There's been a surge in television watching over the past month as more people avoid social interaction in order to prevent the spread of the novel coronavirus. And that sounds like great news for pay-TV providers. It would seem their services are now more valuable than ever.
Except the industry is facing three major challenges that could have long-lasting effects on pay-TV providers well after the threat of coronavirus has abated. Let's take a closer look at what these three challenges are, as well as which companies will see the biggest negative impact as a result of not meeting the challenge.
1. The biggest draw for pay-TV -- live sports -- disappeared overnight
Pretty much every sports league (amateur and pro) suspended play in mid-March. The NCAA canceled its championship basketball tournament, the NBA and NHL put their leagues on hiatus, and the MLB pushed back its opening day indefinitely.
Sports are one of the biggest draws for the pay-TV bundle. Live sports accounted for 89 of the top 100 broadcasts in 2018. Networks like Disney's (NYSE:DIS) ESPN can command premium affiliate fees due to their sports content and their importance to the overall network bundle. Without live sports coverage, pay-TV becomes much less necessary.
2. Suspended productions mean hit TV show delays
Some consumers subscribe to cable and certain networks just to see specific shows. Prestige programming is no longer relegated to a few networks. Cable networks like Disney's FX or AMC (NASDAQ:AMCX) produce high-quality original series that have a loyal fan base. And many subscribers pay up for the bundle just to watch their favorite series as soon as they air. FX pushed back the debut of Fargo and AMC is halting production on its two Walking Dead series.
But the spread of coronavirus has halted television productions around the world. That means some series are ending their seasons early this spring, and it means others won't debut on schedule.
The premium content on cable is going to dry up, and an extended production shutdown means subscribers will be left with nothing but reruns for a while. That doesn't make for a very valuable service.
3. The recession is only just beginning
It seems likely we're at the start of a recession. While we can't know for sure, economic forecasters expect an unprecedented decline in GDP for the second quarter. What we do know is that we've seen about 10 million jobless claims in just two weeks, and the situation is going to get worse.
And while many jobs will come back quickly once people are able to move about freely again, a not-insignificant percentage of jobs won't. Karen Mills, former head of the U.S. Small Business Administration, believes we'll see 20% to 30% of small businesses have to close up shop due to the impact of coronavirus.
What's more, we may see fewer entrepreneurs investing in themselves for some time, as the future remains uncertain, even if we do manage to contain the virus. That means a lack of job growth and elevated unemployment could persist.
All of this is to say that when faced with unemployment, consumers tend to cut the nonessentials, and pay-TV is increasingly nonessential in most households.
Two providers that'll get hurt the most
While the entire pay-TV industry is likely to suffer, two providers with the greatest risk of cord-cutting are AT&T (NYSE:T) and DISH Network (NASDAQ:DISH). That's because neither offers a strong broadband service throughout most of the country to keep subscribers from canceling. While satellite technology allows both companies to offer pay-TV service nationwide, broadband efforts lag well behind.
AT&T is building out a fiber network, but it's no longer focused on deploying more fiber to the home. Instead, it's looking to improve its penetration rates where it has fiber. Fiber allows AT&T to offer speeds up to 1 Gbps, whereas its old copper lines have very limited speeds compared to cable. Still, it only has 3.9 million fiber subscribers as of the end of 2019 versus over 20 million video subscribers.
Meanwhile, DISH doesn't offer broadband service. And it's far less diversified than AT&T. It's now facing the challenges of building out a wireless network and taking over operations of Boost Mobile. That requires considerable cash flow, and the company could be facing serious pressure on its cash balance as cord-cutting takes hold of its core business.
Satellite companies could be the hardest hit in the current environment as both premium content and willingness to pay for it dry up.