The New Television Landscape: Winners and Losers

The future of TV and entertainment is evolving at a rapid pace. Many investors and analysts are working under the assumption that internet-based new age media companies will emerge as winners — and legacy media companies will finish last as the "cord cutting" trend continues.

The Analyst

KeyBanc Capital Markets' Andy Hargreaves.

The Rating

• Positive Impact: Alphabet Inc GOOG GOOGL, Netflix, Inc. (NASDAQ; NFLX) and Facebook Inc FB.
• Neutral: CBS Corporation CBS and Twenty-First Century Fox Inc FOXA.
• Negative Impact: AMC Networks Inc AMCX, Discovery Communications Inc. DISCA, Viacom, Inc. VIAB and Scripps Networks Interactive, Inc. SNI.

The Thesis

One of the major takeaways from third-quarter media and entertainment earnings was evidence that consumers are adopting vMVPDs, or multichannel video programming distributors, at an accelerating rate, Hargreaves said in a Tuesday note. VMVPD services added 180,000 new users in the first quarter, 430,000 in the second quarter and now 740,000 in Q3, Hargreaves said. (See Hargreaves' track record here.) 

The trend is set to continue in the near-term at the very least, the analyst said. Exiting 2016, there were an estimated 1.5 million vMVPD subscribers, and this figure is estimated to rise to over 3.6 million by the end of 2017 and 6.4 million by the end of 2018, according to KeyBanc. On the other hand, the pace of pay-TV subscriber losses showed signs of slightl acceleration in the second quarter, Hargreaves said. 

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"Technology shifts are rarely linear; growing penetration of connected TV devices, increasing marketing by vMVPD services, and improving service quality will all likely contribute to growing adoption rates," Hargreaves said.

The surge in demand for vMVPD is no doubt a game-changer for the TV and entertainment industry given a "massive increase" in content that's readily available, the analyst said.

Pure-play cable networks are now "significantly negative exposed," Hargreaves said.

If YouTube TV and Hulu Live capture just 5 million subscribers between the two of them it would negatively impact annual earnings per share at:

• 1) AMC Networks by 8 percent
• 2) Discovery by 9 percent.
• 3) Scripps Network by 8 percent.
• 4) Viacom by 17 percent.

The ongoing industry dynamic shifts are seen as being "broadly negative" for TV networks, but broadcasters are "much better positioned" than cable networks, according to KeyBanc. Internet companies with large media and entertainment exposure — including Netflix, Amazon, Alphabet and Facebook — boast the necessary scale to bring their content to the global stage and, perhaps more importantly, can easily sell personalized ads to their users.

Price Action

• The worst performer mentioned in the note is Discovery Communications, down 36 percent since the start of 2017.
• The best performer mentioned in the note is Netflix, up 58 percent since the start of 2017.

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