MediaTalk | Season 3 | Ep. 10 - Network Owners Navigate M&A and Margins in Media’s New Era

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Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence, tech, media and telecom news team. Welcome to "MediaTalk," a podcast hosted by S&P Global, wherein the news and research staff explore issues in the ever-evolving media landscape. On this installment, we're going to do something a little different. S&P Global recently held a webinar titled "A New Era for Video Distribution." Sarah James — who manages the tech, media and telecom news team and is my boss and also the editor of "MediaTalk" — led this discussion. Sarah spoke with a trio of Kagan research analysts in assessing the US pay TV landscape, the rise of streaming services, and evolving media company strategies. I'm going to give you a flavor for that webinar and let you know how you can gain access to the full event later on. Here's a taste of this far-reaching discussion.

Sarah James: Welcome to today's webinar about the new era for video distribution. My name is Sarah James. As part of S&P Global Market Intelligence, I manage the tech, media and telecom news team. I'd like to introduce today's speakers. Joining us is a trio of principal analysts from Kagan, a media research group within S&P Global Market Intelligence. Justin Nielson heads the Kagan Media team covering broadcast networks, sports, digital audio and streaming video sectors. Scott Robson focuses on US cable TV networks. Scott analyzes the economics of broadcast, premium cable and regional sports networks. Seth Shafer leads the streaming video coverage and oversees the group's consumer insight surveys conducted in the US, Europe and Asia-Pacific. Specific areas of research focus include subscription video and free ad-supported video market sizing and tracking the broader consumer shift to digital entertainment. Let's get to it. Kagan recently published their forecast for the US pay TV subscriptions. Scott, can you talk about what the forecast shows from Kagan?

Scott Robson: Hello, everyone. When talking about a new era for video distribution, linear video distribution is on the decline. We estimate that there were around 46 million traditional multichannel homes at the end of 2024, which is down from over 100 million in the industry's heyday. So, about one-third of US video homes subscribe to a traditional multichannel service. Now, 2025 is set to be a pivotal year as we're projecting online video-only homes to surpass traditional multichannel homes for the first time. When we dig into the forecast, the satellite and telco operators are shedding subscribers at a faster rate than the cable operators. Comcast Corp. and Charter Communications Inc. are the biggest players in cable video, and it looks like some of the smaller players are likely exiting video to focus on broadband. Now, from the cable network's perspective, this has been the biggest challenge. Cord-cutting has resulted in fewer viewers and paying subscribers, which has had a negative effect on both distribution and advertising revenues.

James: Seth, prior to the webinar, we had an audience question come in around the impact of virtual MVPDs in the pay TV universe. Are they still growing?

Seth Shafer: From the virtual multichannel world, really, this launched in 2015 in the US, with [Sony Corp.'s] PlayStation Vue as the first, I think, was a bit of an exciting time at Kagan as far as a new model that we talked about, heard rumblings about and suddenly it's here in the space. Early days of that model were $30, $40, $50 packages. In some ways, it was finally what consumers were clamoring for: getting out of the pay TV world. Slimmer, skinnier bundles, priced under $100 a month. As that sector has evolved, though, it's starting to look a bit more like traditional pay TV. So packages have gotten more expensive, lineups have gotten bigger, things like that. We haven't really seen the virtual services; these haven't been a one-for-one replacement. When we talk about cord-cutting, we're still seeing a decline over time, even with the rise of the virtual multichannel subscribers, it's not moving that total stack bar higher and higher. So those are the households that are dropping out of the pay TV world, taking on other streaming services, subscription services, using a lot of free services, using YouTube, TikTok, things like that. In a way, what we all cover — Justin, Scott and myself — is really trying to give clients kind of insight on a quarter-by-quarter basis of the flow of these subscribers, the impacts and where companies need to be to meet this shift in consumers that we're seeing over time.

James: One more for you. Can you just give us a sense of scale here? For instance, how big is the biggest streamer versus how big is the biggest traditional operator and how big is the biggest virtual MVPD?

Shafer: Yeah. So the Netflix Inc., Hulu LLC, Disney+ kind of streaming services are at the top, they've dominated this list. To be fair, we are talking about different delivery models. A $10 subscription to a Netflix or Disney+ looks different than a $100-plus subscription to a Charter or Comcast for traditional pay TV service or on the virtual multichannel side. These packages now are $70-$80 a month. So it's a bit of mixing apples and oranges as far as what this scale really means. But we have really seen it over time. Obviously, the streaming subscription services consumers. I think from our survey data, it's over four services per household on average on the SVOD side. Obviously, that's popular with the virtual multichannel model we were talking about. YouTube TV is the largest in that sector, closing in on Charter and Comcast, so in the next few years, those may be at parity. What that kind of means, it's going to be an interesting trend for us to track. Traditionally, the virtual multichannel services had smaller subscriber bases, so they were a little bit disadvantaged in carriage negotiations when they go to a Walt Disney Co., a Paramount Global. And they're negotiating over what they're going to pay for network carriage so that smaller base puts them at a disadvantage for the virtual multichannel ones. As they get bigger, they have a bit more leverage in those negotiations and what that looks like.

