Where does the cable industry go next?
The streaming revolution seems to have only gained steam with the pending merger of two cable powerhouses, Discovery Communications Inc. (DISCA) - Get Discovery, Inc. Class A Report and Scripps Networks Interactive Inc. (SNI) . In the deal announcement on Monday, July 31, Scripps president and CEO Kenneth W. Lowe stated outright that the merged entity would be looking at cable alternatives.
"This agreement with Discovery presents an unmatched opportunity for Scripps to grow its leading lifestyle brands across the world and on new and emerging channels including short-form, direct-to-consumer and streaming platforms," Lowe said.
The fact that Discovery and Scripps may want to develop an over-the-top, or OTT, service should come as no surprise. Pay-TV subscriber growth has been negative since 2013, and the cable pay industry has been declining 2.4% annually since then, according to a recent MoffettNathanson LLC report.
Many cord-cutters are defecting to streaming services such as Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report and Amazon (AMZN) - Get Amazon.com, Inc. Report Video or opting for skinny bundles such as Dish Network Corp.'s (DISH) - Get DISH Network Corporation Class A Report Sling TV. Should a potential Discovery-Scripps bundle worry the former group?
Even though Discovery and Scripps together account for 20% of the viewership on cable, that statistic means less and less as more people cut the cord. Discovery's acquisition of Scripps will give it access to networks with higher operating income, which could be allocated toward an OTT offering. Discovery Communications CEO David Zaslav has envisioned a nonsports skinny bundle that would be offered at a low price point like $10, a reality that seems closer now that Discovery will have popular Scripps channels such as HGTV and Food Network in its arsenal.
It will still be an uphill battle for an OTT offering to be meaningfully profitable, though. A nonsports skinny bundle, as Walt Disney Co. (DIS) - Get Walt Disney Company Report CEO Bob Iger has said, would not be "practical in terms of gaining penetration." Sports games remain the most popular programming on television, and a skinny bundle without it would be a difficult sell.
Additionally, while Scripps and Discovery operate five of the top pay-TV networks for women, skinny bundles have to appeal to every demographic if they are to replace cable in most households. The bundle that Zaslav has talked up would have to include options for kids, such as Viacom Inc.'s (VIAB) - Get Viacom Inc. Class B Report Nick Jr., and also for adult men, such as AMC Networks Inc.'s (AMCX) - Get AMC Networks Inc. Class A Report namesake channel.
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To enlist the bevvy of channels needed for a well-rounded skinny bundle, Discovery and Scripps would probably have to reevaluate the $10 price point if they hoped to make a profit -- and, indeed, such a bundle under discussion at Viacom has a $20 price tag attached. Or they could forgo the bundle route altogether, still licensing channels to services such as Sling TV but concentrating efforts on leveraging their popularity among women during carriage negotiations with cable companies.
Wedbush Securities Inc. analyst Michael Pachter thinks this may be the best route.
"Discovery and Scripps are the ones with the most to lose from cord-cutting," Pachter said. "They're never going to make enough revenue s
elling to us direct. Content owners have to preserve the ecosystem that maximizes their own product."
Zaslav has made it clear that Discovery intends to maximize its product, perhaps by consolidating its efforts. 85% of cable TV fees and advertising revenue comes from six or seven of Discovery's 12 channels.
"At least for us, we have started to move towards looking at our 12 channels in the U.S. and seeing that a strong eight may be the direction that the industry is going," Zaslav said.
Discovery gets the lion's share of its viewership from four networks: Discovery Channel, TLC, Investigation Discovery and Animal Planet. It also carries cable network Eurosport, which is popular in Europe.
In addition to HGTV and Food Network, Scripps owns Travel Channel, DIY Network, Cooking Channel and Great American Country.
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