Late last year, Comcast Corp., the owner of NBCUniversal Media LLC, announced it intends to spin off much of its domestic linear TV operations into a separate publicly traded company. A few weeks later, Warner Bros. Discovery Inc. (WBD) announced plans to enhance its strategic flexibility by reorganizing its corporate structure into two parts: global linear networks and streaming and studios. This report addresses investor questions about how S&P Global Ratings might view a stand-alone linear TV network company and whether such a company could be rated in the investment-grade ('BBB-' or higher) category. These thoughts are preliminary and not criteria. Any actual ratings determination would be made by a ratings committee and each company would be assessed on the merits of its own case.

What is S&P Global Ratings' long-term view of the U.S. linear TV ecosystem?

We believe that linear TV's decline in the U.S. is irreversible, but that there is no immediate cliff. We expect the decline will be a steady one that will take years to reach its final conclusion. Over the next two years, we forecast the pace of pay-tv cord-cutting to abate because of Charter Communications Inc.'s video and streaming bundling strategy and improve toward 5.8% by 2026 (we estimate it was 6.7% in 2024). Annual affiliate fee increases used to exceed this decline but hasn't for the past few years. We also expect affiliate revenues to decline somewhere between 3% and 7%, depending on the network portfolio.

Advertising, the other key revenue stream supporting linear TV, will decline more precipitously than affiliate fees as audience ratings are eroding quicker than the rate of cord-cutting. This trend is more acute for general entertainment networks, which are on pace for both double-digit audience declines and single-digit price cuts for ad inventory. We expect revenue from sports-focused networks will hold up better (but still decline), with audience ratings and prices for ad inventory stabilizing or even modestly growing for some sports, particularly the National Football League (NFL; though we do note that even the NFL isn't immune from ratings declines--audience ratings for the 2024 NFL regular season declined by 2.2%). Sports programming; however, is a double-edged sword. It provides revenue stabilization and even some growth, but rising broadcast rights fees weaken cash flows and depress margins.

What can the media companies do organically to change the trajectory?

In our opinion, the path forward for the network TV business, whether part of a larger, diversified media company or spun off into a separate company, is to simply try to manage the pace of cash flow declines. We believe the companies only have limited ability to influence the rate of revenue declines. Programming original scripted content and sports are the most likely ways to draw audiences but most media companies have limited financial resources and would prefer to prioritize spending on content for their growing streaming services rather than for their declining linear TV networks. Instead, we expect the companies to focus their efforts on managing operating costs, including programming, to keep pace with declining revenues. This process has already been ongoing for years and has consisted of eliminating original content on shoulder networks (e.g., FXX and MTV2), replacing more expensive scripted content with cheaper, unscripted reality shows, consolidating operating teams that supported individual networks, especially content development, programming, marketing, and ad sales. We also expect this focus on cost-cutting to only increase. In general, most legacy media companies believe they are in the early stages of this cost rationalization process and expect to squeeze more cost-savings out of their linear TV businesses. We expect to evaluate this strategy by monitoring margin trends.

What challenges do diversified media companies face in spinning off linear TV businesses?

Legacy media companies have a number of operational and execution challenges to address when spinning off their linear network TV business. The media companies have historically closely intertwined their content creation and linear TV network businesses and dis-entangling them from each other would likely result in significant dis-synergies and operating inefficiencies for both "Cable SpinCo" and "Content RemainCo." In our view, the biggest uncertainty would be how Cable SpinCo would get the programming needed for its linear TV networks and how moving to an arms-length pricing model from a captive-studio model, would hurt Cable SpinCo.'s operating and financial metrics. Some media companies have captive TV studios that are embedded within the linear TV networks. We don't believe these TV studios would move with Cable SpinCo. And if these studios don't move, what would be the terms of the content licensing arrangement with Cable SpinCo? Losing those rights could significantly hurt Cable SpinCo.'s future business prospects.

