Pay TV: You Can Do Without It and Without the Stocks Too

Disaster struck this week when I turned on my television and saw absolutely nothing. My DirecTV receiver was on the fritz, and the emergency backup receiver was equally useless.

The tech support person on the other end of the phone did her best to get me up and running, but I was forced to go without service for two days. A few years ago I would have undergone acute separation anxiety, but media distribution in the 2010s has evolved to the point that pay TV, while not exactly superfluous, is no longer the must-haves that it used to be.

That's something to consider before buying shares of DirecTV or rivals like Time Warner Cable. They have been among the strongest performers since early August, rising as much as 30 percent, but as the media landscape continues to change and pay TV companies have to fight off more competitors, the stocks appear vulnerable.

I got through my two days in the wilderness by watching Hulu, a venture of NBC Universal, Fox Entertainment and ABC that streams movies and television shows for no charge, but with commercials. Hulu in less than two years has become the 33rd most popular website in the United States, according to alexa.com.

It has plenty of company, as well as plenty of viewers; services like the Internet Movie Database, tv.com and individual free and pay television networks also stream shows for free. Apple has held talks with ABC and CBS to offer web-based subscription televisions services, according to a recent Wall Street Journal story, and a Los Angeles Times story highlighted expanding efforts to beam TV shows to smart phones.

Given all these alternatives, cable and satellite TV services that cost $50 a month or more don't seem like such great deals, even when they're glitch-free. Michael Hodel, who follows the pay TV sector for the research firm Morningstar Associates, articulated the threat from the proliferation of other distribution sources.

"Although consumers continue to watch large amounts of traditional TV programming, with an increasing amount of content available online, habits are starting to change," he observed in a recent research note.

The industry is taking steps to adjust to the new order, some more graceful than others. In the last few weeks Comcast agreed to buy a controlling stake in NBC Universal and its extensive content, and Time Warner engaged in a very public spat with Fox over the fee that the cable operator must pay for Fox programming.

That's below street level. The two competitors vying for supremacy in the sky, DirecTV and Dish, have been boring their customers, and everyone else's, with saturation ad campaigns. DirecTV has been offering additional programming at no extra cost and large signup bonuses.

Jason Bazinet, an analyst at Citi Investment Research, also recognizes the difficulties facing the industry. In recent reports on DirecTV and Time Warner Cable, he cites the "challenging" backdrop for the sector, the potential for programming costs to accelerate this year for Time Warner and reduced third-quarter operating earnings last year for DirecTV.

He tells a convincing story, then offers a surprise ending: He rates both stocks a buy, although the recent run-up in DirecTV has taken it close to his $34 target price, so there is a chance that he will revise his thinking.

I'm glad to have my service back, but I discovered thanks to the various online options that I could live without it without having to resort to extreme measures like reading a book or holding conversations with loved ones.

I'm not ready to give up DirecTV yet, but my tolerance for price increases has certainly gone down, and the same is likely to be true for many other customers. As investors acquire a better understanding of the impact that trends in media distribution are having, the amounts that they're willing to pay for the stocks of pay TV companies may go down too.