Shares of America's biggest media companies, such as Walt Disney (DIS), Viacom (VIAB), Time Warner (TWX), Comcast (CMCSA) and CBS (CBS) got hammered this week. That's because investors are increasingly worried about the existential crisis to media business models posed by the growing numbers of cord-cutters, or people quitting pay-TV services.
Disney, whose properties include the all-sports cable channel ESPN, declined almost 9 percent after the entertainment giant reported subscriber losses at the network, long a financial juggernaut. Worries about Disney pushed Time Warner down more than 9 percent. Viacom, owner of Comedy Central and MTV, plunged more than 20 percent after reporting disappointing earnings as ad revenue tumbled in the wake of a decline in ratings.
Comcast, the world's largest cable company, dropped about 6 percent as it lost 8,000 video customers in the latest quarter while gaining 407,000 high-speed Internet clients. CBS, the parent of CBS MoneyWatch, fell nearly 6 percent even as CEO Les Moonves raised his forecast for the amount of fees the company will earn from pay-TV operators to $1 billion next year. That's a year earlier than he had previously expected.
One prominent media shareholder believes the sector's sell-off was an overreaction to the news about ESPN, which many thought could weather the challenges facing other cable networks because most sports programming is watched live.
ESPN is by far the most expensive channel for providers to carry, and it's a big profit generator for Burbank, Califorina-based Disney.
"If the most powerful has a problem, others are likely to be running to the doctor or the emergency room," Larry Haverty, a portfolio manager at Gamco Investors, told CBS MoneyWatch. Gamco has $45 billion in assets under management, including shares of many media companies. He added that he was "very enthusiastic" about the cheap valuations of stocks he's finding in the sector.
Still, cord-cutters represent a small but growing problem for pay-TV operators. A survey released in June by TiVo's Digital Savers found that 8.2 percent of respondents had "cut the cord" in 2014, an increase of 1.3 percent from the previous year. A recent Reuters poll found that 77 percent of U.S. adults indicated they would prefer to buy only the channels they wanted to watch, also known as a-la-carte pricing.
"It's a small number, but it's demographically significant," said John Bergmayer, a senior staff attorney at the consumer group Public Knowledge, which advocates a-la-carte pricing.
Even scarier for the industry are "cord nevers" who never get pay-TV service to begin with, he said. "It tends to be disproportionately younger people. They're never getting in the habit of paying for cable TV."
Unfortunately, economists have argued for years that a-la-carte pricing would lead to higher prices and less choice for consumers. That's because media companies would have difficulty supporting networks that couldn't attract enough financial support to make it on their own outside of the channel bundles that most viewers pay for. Major channels such as ESPN could also suffer because they wouldn't be able to charge as much for advertising because their audience would be much smaller if they were unbundled.
"If you are a major brand like ESPN and HBO, you can reach a lot of consumers," said Dmitri Byzalov, an assistant professor of accounting at Temple University, who has published scholarly research on the topic. "If you're some third-rate channel, you will have to spend huge amounts of money to advertise yourself ... just to get subscribers," he added. "Even in the best-case scenario, the immediate savings to consumers would be small at best, and in the long-run, you risk destroying half of the channels that are ... valuable enough to many viewers."