NBCU to Shut Down Seeso Comedy Subscription Service (Aug 9, 2017)
Discovery to Acquire Scripps Networks for $14.6 Billion (Jul 31, 2017)
Facebook Readying First TV Pilots for August (Jul 26, 2017)
YouTube TV Adds 10 New Markets with Local Channels (Jul 20, 2017)
Snapchat Launches Daily NBC News Show (Jul 19, 2017)
Cable Network Owners Discovery and Scripps in Merger Talks (Jul 18, 2017)
The Wall Street Journal is reporting that two cable network owners, Discovery Communications and Scripps Networks, are discussing a merger, though there seems no guarantee that a deal will actually get done. The two are among the mid-tier cable network owners in the US, similar sized domestically while Discovery has a significant international business too. Combined, they would be the size of HBO domestically, and the size of Viacom including the international business. Each company has several networks which reach the vast majority of US households by being in the basic cable tier, but Scripps also has several less widely distributed networks, and the biggest thing they have in common is their focus on non-fiction, non-sports content, an important slice of overall content consumption but missing arguably the most popular dramas, comedies, and sports content that most people consume a great deal of. There have been recent talks about sports-free pay TV packages involving Discovery, though not Scripps. The reality is that the cable network business is only going to become more challenging in the coming years as subscriber numbers and ratings continue to drop in the face of cord cutting, cord shaving, and shifting consumption patterns driven by online video services like Netflix. Joining forces would boost scale and negotiating power and therefore help somewhat, but even the combined company would be dwarfed by the industry giants like Time Warner, Disney, and 21st Century Fox in the cable network business alone. I could see some standalone streaming services coming out of all this too, especially for non-sports fans, but I don’t see any of this solving the underlying problems cable network owners face today or in the future.
Netflix today kicked off the Q2 earnings season with the first official earnings from a company that I cover, and reported stronger than expected subscriber growth off the back of a House of Cards season launch that was pushed back from Q1. Netflix was way off on its sub growth forecast, and though it surprised on the upside this time around that hasn’t always been the case in several recent guidance misses. Even though Netflix didn’t mention it this quarter, the delayed HoC launch screwed around with lots of year on year comparisons both this quarter and last, since Q1 is usually by far its strongest quarter for subscriber adds and Q2 is usually the low point of the year. Taking a step back, though, Netflix continues on its recent tear, with international growth the major driver, and profits domestically continuing to grow nicely off the back of last year’s price increases. Importantly, Netflix is now projecting that the international business will be profitable on a contribution basis for 2017 as a whole, which will be another major milestone after total non-US subs surpassed US streaming subs for the first time in Q2. The cash flow drain continues to be rapid, with an average of over half a billion dollars per quarter in negative free cash flow over the past year, and over $2 billion in cash content costs in Q2, and $8 billion over the past year, relative to the $6 billion Netflix protected for 2017 on a P&L basis (see this Variety piece I wrote last month for why cash and P&L spending are so different). For now, the subscriber and associated revenue growth are keeping Netflix out ahead of its content spending, but Netflix absolutely has to continue to grow at close to the current rate if it’s to continue to finance massive original content costs and grow profits at the same time.
This is a good time to remind you about the Jackdaw Research Quarterly Decks Service I also offer, which provides slide decks and videos on roughly a dozen major tech companies including Netflix each quarter during earnings season. Tech Narratives subscribers get a 50% discount, so let me know if you’re interested and I’ll send you a coupon code. The Q2 Netflix deck is available now, and will be updated in a few days when the 10-Q is out with more data. You’ll find some of the charts in this Twitter thread from earlier.