OTT-Only Model Would Hurt Most Cable Networks, but not Disney, Citi Says

Disney is perhaps the only cable network that wouldn't suffer hugely as purely an over-the-top business, Citi said in a report Thursday. "In a pure OTT world, most firms would see their equity value fall." The rates of decline vary widely in Citi's analysis, from a 58 percent decline in Viacom's equity; to a 10-25 percent drop for Comcast, Fox, Scripps and Time Warner; to a less-than-10 percent drop for CBS. "Virtually every media firm will have difficulty generating as much revenue as they do today by shifting to a la carte," Citi said. However, Disney would see its equity up about 10 percent "even with $1.5 billion in incremental OTT costs," Citi said. The Citi analysis used a model plotting demand curves for various channels, with ESPN topping the list for Disney. Under that same model, Citi said, NBC, USA and SyFy are Comcast's most popular channels, while HBO and TNT have the highest modeled demand at Time Warner, Fox News is tops at 21st Century Fox, Nick and TV Land win out at Viacom, Discovery Channel and Animal Planet at Discovery, and HGTV and Food at Scripps. The Citi model then focused on finding the profit-maximizing retail price for each of those channels. And then with those estimates, Citi was able to compare current revenue with theoretical a la carte revenue; operating as online video distributors Disney would generate the most revenue at $12.2 billion, and do better than it does today, while most other content companies would be worse off financially -- though Discovery would be near parity, Citi said. "We expect most media companies to preserve the status quo and [perhaps] limit the content they sell" to subscription VOD providers, Citi said. Disney hasn't made that switch, likely because it would be then competing against a number of companies that also distribute ESPN, Disney Channel and ABC; it would not be able to raise affiliate fees at the same rate; and costs of selling direct to consumers would go up, such as marketing and billing expenses, Citi said. "But if Disney ever faced an existential crisis, investors can be fairly certain ... that each of these potential hurdles could be overcome."