So, About That Disney ‘Lifeboat’ Two Analysts Worry About …


Both MoffettNathanson senior analysts Craig Moffett and Michael Nathanson have described the planned suite of direct-to-consumer services from The Walt Disney Co. as a “lifeboat” — one, they say, is “ready and waiting if the status quo deteriorated to the point that it came time to abandon ship.”

With Q1 cord-cutting results now in the books, it may still be too early to abandon ship… but it’s not too early to put on the lifejackets, they say.

They write in a new investor brief:

The accelerating decline in traditional Pay TV subscribers in Q1 is by this point old news.

The combined losses from Cable, Satellite, and TelCo TV were more than 75% worse than in the corresponding quarter a year ago, reaching a record rate of decline on both an absolute (1.4M subscribers) and percentage (-4.8% YoY) basis. Again, old news. Even the subtexts of this story are already familiar: Cable operators are increasingly indifferent to video retention, and the wheels are rapidly falling off satellite TV.

The more interesting, and ultimately more important, developments this quarter relate to the media companies, not the distributors. Based on our proprietary checks, growth for the
vMVPDs also slowed significantly in Q1. With vMVPDs picking up less of the slack, total
distribution for cable networks fell off the table, reaching a worst-ever rate of decline of -1.9%.

That’s been much less widely reported, but it ultimately will have a much larger impact on
where things go from here.

There’s every reason to believe that things will only get worse. If Cable is, indeed, becoming less inclined to defend the status quo, then traditional MVPD losses will only accelerate. But if history is any guide, the response from the media companies will be to raise rates to pick up the slack. That will accelerate the declines.

Meanwhile, the vMVPDs are raising rates as well (the latest round of price increases came after Q1 had ended). Some of that is simply the reality of contractually rising cost per network. But there is also a trend towards greater and greater channel inclusion among vMVPDs. That’s not so much because the vMVPDs are trying to fill gaps in their lineups as it is that they are being forced to include ever more networks.

The more the vMVPDs mirror the channel bloat of the traditional MVPDs, the more their
growth, too, will stall. And the more the programmers will have to raise prices to fill the gap. All this portends a growing bifurcation between general entertainment and sports/news. Sports nuts and news junkies will be forced to stick with the status quo… and they will pay higher and higher prices in order to do so. But that will only drive more and more entertainment-only subscribers away, into the arms of cheaper SVOD and AVOD alternatives.

And that, ladies and gentlemen, will force Disney’s hand in launching the lifeboats. New Fox, with its focus on sports and news, and CBS, with one core network to defend, will keep pushing price. And that, in turn, will only further impoverish the status quo. Disney, uniquely, has the assets to succeed in both sports/news AND entertainment.

But does anybody else?