The Fuse is Lit for a Cable TV Implosion

The demise of cable TV has moved swiftly in recent years from its status as a lingering worry to an inevitability, and as 2024 wraps up, it looks all but imminent. With reports of subscriber losses quarter after quarter, year after year, it wasn’t hard to envision a future in which the trend continued until subscriber numbers crashed to almost zero. Cable TV might live on as a legacy product, catering primarily to elderly users who have the money to pay for it and can’t be bothered to learn something new, but about as relevant to the world as landline telephone service is to the communications industry.

But with recent moves by the big media companies, it’s looking more and more like cable TV will be going out not with a collective whimper from its dwindling subscriber base, but with a bang as the medium itself implodes.

The major media companies’ response to linear TV’s accelerating decline has created a perilous situation that’s not just limited to linear TV, it could prove calamitous for the entire media industry. With Wall Street and other financial analysts focused on the short-term impacts of the current crisis, the industry doesn’t seem to realize the magnitude of the hidden risk here.

Prelude to a Fall

To understand why one industry challenge could lead to an even greater crisis, it’s important to understand exactly how and why the course of events has deviated from what was long expected by industry observers.

The exodus from cable and satellite TV was long anticipated. While many industry leaders held out as long as they could, doubling-down on and trying to protect highly lucrative traditional pay-TV revenue streams, the industry was ultimately headed over over-the-top distribution as standard.

In response, ever major media company has rushed to build a streaming service. Netflix, it appeared, was eating their lunch, so it seemed simple enough to copy that approach. And while Netflix had long benefitted from licensing third party content, the media companies believed that a first-party approach could beat Netflix at its own game, depriving their main competitor of valuable content and monetizing it themselves.

This was the plan and the expectation: customers would take the same $10 a month they gladly offered up to Netflix, and give it straight to Disney, or Time Warner, or NBCUniversal, etc. Viewers would be cutting out the middle-man and opting for direct-to-consumer product over some of America’s least popular corporations, the cable TV providers. Cord-cutting would be a problem for cable and satellite companies, but not for the media empires that created all the content.

What happened instead was what analyst Alan Wolk dubbed the “Flixcopalypse.” Because Disney, Time Warner, NBCUniversal, CBS/Viacom, Apple, and more all launched new streaming products at once, consumers were suddenly asked to pay for half a dozen streaming services, which together added up to as much as a monthly cable bill.

This shifted consumer behavior and created the current environment of super-charged churn rates and high customer acquisition costs. Rather than pay six subscriptions consistently, consumers binge and bounce, watching their fill of one service and moving on to another. After several rounds of rapid price increases, the streaming services are only now just barely in the black. But while board rooms may see that as cause for celebration, the current rush to exit the cable channel business could wipe out those small profits with a tsunami of red ink.

Abandoning the Linear TV Ship

Now that the writing is on the wall for traditional TV, the panic has begun, from the C-suite to Wall Street. A simple view of the problem has led at least a couple of the nation’s largest media companies to a simple solution: if the cable TV business looks bleak, get out of the cable TV business!

Comcast has already announced plans to spin its cable channels into a new company, while Warner Bros. Discovery has recently restructured to tee up a similar sort of spin-off or sale of its own cable assets. On the surface, this seems logical, but it creates a massive number of new challenges for both sides of the business post-split. They must either remain entirely entangled and co-dependent, or both be destabilized.

Currently, the same content appears on both cable networks and the associated streaming service. But if the cable channel and streaming service are split up into two independent entities, how can that continue to be the case? This is the first of many intractable questions that come up. What about older content? Does an older hit show from Comcast’s USA Network belong to the channel, and now “SpinCo”, or does it belong to the production studio that’s still part of “RemainCo”? Perhaps more important is the flow of revenue which funds that content creation. While cable revenues face a steep decline, they’re still a large source of cash flow which has historically funded the production of shows for those channels. If the studios and streaming services no longer have access to that cash flow, those meager first profits from streaming will become huge deficits as they absorb those production costs.

These questions don’t yet seem to have good answers. Perhaps the most obvious would be for an agreement between “SpinCo” and “RemainCo” that maintains those critical flows of content and financing, but if they remain so dependent upon one another, what advantage is there in a spin-off to begin with?

The Deeper Risk of Collateral Damage

Putting aside all these lurking questions, this spin-off plan remains a subtle time-bomb for the media industry. When a big media company jettisons its cable channels, that “SpinCo” becomes a company in free-fall. With a rapidly declining business, these cable channel companies are not viable businesses long-term, and with all their assets in rapid decline, they have little negotiating leverage for deal-making.

Some analysts have argued that these dire straits actually encourage mergers and acquisitions by allowing the market to set a value for the new company and forcing any “SpinCo” to accept any remotely reasonable offer. But while this sounds nice in theory, what sort of buyer would want to get further in to the linear TV business right now at any price?

What would it mean for the cable TV dial if dozens of the nation’s most-watched cable networks ultimately go dark? A failure of any one “SpinCo” could deal a body blow to what’s left of the cable TV business, and if half a dozen of these cable network cast-offs hit the market at once, the risk is only magnified. In fact, it currently seems like a sudden collapse of cable TV is the most likely outcome.

The first possibility is that one or more “SpinCo” doesn’t find a buyer and ceases to be able to sustain itself. But simply finding a buyer doesn’t necessarily mean salvation, especially with the kinds of firms that could be attracted to a desperation deal. Think smaller media companies with grand ambitions but not a lot of resources, private equity firms looking to wring whatever value is left in those assets as fast as possible, and the like.

None of these scenarios bold well for any of the companies involved, much less the cable channels themselves. There can be no cable TV without cable TV channels, so a sudden loss of whole channel families would be disruptive to the entire medium. Cable, satellite, and even virtual pay-TV providers would be hit hard first, but while the big media companies, whether they’ve spun off their cable channels or not, would be forced to deal with a sudden drop in whatever revenue was coming from these distributors.

This could be catastrophic all around, and unless there’s a sudden change in course, the clock is already ticking. In fact, other media companies are likely to follow Comcast and Warner Bros. Discovery in their spin-off strategy. Time is running out for the entire industry to find a new distribution system that works, and a dozen different SVOD apps just isn’t it.

This is a critical moment for the media industry. Not the past few years or months, significant as they have been, but rather, these very days. Decisions will be made that will be enormously consequential in ways that we may not yet fully understand, with implications for the entire industry. Can a major crisis be averted or is it already in motion? The fate of a multi-billion-dollar industry is at stake right now.