Why Are Television Stocks Sinking As Television Viewership Rises?

For all the talk about cord cutting and the move to mobile, few people are actually doing so. Not because they are so devoted to cable, but because it is increasingly linked to the internet.

The newer forms of tv watching are adding viewers, but less of the revenue is going to the established networks and cable franchises which are raising fees to make up for lost advertising. JL

Michael Wolff reports in USAToday:

Does the $3 billion that Netflix pays back to the television industry cover TV’s loss of syndication revenues and do television licensors have the clout to make sure Netflix covers that loss?
The other day, a senior Facebook executive sent me a link to a New York Times story about the precipitous drop in TV stocks, saying that while he didn’t necessarily regard share prices as a sign of much, still the perception in the market obviously counted for something, didn’t it?
That could sum up pretty much the state of digital-era capitalism: an understanding on the part of everybody that share prices in the digitally inflected world are often disconnected from reality, but, nevertheless a belief that they have something important to tell us, even if we’re unlikely ever to know what.
In this example, the share prices of his company, Facebook, wholly advertising supported in a universe where ad rates are ever falling and per-user value is in constant decline, is going up, while shares of TV-focused companies like Disney, Fox and Time Warner, with a subscription revenue stream and robust ad rates, are going down.
The proximate cause of the decline in TV stocks was advice from Disney tempering ESPN’s growth projections. That is, the fastest growing and most profitable entity in modern media, one vastly outpacing any digital platform, was encountering thinner air in the upper stratosphere.

National League third baseman Todd Frazier is interviewed by ESPN anchor Lindsay Czarniak ahead of the 2015 MLB All-Star Game on July 14, 2015, at Great American Ball Park in Cincinnati. (Photo: The Enquirer/Kareem Elgazzar)

This then, according to analysts, was extrapolated into a long-term projection in which the TV industry was going the way of the steel business. To this point, the New York Times story quoted an analyst, David Bank from RBC Capital Markets. While acknowledging in on-the-one-hand-and-on-the-other fashion that while TV fundamentals yet looked solid, Bank said, “the concern is when you look at five or ten years out, you become less certain about the ecosystem.” (Analysts, in a fight to be quoted, always look for a ways to support a reporter’s thesis.)
In other words, television, which for more than 60 years has adapted to all manner of transformation in the entertainment business, is in a weaker position than 10-year-old Facebook, in an industry where few companies maintain dominance for more than a generation.
The context here, or the source of the hysteria, is of course cord cutting. Ever-growing numbers of people are not watching television on television, but on various other screens.
Actually, few people are really cord cutting because the same cord that gives you television on your television also gives you Internet connectivity and, hence, television on your other devices. People are not so much cord cutting as changing their particular cable packages. (Even this is overblown — many people are not watching television on television, and yet still paying to do so.)
What’s more, the underlying point here is a topsy-turvy one because, while the implication of cord cutting is that fewer people are watching television, in fact more people are watching more television than ever before — just not on the television.
In some real sense, this is not a business crisis, but a definitional one: Many people are using the same words to talk about different things.
Netflix, according to the Times story on the TV share price fall, is “cutting into the time people spend watching traditional television.” Except, of course, what people are watching on Netflix is exclusively traditional television. Indeed, Netflix will pay the television industry $3 billion a year so that it can let people watch traditional television, albeit not on television.
While Netflix shares soar, and the TV business’ decline, it's curious to note that HBO, a business similar in size to Netflix, makes $2 billion in profit, largely because of the efficiencies of the traditional television ecosystem, while Netflix, because of the inefficiencies of the streaming system and vast subscriber churn, makes nothing to speak of. But pay no attention.
Indeed, in back-to-the-future context, broadcast television was once thought to be threatened by cable television, which was stealing its audience. But after a bit of definitional confusion, it became clear that it was all television, hence, it all rolled back into one very profitable business.
And, surely, this renewed, or ever-increasing fracturing, is an issue. But in some sense, it's not so much an audience issue as a math issue. Does the $3 billion that Netflix pays back to the television industry cover TV’s loss of syndication revenues and do television licensors have the clout to make sure Netflix covers that loss?

True, the publishing industry dopily let digital convince it that there were unimagined opportunities that would at some future date compensate it for its subscription and advertising losses. But television people have seen that particular business calamity and, anyway, they do nothing so well as make tough deals and fight bitter turf wars.

It's also true that the bedrock of television, advertising, is in some obvious existential sense being transformed. Television viewers have learned how to watch television without advertising — with advertising now seeming more and more like a primitive form and activity.
Looking to the future, advertising is not a business you’d much want to be depending on.
Television, however, has cannily gotten people used to paying for television, in cable bundles and now in VOD programming. Paying vast amounts — as television is not something anyone seems willing to do without. That’s the clear financial challenge for the industry: How do you make television so compelling and essential that people will pay ever-larger fees to compensate the industry for lost advertising revenues?
That's a challenge, but nothing like the challenge faced by Google and Facebook, which exist now only on advertising, with its ever-decreasing value, with no wherewithal at all to charge people and no evident product that anyone will pay for. Except, of course, if Google and Facebook start streaming television, too.
While the perception of television, causing volatile share price swings, is less, the reality, appreciated by a world of habituated and devoted customers with open wallets, is more.