Plunging TV demand cuts deep on Wall Street
Led by Disney, media giants lose $60B of capitalization in two-day meltdown
Cord-cutting millennials who shun cable TV have long plagued the entertainment industry. Now they’re wreaking havoc on Wall Street.
American media companies led by Walt Disney Co. lost more than $60 billion (U.S.) in market capitalization in two days on mounting evidence of shrinking demand for cable TV and networks such as ESPN that make money from ads. So-called cord cutters, who quit paying for pay-TV packages of hundreds of channels and favour online streaming services such as Netflix Inc., are undermining a business model that has sustained the TV industry for decades.
It took Disney, a company with a stellar record of sales and profit, to deliver the wake-up call and end Wall Street’s 61⁄ 2- year love affair with traditional media. Disney’s disappointing results Tuesday night led to what long-time cable analyst Craig Moffett called swift and unprecedented carnage. The S&P 500 Media Index has since dropped 11 per cent — on pace to be the worst two-day slump since 2008.
“Almost every investor with whom we have spoken has described an almost palpable sense that sector sentiment has changed, some would say perhaps permanently,” wrote Moffett, an analyst at MoffettNathanson LLC, in a note.
Disney’s results highlighted the challenges that could be extrapolated to the rest of the industry: falling advertising sales and fewer subscribers at cable networks including the popular ESPN — meaning lowerthan-expected affiliate fees from pay-TV providers. That threatens the two revenue sources that have fuelled earnings at media giants including Time Warner Inc.
After Wednesday’s meltdown during trading hours, CBS and 21st Century Fox Inc. failed to allay concerns about the future of TV with earnings marked by shrinking U.S. advertising sales. Viacom Inc., the owner of MTV, Nickelodeon and Comedy Central, added to the fray by posting slumping sales Thursday, sending its shares plunging.
“The Viacom and Fox results did nothing to assuage investors’ concerns,” said Paul Sweeney, an analyst at Bloomberg Intelligence. “What we are seeing is a classic investor rotation out of the media sector. At some point, the market will stabilize and investors will sift through the rubble to identify winners and losers.”
For now, the only clear winner is Netflix, which rose 2.1 per cent to an all-time high Wednesday as media shares crashed. The two-day drop in the 15-member S&P 500 Media Index, as of midday Thursday, had wiped out more than $60 billion in shareholders’ value. The worst stock in the gauge is Viacom, followed by Fox and Time Warner.
It’s quite a reversal of fortune for the industry. Since global equities bottomed in March 2009, the S&P 500 Media Index had risen more than 400 per cent through Tuesday. CBS Corp. was up more than 15 fold over the period.
What’s next for the industry? Even seasoned observers are opting to take a back seat until the dust settles.
“We’ll be looking for a bigger pullback in valuations and, just as importantly, a qualitative sense that sentiment really has shifted, before we get more constructive,” Moffett wrote.