TV’s Dead Zone: How the Cable Sector Is Killing Off Struggling Networks

Earlier this month, the close-knit world of unscripted cable-TV producers became convinced that A+E Networks was about to pull the plug on its FYI channel, making the three-year-old lifestyle outlet another casualty of the too-much-TV environment.

This was news to A+E Networks, which has locked in carriage deals for FYI with the largest pay-TV distributors, stretching into 2020. As it turned out, a shift in FYI’s development focus and the shuffling of a few staff members within the A+E Networks channel group set off a game of telephone that wrote an obituary for a channel that figures into the core of A+E’s plans.

But the fact that the shutdown of FYI seemed plausible to industry professionals speaks volumes about the state of upheaval in the traditional cable-distribution landscape. NBCUniversal’s decision in January to shutter two of the weakest linear outlets in its channel portfolio — Esquire Network and Cloo — was a warning shot that is reverberating throughout the pay-TV jungle. The thinning of the cable-channel herd has begun.

Joe Wilson for Variety

“I think, over time, you’re going to have more and more linear networks go by the wayside,” says Coleman Breland, distribution president for Turner Broadcasting. “I think that’s actually necessary. So many of these networks do less than 100,000 viewers in total-day average; there just aren’t enough eyeballs to support them. But they’re taking money out of the ecosystem.”

At stake for the largest cable programmers is an estimated 10%-20% of the roughly $40 billion in domestic affiliate fees collected from distributors, known as MVPDs, last year by Disney, NBCUniversal, 21st Century Fox, Viacom, Time Warner, Discovery Communications, AMC Networks, A+E Networks, CBS Corp., Scripps Networks Interactive, and a handful of other media companies.

  

The new scrutiny on underperforming channels goes hand in hand with the other big jolt in the pay-TV arena: the rise of low-cost streaming-channel packages. A host of well-heeled digital giants see a market opportunity in targeting consumers — call them cord-cutters, cord-shavers, or cord-nevers — put off by the high price of the traditional MVPD packages that offer 200-plus channels.

Those in the first wave of digital MVPDs are still planning to field fairly expansive channel packages rather than a true “skinny bundle,” such as the one Dish Network’s pioneering Sling TV service offered when it launched in early 2015. But the focus on new ways of packaging linear channels has nonetheless spurred a tough evaluation of what it means to be a “must-have” channel in a pay-TV package.

“It’s pretty clear that there are way too many channels,” says Rich Greenfield, media analyst at BTIG Research. “The TV bundle has gotten too bloated with channels that have too little programming. There’s a tremendous amount of inefficiency.”

DirecTV launched its low-cost DirecTV Now streaming package in late November after wrangling with programmers for more than a year for the necessary rights. YouTube unveiled its broadcast-centric “YouTube TV” service on Feb. 28. Hulu is expected to introduce a more expansive offering, fortified by content from its studio owners (Fox, Disney, NBCU, and Time Warner) within the next month. Amazon and Apple are seen as potential entrants into the OTT bundle market, too. There are also rumblings of even more narrowly tailored packages — say a collection of entertainment channels or news outlets — coming to market in an effort to sidestep the single biggest driver of cable programming costs: sports channels.

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BY THE NUMBERS: NET WORTH

Nine companies own the overwhelming majority of cable networks available to U.S. consumers. This chart exhibits not only who owns what, but includes several key indicators as to the relative financial health of each channel: the affiliate fee each channel collects from pay TV distributors, the total number of viewers each channel averages on a 24-hour basis, and the total subscribers each channel reaches.

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With pay-TV bundles going on a diet, programmers are facing a dilemma: Let marginal channels die a slow death from steady subscriber losses, or pull the plug sooner rather than later. Either way, earnings from affiliate fees will take a hit. The hope among programmers is that funneling more resources to the strongest channels will fortify the affiliate fees and advertising potential of their biggest brands.

NBCUniversal’s decision to shutter two channels was undoubtedly influenced to some degree by the perspective of its parent company, Comcast. The cable giant can point to its own actions when playing hardball in carriage negotiations with outside programming groups.

Of all the major cable players, none is facing a tougher transition to the better-not-bigger era than Viacom. The company has the largest domestic fleet, with some 25 outlets, many of them spinoffs of flagship channels (MTV Live, Nicktoons, BET Gospel, CMT Music, et al). They were born at a time in the 1990s and early 2000s when the pay-TV arena was in a go-go period of growth, and programmers used their clout with MVPDs to secure additional channel real estate in addition to steady price increases.