James: Justin, can you talk about how cord-cutting is impacting retrans fees for broadcasters? On one hand, I could see over-the-air delivery being more important than ever as people are cutting the cord. But on the other, a smaller pay TV universe means a smaller retrans base, right?

Justin Nielson: Sarah, yes. So you're correct. As you alluded to here, there's been a small increase in over-the-air viewership because of the rising cost of pay TV subscriptions. However, TV station owners receive, on average, 40% of their gross revenue from retrans fees. So it's a big segment for them. And the consumer shift from traditional to virtual pay TV subscriptions has impacted the affiliate TV station owners since the networks actually negotiate the virtual carriage and terms as opposed to direct negotiations with the MVPDs in the retrans regime. Despite the slowdown in retrans growth, broadcasters have fared better than basic cable nets and RSNs, or regional sports networks. Given the strength of their national, local programming and live sports, including Super Bowl and NFL games, they generate roughly 28% of the fees paid by all paid TV operators.

James: So I see that we've got a lot of questions around M&A, and we are definitely going to talk about that. But before we do, we also wanted to take a second to talk about margins across these three different segments we've talked about. So, if we could just go around, Justin, how have margins for broadcasters changed over time and why?

Nielson: Yeah, going back about a decade, it was really good for broadcasters. The 40% plus was not uncommon. That has trimmed down to probably low 30% in political years to even lower than that in nonpolitical years. You really look at the top broadcasters, the Nexstar Media Group Inc.'s, the Sinclair Inc.'s, the Gray Media Inc.'s and others. They're doing better than some of the smaller group owners and independents just because of the scale that they have and the retrans synergies. So essentially, they have better leverage in retrans negotiations. So they've been able to keep those margins up. But that's also impacted the M&A market as well. You're not seeing the traditional broadcast margins that you've had in the past. And most of the broadcast transactions are based on a cash flow multiple. So those station values have either declined or they just stopped trading because those values are not commensurate with what they're looking to sell it for.

James: Scott, on the cable side, can you talk about the changing margins on both? Maybe the distribution and the programmer side?

Robson: Yeah. From the cable networks perspective, declining revenues have resulted in declining margins. There were cable networks with margins of 60% plus in the industry's heyday, and those have declined a lot in the past decade. It's now more common to see a network with around 30% margins or even less. There's also been a pullback in expenses at cable networks, which has helped keep these margins afloat, especially as more original content shifts to streaming services. From the operator's perspective, margin in video has been declining for years now. It's gotten to pretty much unsustainable levels for some of the bigger players who seem to be using video as more of a retention tool rather than a profitable business line and cash flow driver.

James: Great. And Seth, if you could take the streaming side, how have margins changed for SVOD and AVOD services?

Shafer: Yeah, in some ways, margins are easy to talk about for me because they don't exist in the context that we're talking about. For all the excitement around streaming, this shift to streaming, it's still been a struggle for most operators to get to profitability. We, in our sort of internal media training, we're always encouraged not to call out single companies and things like that. With that caveat, it's really difficult to talk about streaming margins without obviously looking at Netflix, with what Netflix has been able to achieve with kind of 20%-25% operating margins and everyone else that has been investing heavily, spending billions on content and building out infrastructure, expanding globally. And the caveat here for this is that we're looking at the direct-to-consumer parts of these businesses. So obviously, Disney overall is more profitable than what we're looking at here. This is just isolating the direct-to-consumer streaming part of it, but big headway from all the major kind of global streamers. The flip side of that coin is that what's helped from a profitability kind of operating income point of view has involved layoffs. It's involved kind of scaling back ambitions about what markets globally all these services will operate in, and it's really been cutting back on kind of content spending, trying to find that balance between reducing churn, keeping people happy with the service, finding some growth in new subs, but also just being realistic about, you know, how many $100 million plus new original shows can you produce in a year and still be profitable? There's really been the big shift in the last few years, I think.

James: Yeah. Scott, we got a lot of questions that came in around multiples of cash flow for cable networks in M&A. I think about the Time Warner deal with AT&T Inc. was maybe the peak for cable network valuations. More recently, obviously, we saw the Skydance Productions LLC deal for Paramount Global. I wonder, going forward, how are you thinking about how cable networks will be valued in a sale in the cord-cutting environment?