Additional key issues companies would need to address include the potential impact to both companies' operating metrics, such as a weakening of operating leverage due to reduced scale, and higher operating costs due to the dis-synergies from the separation. Content distribution agreements could be affected by the split, especially if the network portfolio is split, with some networks retained by RemainCo. This could affect both existing pay-TV distribution agreements and sports broadcast rights agreements. There is also uncertainty around how RemainCo and SpinCo would disentangle any shared services between the cable networks, any retained networks (e.g., Comcast will have to do this as it plans to keep its NBC broadcast network), film and TV studios, and any streaming services. The media businesses are closely intertwined through the shared news operations (e.g., like NBC, which has global news operations), the advertising sales teams, the creation and licensing of content between the various businesses, and the allocation of sports programming across the broadcast TV network, cable networks, and streaming platforms.

What are the long-term prospects for a stand-alone linear TV company?

The most significant issue in assessing the long-term prospects for Cable SpinCo, in our view, would be around the potential value cable networks bring to consumers. What are we really left with once separation occurs? In most cases, Cable SpinCo won't own any content as we would expect the captive TV studios and libraries will remain with Content RemainCo. As a result, Spinco's TV networks would have to license content from an external source, either from RemainCo or a third party. Ultimately, the networks would just be distribution vehicles; that is, middlemen that package content licensed from third parties into a linear stream and sell those linear streams to the pay-TV distributors. They would be vulnerable to termination of content rights agreements (e.g., see our discussion of Corus below).

Are there any rated stand-alone network TV peers?

We currently have a few direct peers, AMC Networks Inc. and Fox Corp. in the U.S., and CME Media Enterprises BV in Europe. In addition, we have a few comparable companies, DIRECTV Entertainment Holdings LLC, ITV PLC in the U.K., and Corus Entertainment Inc. in Canada (see table 1). Most rated media companies own both content creation (i.e., film and/or TV studio) and distribution (i.e., linear TV and/or streaming).

Table 1

• AMC Networks Inc. (AMC; B+/stable/--) is currently the only stand-alone rated U.S. cable TV network operator. It consists of five domestic cable networks and limited operations scattered across 110 markets, a number of niche streaming services, and a small film and TV library. Since December 2022, we have lowered our ratings by two notches to 'B+' from 'BB', and revised our business risk profile assessment by two categories to weak from satisfactory, reflecting our assessment of the company's limited domestic network portfolio; dependence on general entertainment programming; and lack of sports or news content, which limits its ability to raise affiliate fees to mitigate pay-TV subscriber declines and attract advertising spending as audience ratings decline at a higher rate than its domestic peers.
• Corus Entertainment Inc.(CCC/Negative/--) isn't an exact match, given that it has a film and TV production business and owns a portfolio of radio stations. It recently lost its Canadian programming rights to WBD's content, which highlights a significant risk to all stand-alone cable TV network companies in that they are generally dependent on licensing third-party content. In Corus' case, WBD moved the rights for its suite of English-language home- and lifestyle-related suite of channels such as HGTV, The Food network, and The Cooking Channel to Rogers Communications Inc. As a result of this loss, combined with severe pressures in the linear TV advertising market, we lowered our credit ratings on Corus to 'CCC' from 'B-', with a negative outlook.
• CME Media Enterprises BV (CME; B+/Positive/--, with what we consider a weak business risk profile) is a stand-alone TV station operator, operating 46 free-to-air and paid-TV channels across six markets in Central and Eastern Europe. While the company, and its markets, are exposed to secular declines in linear TV consumption, we believe it will happen at a slower pace in Central Europe, than in Western Europe, due to less mature advertising markets and local language preferences. The company is able to raise prices, which supports its advertising revenue and carriage fees. In addition, CME's markets are smaller, and local households have lower purchasing power, which makes these markets less attractive for large global streaming platforms. This, together with preference for local language content, allowed CME to build out a successful local streaming platform VOYO, which competes strongly and, in some markets, is ahead of global streaming platforms in terms of subscribers. We expect the company will continue investing in its streaming operations and sports content, which will support its linear TV and online viewership.
• ITV PLC (ITV; BBB-/Stable/--) is an important comparison, even though it's an integrated production, broadcasting, and streaming business and hence we view it as having a fair business risk profile. Fifty-eight percent of external revenues comes from the linear networks and streaming businesses and the remaining 42% from its TV studio. Similar to global media companies, ITV faces the structurally declining linear TV viewing and manages the transition to direct-to-consumer distribution, very high competition, and pressure on profit margins in content production. It also lacks geographic diversity with the broadcast operations concentrated solely in the U.K. However, the diversity provided by the combination of both the TV studio and U.K. TV networks supports our assessment of its business risk profile. The successful rollout of its streaming platform ITVX drives strong growth in digital advertising revenue, which largely offsets the decline in linear TV advertising. Our downgrade thresholds for the rating is leverage of 2.5x or FOCF to debt of 20%.

