Assuming the late Marshall McLuhan could retool his famous maxim, “The medium is the message,” he might look at the stock market and quip: “The message is the media, and it’s ugly.”
Media companies that have performed well this year now hang on to future gains by a thread. Or make that a cord.
Observers say that anxiety over the grim prospects of cable TV — known anecdotally as “cutting the cord” — lie at the heart of last week’s stock stumble. Major media stocks took their worst weekly tumble in nearly a decade, and that’s saying something considering how bullish the market has been in 2015.
The wounded include Walt Disney Co. (ticker: DIS), which is down 9 percent, and Discovery Communications (DISCA), down 5 percent. Twenty-First Century Fox (FOX) is off more than 7 percent, and E.W. Scripps Co. (SSP) is down 8 percent. Viacom (VIA, VIAB), the home of cable channels MTV, Comedy Central, BET and Nickelodeon, has collapsed more than 19 percent.
“The reaction to the latest earnings news from the cable TV industry has been negative to say the least, and it appears there may be further weakness to come given the loss of momentum in the space,” says Katie Stockton, chief technical strategist for BTIG. “Nevertheless, the down move looks corrective as opposed to the start of a bearish reversal.”
There have been some rebounders, though. Time Warner (NYSE: TWX) was off 15 percent through Thursday, but recovered more than a third of that. Ditto CBS Corp. (CBS), which made up half of a 9 percent loss, thanks in part to second-quarter results that beat Wall Street’s expectations.
Viewers seem to be turned off by commercials — a primary driver of revenue — now that they’re exposed to ad-free entertainment platforms such as Netflix (NFLX). Pragnya Pattnaik, senior analyst at The Edge Consulting Group, points to the appeal of a media world without inane infomercials and mind-numbing jingles. “Due to the migration of viewers from ad-supported platforms to non-ad-supported or less-ad-supported platforms, we expect the U.S. TV industry to witness structural decline,” she says.
The changes will force big media companies to adapt if they are going to prosper, experts say.
“The big content originators will need to shift their business models to survive in this new era of TV viewing,” says Todd Antonelli, managing director of Berkeley Research Group in Chicago. “They should focus perhaps more on relevant, ready-now content for the needs of what’s becoming the norm in content aggregation: Netflix, Amazon (AMZN) and Apple (AAPL) TV.”
Antonelli speaks from personal as well as professional experience: “We cut the cord the year Apple TV came on the scene,” he says. “Why? Nobody has time for TV anymore.”
At least not the way people have watched TV over the last decade or so.
“People of a certain age spent their entire lives seeking bigger-screen TVs and home movie setups,” says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University’s Robert B. Willumstad School of Business. “Young people now, especially in the desired 18-to-36 demographic, are perfectly content to consume content on their devices: iPhones, iPads, laptops, etc. This is striking some fear into media investors.”
Driscoll and others think the fear is overblown: The 500-pound gorillas of the media jungle have plenty of time to muscle into the 21st century.
“Hulu was formed by NBC, Fox, and Disney in an effort to create an owned distribution channel, and it’s already generating billions of dollars in revenue,” says Frank Lane, vice president of TDM Financial in Seattle. “Companies like CBS are also providing all-access and Showtime streaming.”
Still, they can’t hold a candle to Netflix and Amazon, both rock-solid in the streaming scene. “Anyone who can successfully jump on the streaming bandwagon with original and arresting content can join the game, like Google (GOOG, GOOGL) or YouTube,” says Wheeler Winston Dixon, a professor of film studies at the University of Nebraska. “But Netflix has such a long lead, with Amazon coming in behind, that it will be a heckuva game of catchup.”
And so, investors are seeing opposite numbers to what old-guard media has posted. Netflix added 3.28 million streaming subscribers in the second quarter and is the top gainer on the Standard & Poor’s 500 index for 2015, up 147 percent. Amazon is close behind, up about 70 percent.
But even those companies need to proceed with caution, says Daniel J. Dingus, president and chief operations officer of Fragasso Financial Advisors in Pittsburgh. “Any stumble may lead Wall Street to punish these stocks quickly — although Amazon is more diversified and has some strength with its cloud computing services. Netflix needs to keep the hits coming and gain in the international markets to maintain its strong growth.”
So it’s possible a more realistic crystal-ball view sees streamers and startups — that need content — joining forces with majors that already have it in spades.
“I suspect a distributor like Netflix, Amazon or Apple will emerge as a leader and then have to acquire content through some form of acquisition or joint venture with one of the dominant content providers,” says Tom Arnold, a professor of finance at the University of Richmond.
And yet, are those jungle drums beating on the far horizon? The video-playing field is certainly leveling, leaving room for a host of gestating, feisty high-techs to grow into gorillas in their own right.
“It’s safe to say other players are likely to enter the online space, furthering driving down subscription fees,” says Clifford L. Caplan, founder and president of Neponset Valley Financial Partners in Norwood, Massachusetts. And until things shake out, “media stocks are probably not a good place to invest at the moment.”
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Why Major Media Stocks Are Struggling originally appeared on usnews.com