In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear. What happens next?"
One day, a media historian will look back on the streaming era and notice that two of the most notable legacy media failures in 2022 were innovations subsidized by Charles Dolan in the 1970s and 1980s.
First, Dolan’s cable network Cablevision launched a Long Island-focused regional sports network (RSN) in 1976 that would be renamed SportsChannel in 1979, and that became the default template for RSNs that launched elsewhere in the U.S.
Second, the American Movie Classics Network, or AMC Network as we now know it, was launched in 1984 by Rainbow Networks, a subdivision of Dolan’s Cablevision. For three decades, Rainbow Media bought and sold a portfolio of cable channels that included the Independent Film Channel (IFC), Bravo and Sundance TV. It rebranded itself as AMC Networks when it went public in 2011.
Both networks’ business models grew as pay TV became the dominant distribution paradigm, reaching a maximum of 105 million households in 2010. Now, in 2023, both are declining as cord-cutting has accelerated in 2022 (a loss of 5 million to 6 million households, or 11% of households, estimated). Both models were able to survive in their early years because they were nurtured with funding and distribution — “subsidies” — by Cablevision.
Key Takeaway
But for Cablevision's subsidies in the 1980s, neither AMC Networks nor the RSN model may have survived. Both are now failing and need a subsidy again when subsidies seem to have less long-term value in a post-linear marketplace.
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But now both models are struggling because cord-cutting trends are returning those networks to levels of scale they last had 40 years ago: 37.8 million cable TV households in 2023, according to the Leichtman Research Group, is only slightly larger than cable’s reach in 1984 (30 million to 32 million), and is trending downwards.
Both networks now need subsidies to survive, just as they did 40 years ago.The challenge in 2023 is that the market is increasingly realizing that no alternative model to linear exists in streaming, and there are no Charles Dolan-type figures who provided subsidies in the 1980s with a longer-term vision of growth.
Without the certainty of where growth will come from, what will a much-needed subsidy accomplish for either AMC Networks or RSNs?
Subsidies vs. Bundles
I have been writing about subsidies as a theme this month because I think it’s an important detail to the cord-cutting business — really the business *history* — that many seem to forget. Or rather, it is forgotten because we hear more from legacy media executives who believe the bundle economics and value proposition for consumers need to be replicated in streaming.
My favorite example of this was a 2020 Variety podcast interview with Starz CEO Jeffrey Hirsch, but Warner Bros. Discovery management has been pushing bundle logic, too, as it sells its upcoming relaunch of the HBO Max app with both HBO and Discovery+ libraries. They all seem to be forgetting the subsidy business logic behind the bundle.
The bundle business model of cable networks aggregates multiple television channels and charges consumers a lump fee for a bundle of channels offered by AMC Networks, Paramount, NBCUniversal, Warner Bros. Discovery and others. As the retailer, they charge a fee for accessing their customer bases, often millions of households at scale. For example, Comcast currently has 15.5 million cable households and they generated $21.3B from those households, effectively $1.775 billion per month or $115 per household. That $115 “fee” is the aggregate of all fees Comcast is charging to networks to reach *all* households within a cable network. For the lump fee to stay at existing prices, each channel must accept a discounted per subscriber fee priced by the cable network in exchange for distribution.
Given that, the best strategy for cable channel providers like AMC Networks and RSNs has been to merge into larger portfolios of networks with unusually valuable audiences. Aggregating channels historically has enabled them to protect their positions at the negotiating table while extracting higher rates from the cable networks, and therefore to extract more value from the bundle with more channels. That also has been the business plan of conglomerates like NBCUniversal, Paramount and Warner Bros. Discovery.
An additional benefit of this approach is that channel fees spread across more networks effectively subsidize the survival of niche networks. Meaning, a network may get only tens of thousands or hundreds of thousands of viewers per night, and therefore cable networks customers should not be paying for them. But as a part of a collective of channels, those households are subsidizing a channel that they may not ever visit or watch.
Subsidies as a business plan (1980s)
The clever aspect of Charles Dolan's Cablevision subsidizing AMC Networks and RSNs is that it pursued the same strategy as a cable network: offering these channels within their bundle were win-win offerings for subsets of the audiences (RSNs and local sports fans, American Movie Channel and households needing movies to watch), but subsidized by all households in the cable netowrk. As I wrote earlier this month, live sports broadcasts have been a natural fit for live-linear video delivery. Cablevision subsidized RSNs to attract a valuable demographic — 18-34-year-old males with disposable income to watch sports — to his early cable bundle offerings to grow.
