Discovery, Tegna in trouble as content redistribution model runs out of reasons to exist, analyst says

Earnings
Based on quarterly results, Barclays thinks Discovery and Tegna could be under the most pressure.

Discovery and Tegna could be particularly challenged as the current content redistribution model runs out of reasons to exist, according to one analyst.

Barclays’ Kannan Venkateshwar said it’s becoming clear that the two ends of the value chain—content creation and last-mile distribution—are becoming increasingly valuable.

“Business models like cable networks and local broadcast, which merely redistribute content in one form or another, will likely have very few reasons to exist in the current form over the next decade,” wrote Venkateshwar in a research note. “While multiple media companies have responded with a proliferation of OTT products of their own, in addition to OTT products from entrants like YouTube and Hulu, the pace of consumption pattern changes appears to be much faster than the benefits from newer revenue sources.”

RELATED: Discovery’s U.S. networks see Q1 earnings growth despite subscriber losses

He added that OTT products are “at best attempts to claw back some of the share loss in a market that is broadly saturated,” a factor that will cause investors to more carefully consider the terminal value of these businesses.

Based on quarterly results, Barclays thinks Discovery and Tegna could be under the most pressure. For Tegna in particular, the firm finds it hard to believe that the company will be able to meet its guidance given recent trends around accelerating subscriber losses.

“While local broadcasters are likely to try and offset this with mergers, the M&A process itself is likely to be messy and the benefits from such deals are likely to be short-lived,” wrote Venkateshwar.

Jefferies’ John Janedis also sees causes for concern at Tegna but notes that retransmission revenue could keep increasing.

RELATED: Tegna media Q1 revenues stay flat despite fallout from no Super Bowl, less political ad spend

“Mgmt. guided to total media rev up low to MSD which we est. implies core down 4-8% (JEFe -6%). This rate of decline is similar to Q1 which we est. came in at -6.3% excl. the $9M SB impact. With both Q1 / Q2 pacing negative and tougher comps (related to political) in 2H17, we see risk to the FY—on the positive front, retrans continues to come in ahead,” wrote Janedis in a research note.

Janedis also noted that Discovery’s sub losses at its smaller networks have accelerated while sub losses at "core" networks are trending better than the overall portfolio. Still, total sub losses in the 3% range are weighing on U.S. distribution growth, he said.

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