A major battle in the streaming wars is unfolding before our screen-strained eyes. As consumers spend more time at home amid the coronavirus pandemic, streaming hours have boomed. And even as the weather warms up and economies reopen, streaming could see a permanent step up as a result of a pull-forward in subscribers and increased cord-cutting.

At the same time, streaming services (and traditional television networks) are facing the challenge of being unable to produce new series and films. At least not in the volume demanded by consumers.

The current environment, where the increase in demand for streaming content is significantly outpacing the supply, could force some smaller streaming players to reconsider the value of their content libraries. They could be more valuable in the hands of another streaming service, making it economically beneficial to license content instead of keeping it for themselves.

J.P. Morgan media analyst Alexia Quadrani thinks legacy media companies with large back catalogs but fledgling streaming services are candidates to reconsider their streaming strategies over the next few months. In particular, ViacomCBS (NASDAQ: VIAC), AMC Networks (NASDAQ:AMCX), and Discovery (NASDAQ:DISC.A) (NASDAQ:DISC.B) (NASDAQ:DISC.K) could end up licensing more content rather than investing in their own streaming services.

A person holding a remote in front of dozens of screens

Image source: Getty Images.

A challenging environment for legacy media companies

ViacomCBS, AMC Networks, and Discovery generate the bulk of their revenue from their cable television networks. There are two components to that business -- subscription revenue and advertising revenue -- both of which are under pressure right now.

In the past, these companies have been able to offset subscriber losses from cord-cutting and cord-shaving through contractual rate increases with distributors. And while those rate increases should hold, we could see an acceleration in cord-cutting in the back half of the year. That could lead to steeper declines in distribution revenue growth despite those rate increases.

All three cable TV network companies saw declines in their distribution revenue growth during the first quarter. While distribution contract renewals and adjustments can affect results from quarter to quarter, the fact that all three saw slowing growth or faster declines indicates that it's a secular trend.

Company

Q1 2020 Subscription
Revenue Growth

Q1 2019 Subscription
Revenue Growth

AMC Networks

"High single-digit" decline

"Low single-digit" growth

Discovery

2%

4% (pro forma)

ViacomCBS*

(6%)

(1%)

Data source: Company earnings reports and conference calls. *Cable networks.

Meanwhile, the television advertising business is facing secular pressure. While marketers pulled back on spending in the first quarter as the coronavirus descended upon us, and those pullbacks likely persisted through the second quarter, the hit to ad revenue could get much worse in the second half of the year.

Indeed, the outlooks aren't pretty. AMC forecast a 30% decline in ad revenue for the second quarter. Discovery said April was down 20%. And with marketers canceling significant portions of their upfront commitments, advertising in July through September could be down even more. (ViacomCBS didn't provide an outlook.)

Why that downturn matters for streaming

Given the challenges facing their main cable network businesses, AMC Networks, Discovery, and ViacomCBS should look to streaming distribution to bolster their revenue. While they all operate streaming services of their own, they're mostly niche offerings. Even CBS's mainstream offerings -- CBS All Access and Showtime -- have just 13.5 million total subscribers despite over six years in the market.

While streaming is certainly an area of growth for all three media companies, it's not nearly as big of a source of revenue as their main television network operations. And with the economics of streaming facing a potential change as content grows more scarce, these companies could improve their financial results by licensing content instead of selling it directly to consumers. 

Management will have to weigh the long-term interests of their companies versus the short-term need for high-margin revenue. All three companies pointed to their strong cash positions during their earnings calls. But certain niche streaming projects may not survive a full analysis of their long-term potential versus the income generated from licensing most of their content. And those decisions will certainly be influenced by the current struggles of the television network industry.