AMC Networks launched in 1984 as a channel “focused on classic movies – largely those made prior to the 1970s – that aired during the afternoon and early evening hours in a commercial-free, generally unedited, uncut and uncolorized format.” That value proposition was similar to the movie channels that were growing at the time like HBO and Showtime. According to the Wikipedia history of the channel, it struggled to gain carriage on other cable networks but after some deal-making it expanded to availability in 39 million households in the U.S. in 1989.
At its peak, AMC reached 96.3 million households in 2011, according to its 2011 10-K. With cord-cutting trends, AMC Networks reached 69.9 million Nielsen subscribers in the U.S. in 2022, down from approximately 78.3 million Nielsen subscribers in 2021. It generated just over $3B in annual revenue in both 2022 and 2021.
Both AMC Networks and RSNs were able to prove their models out on a smaller scale but with an eye to more national distribution. But for Cablevision's subsidies in the 1980s, neither AMC Networks nor the RSN model may have survived. Now, they need those subsidies again.
Debt
A discussion of subsidies requires a discussion of debt because the needs of AMC Networks and RSNs for subsidies is primarily for paying back bondholders. Currently both generate enough revenues to run profitable businesses. But they do not generate enough revenue to run a profitable business *and* to pay down debt.
Right now, AMC Networks carries $2.8 billion in debt. It needs healthy levels of operating income to pay down that debt. But last year it generated $87 million and around $700 million in earnings before interest, taxes, depreciation and amortization. It paid $120.4 million in interest expenses in 2022 on that debt from $181 million in cash from operating activities in 2022 (675%). Its long term debt was expensive in 2022, and will only get more expensive the longer it struggles to figure out streaming (if it ever does).
As for RSNs, there are two groups currently in the headlines: the Sinclair Broadcasting Group-owned Diamond Sports Group — which is carrying a complex $8.6 billion debt load — and the AT&T Sports Networks owned by Warner Bros. Discovery — no longer have “sufficient cash to pay the upcoming rights fees” to teams. Meaning, they do not have enough cash flow to run their business, whereas RSNs under Diamond are still able to make their rights payments.
AT&T Sports Networks can no longer operate and have proposed transferring ownership of the networks and programming rights to the teams for no purchase price consideration beyond a release by the teams of any future claims against the networks. So that outcome seems predictable.
Diamond is more notable because it does have enough cash flow to run its businesses — “$425 million of cash on hand to fund its business and restructuring” — but with “razor-thin” margins. The top tier of creditors who own $630 million of the $8.6 billion debt load have positioned themselves to protect their debt (they own three of Diamond’s five board seats). But there are nearly $5 billion in lower ranked bonds that have recently traded at under 10 cents per bond, according to a Bloomberg report in January, “signaling a near-total wipeout” for these lower tier creditors.
That suggests the markets believe the future for RSNs will be the top-tier or first-lien creditors (meaning, first in line for interest payments) coming out ok, and lower tier (secondary and unsecured) creditors being forced to exchange their debt for equity in the post-bankruptcy restructuring. Sinclair will leave its bankruptcy with less debt but also owning less than the majority shareholders.
Subsidies in a streaming world
The short expectancy of Diamond’s subsidy from debtholders may be the most important takeaway here because it contrasts with the patient vision of a long-term visionary like Charles Dolan. It suggests that subsidies are available in this fast-changing media marketplace, but not for long. Bondholders no longer envision streaming as not the business opportunity or financial solution many had once assumed it to be. AMC Networks now faces a similar market sentiment: its bonds that will mature in 2025 have recently cratered in value to 76 cents on the dollar.
So, as in 1979 and 1984, the AMC Networks model and the RSN models will need subsidies to survive in a world of 37 million cable households. But in 2023, it increasingly seems that subsidies seem like more like charity. In the best case subsidies offer some form of interim financing (e.g., a bridge loan) to stay afloat with the expectation that a new model will be found.
The question is, will a new model be found? No Charles Dolan-type visionaries have emerged in legacy media with an understanding or vision for the longer term scale of streaming. Disney CEO Robert Iger had been considered one, but he is now rethinking the entire streaming business after his long-term vision fell apart and Disney carries $48.4 billion in debt that was intended to have funded that vision. Outside of legacy media, streaming visionary and Netflix Executive Chairman Reed Hastings has seen his global vision of Netflix becoming a default streaming service evolve into gaming and ad-supported models. Unlike Disney or AMC Networks, Netflix is generating cash flow to pay down its $14.3 billion in debt (down 2.3% from 2021 levels).
Nor has the streaming model proven that it offers opportunities for smaller streaming services to find growth. No one seems to know where it is all headed, and that means, a subsidy seems to have less and less long-term value in post-linear marketplace.