consumers will choose bloated pay-TV packages, even if they remain simpler and more convenient than navigating a confusing SVOD and AVOD landscape. Even virtual MVPDs like Sling TV and Hulu + Live are losing subs now as AVOD and FAST channels spread. As Disney CEO Bob Chapek implied during the company’s Q1 earnings call, ESPN’s sports content would probably have moved to streaming by now if not for those sweet license fees still rolling in from 70-plus million MVPD homes. Similarly, NHL Commissioner Gary Bettman this week said DTC makes sense but only “over time.” That’s the thing. Market realities and legacy cashflow pressures will be with us for quite a while. But if cable operators could survive years of capital pressures and government regulation to achieve the American Dream, then we’re guessing media companies can withstand Wall Street’s recent skepticism to achieve their own version: Let’s just call it the American Stream. You’re welcome.

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