• by Diane Mermigas , November 5, 2010

About the only thing anyone can agree on these days is that transformative change is afoot. The impact and the outcome are up for grabs.

Still, two veteran industry analysts have managed to come to similar conclusions in new introspective reports. The owners of premium TV content are under pressure to preserve and grow value in a multichannel world that has already devastated music and newspapers. Shifts in the Pay-TV ecosystem are real and can prove devastating to all.

So far this year, broadcast network television is rebounding amid multiscreen challenges, observes Michael Nathanson, head of Nomura Securities' media equity research and formerly of Bernstein Research. Broadcast ratings losses are moderating, while cable ratings are falling. The broadcast networks' audience reach advantage is beginning to firm its recessionary low advertising prices. DVR viewing trends continue to favor broadcast network programming, and broadcasters are successfully forging a new revenue stream from cable affiliate fees, evidenced in the recent News Corp.-Cablevision battle.

"The balance of power is beginning to tilt the broadcast networks' way due to a combination of emerging trends," Nathanson says.

In a companion report, Nathanson argues that owners of content (principally the same big media companies that own the major broadcast and cable networks) will protect the existing TV ecosystem and preserve program value in the face of free substitute online outlets. "Absent a suitable alternative, we still see multichannel TV as a share gainer," Nathanson writes.

The challenge will be holding the line on free access to premium content online that undermines TV's value proposition across what he calls "the holy distribution trinity of cable, satellite and telcos." Cord-cutting is less an issue than how the owners of TV content will manage monetization. Consumer spending on media far outpaces overall personal consumer and advertiser expenditures.

Needham & Co. analyst Laura Martin attempts to quantify the economic risk to big media content owners based on a proprietary Needham survey.

CBS and News Corp. have about as much market cap at risk as Time Warner and Viacom as viewers gravitate to Web-delivered video. Even the dominant cable operators -- Comcast and Time Warner Cable -- have market cap risks similar to Disney, Viacom and Time Warner in the face of cord-cutting value destruction, Martin says. For every 1% of subscribers that disconnect from their TV subscriptions, these media giants each lose roughly 1% to 1.5% of their market cap, she estimates.

As the nascent movement gains traction, the bottom line impact will become more palpable. For the first time in the second quarter, the domestic Pay-TV ecosystem lost subscribers; an estimated 200,000 households cut the cord to cable, satellite and telcos. The Pay-TV subscriber decline continued in the third quarter, companies reporting earnings said this week. Convergence Consulting Group says 600,000 households stopped paying for television programming in 2009 and projects that number will rise to 1.6 million by late 2011.

The least vulnerable of the content players has programming that is aired "on a broadcast network (maximum reach) that is part of a successful series (ever harder to create) that can be sold to a growing number of offshore cable channels over multiple syndication cycles" stretching for decades, Martin concludes. She cites CBS and News Corp. as the potential biggest winners.

Contrary to conventional wisdom, cable channels aggregating other people's content (reruns) or specializing in original content that has little long-term library value are most at risk. Still, the overriding challenge for all is how to get consumers to pay for premium content wherever and however they access it. Put another way, does moving content online undermine its perceived value within the Pay-TV bundle?

The Pay-TV ecosystem generated about $140 billion in revenue in 2009 in subscriptions and advertising paid to cable, satellite and teleco video providers. The U.S. Pay-TV ecosystem has a public market capitalization of about $345 billion, Martin estimates based on the principal players involved. With multichannel video penetration at 87% of households (or about 100 million households paying an average $70 each month for about 300 channels), any shifts in the Pay-TV ecosystem can be profound.

Although TV viewing has never been higher, according to Nielsen, the jury is still out on whether moving TV content online is substantive or additive to the total reach and value attached to TV content. Needham's proprietary survey findings suggest that cost-conscious consumers only see a value proposition worth paying for in the programs and channels (or networks) they most want to view. So much for bundled programming. The good news: premium content most in demand anywhere is garnering a larger percentage of overall advertising and subscription dollars across all channel.

The quandary at hand: "As YouTube, Google TV, Apple TV and others make inroads into delivery of TV content online, the content companies are faced with the specter of trying to protect a huge economic pie on the TV, or follow viewers to the platforms they want to be on...but don't always want to pay for," she said.

With this Pay-TV ecosystem commanding an estimated 34% of consumer media spending, which Nathanson predicts will grow an average of nearly 4% annually through 2015, there is money for the taking. More specifically, consumer spending on cable and satellite TV subscriptions could grow an average annual 5.6%, depending upon the sustainability of affiliate fees and retrans payments, Nathanson says. Over the next several years, collectively smaller advertising spend could grow 3.5% annually on the broadcast networks and about 7% on the cable networks. The good news is "consumers will tend to stop buying new shoes and cars to fuel media consumption," he says. The bad news is there are no clear-cut paths to those dollars.