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Media 2020: Searching for Life Beyond the Bundle

Viewers continue to add streaming subscriptions while tuning out pay TV, but investors shouldn't assume they know how this story ends. The wildcard: NFL rights negotiations this year.

365体育投注网站Consumers continue to sign up for streaming video services at a remarkable clip, and while many people proclaim they “don't have time to watch television,” the average U.S. household with broadband now has two to three different streaming TV subscriptions.

At the same time, newly formed households are bypassing pay TV and more cable/satellite subscribers are canceling. The pace of “cord cutting,” which picked up by another 4% in 2019, will likely accelerate this year, as more viewers subscribe to the seemingly endless stream of new original content.

Meanwhile, a third development may drive the most seismic change: For the first time since 2011, the NFL is expected to negotiate media rights, and for a significant pay raise. While a near-term positive for broadcasters serving up football games to hungry sports fans, this development could end up inflating the cost of premium cable and satellite packages—and prompt more cord-cutting among non-sports fans. In other words: perhaps the beginning of the end for the pay-TV bundle as it has historically existed.

The Next Evolution of TV Distribution Is Over the Internet

Source: Company data, Morgan Stanley Research

Distribution Dwindles for Networks

365体育投注网站By the end of 2020, approximately 100 million U.S. households will have broadband, vs. about 85 million who have pay TV. By year-end, those households will have subscribed to roughly 250 million paid streaming accounts, a 30% increase from the year before.

365体育投注网站While the trend from pay-TV to streaming is clearly accelerating, one of the biggest changes in 2019 wasn’t the rise of streaming, but instead a more nuanced shift by cable and satellite pay-TV distributors. Profitability of retail pay TV distribution has now eroded to the point where these distributors are no longer trying to grow the business—in fact, they seem largely indifferent to its accelerating decline. That's bad news for the networks and their parent companies.

On a positive note for networks, advertising is helping to buffer some losses, if only in the short term. Ad sales represent two-thirds of broadcast network revenues. For the moment, this is a bright spot: The U.S. ad market is strong, the consumer is healthy, capital is cheap—and it's a big election year. Together, these factors support our view that U.S. advertising can grow 5% in 2020.

Pay-TV Subscriber Declines Accelerated in 2019
as Streaming Became Mainstream
(Pay-TV Subscriber Year-Over-Year % Growth)

Source: Company data, Morgan Stanley Research

Sports Fans Foot the Bill

365体育投注网站Although traditional TV viewers are increasingly tuning out, sports represents a notable exception. Led by the NFL, sports programming has buoyed the legacy pay-TV bundle and is one of the biggest revenue generators for network advertising.

The NFL is expected to flex its influence this year by negotiating higher media rights. On a per-household basis, sports-rights fees could more than double, from $15 to more than $30 by the end of the next rights term (likely 2030), pushing up subscription rates and accelerating cord-cutting, especially among households that could care less about sports.

On a Per Pay TV Household Basis, Sports Rights Fees Could More Than Double by the End of the Next Period of NFL Agreements (likely 2030)

Source: Company data, Morgan Stanley Research

365体育投注网站In the short term, industry consolidation could help broadcasters finance this step up. Over the long term, however, the bundle may evolve into a largely sports-only product, prompting all but the most die-hard fans to cut the cord.

If we are right, this may be the last "normal" TV renewal for the NFL. The last time the League negotiated media rights, in 2011, pay TV was in 80% of U.S. households. We expect such penetration to dip below 70% by the end of 2020. These new agreements could extend to 2030, at which point pay TV may be in just half of all U.S. households.

Not Game Over

Given the extremely wide range of price-to-earnings multiples for media stocks, investors seem confident about how this game ends. On the one side, the market has priced in strong growth for early disruptors, on the other, it seems unwilling to give most traditional TV businesses credit for new expansion into the streaming arena.

While streaming content represents a profound change for the Media sector, investors shouldn't be too quick to count out the incumbents. The success of one mass-media conglomerate's streaming debut last year suggests that it can be done—and it has galvanized others to step up their efforts to look for business beyond the bundle.

Not surprisingly, the sense of urgency around streaming or digital extensions for brands and networks is picking up. The pressure is on for both traditional players and disruptors to build, buy and re-release content—understandably, since intellectual property rights may ultimately decide the winners and losers.

For more Morgan Stanley Research on key Tech, Media and Telecommunications themes, ask your Morgan Stanley representative or . You can also visit the Tech, Media and Telecom 2020 page. Plus, more Ideas from Morgan Stanley's thought leaders.