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REPLAY | About Everything: Does Cable Have a Future?

Yes, but not a happy one. It’s mostly about managing decline.

 

Editor's Note: In this complimentary edition of About Everything below, Hedgeye Demography Sector Head Neil Howe writes about why the cable and satellite TV industry's glory days are behind it. In it, Howe dissects the underlying demographic drivers and explains the broader implications for investors.

 

***After reading the written piece, join Neil LIVE on HedgeyeTV (see video player below) at 2:30pm ET Tuesday to discuss. It's free.

 

WHAT’S HAPPENING?

 

The cable and satellite TV industry is ailing. Gone are the glory days of the early 2000s, when company revenues soared 20 to 30 percent annually.

 

Last year, industry revenues fell 15 percent. Net incomes among giants like Comcast, Time Warner Cable (TWC), DirecTV, and Dish also tanked—while smaller players like Charter Communications and Liberty Global actually saw theirs turn negative.

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart3

 

You wouldn’t know the severity of the situation by looking at the market. Though share prices of most cable companies took a dive last year, many of these stocks have recovered and are now doing better than ever. Comcast (also home of NBCUniversal) has all but regained its peak 2015 value, while Verizon and AT&T continue to post new highs (no thanks to their cable businesses). 

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart4

 

While industry P/E ratios are a far cry of what they were a decade ago, they’re still just marginally beneath the S&P 500 at large. So what would you rather bet on: the entire American economy or a moribund industry with no easy path to profitability? OK, “neither” is an acceptable answer. But “number two” is certainly the wrong answer.

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart5

WHY IT’S HAPPENING: DRIVERS

 

Cord-cutting. The top nine cable companies lost about 340,000 video subscribers in 2015. The year before, the industry at large lost 1.2 million subscribers. By comparison, Netflix added more than 1.5 million subscribers last quarter alone. Thanks to Netflix and the myriad other cheap (or free) ways consumers can get content today, you no longer need a cable subscription to see your favorite shows.

 

Even when cable firms do gain subscribers, they’re often feasting on the scraps of shrinking satellite providers. (Dish and DirecTV lost over 135,000 subscribers each last year.)

 

Generational change. Millennials are by far the largest group of cord-cutters and cord-nevers. Whether they can’t afford it or they’re content to find entertainment online, Millennials consider cable an option, not a necessity. In 2015, 19 percent of 18- to- 29-year-olds cut their cable or satellite subscription. Another 16 percent never had cable. (And plenty still live with parents who foot the bill.) 

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart6

 

Instead of plunking down on a cable subscription, Millennials would just as soon use an antenna (remember those?) to find broadcast shows. Or they cut out broadcast TV altogether and go broadband-only. 

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart7

 

This trend will continue to give cable companies a major headache as Millennials take their new viewing habits with them up the age ladder. Forecasting firm eMarketer predicts that by 2018, one in five households will not subscribe to pay-TV.

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart8

 

Increased regulatory scrutiny. In 2015, just three companies—Comcast, TWC, and Charter—accounted for 77 percent of all cable subscribers. Not only is cable concentrated at the national level, but many of these companies enjoy steel-trap regional monopolies. In many cities, the typical household can only subscribe to one provider. Most of the rest can choose between two duopolists (usually a cable company and a telecom). 

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart9

 

REPLAY | About Everything: Does Cable Have a Future? - neil chart10

 

From monopoly comes pricing power, and from pricing power comes a boost in profit margins. Yet this too may be ending. The antitrust regulators are catching on. The TWC and Comcast merger was called off—thanks in part to promises by federal regulators to fight the deal. Charter’s newly minted acquisition of TWC includes mandates that are stricter than current industry regulations. Stricter FTC oversight may ultimately deter “defensive” mergers by small cable firms in steep decline. This would further cloud the industry’s outlook.

 

Even the set-top box is fair game for regulators. Cable giants earn $20 billion annually from forcing their hardware into the hands of subscribers—at least until the FCC drops the hammer and opens up this niche market to third parties. 

DO THE CABLE COMPANIES HAVE A WAY OUT? 

