• by Wayne Friedman , March 18, 2021

Direct-to-consumer (D2C) TV businesses -- new premium streaming TV platforms -- have driven public TV companies stock prices up by nearly 167% since November. But one research firm now believes some of this is over the top.

Macquarie Research says its downgrading Discovery Inc and ViacomCBS to underperform. Both companies recently launched new D2C consumer businesses: discovery+ and Paramount+, respectively.

Senior analysts Tim Nollan and Sean Kumar write there is a tradeoff with many of these businesses -- trading lower profit-margin businesses (D2C) for high-margin businesses (linear TV).

“We expect D2C on balance to restore low- to mid-single digit revenue growth overall. But this will likely lead to lower operating margins through 2024 for some, as the cost of content investment weighs. D2C operations are likely lower margin businesses even over the long period.”

They add: “We are downgrading [Discovery and ViacomCBS] from neutral to underperform, both purely on valuation grounds. Both companies have made bold moves in D2C and been rewarded with outsized share price moves.”

The future of linear TV doesn’t look good: “Flat at best, and more likely will deteriorate ... given the investments needed in D2C now, we do not expect meaningful earnings growth to resume until 2023.”

Deterioration comes from traditional pay TV subscribers, which were down another eye-popping 7.5% in the fourth quarter. Long-term, this trends means declining affiliate fees from 2022 onward.

In addition, it also means flat advertising revenues, at best “even with the promise of advanced TV advertising efforts sustaining pricing as ratings continue to fall.”

Macquarie estimates cable affiliate revenues at zero growth, then dropping after 2022 by 1% per year. On the plus side, it sees broadcast retransmission revenue at 10% growth through 2022. It hasn’t yet factored in big sports programming from the NFL. The league is in the process of long-term renewal with TV networks.

They also believe content-licensing revenues could slow as TV companies consider retaining programming for their own use on premium streamers.