Why is Fox Corp. business risk profile assessment satisfactory and rated investment grade?

We assess Fox Corp. as having a satisfactory business risk profile and we rate it in the investment-grade category (BBB/Stable/--) even though it doesn't own a sizable film/TV studio and is fundamentally a U.S. domestic linear TV company. Fox owns one of the four major U.S. broadcast networks and has domestic broadcast rights to key tier-1 sports including the NFL, Major League Baseball (MLB), and Big 10 college football. It also owns cable networks focused on news (i.e., Fox News and, Fox Business) and sports (i.e., FS1, FS2, and Big 10 Network). Fox News regularly draws prime-time audience ratings on par with the major broadcast networks. Despite ongoing secular declines, Fox's key operating metrics, such as advertising and affiliate revenues, continue to grow, as opposed to its domestic peers. Fox has consistently grown its affiliate revenue, demonstrating its ability to still get larger price increases then peers, which are experiencing low- to mid-single digit percent declines in linear affiliate revenue. Similarly, Fox's advertising performance is stronger and more resilient than Paramount Global's and WBD's due to the strength of its sports portfolio and its leading position with Tubi in the free ad-supported streaming television (FAST) segment. Our credit rating on Fox benefits from its credit metrics (e.g., leverage and FOCF to debt) that are well below the thresholds that we've set for the ratings. Still, we don't expect Fox's operating performance to persist over the long term given the ongoing decline of the pay-TV bundle and its lack of a streaming option for its sports rights. If Fox's operating metrics begin to align toward its peers', we could adjust our view of Fox's business risk profile.

How does DIRECTV compare to a stand-alone cable network company?

DIRECTV is the third-largest pay-TV operator in the U.S., behind Charter Communications and Comcast. The Direct Broadcast Satellite (DBS) operators (of which DIRECTV is one), the cable connectivity companies, and the linear network TV companies all face the same cord-cutting pressures. Still, we view the DBS operators as more vulnerable to these trends because they lack both product diversity and a unique service that competitors can't replicate. The cable connectivity providers have product diversity, with high-speed broadband internet service as its primary product and, in some cases, mobility, and can offer video at a discount in a bundled offering (though most have stopped doing so). Cable network TV operators benefit from providing unique content on their TV networks, which could reduce substitution risk. For example, viewers have no option if they want to watch those NFL games broadcast on FOX Network. DBS, on the other hand, depends solely on distributing network TV bundles and doesn't have a unique package that other pay-TV distributors can't replicate. As such, we view DIRECTV as having a vulnerable business risk profile. Our 'BB-' issuer credit rating on DIRECTV incorporates S&P Global Ratings-adjusted leverage of 3x and one notch of support because of AT&T Inc.'s ownership and split control. Our ratings on DIRECTV are on CreditWatch with negative implications, where we placed them on Sept. 30, 2024, because the one notch of support will go away once private equity company TPG Inc. (not rated) completes its acquisition of AT&T's 70% stake later this year.

