Cable networks are going to find it harder and harder to justify raising distribution costs for TV providers, according to BTIG analyst Rich Greenfield.
Citing contributing factors including secular decline in pay-TV subscribers and TV advertising, as well as “TV advertising softening as ratings fall off a proverbial cliff,” Greenfield said the next round of affiliate renewals will need to feature more flexible deals in terms of channel packaging for distributors.
Greenfield said in the past cable networks have pushed prices up by improving the content, offering better picture quality (HD vs. SD), giving access to on-demand content, enabling TV Everywhere for cross-device/out-of-home access and full-season stacking. He added that greater MVPD competition has given programmers more leverage. But soon, the other shoe may drop.
“As programming deals come up for renewal, we struggle to see what meaningful incremental value programmers can offer distributors, beyond mobile rights that have not already been granted. The negotiation now really comes down to simply pricing and packaging. Price could certainly continue to rise, but it is likely to be accompanied by increased bundling flexibility enabling distributors to create smaller, more attractive channel bundles,” Greenfield wrote.
Greenfield’s comments tie in with Viacom CEO Bob Bakish’s continued assurances that a $10-$20 entertainment-only channel bundle will become a pay-TV option within the next year.
Programmers like Viacom and Discovery have been careful not to position such an offering as a direct competitor to SVODs like Netflix, but have also warned that the traditional TV ecosystem needs a similarly priced offering to catch the eye of the millions of consumers who’ve flocked toward services like Amazon, Hulu and Netflix.
But soon traditional TV programmers could have to bow to shrinking revenues and cut back on content budgets in order to maintain margins, Greenfield said. The emergence of digital players like Facebook and Amazon—which recently won the rights for NFL’s Thursday Night Football—could exacerbate the problem by ramping up competition for original and licensed programming.
Greenfield also highlighted the trend of operators like Comcast giving space to online video services such as Netflix and YouTube on its set-top boxes. Not only does Comcast not have to pay Netflix for the privilege, Comcast may see some residual revenue if the move contributes to subscriber growth for Netflix or other SVODs.