Robson: Yeah, so cable networks used to go for upwards of 10 times to 12 times cash flow multiple. It was a very big business. There were a lot of deals being done. We haven't seen that many deals as of late. What we've seen are things like I mentioned before, with networks shutting down without a buyer, with networks going on the chopping block or the sales block for years on end without any deals coming through. So it's hard to say exactly how much these networks are going to be valued at. I think the lack of buyers makes it pretty tricky. And I think that there is also a great disparity among the networks that are seen as valuable and not valuable. There's a big sports network that still generates a lot of revenue. That's certainly going to demand a premium over a network that's playing music video reruns.

James: The Trump administration has been widely expected to usher in a deregulatory environment, which could be good for M&A. Justin, can you talk about the broadcast side and the outlook for M&A there?

Nielson: Yeah. So, at the beginning of the year, there was a lot of enthusiasm for regulatory relief under the Trump administration and potentially lifting or eliminating the 39% national ownership cap for TV station owners. That stalled a bit because of all the pushback for Trump's executive order barrage and Musk's Department of Government Efficiency cutbacks. So I'm hopeful that it gets on the Congress' radar and the FCC. The NAB CEO, Curtis Liggett, in a recent keynote address advocated for the elimination of the cap and then basically opined that it was instituted in error without competition from streaming companies. However, it can't be the FCC alone that lifts the cap. It has to go through a bill in Congress to make that change to the Cable Act back in '92 and subsequent acts.

James: Scott, what about on the cable side? I think David Zaslav, in particular, had been very vocal about wanting an administration that was open to M&A or partnerships. How are you thinking about the M&A outlook under the new administration?

Robson: Yeah. There's already been a lot of major consolidation in the cable network sector over the past decade. You mentioned Zaslav. We've seen Warner Bros. Discovery Inc. roll out nearly 30 networks. Disney purchased Fox Entertainment Networks, and in today's current environment, there's not a whole lot of appetite for cable networks. What's interesting, and you might see it play out somewhere along the next few years, is what's happened with Comcast spinning off most of their cable network assets. Will they look to merge that with other cable network assets and create a pure-play cable network stock? I'm not so sure about that. Outside of the cable news networks, I think that the cable network space is pretty open for M&A regardless of the regulations at this point. AMC Networks Inc., they seem to be someone that gets brought up every so often as a prime target of M&A. Not sure how attractive that is in this day and age. So I think it will be interesting to see what happens once Paramount's merger with Skydance is completed and if they're going to be aggressive in looking and evaluating the business and see what makes sense.

James: And Seth, how about streaming on the M&A side?

Shafer: Yeah, again, our worlds are pretty mushed up. So what Scott says really also applies to my world as well, I think, as far as part of the lack of M&A, we haven't seen an Amazon or an Apple or kind of a traditional tech company make a big buy in the space. We did see Amazon buy MGM, but there's really been this sense that kind of big tech is waiting out sort of the impacts of cord-cutting. So if these cable networks are declining, depreciating assets, why buy when there's no pressure to let these depreciate, let things settle out, and then make purchases. And really, I think the crown jewel, and we saw this a bit with Paramount and Skydance, it's really the content production assets, the library assets, that are the crown jewel of some of these media companies. So the appetite is less for kind of the traditional network business, more for the content side. And then, how do you get there? Scott's points about kind of the spinoffs of the cable networks. I think that's a necessary step to really allow people to come in and buy the parts of these businesses they may be most interested in. Lionsgate's another one that's made efforts to split off the traditional kind of linear business from content assets. The regulatory issues really come into play when we've talked in the past about a combination of a Comcast and a Paramount, and things like that, where you have too many broadcast networks and things can't fit because of regulations. That's been a holdup in the past, but I think we're getting to a different environment. I think to Scott's point, it'll be interesting to see with the spinoffs of the cable networks. Are those buyers primarily kind of private equity, or are there people who still see cash flow and short-term value, or will one of these spinoffs be more of an aggregator, will they purchase more cable network assets and be a mega aggregator that's got more leverage and things like that. So, I think that story is still to be written in the next year or two.

Reynolds: That concludes this episode of "MediaTalk." Many thanks to Sarah, Justin, Scott and Seth for sharing their thoughts and insights across these important topics shaping the media industry today and tomorrow. For those who want to check out the webinar in its entirety, go to the events tab on www.spglobal.com/market-intelligence, and you can gain access. This is Mike Reynolds. Thanks to all of you for listening. Catch up soon on our next "MediaTalk" installment.