Media Communications & Media: Pressures building in Pay TV

Management commentary has anchored 2Q advertising expectations, but the bigger question is the trajectory of the pandemic, the strength of the U.S. economy and how much improvement we will see in 2H20 and 2021.

13 Jul 2020

TV Ad market has relied on pricing in recent years to keep trends stable; pricing support could erode in a post-COVID world

Source: Nielsen NNTV, Company data, UBS TV Ad Growth above not adjusted for non-core items

This line graph shows ad revenues, ratings delivery and implied pricing from 2012 to 2019.

Lowering our estimates for U.S. Pay TV subs....again

In our May note, we suggested the U.S. Pay TV industry would lose 7M+ subs in 2020, equating to a 7.6% sub decline, up from 5M losses or a 4.9% decline in '19. The change was driven by pricing moves at many of the larger distributors as they deemphasize multichannel TV within their portfolios. The latest round of price increases against a COVID-driven backdrop of few sports and macro pressure should exacerbate the problem. In our latest note, we lowered estimates for the virtual players and we now look for 7.7M losses or an 8.2% decline in Pay TV subs in 2020, the worst decline on record.

A perfect storm for cord cutting? Prices rising and strategies evolving in video

Video strategies for traditional multichannel video programming distributors (MVPDs) continue to evolve - satellite providers are migrating to virtual services while cable is taking a more broadband-centric approach with a greater focus on profitability. Virtual multichannel video programming distributors (vMPVDs) meanwhile (~10% of Pay TV subs) are also raising prices (despite their appeal to the most price sensitive portion of the market). With limited friction to cancellation, no sports, the end of lockdowns and macro headwinds, price increases could have a sizable impact on vMVPD sub trends.

Expect gradual advertising recovery but 2H visibility limited

We believe 2Q TV ad declines generally came in better than original estimates, but the pace of future improvement remains the big question. This will be dictated by the trajectory of the pandemic and the return of live sports (6% of TV viewership but larger % of TV ad). We continue to model a 2H recovery in Nat'l TV ad (-13% in 3Q; -8% in 4Q vs. -30% in 2Q). That said, higher reliance on scatter & increased uncertainty around sports adds risk to our forecasts. We expect TV ad to return to growth next year, but show ad spend down ~10% vs. 2019, which benefitted from a strong economy.

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