Retransmission Discontent

Last week’s meltdown among media company stocks seems to have subsided for now, but not before wiping out $60 billion in market value. Shares of Viacom fell 17 percent between August 4 and August 11; Discovery Communications and 21st Century Fox each fell 13 percent; Disney shares dropped by 11 percent; Time Warner by nine and Comcast (NBCUniversal), CBS and Starz all fell by mid-single digits.

Media CEOs complained, and many analysts concurred, that the sell-off was overdone, and that neither the actual earnings news that triggered it nor the underlying fundamentals of the business justified such a drastic repricing. It certainly wouldn’t be the first time that the market overreacted to events in the short term.

In fact, the stampede out of pay-TV stocks last week felt more like the release of pent-up anxiety among investors than a reaction to any particular bit of news. It began when Disney issued a small downward revision to its earnings forecast for its ESPN unit, which it blamed on “modest subscriber losses” from cord-cutting. The adjustment was a small one, but Disney chief Bob Iger has been among the most outspoken media CEOs in arguing that cord-cutting is a limited and manageable phenomenon, and that ESPN iswell-positioned to profit from changes in the pay-TV business. If even Disney couldn’t paper over the impact of cord-cutting on ESPN, investors seemed to conclude, then maybe the problem really is as bad as we feared.

Similarly, ratings woes on linear TV channels are not new. But when Viacom reported a 9 percent drop in ad revenue from its cable networks investors seemed to take it as confirmation that even well-established media brands are losing pricing power in the advertising market.

Investors — to say nothing of the media companies themselves — could have still more to worry about this fall, however, as the Federal Communications Commission takes up a series of proposed rule changes that, if enacted, could significantly reduce the networks’ bargaining leverage with distributors, making it harder for the networks to command price hikes for carriage of their channels from cable and satellite providers.

This week, FCC chairman Tom Wheeler officially kicked off a review of the retransmission consent rules that govern how broadcasters and pay-TV providers negotiate carriage agreements. The review was mandated by Congress as part of last year’s Satellite Television Extension and Localism Act Reauthorization (STELAR). It directs the FCC to review, and if necessary revise, its standards for what qualifies as “good faith” negotiating, which the rules currently require.

Read the rest of this post at Concurrent Media.