In September 2022, just months before his unexpected return to The Walt Disney Co., Bob Iger issued a stark warning about the impending decline of the linear TV industry.
During an interview with Kara Swisher at The Beverly Hilton's International Ballroom, Iger remarked, "Linear TV and satellite are heading towards a steep cliff, and they will be pushed off it... I can't tell you when, but it will happen."
As of this week, it feels as though the industry has finally plunged off that cliff.
On August 7, Warner Bros. Discovery took a staggering $9 billion impairment on its linear cable channels, partly due to the apparent loss of NBA rights and uncertainties surrounding affiliate renewals. Just days later, Paramount Global recorded a $6 billion charge on its cable channels, triggered by the valuation linked to the Skydance deal. In an instant, $15 billion in value was wiped out.
Cable's decline has been evident for years (Iger first hinted at the peak of cable TV during a now-infamous August 2015 earnings call, where he alerted everyone to the "beginning of the decline," as Bank of America's Jessica Reif Ehrlich notes). However, what had been a gradual erosion has now turned into a near-total collapse.
"The cable networks are caught in this horrific, perpetual, never-ending decline," Reif Ehrlich observes. "It's been more dismal than almost anyone anticipated. Even just two years ago, when the writing was on the wall, we still believed the decline would be slower than it has actually been."
The downturn has been fueled by cord-cutting, but in recent quarters, the cable industry has faced a double blow: subscriber numbers are falling faster than carriage fees are rising, and advertising dollars are abandoning TV as ad-supported streaming platforms provide new avenues for marketers to allocate their budgets.
“Cord-cutting has been a persistent challenge for the linear television business over the past few years, with no signs of improvement. The more recent issue, however, is the pressure on U.S. linear advertising, which has intensified the situation,” says Robert Fishman, a senior analyst at Moffett Nathanson.
“Now, both primary revenue streams are under strain, forcing linear cable networks to reassess their future from a cash flow perspective. They must navigate these broader ecosystem challenges and their impact on the top line, leading them to cut expenses in an attempt to mitigate some of that pressure.”
For the past three decades, the entertainment industry has thrived on the economics of pay-TV, where steadily increasing carriage fees and valuable ad inventory created a business model that was virtually unparalleled outside the tech sector.
However, while some traditional entertainment companies are diversified (like Disney and NBCUniversal with their profitable theme parks, or Comcast with its internet business), and others have a more focused revenue model (such as Fox Corp., which relies heavily on sports and news), companies like Warner Bros. Discovery, Paramount, AMC Networks, and others find themselves in an especially precarious position.
So what lies ahead?
Analysts suggest that the chaos in the cable industry is just beginning. Cable channels might become the next newspapers: prime targets for investment funds eager to extract cash from them while they still can.
Alternatively, cable channels might consider a rollup, either within an existing company or through a third-party acquisition.
"Someone will eventually separate their linear assets, and another party will roll them up," predicts Jessica Reif Ehrlich. "We have these so-called stranded cable networks—perhaps part of larger companies, but not prioritized for investment or growth. By consolidating many cable networks, you could eliminate corporate overhead, duplicative advertising functions, distribution costs, and other expenses. A rollup could be managed purely for cash."
The challenge, however, is that the value of cable channels is highly uncertain, as the massive impairment charges suggest. How quickly will the pay-TV system collapse? And how much lower can carriage fees drop? Until there's more clarity on these questions, investors might hesitate or wait for more opportunistic moments—such as a potential bankruptcy.
"I think all the companies are going to explore various possibilities," said Fishman. "However, it remains to be seen how much interest there is in the market for some of these smaller cable networks, and at what price outside investors are willing to value these assets."
Despite the Skydance deal, Paramount is pushing forward to negotiate new deals.
"The collection of assets that make up Paramount Global today was built during the rise of linear television. While we have strong brands and businesses, we must reshape our portfolio to remain competitive in the future," said Paramount co-CEO Chris McCarthy during the company's earnings call.
"The assets in question are undeniably strong with promising futures, but they would be better served independently or as part of another business."
In light of this, the substantial write-downs might ironically provide these companies with a clearer path forward.
"It gives them more flexibility as they consider moving pieces around," said Reif Ehrlich, noting that "the asset mix of many of these companies will need to change."
As Bernstein analyst Laurent Yoon noted on August 9 regarding Paramount, the "$6 billion impairment charge may seem alarming, but we believe the book value of their goodwill is a leftover from previous deals (like WBD), and the upcoming transaction with Skydance is an opportunity to confront reality."
Broadcast networks and live sports are currently in demand, and the entertainment landscape has firmly shifted to streaming. For traditional companies, streaming is just beginning to become a profitable venture.
The shift from the traditional pay-TV model to a streaming-centric approach may not be as profitable, but it is a viable path forward. The key lies in adapting to the new landscape.
"There is a very significant other side of the coin here," WBD CFO Gunnar Weidenfels said on August 7. "This is really a distribution ecosystem in transition, not a content ecosystem in transition. We’re using our content increasingly and more successfully in the streaming space, rather than on the linear side."
Weidenfels emphasized that there's "tremendous upside opportunity" in both the direct-to-consumer (D2C) business and the studio business, suggesting these areas can compensate for the decline in linear TV.
However, convincing Wall Street of this potential remains a challenge.
"This remains a difficult space in which to invest," noted Macquarie analyst Tim Nollen in an August 12 research note.
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