The Viacom turnaround plan unveiled in February by new president-CEO Bob Bakish calls for the company to reallocate most of its programming and marketing expenditures to shore up its “flagship six” channels: MTV, Nickelodeon, Nick Jr., Comedy Central, BET, and the Paramount Network (a revamp of Spike TV coming next year).

But the 19 other outlets in the Viacom stable still generated some $1.3 billion in affiliate fee revenue and $1 billion in advertising sales in 2016, according to Bernstein Research’s Todd Juenger. That adds up to 28%, or $973 million, of the company’s total earnings, which explains why Viacom cannot easily pull the plug on them, at least not all at once.

Viacom’s 180-degree strategy shift was prompted by a clear-eyed evaluation of its programming spending. The new regime, led by Bakish, realized that the company’s considerable expenditures were simply spread too thin across too many outlets, particularly for costly scripted programming. The revamp calls for the Paramount Network to be the home for most scripted programming while MTV returns to its roots with a focus on unscripted series.

Industry observers say there is no chance that all of Viacom’s 25 channels will endure the marketplace shifts in the years ahead. Beyond strengthening the six channels that drive the bulk of the company’s cable revenue, the goal is to shore up the most popular of what it calls its “reinforcing networks” by focusing them on distinct programming niches. Bakish, speaking March 1 at an investor conference, cited TV Land as a prime example of what’s gone wrong with Viacom’s tonnage approach.

“What has actually happened is we’ve spent a lot more money to generate lower ratings. So as you move off that strategy, [you] reallocate resources,” he said.

Esquire Network delivered only an estimated 18¢ per subscriber to NBCUniversal, but that still added up to more than $150 million in 2015. NBCUniversal ultimately decided that it made no sense to continue investing in a linear channel that was steadily losing subscribers.

NBCUniversal and other programmers are increasingly inclined to give up the fight for pennies on low-visibility channels in the hopes of commanding more dimes and quarters for their strongest channels.

“As the discussions with MVPDs get more contentious, I think you want to make sure that your big networks are fully supported and you’re more willing to reallocate [resources],” NBCUniversal CEO Steve Burke said last year.

Anthony DiClemente, media and internet analyst with Nomura Instinet, notes that CBS Corp. is a hot shot on Wall Street because it has the advantage of driving the hardest bargains for its two marquee properties: the CBS broadcast network (via the company’s O&O stations) and Showtime. For years, CBS was hammered by Wall Streeters for its focus on broadcast and lack of diversification into cable. But in a skinny-bundle world, the Eye has a strong hand to play.

YouTube CEO Susan Wojcicki introduces YouTube TV, a cheaper alternative to pay TV bundles that excludes many top channels. Reed Saxon/AP/REX/Shutterstock

“It’s not like bigger is better right now. You have albatrosses of networks that are dead weight on your shoulders,” DiClemente says. “That’s why investors love CBS — it’s one network that has four to six times the viewership of basically any cable network. They’re where the other guys want to be.”

The hardest place to be right now is among one of the vast number of outlets in the middle to lower ranks of distribution. Programmers have to pick their battles on prioritizing the channels they want to piggyback on their largest brands for skinny-bundle distribution. And because of the competitive pressures buffeting traditional MVPDs, the chances are slimmer that even a channel with promise can grow its distribution base over time. Representatives for the industry’s largest MVPDs — Comcast, DirecTV, and Charter — declined to comment for this story.

A+E Networks has elevated FYI into its core cluster of six channels — A&E Network, History, Lifetime, Lifetime Movie Network, and Viceland — but others such as Lifetime Real Women are seen as endangered species. Channels that have been grouped into add-on tiers on traditional MVPDs face a particularly uphill climb.

“What’s challenging with the smaller networks is that they’re carried on niche tiers, and those tiers aren’t performing at the level that they once were,” says David Zagin, president of distribution for A+E Networks. “It makes it very difficult for a smaller network to break out and become a more fully distributed network. We want to make them more popular with more investment in programming, but we’re not getting the distribution to take them to the next level.”

Laura Martin, senior analyst at Needham, sees a clear subscriber threshold that smaller channels must reach to remain viable. “If you don’t have 40 million to 50 million subscribers, you cannot exist, because you can’t generate ad revenue,” she says.

In this environment, it’s no surprise that the largest cable programmers are increasingly preaching the mantra of focusing and fortifying their offerings in order to secure increases. Discovery execs have been vocal about redirecting resources to bolster their strongest channels. But as is the case with Viacom, this also begs the question of the viability of low-visibility channels such as American Heroes Channel, Discovery Life, or Destination America.