 

Broadband. In the absence of a robust pay-TV customer base, the top cable companies are gunning for new broadband revenue. But this transition could be stymied by net neutrality legislation. The FCC wants to regulate broadband like a common carrier—which would prevent cable companies from raising broadband prices to make up for cable losses.

 

Sure, the industry would get a boost if the American public rapidly upgraded to much higher bandwidth video (like 4K video or perhaps new VR consoles). In time, the FCC would have to allow firms to invest in a whole new broadband infrastructure. But don’t hold your breath. There’s little evidence to date that the public wants to pay for this extra “service,” any more than it wanted to pay for 3D TV. (Gee, what happened to that?)

 

“Skinny” bundles. Last year, Verizon and Comcast introduced pared-down, cheaper channel bundles—but these options reduce revenue and earnings. Cable companies have no real incentive to offer pay-per-channel plans: There’s no way they would be better off with less content and less revenue in a bundle-less world. 

 

REPLAY | About Everything: Does Cable Have a Future? - neil callout

 

New services. The big cable firms are reaching far beyond mere TV packages. They are dreaming up new products they hope will entice more consumers to stick around. Exhibit A: AT&T, Comcast, TWC and Verizon all offer home security systems, which cost less than traditional home security services when bundled. But long-term, do you think they can possibly compete with cutting-edge IP-based services like Nest? There’s a reason why this software revolution is called the “Internet of Things”: It’s all on the INTERNET.

 

Comcast and Cablevision are also investing in ways to allow customers to stream content through their set-top boxes. But again, this strategy risks rendering the cable subscription itself obsolete.

 

Live TV. Can’t-miss live events—like NFL games or local news or presidential debates—may be the last true bastion of cable profitability. It’s easier to maintain an exclusive price for content that has to be watched in real time. Nobody hosts a Super Bowl Party the day after the Super Bowl.

 

To be sure, generational forces could help live programming. Millennials’ penchant for second-screen viewing gives the cable industry more opportunities to bring back the linear TV experience. Cable could turn the tide by hosting online communities centered on live programs that are available only through cable.

 

But how long will it be until major sports leagues take a page out of HBO’s playbook and bring their content directly to the fans? Though cable companies hope the answer is “never,” the seeds have already been planted (see: NBA Live, MLB Live, and NHL.tv).

 

Content aggregation. There may be room enough for one cable company to win out. How? By using the research and consumer data at its disposal to guide consumers through an increasingly fragmented landscape of content. A savvy, streamlined firm (perhaps Comcast?) could have a chance to survive the impending dearth of cable subscribers. So I’ll allow that one healthy survivor may emerge. But only after a prolonged and bloody gladiatorial contest has come to an end.

TAKEAWAYS

  • Broad band, cord-cutting, IP-based software, and stricter antitrust enforcement are combining to throttle cable firms. Avoid being long in these firms, and look for opportunities to short those having no line of business (like telecom or content) other than cable.
  • Be skeptical when you hear CEOs and analysts say they have a magic formula to stop the bleeding—like doubling down on broadband, repackaging content, or offering new products. There’s no easy fix for a dying paradigm.

Dale: The Most Important Charts In Global Macro

Dale: The Most Important Charts In Global Macro - Dollar cartoon 04.27.2016

 

Below are six key charts with analysis from Hedgeye Senior Macro analyst Darius Dale, which shed light on where we think the U.S. Dollar is headed. (For more, follow Dale on Twitter, @HedgeyeDDale.)

 

1.

"These are the the most important charts in all of global macro. Will the US Dollar hold the line or fade like a flower?"

 

Dale: The Most Important Charts In Global Macro - dxy index 5 9

2.

"The Federal Reserve torched the dollar and got the short-term reflation pop it wanted, but can that be sustained?"

 

Dale: The Most Important Charts In Global Macro - demographics 5 9

3.

"As a follow-up, here's why 35-54 year-olds matter."

 

Dale: The Most Important Charts In Global Macro - demographics2 5 9

4. 

"At what point do the ECB and BoJ throw in the proverbial towel.. and perpetuate a series of higher-lows in the DXY?"

