Programmer and pay-TV stocks get crushed as ESPN woes spur concerns of cord cutting, skinny bundles

Stocks for virtually all of the major media conglomerates have dropped sharply amid newly heightened concerns about the future of the pay-TV bundle.

Discovery Networks (down 12 percent in Wednesday trading)  and 21st Century Fox (down 10.4 percent) led the decliners, but the Walt Disney Company (minus 3.7 percent), Time Warner Inc. (off 3.19 percent) and Comcast (NASDAQ: CMCSA), home of NBCUniversal (off 2.53 percent) tumbled, too.

Pay-TV companies caught what one analyst called the "cord-cutting contagion" too: Charter Communications (NASDAQ: CHTR) and Time Warner Cable (NYSE: TWC) were both off nearly 6 percent in late-morning trading.

The investor reaction has been negative even for companies with solid second-quarter earnings reports. CBS Corp., for example, reported a 1 percent rise in second-quarter revenue to $3.22 billion, driven partly by solid performances by cable networks including Showtime. But its stock had slipped more than 4 percent as of mid-day trading on the New York Stock Exchange.

"There is almost an eeriness to this; it doesn't seem fundamentally driven," said David Bank, an analyst with RBC Capital Markets, to the New York Times. "The concern is when you look at five to 10 years out, you become less certain about the ecosystem."

Most investment analysts have tied the investor concerns to Disney, which conceded on Wednesday that its dominant cable platform, ESPN, has indeed lost subscribers due to contraction of the pay-TV eco-system.

Disney CEO Bob Iger sought to calm investor nerves, assuring investors that the "expanded basic package" of pay-TV channels ESPN has thrived in for the last three decades "will remain the package of choice for years to come. He minimized the impact of so-called "skinny bundles," which segregate niche and enthusiasts channels -- such as national sports networks -- to add on packages.

"ESPN is a must-have brand as part of the initial service offering for these new packages," he said.

However, given the size of ESPN's fast-expanding, multi-year, multi-billion-dollar program licensing contracts with major sports leagues like the NFL and NBA, small decreases in subscriber numbers make a huge difference. In its compelling analysis, the Wall Street Journal notes that ESPN's margins have decreased to 38 percent this year from an historical average of 45 percent.

If the network's current rate of subscriber attrition holds, its margins rise back to 42 percent by 2020, as programming costs stabilize. However, if subscriber declines accelerate by even 1 percent, margins slip back below 40 percent.

Still, in downgrading the near-term growth prospects of a media stock that so reliably expands, Disney executives set off a chain reaction that led right back to the pay-TV sector.

"Contagion was perhaps inevitable," said MoffettNathanson analyst Craig Moffett in a note to investors. "Almost every investor with whom we have spoken has described an almost palpable sense that sector sentiment [about cord cutting] has changed, some would say perhaps permanently. Sentiment aside, however, there has already been an understandable desire among cable investors to weigh what is really at risk. The process has already begun of sifting through the wreckage and considering positioning 'the morning after.'"

For more:
- read this New York Times story (sub. req.) 
- read this Wall Street Journal story (sub. req.)
- read this Re/code story

Related articles:
Disney's Iger: 80% of ESPN sub losses were due to pay-TV contraction, not skinny bundles
ESPN scratches and claws to sustain its margins amid souring pay-TV economics
ESPN has lost 3.2M subs in the past year; could pull itself off Sling TV