Did Disney, Fox, and Warner Bros. Discovery Just Put the Nail in the Coffin for Traditional Cable TV?

The unrelenting cord-cutting movement already had the United States cable television industry on the ropes. Now the business may have just been dealt a knockout punch. Its single most important draw — live sports broadcasts — will soon no longer be predominantly tied to cable service providers.

Once an anchor for the cable business, more and more sports programming has been making its way to streaming venues. A massive chunk of this programming is going to suddenly be made available online later this year. Cable company investors should be very concerned.

The biggest leap yet for sports streaming

Sports isn’t exactly unheard of on streaming platforms. Walt Disney‘s (DIS -1.95%) ESPN+ offers a great deal of what its ESPN cable channel doesn’t. Amazon‘s Prime aired the NFL’s Thursday night games this past season. Paramount Global‘s Paramount+ and Comcast‘s (CMCSA 1.99%) Peacock gave their subscribers access to a bunch of NFL games this year as well. Notably, Paramount+ will air this year’s NFL championship game on the streaming platform.

But there’s a major leap forward on the sports-streaming front coming later this year.

On Tuesday, Disney, Warner Bros. Discovery (WBD -1.93%), and Fox (FOX 3.12%) (FOXA 3.44%) co-announced the trio is teaming up to launch a streaming service later this year that will carry a tremendous number of live sporting events. While several details — like pricing — have yet to be hammered out, other details have already been divulged. Chief among them is the fact that subscribers to this platform will “have access to the linear sports networks including ESPN, ESPN2, ESPNU, SECN, ACCN, ESPNews, ABC, Fox, FS1, FS2, BTN, TNT, TBS, truTV, as well as ESPN+.” That’s pretty much everything these three media giants offer on the sports front.

Perhaps most noteworthy, however, is the fact that while this lineup of cable channels will certainly appeal to sports fans, broadcast networks like ABC and Fox, along with cable channels like TNT and TBS, aren’t sports-only venues. This bundle is a big slice of the rest of cable’s most important programming. It’s missing Comcast’s NBC and Paramount’s CBS. But it’s also missing a bunch of the cable channels that cable critics claim most people rarely watch and don’t want to pay for.

More to the point, this sports-friendly skinny bundle may well be enough to turn any marginally committed cable subscribers into full-blown cord-cutters.

What stocks stand to lose from this deal?

Is this new deal a guaranteed immediate end to the country’s cable TV names like Charter Communications‘ and Comcast’s Xfinity? No. There’s a sizable cohort of cable customers who will pay for traditional cable service until the day they die. It’s just too easy, convenient, and familiar for them to quit now.

The partnership’s participants also understand they’ve got a vested interest in minimizing the adverse impact it may have on the country’s cable television industry. As Gabelli Funds’ co-CIO for Value Chris Marangi noted in an interview with Fool.com: “Presumably, the product will be priced so as not to encourage cord-cutting. In fact, it appears aimed at capturing those not currently in a bundle (cord-nevers).”

It’s a premise that’s sure to be tested. Cable TV providers seem to only have a tenuous hold on their current customer basis. Charter lost another 257,000 cable subscribers during the final quarter of last year, dragging its headcount down from an early 2018 figure of nearly 16.8 million to a little over 14.1 million now. Comcast’s Spectrum is clearly on the defensive as well. It was serving almost 22.3 million paying cable customers as of the first quarter of 2018. Thanks to last quarter’s attrition of another 389,000 cable subs, it now only has 14.1 million remaining.

Major cable TV service providers like Comcast's Xfinity and Charter's Spectrum continue to lose paying subscribers.

Data source: Comcast Corporation and Charter Communications. Figures are in thousands. Chart by author.

It’s not as if Comcast and Charter are outliers either. Altice, Dish Network, and other cable companies are already facing the same degree of customer losses. And these losses may well accelerate once Disney’s, Fox’s, and Warner’s sports-generous skinny bundle is launched this fall.

Numbers from CableTV.com suggest access to live sports is the top reason consumers continue paying for cable, with 19.6% of U.S. cable customers polled making that claim. The next-nearest reason at 11.7% of respondents is keeping access to live entertainment. Being able to watch news is the most important feature for 9.5% of respondents, with a slightly higher 10.1% of these consumers saying their internet service is too slow to support streaming video.

With much of cable’s sports programming — along with a wide swath of its non-sports content — about to become available outside of a conventional cable subscription, at least three of those reasons for not cutting the cord weaken … a lot.

What stocks stand to win from this deal?

Walt Disney, Warner Bros. Discovery, and Fox are the winners here. Just be sure to keep any expectations in check.

The challenge isn’t a lack of capability or lack of content to share with subscribers. The issue is that in all three cases, a successful streaming partnership at least partially threatens each party’s existing cable-based revenue. And in Disney’s case, any additional success on the sports streaming front will be diluted by the media giant’s much bigger television, film, and theme park businesses. This new venture may or may not move the needle much.

Take a step back and look at the bigger picture, though. The nation’s cable television business is disintegrating with or without any additional prodding from streaming players and studios. All three companies in question are better served by taking matters into their own hands now rather than allowing themselves to be put in a position where they can’t call their own shots.

Indeed, this team-up may well reverse the slow, collective decline of all three companies’ current television businesses. As Gabelli Funds’ Marangi went on to say: “We’ve talked about the importance of scale in this business. … I think this gives those companies a path forward to be an effective competitor and to save money in doing it.

It’s possible all three members of this trio will be better off by starting a full-blown (even if gradual) break-up with its cable television partners. They certainly don’t bring as much value to the table anymore, and will likely only bring less in the future.

Brace for fuzziness

The overarching challenge here isn’t changing. That’s the difficulty in determining causes and effects within the television entertainment industry.

See, people are already cutting the cord, so it won’t be entirely clear if any acceleration of the cord-cutting movement is the result of a new skinny bundle or not. Fox’s, Disney’s, and Warner’s new joint streaming service is slated to launch later this year, but consumers may or may not cancel their cable service and sign up for the alternative straightaway. It might take months or even years to prompt people to change their minds about how they watch TV.

As an investor, however, part of your job — and maybe the biggest part — is ferreting out the bigger, broader trends that are working for or against a particular stock you may own. In this case, the advent of a sweeping sports-fan-friendly streaming bundle makes a big problem even worse for cable companies like Charter and Comcast. 

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