This post originally appeared at Smart Content News.
Last week’s meltdown among media stocks left many Wall Street professionals scratching their heads.
Objectively speaking, the earnings news that triggered the sell-off, first from Disney and followed by Time Warner, Discovery and Viacom, was sobering but hardly catastrophic. Disney made a modest downward adjustment to its full-year forecast for its cable unit, led by ESPN, from “high single digits” to “mid-single digits” due to continued subscriber losses among pay-TV providers. Viacom reported a 9 percent year-on-year decline in advertising revenue, driven by falling ratings for its cable networks, but its net income for the quarter actually beat Wall Street estimates.
Yet it was enough to start a stampede that wiped out more than $45 billion in market value across seven pay-TV companies.
Some of those losses are likely to be recovered over the coming weeks and months as investors get a grip on themselves and the companies trim spending to boost EPS. But the massive selloff could still have a lasting effect on the sector.
The abrupt selloff, well beyond what the fundamentals of the stocks would justify, seemed to reflect a dramatic shift in market sentiment regarding valuation benchmarks and appropriate share-price multiples for media companies as investors focus on structural changes in the pay-TV business. Resetting those assumptions to pre-meltdown levels might require some restructuring of the sector.
That appetite for restructuring could attract opportunistic suitors from outside the pay-TV business, particularly from the technology sector.
The rate of decline in pay-TV subscribers may shift from quarter-to-quarter. But as a chart put together by researchers at MoffettNathanson vividly makes clear (h/t Re/code), the subscriber growth rate has been declining fairly steadily since the end of 2006 and is now negative.
It’s doubtful any amount of industry restructuring could reverse that trajectory. One trend line that could be reversed, however, is the decline in TV advertising revenue.
As CBS’ chief research officer David Poltrack spelled out in a presentation to the TV Critics Association this week, linear TV viewing may be down, but people are consuming more TV programming than ever across all platforms. The problem for the networks is that they lack the means to measure a growing share of that viewing and they lack the technology to fully monetize it through advertising.
Even traditional linear TV advertising has the potential to compete more effectivelyfor the dollars now fleeing to digital platforms, by adopting approaches like programmatic selling and real-time bidding.
Either of those scenarios, however, will require a significant technological upgrade to the networks’ current advertising infrastructure, from data integration to analytics to asset management. With their share prices already under pressure, however, the media companies are not in a position to make the investment needed for such an upgrade.
Silicon Valley, however, has both the technology and the cash to make it happen. With media company shares suddenly more affordable, a corporate marriage of TV and technology looks more plausible than it did a week ago.