 

Dale: The Most Important Charts In Global Macro - euro stoxx topix 5 9

5.

"Furthermore, how much more pain can Japanese and European officials take? The alleged 'Shanghai Accord' is killing their markets." 

 

Dale: The Most Important Charts In Global Macro - euro stoxx topix2 5 9

6.

"To be 100% clear, we think the US Dollar holds the line and pukes on reflation over the next few months. But if it doesn't, our game-plan will change."

 

Dale: The Most Important Charts In Global Macro - dxy index2 5 9

 


McCullough: Expensive? ‘I Love Expensive’

In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about why he’s still bullish on McDonald’s (MCD), Utilities (XLU), and Long Bonds (TLT) even though they are “getting expensive.” 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

RTA Live: May 9, 2016


Monday Morning Risk Monitor | Slowing China & Rolling Commodities

Takeaway: Last week, a flurry of soft US economic prints stoked fear. Weakening commodities, slowing China and reversing High Yield fanned the flames.

Key Takeaway:

A number of U.S. economic measures raised concern for the market last week; the ISM Manufacturing Index came in lower than expected at 50.8, jobless claims rose by +17k (the largest w/w increase all year), and April jobs growth came in lower than expected at +160k. Beyond this, commodity prices began to roll over, taking high yield prices with and EM sovereign CDS with them. Chinese steel was down for the first time since mid-February, CRB declined, and high yield YTM rose. Beyond this, the median sovereign CDS widened by +3 bps to 100; Italy and Spain caught the brunt of investors' concerns with their respective CDS widening by +9 bps to 127 and by +10 bps to 97.

 

Our heatmap below is negative on the short term, positive on the intermediate, and mixed on long-term measures.


Current Ideas:

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 13 improved / 3 out of 13 worsened / 9 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 3 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM15

 

1. U.S. Financial CDS – With weak economic data last week such as a lower than expected ISM Manufacturing Index, rising jobless claims, and slower than expected job growth, swaps widened for 14 out of 16 domestic financial institutions and the median spread widened by 2 bps to 102.

Tightened the most WoW: COF, JPM, PRU
Widened the most WoW: HIG, AIG, LNC
Tightened the most WoW: RDN, BAC, C
Widened the most MoM: HIG, AIG, AXP

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM1

 

2. European Financial CDS – Financial institution swaps mostly widened in Europe last week, led by Portuguese Banco Espirito Santo swaps, which widened by 150 to 1546.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM2

 

3. Asian Financial CDS – Financials CDS in Asia were mixed last week. 2 of 3 Chinese bank swaps widened, and both Japanese Daiwa and Nomura swaps widened. Meanwhile, all Indian bank swaps tightened.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Spanish sovereign swaps widened the most, by 10 bps to 97.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM3 2


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week, led by Turkish sovereign swaps, which widened by 27 bps to 267. Meanwhile, Indian CDS stood out as the only EM sovereign swap to tighten, by -5 bps to 161.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM16

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 7 bps last week, ending the week at 7.46% versus 7.39% the prior week.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 1.0 points last week, ending at 1892.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis point last week, ending the week at 43 bps this week versus last week’s print of 43 bps.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM7

9. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 180 versus 182 the prior week. As compared with the prior month, commodity prices have increased 5.2%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 9 bps.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 5 basis points last week, ending the week at 2.00% versus last week’s print of 2.05%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM10

12. Chinese Steel – Steel prices in China fell 5.2% last week, or 160 yuan/ton, to 2915 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51.2% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM4

 

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 148 trillion RMB as of March 31, 2016, which is up +12.3% year over year. Note: this data is only updated quarterly.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM18 

15. 2-10 Spread – Last week the 2-10 spread tightened to 104 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 1 bps to 43 bps.

Monday Morning Risk Monitor | Slowing China & Rolling Commodities - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 5 9

 

Daily Market Data Dump: Monday - sector performance 5 9

 

Daily Market Data Dump: Monday - volume 5 9

 

Daily Market Data Dump: Monday - rates and spreads 5 9


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