A combined Discovery Communications and Scripps Networks may not be strong enough to push back against declining TV viewership, analysts say.
Discovery today announced a $14.6 billion acquisition deal for Scripps Networks, and while industry analysts have acknowledged benefits to the deal, they’ve also pointed out secular trends in the TV industry that don’t bode well.
“While we believe the two companies are likely better positioned together, rather than apart, the longer-term issues facing the industry still remain,” said Jefferies analyst John Janedis in a research note. He specifically noted declining viewership on TV, and more so, on cable networks; the combined companies’ networks making it harder to push a skinny bundle; and Discovery's content travelling globally more easily than Scripps'.
According to Todd Juenger, vice president and senior analyst at US Media at Sanford C. Bernstein, linear TV viewing has declined around 20 minutes per person since 2012. He added that audience declines and cord cutting are pressuring networks’ two main revenue sources: advertising and subscriber fees, respectively.
But while slumping ratings have impacted most cable networks, Scripps has been able to defy the trend in recent years. MoffettNathanson analyst Michael Nathanson said that even though Scripps’ ratings in 2017 are struggling against 2016 comps, the company has averaged ratings growth 600 basis points higher than its competitors since 2013.
“Furthermore, after outpacing a flat cable network advertising market in 2016 by a massive 1,000 basis points, SNI will be challenged to maintain that momentum. So it’s probably a great time to find a buyer,” wrote Nathanson in a blog post.
While Scripps have maintained some ratings growth amid declines, Discovery has felt the impact of linear TV losing its luster, particular in growing subscriber declines.
Of course, a deal for Scripps will give Discovery a big shot of inorganic subscriber growth and it could also give the combined company more leverage in affiliate agreement negotiations with pay-TV providers.
The agreement could also help solidify Viacom’s and Discovery’s aspirations around a lower-priced entertainment-only bundle. But the price for Scripps might not justify the opportunity.
“Also, there is a surprisingly compelling opportunity for the 'outsiders' to work together to bundle a sub $15 nonsports channel offering, although this alone probably does not justify paying a 20-30% premium for SNI,” wrote Nathanson.