Discovery Communications CEO David Zaslav told investors during the company’s Feb. 14 fourth-quarter earnings call that five of its channels account for about 85% of its affiliate revenue and advertising. “And we’ve really focused on making them stronger,” he added. But Zaslav also noted that Discovery was focused on making its smaller channels into “super fan” networks. “We have Velocity — it isn’t a large audience, but it’s a very compelling audience.”

“So many of these networks do less than 100,000 viewers in total-day average; there just aren’t enough eyeballs to support them. But they’re taking money out of the ecosystem.”

Coleman Breland, Turner Broadcasting

AMC Networks is diving into the emerging skinny-bundle world because its flagship channel is a must-have — thanks to “The Walking Dead” — and its four other channels are priced well relative to viewership. The company, a regular target of acquisition rumors, is in carriage negotiations with YouTube and Hulu.

“We deliver outsized value,” says AMC Networks distribution chief Bob Broussard. “Working out the fine points of distribution rights gets a little tricky with distributors that want to give consumers the opportunity to view [shows] on a delayed basis and a remote basis. But we’re in a good position.”

Regardless of positioning, programmers are adjusting to a cable universe in a period of gradual, sustained contraction. Nielsen estimates for March show a 2.3% year-over-year decline in the number of U.S. pay-TV subscribers — representative of the slow-drip customer losses experienced by providers in recent years.

Digital skinny bundles have a significant upside. “They can expand the overall pie when it comes to multichannel subscriptions, without question,” says Justin Connolly, head of distribution at Disney.

But they have yet to catch fire with consumers, and are not the only drivers of the subscriber downturn in the MVPD marketplace, according to Burton Jablin, COO of Scripps Networks Interactive.

“They’re so relatively new, and it’s not the easiest thing for someone to switch to something that’s totally new,” Jablin cautions.

In fact, the biggest change-agents in the television ecosystem have been subscription-video services. Netflix, Hulu, and Amazon have altered the creative landscape by pouring billions of dollars into the original-programming arms race. On the distribution side, they’ve had no lesser impact. Until their rise, MVPDs had a near-monopoly on video entertainment. Now, thanks to lucrative streaming deals that have pumped revenue into TV studios, much of the content available on cable can be watched on services that cost less per month than a decent pizza.

“There has been a proliferation of content outside the traditional pay-TV system,” says Fox Networks distribution president Mike Biard. “Consumers are itching to get more content on their terms, and they’re finding it many places.”

Facing unprecedented competition and eroding subscriber bases, MVPDs are likely to lean hard on channel groups in forthcoming negotiations. A tougher stance on straggler channels will likely result in more surgical amputations such as Esquire Network. Or it could lead to shotgun-spray actions, as when Suddenlink and Cable One dropped Viacom channels en masse in 2014.

Series like “Brew Dogs” are no longer available on linear TV now that NBCU has shut down its Esquire net. Courtesy of NBC Universal

“MVPDs are looking at everything through the lens of ‘How do I shave my costs and protect my margin?’ ” Biard says. “Our content stands up to that scrutiny because it’s distinctive and compelling with large, passionate audiences. But industry-wide, this increasing bottom-line focus means some programming will find it more challenging to achieve or sustain distribution.”

In future negotiations, MVPDs will be emboldened not just to drop channels or groups, but to demand greater flexibility in how they package channels and what carriage rates they guarantee. To aid their arguments, they will be able to point to the flexibility built into some of the digital skinny-bundle offerings.

The potential breakup of cable’s big bundle has long represented a threat to less-visible channels. Disney, Fox, and Turner have taken steps to streamline their portfolios in recent years. Turner eliminated CNNfn and CNN Sports Illustrated more than a decade ago, redirecting resources to then-nascent digital efforts. Fox turned Fuel into Fox Sports 2 and Fox Soccer Channel into FXX, growing subscription bases for both. Disney relaunched Soapnet, a home for daytime-drama reruns, as Disney Junior, an extension of the kids-focused Disney Channel.

But such rebrands are difficult to pull off. Esquire Network was a relaunch of NBCUniversal’s Style channel in 2013. A+E Networks made a bet with Shane Smith last year that turning History 2 into the millennial-bait of Viceland was a better long-term play for the company. But viewership so far has been modest, at best.

Programming-distribution veterans emphasize that the proliferation of MVPD packages and options will give consumers even more of a voice in determining which channels live or die.

“It all comes down to how indispensable your channel is to the customer,” says NBCU’s content distribution chief Matt Bond. “Ratings are only moderately tied to that question. It’s about how valuable your channel is to a distributor who is selling a collection of services as a subscription product.”

 

http://variety.com/2017/tv/features/overcrowded-cable-sector-esquire-spike-fyi-1202012647/