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Market Commentary: September 2023 – Content Is King

Content Is King and the Polka King Who Knew It

September 2023

By Ward Williams

In the beginning, there was radio, and all programming was live. Then came broadcast television, and the “big three” networks produced and showed live programming from their own studios. In the early 1970s Lawrence Welk changed the world forever. Ask your parents and grandparents what a big deal he was in TV entertainment, and I’ll tell you what a big deal he was in the business of entertainment.

In 1951, The Lawrence Welk Show began as a local program on KTLA in Los Angeles. Mr. Welk, an orchestra leader from the upper Midwest, broadcast the shows from ballrooms while KTLA produced and owned the show. In 1955, ABC bought the show. Mr. Welk was a highly paid employee while ABC produced, owned, and broadcast the show nationally. In 1971, ABC cancelled the Lawrence Welk show. Mr. Welk then established his own production company, produced the show and sold it to any TV station in the US. This was the birth of syndication. Syndication is the process that allows production companies to pay actors millions of dollars per season because they will earn it back, plus profits, when they syndicate. See: M*A*S*H, Cheers, Friends, etc.

Until the mid-70s, the networks controlled what shows were on television. By the 1980s you could receive your TV via broadcast airwaves, cable, or satellite. Fast forward to September 2023. Broadband internet allows you to watch whatever, whenever, wherever. Who needs networks, cable or even satellite? Cord cutting, represented on the left-hand chart, is being overtaken by residential broadband access.

While this downgrade was not due to any major changes to Fitch’s US government fiscal or debt projections, that is not to say those financial trends are not without concern. The US has a mounting deficit and debt issue that will be difficult to mitigate without sufficient political will. The core of the issue is that the US has a chronic spending problem. This chart outlines Federal revenues and outlays as a percentage of GDP over the last 50 years, along with the Congressional Budget Office’s projection for the next 10 years. What it shows is that despite a myriad of tax regimes, Federal revenues typically oscillate around 18% of GDP and are influenced more by the economic cycle than anything else. However, Federal outlays as a percent of GDP, while also impacted by economic cycles, have structurally risen from 19% of GDP in 1972 to a projected 24% of GDP by 2032. While 5% may not seem like a significant increase, by 2032 this extra 5% of spending adds up to $1.8 Trillion of added deficits per year! And when combined with ballooning entitlements such as Social Security and Medicare, the Federal debt as a percentage of GDP is projected to balloon over the next 30 years.









However, those platforms do still need content. Push came to shove this summer when Spectrum (owned by Charter Communications) told Disney that it wouldn’t pay a higher fee to carry ESPN in its TV packages. It was a lose-lose for Spectrum: pay more for ESPN, raise prices, and lose subscribers; OR stop carrying ESPN and lose subscribers. Disney (which owns ABC, ESPN, and dozens of other networks) responded by turning its networks off on Spectrum cable. It also has the power to do this to other cable/satellite carriers to force higher fees. Eventually, on the day of the first NFL Monday night game on ESPN (9/11/23), a compromise was reached: Disney will allow Spectrum to broadcast ESPN, and other networks previously not carried by Spectrum, in exchange for higher fees.

Why is this important? First, it shows that content is still the 800-pound gorilla. Second, it demonstrates that the next wave of delivery technology, internet-based streaming, is here to stay. Although you might receive your cable TV and internet from the same provider via coax cable or fiber, they are two distinct products. Regardless of how (or where) you receive your internet signal, you can get your entertainment content via YouTubeTV, Peacock, Hulu, Roku, etc.

It is for this reason that we continue to hold a position in Comcast as the only delivery company in our portfolio. Yes, it is losing cable subscribers like Charter and Spectrum. However, Comcast has a larger, faster-growing fiber delivery internet product than the others.

It’s not at all unlikely that Charter finishes September as the biggest supplier of linear pay TV in America. Regardless of the rankings, operators of linear networks are scrambling, as other major pay TV suppliers including satellite TV companies DirecTV and Dish Network are also in the double-digit percentages range on cord cutting.

The good news in Q2, video-wise, for Comcast was that its direct-to-consumer streaming service, Peacock, added another 2 million paid subscribers and now has 24 million in its ranks. This is larger than its own cable subscriber base or Charter’s cable subscriber base. Revenue for the subscription video service was up 85% year over year to $850 million for the quarter.

Meanwhile, back on the managed pay TV services side, Comcast has pivoted its sales efforts to supplementing what is now its core customer constituency – residential broadband users – with skinny programming bundles provided at a low cost.

In short, content is king: witness Apple+, Prime, Google studios, etc., and its method of delivery is changing faster than it has in history. As a final example of how Lawrence Welk changed the world, consider this. Up until 1966 his show was broadcast in black and white. At his insistence, ABC moved the production to a sound stage that could accommodate color. The next year saw the greatest percentage increase of color TV sales in US history. He knew that his audience would be early adopters (as we say now) because they wanted the content – in that case, the orchestra’s pastel suits.

Shannon Dermody

Shannon DermodyTEST

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