What characteristics and key metrics are considered in the business risk profile assessments

Our assessment for cable network businesses would incorporate our view of:

• Content ownership: How much, if any, content does the Cable SpinCo directly own? Who owns the key content (i.e., what is essential for the cable network to maintain its brand) that is shown on the linear TV networks? And for the content the SpinCo licenses from third-party studios, including RemainCo-- what are the key terms of any licensing agreements? This is especially critical for sports broadcast rights given its importance to the TV ecosystem. In some cases, the cable networks own their own TV studios and libraries (e.g., this is the case for Paramount Global's Nickelodeon and MTV Networks). Do these captive studios move along with their networks, or do they remain with RemainCo?
• Geographic diversity: Are international network TV assets positive for credit quality? The U.S. isn't alone in facing the decline of linear TV but it is, by far, the most exposed to this trend. We believe the English-language markets compared with all major markets around the world are the most vulnerable, with the U.K., Australia, and Canada only a few years behind the U.S. In many non-English speaking countries, cable is not even available, and even where it exists, penetration levels are often low, so there's less cord-cutting and even stability in TV viewing, though we expect similar declines to happen over time. In these markets, locals primarily watch local language content and only supplement that viewing with English-language content they get through the U.S.-based English language streaming services.
• Breadth and depth within key markets: It's not just the number of markets in which the Cable SpinCo operates that's important in our assessment, but also we consider the audience viewing market share in key markets including the largest advertising markets (i.e., U.S., U.K., Germany, France, Brazil, Canada, Australia, and India). Viewing market share is important because it provides companies some strength in negotiating both carriage agreements with distributors and attracting key advertisers who want to reach the largest and broadest audiences. Whether the networks distribute content over-the-air (OTA) or via pay-TV is also important. In general, we view OTA networks as more valuable than those that distribute content over cable due to the broader reach. In many countries, pay-TV penetration is very low (Germany is a good example).
• Key network genres: Does the company offer more than just general entertainment programming? Having both sports and news programming is one way to differentiate from other networks, draw larger audiences, and provide advertisers with live audiences that won't skip advertising.
• Revenue and margin trends: What is the revenue breakdown between advertising and affiliate fees and subscription, and what are the trends for both? Advertising is economically sensitive and more volatile, while affiliate fees are generally less significant outside the U.S. Margin comparisons and trends will likely vary significantly by company, geography, and genre. We would expect margins to be higher for U.S. linear TV networks because of affiliate fees, which generally are significantly lower in most markets outside the U.S. WBD's legacy domestic Discovery networks achieved operating margins around 50% because of the affiliate fees but also because of lower programming costs. On the other hand, sports-oriented networks have lower margins because of the costly sports broadcast rights.

What are the potential outcomes for business risk profiles and what are the ratings implications?

We believe the potential business risk profile outcomes for a stand-alone linear TV network company could range from what we consider vulnerable on the low end, to satisfactory on the high end (see table 2). This is an important assessment if the company is targeting achieving an investment-grade issuer credit rating. Based on our criteria, it is impossible to achieve an investment-grade anchor score with either what we term a weak or a vulnerable business risk profile (see table 3).

The hurdle for Cable SpinCo to be designated either as having a fair or satisfactory business risk profile would surely be extremely steep, and would likely require meeting a number of key differentiating factors, including owning one of the major U.S. broadcast networks, having a scaled and diverse global TV network portfolio, and showing superior operating metrics versus peers despite ongoing secular trends.

Table 2

Table 3

Can Comcast attempt its cable network spinoff without harming our credit ratings?

Our 'A-' credit rating on Comcast is primarily based on the strength and stability of its Connectivity and Platforms business, which accounts for more than 80% of consolidated EBITDA. We view the Content and Experiences business, which includes its cable networks, as weaker than the larger connectivity segment due to greater economic sensitivity, the studio's earnings volatility, continued losses at streaming, and the accelerating decline of U.S. linear TV. Still, we consider the media segment as modestly positive for Comcast's overall business profile because it adds uncorrelated business diversity and brings several growth businesses, in particular, theme parks. The spinoff of the company's cable networks would only have a limited impact on that view because we estimate Cable SpinCo accounts for only 5% of consolidated EBITDA.

