Last year, Comcast Corp., the owner of NBCUniversal Media LLC, announced it intends to spin off much of its domestic linear TV operations into a separate publicly traded company. A few weeks later, Warner Bros. Discovery Inc. (WBD) announced plans to enhance its strategic flexibility by reorganizing its corporate structure into two parts: global linear networks and streaming and studios. That outlook raised investors questions about how S&P Global Ratings might view a stand-alone linear TV network company and whether such a company could be rated in the investment-grade ('BBB-' or higher) category.
S&P Global analyzed that linear TV's decline in the U.S. is irreversible, but no immediate cliff exists. The company expects the decline will be steady and take years to reach its conclusion. Over the next two years, it forecasts the pace of pay-tv cord-cutting to abate because of Charter Communications Inc.'s video and streaming bundling strategy and improve toward 5.8% by 2026 (it was 6.7% in 2024). Annual affiliate fee increases used to exceed this decline but hasn't for the past few years. S&P also expects affiliate revenues to decline somewhere between 3% and 7%, depending on the network portfolio.
Advertising, the other key revenue stream supporting linear TV, will decline more precipitously than affiliate fees as audience ratings are eroding quicker than the rate of cord-cutting. This trend is more acute for general entertainment networks, which are on pace for double-digit audience declines and single-digit price cuts for ad inventory. S&P expects revenue from sports-focused networks to hold up better (but still decline), with audience ratings and prices for ad inventory stabilizing or even modestly growing for some sports, particularly the National Football League. Sports programming, however, is a double-edged sword. It provides revenue stabilization and some growth, but rising broadcast rights fees weaken cash flows and depress margins.
According to S&P, the path forward for the network TV business, whether part of a larger, diversified media company or spun off into a separate company, is simply trying to manage the pace of cash flow declines. At the same time, they have limited ability to influence the rate of revenue declines. Programming original scripted content and sports is the most likely way to draw audiences. Still, most media companies have limited financial resources and would prefer to prioritize spending on content for their growing streaming services rather than for their declining linear TV networks. Instead, S&P expects the companies to focus their efforts on managing operating costs, including programming, to keep pace with declining revenues. This process has already been ongoing for years. It has consisted of eliminating original content on shoulder networks (e.g., FXX and MTV2), replacing more expensive scripted content with cheaper, unscripted reality shows, and consolidating operating teams that supported individual networks, especially content development, programming, marketing, and ad sales. We also expect this focus on cost-cutting only to increase. Most legacy media companies believe they are in the early stages of this cost rationalization process and expect to squeeze more cost savings out of their linear TV businesses.
CHALLENGES FOR DIVERSIFIED MEDIA COMPANIES
Legacy media companies have a number of operational and execution challenges to address when spinning off their linear network TV business. The media companies have historically closely intertwined their content creation and linear TV network businesses, and disentangling them from each other would likely result in significant dis-synergies and operating inefficiencies for both "Cable SpinCo" and "Content RemainCo." According to S&P, the biggest uncertainty would be how Cable SpinCo would get the programming needed for its linear TV networks and how moving to an arms-length pricing model from a captive-studio model would hurt Cable SpinCo.'s operating and financial metrics. Some media companies have captive TV studios embedded within linear TV networks. S&P doesn't believe these TV studios would move with Cable SpinCo. And if these studios don't move, what would be the terms of the content licensing arrangement with Cable SpinCo? Losing those rights could significantly hurt Cable SpinCo.'s future business prospects.
Additional key issues companies would need to address include the potential impact on both companies' operating metrics, such as a weakening of operating leverage due to reduced scale and higher operating costs due to the dis-synergies from the separation. The split could affect Content distribution agreements, primarily if the network portfolio is split, with some networks retained by RemainCo. This could affect both existing pay-TV distribution agreements and sports broadcast rights agreements. There is also uncertainty around how RemainCo and SpinCo would disentangle any shared services between the cable networks, any retained networks (e.g., Comcast will have to do this as it plans to keep its NBC broadcast network), film and TV studios, and any streaming services. The media businesses are closely intertwined through shared news operations (e.g., NBC, which has global news operations), the advertising sales teams, the creation and licensing of content between the various businesses, and the allocation of sports programming across the broadcast TV network, cable networks, and streaming platforms.
The most significant issue in assessing the long-term prospects for Cable SpinCo, according to S&P, would be around the potential value cable networks bring to consumers. In most cases, Cable SpinCo won't own any content as we would expect the captive TV studios and libraries to remain with Content RemainCo. As a result, Spinco's TV networks would have to license content from an external source, either RemainCo or a third party. Ultimately, the networks would be distribution vehicles; that is, middlemen that package content licensed from third parties into a linear stream and sell those linear streams to the pay-TV distributors. They would be vulnerable to termination of content rights agreements (e.g., see our discussion of Corus below).
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