CITI: One media giant could come out a winner amid all the cord cutting

With more and more people leaving traditional cable TV for online streaming services, media companies and investors are scrambling to adjust to the evolving landscape.

And according to one Wall Street analyst, it looks good for only one company: Disney.

One solution for content providers is an over-the-top (OTT) system, where consumers would pay for individual content streamed directly to them, without having to go through a cable company. Netflix, Hulu and HBO Now are all considered over-the-top.

Jason Bazinet at Citi went through each media company’s current channel offerings and determined the optimal price for each in an over-the-top system based on ratings, cost of content and utility derived. In the end, he found that only Disney would increase revenue and equity value in this new model.

“The results of our analysis: in a pure OTT world most firms would see their equity value fall,” wrote Bazinet in a note to clients. “But, Disney would see its equity rise by about 10% (even with $US1.5 billion of incremental OTT costs).”

Bazinet estimates that the hardest hit would be Viacom, estimating the company would lose 30% of their revenue and 58% of their equity value. Following Viacom in the loss column were 21st Century Fox (-35% revenue/-25% equity), Comcast (-40% revenue/-20% equity), and Time-Warner (-22% revenue/-15% equity).

Bazinet says that the reason for Disney coming out on top is one thing: sports.

“Across media firms, sports subsidise non-sports content,” said Bazinet. “In effect, if you are a sports fan, you’re getting a subsidy from your neighbour who doesn’t like sports. As cord cutting occurs, this subsidy will melt away. And, that’s when Disney can pivot to an over-the-top model.”

Bazinet estimates that sports content is worth 3.7x than typical TV content based on viewer utility and demand. Disney’s domination of cable sports through ESPN means that it has a huge leg up over the other providers.

In fact, the report estimates the optimal price for ESPN in an over-the-top format is $US20 per month, by far the highest of the 41 channels Bazinet analysed.

While this number should concern most media companies and compel them to keep the status quo, Disney enjoys a different positions, says Bazinet.

“While investors will fret about Disney’s fate if cord cutting accelerates (since Disney has long-term fixed cost sports contracts) there is no need to worry,” he said. “Disney – and only Disney – has the luxury of pivoting to an a la carte model if (or when) the pay TV universe contracts.”

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