Could the other diversified media companies do the same thing?

We wouldn't be surprised if other major diversified media companies contemplate spinning off their cable network operations in the future. The media companies are in a no-win situation. Every day the companies hold onto their linear TV networks, they become less valuable. We believe a similar straight spinoff will be difficult to achieve without harming the surviving company's credit profile as the linear TV network segment remains a significant portion of overall cash flow. Most media companies still depend heavily on the cash flow from their linear TV networks to help fund their other businesses, make investments, and pay down debt (see chart). This dependence will decline over time as the linear TV business continues shrinking and the streaming segment grows scale and profitability, but for now, we view the linear TV businesses as essential to our current credit ratings on these companies.

If the other legacy media companies were to consider separating their linear TV network operations from the rest of its businesses, the impact to RemainCo's credit metrics and our credit ratings would depend on:

• The pro forma composition of the remaining business;
• How significant the cash flow loss is to the company;
• The stage of the company's streaming business' profitability; and
• Whether the pro forma RemainCo generates, or can shortly generate, sufficient cash flow to support appropriate credit metrics for the credit rating.

What can we learn from examining other secular declining businesses?

In our view, the linear TV sector's decline due to the Internet is not a unique story. Over the past 20 years, the media and telecom industry has had numerous subsectors go through secular declines, including wireline telephone, newspapers, classified yellow pages, and radio. In all these cases, the segments were replaced by something more functional or with cheaper delivery. Wireline telephones were replaced by cellular services, newspapers by free news through social media platforms, classified by search engines and platforms, including Google, and radio by streaming audio. And in all cases, despite steep declines in key operating metrics, these sectors still exist. According to the FCC, there were still 41 million residential voice telephone lines in the U.S. as of June 2022 (that number was 13% higher a year earlier and 100 million higher in June 2000). And, there were an estimated 24 million newspaper subscriptions in 2020, less than half as many as in 2000. For pay-TV, video subscriptions peaked at roughly 100 million households in 2010 (90% penetration). Today that number stands at about 85 million households though with growth in household formation, pay-TV penetration is down 25% to about 65% penetration.

Related Research

• Stemming The Cord-Cutting Bleed: Charter Could Offer A Bandage, Jan. 16, 2025
• Industry Credit Outlook 2025: Media and Entertainment, Jan. 14, 2025
• AMC Networks Inc., Dec 19, 2024
• U.S. Media And Entertainment: Looking For The Winds Of Change In 2025, Dec. 12, 2024
• Comcast Corp.'s Potential Cable Network Spinoff Too Early To Call; Raises Lots Of Questions For The Media Sector, Nov. 07, 2024
• Fox Corp., Nov. 26, 2024
• DirecTV Ratings Remain On CreditWatch Negative Following Dish Merger Termination, Nov. 25, 2024
• DirecTV Entertainment Holdings LLC Ratings Placed On CreditWatch Negative On TPG Purchase And Merger With Dish DBS Corp., Sept. 30, 2024
• Corus Entertainment Inc. Downgraded To 'CCC' From 'B-' On Tight Liquidity; Outlook Negative; Debt Ratings Also Lowered, July 23, 2024
• CME Media Enterprises Outlook Revised To Positive On Adapting Business And Sound Cash Flows; 'B+' Rating Affirmed, June 27, 2024
• Corus Entertainment Inc. Downgraded To 'B-' From 'B+' On Loss of Certain Programming Contract; Outlook Negative, June 19, 2024
• U.K. Broadcaster ITV 'BBB-' Rating Affirmed On Expected Profit Recovery And Low Leverage; Outlook Stable, May 16, 2024
• AMC Networks Inc. Downgraded To 'B+' On Competitive Weaknesses, Subscriber And Advertising Declines; Outlook Stable, Dec. 21, 2023