📺TV Content Distribution is in a State of Flux📺

Callback to the Fuse Media LLC chapter 11 bankruptcy filing in which we wrote:

Why is it in bankruptcy? In a word, disruptionDisruption of content suppliers (here, Fuse) and content distributors (the traditional pay-tv companies). Compounding the rapid changes in the media marketplace is the company’s over-levered balance sheet, an albatross that hindered the company’s ability to innovate in an age of “peak TV” characterized by endless original and innovative content.

The company illustrates all of this nicely:

“…the overall pay-TV industry is in a period of substantial transformation as the result of the introduction into the marketplace in recent years of high quality and relatively inexpensive and consumer friendly content alternatives (e.g., Netflix, Hulu and others). The ongoing marketplace changes have resulted in, and will continue to cause, a material decline in pay-tv subscribers and related affiliate fee revenue as a result of a declining number of new subscribers, "cord-cutting" (the cancellation of an existing pay-tv subscription), and "cord-shaving" (the downgrading of a pay-tv subscription from a higher priced package to a lower priced package). Each quarter the Company receives less revenue from its traditional pay-tv distribution partners as the result of the decline in subscribers receiving the Company's networks. And new sources of revenue for the Company, although developing and in progress, have not grown sufficiently to offset revenue declines in the legacy business. As a result of these trends, the refinancing of the Company's debt was not viable.”

The Information recently confirmed (paywall) what Fuse was saying and we all know is true from our own experience with the myriad subscription-related bills we’re all getting: pay-TV is, indeed, in the midst of some substantial transformation. They write:

Cable channels have long been the cash machine for the entertainment industry thanks to a quirk in their business model. Cable and satellite TV firms pay channels fees for each subscriber who has the channels available in their service package, regardless of whether anyone watches the channels. AT&T, owner of DirecTV, is trying to change that—with far-reaching implications for the TV industry’s profitability.

AT&T wants to pay channels based on how many people actually watch, rather than the number of subscribers who have access to the channels. The idea is driven by two major trends. Firstly, a growing number of consumers are canceling their expensive cable and satellite packages in favor of cheaper streaming services. Meanwhile, TV channels are charging distributors like DirecTV more for the right to carry them even as the channels’ audiences are shrinking….

Note:

What a model! Fewer and fewer end users but higher and higher costs nonetheless. More from The Information:

If AT&T can shift to paying for channels based on their audience size, it could reduce programming costs for its DirecTV and phone-based TV service U-verse and potentially lead other cable and satellite operators to follow suit, sparking a revolution in television. For years, cable and satellite services have complained that programming costs were too high. They can account for more than 60% of video-related revenue.

AT&T’s effort to get entertainment companies to agree to get paid for actual viewers of their shows is in its infancy and it faces long odds. “This is probably the greatest negotiating friction in all the businesses,” AT&T Communications CEO John Donovan told The Information last summer when asked about the company’s discussions around so-called engagement pricing.

These efforts — while currently a longshot — are worth monitoring. Content providers and distributors look headed for a collision.

Disruption, Illustrated. Fuse LLC Files for Bankruptcy. (Long Netflix).

California-based Fuse LLC, a multicultural media company composed principally of the cable networks Fuse and FM, filed a prepackaged chapter 11 along with 8 affiliated debtors in the District of Delaware to effectuate a swap of $242mm of outstanding secured debt for (a) $45mm in term loans (accruing at a STRONG 12% interest and maturing in five years), (b) new membership interests in the reorganized company and (c) interests in a litigation trust. General unsecured creditors will recover nothing despite being owed approximately $10mm to $25mm.

The company is well known to millions of US homes: approximately 61mm homes get Fuse, an independent cable network that targets young multicultural Americans and Latinos. FM’s music-centric content reached approximately 40.5mm homes “at its peak.” The company has three principal revenue streams: (a) affiliate fees; (b) advertising; and (c) sponsored events; it generated $114.7mm in net revenue for the fiscal year ended 12/31/18 and “had projected affiliate fees of approximately $495 million through 2020.

Why is it in bankruptcy? In a word, disruptionDisruption of content suppliers (here, Fuse) and content distributors (the traditional pay-tv companies). Compounding the rapid changes in the media marketplace is the company’s over-levered balance sheet, an albatross that hindered the company’s ability to innovate in an age of “peak TV” characterized by endless original and innovative content.


DISCOVER MORE WITH PETITION.