Saturday, September 30, 2023

Will Linear Video be Profitable in 2040?

Nobody doubts the decline of the linear video subscription business. The only issue seems to be the point at which it ceases to be profitable at all, for content owners or distributors such as Comcast and Charter Communications.


According to analysts, Charter and Comcast combined profit from linear video services after deducting all expenses was approximately $3 billion in 2022. This is down from approximately $4 billion in 2021 and $5 billion in 2020.


In 2023, profit for those firms from linear video might be about $2.5 billion. 


Total profit for the firms in 2023 will likely be in the range of $16.3 billion. So linear video might represent about 15 percent of total profit. Significant, but less significant with each passing year. 


So Charter Communications and other U.S. cable operators--all other things being equal--would certainly prefer to remain in the linear TV subscription business under the right circumstances. 


But linear TV also arguably represents half of total operating costs, a quarter of cash flow. 


So what could change were Charter, or any other cable TV company, to abandon the linear TV business entirely? Surprisingly, there is at least a chance that financial performance would improve, despite the lost revenue. 


Linear Video

Actual 2023

Hypothetical

Revenues

$20 billion

$0

Operating Costs

$15 billion

$12 billion

Cash Flow

$5 billion

$7 billion

Earnings

$2 billion

$3 billion


One study by MoffettNathanson estimated that Charter would lose $1.5 billion in revenue and $1 billion in earnings if it were to exit the linear TV business. Another study by LightShed Partners estimated that Charter would lose $2 billion in revenue and $1.5 billion in earnings if it were to exit the linear TV business. The study assumed that Charter's average profit per video customer is $18.


LightShed Partners seems to believe that Charter's linear video business is more profitable than that. LightShed Partners has estimated that Charter would lose $2.5 billion in revenue and $1.5 billion in earnings if it were to exit the linear TV business.


Company

Revenue

Profits

Cash Flow

Operating Costs

Charter Communications

33%

46%

25%

50%

Comcast

35%

38%

28%

42%


By some estimates, linear video, though declining, still represents 25 percent to 33 percent of total revenues for many cable TV operators. 


For many cable operators, linear video might represent perhaps 20 percent to 25 percent of firm profits, though some cable operators might earn as little as five percent profits from linear video services.  


Category

Revenues

Profits

Cash Flow

Operating Costs

Home Broadband

45%

30%

40%

25%

Mobile Services

15%

5%

10%

10%

Voice Services

10%

5%

10%

10%

Linear Video Entertainment Subscriptions

30%

20%

20%

45%


Linear video might often represent 20 percent to 25 percent of cash flow as well, though smaller operators might well generate only about five percent of cash flow from linear video. 


On the other hand, linear video might represent as much as half of all operating costs. Assuming unwinding of contracts is not burdensome, one therefore has to ask what the impact would be were Charter Communications or other cable operators to abandon the linear TV business altogether.


Obviously, revenue would fall. But so would operating costs. And the impact on profits or cash flow might well be positive. 


The point is that, at some point, linear TV revenues will diminish to the point that it is questionable whether it makes sense to remain in the business. That is the challenge now faced by Disney and other content providers as well as by all linear video distributors. 


Will linear video still be profitable for firms such as Comcast and Charter in 2040? That appears unclear, but at present rates of decline linear video profits--if they exist--will be marginal by 2040. 


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