Comcast’s planned spinoff highlights challenges in the cable industry

When Comcast swallowed NBC and Universal Studios 14 years ago, the sibling cable channels USA Network, Bravo and CNBC were considered diamonds in the rough.

USA Network had gained traction with its “Blue Skies” programming strategy: sunny and upbeat TV programs infused with a buoyant energy and natural light. The cable channels were NBCUniversal’s equivalent of blue skies, routinely delivering three-quarters of the company’s profit. In 2012, cable networks threw off a robust $3.3 billion in cash flow.

Times have changed.

Comcast this week announced its plans to jettison all but one cable channel into a separate, stand-alone publicly traded company that will take shape over the next year.

“This is a reminder that the cable television network business is yesterday’s news,” analyst Craig Moffett said Wednesday in an interview. “If it feels like Comcast is shedding itself of an albatross — that’s because it is.”

For now, Comcast’s cable channels remain a viable business by generating $7 billion in annual revenue. But you have only to look at the properties the Philadelphia cable giant is keeping to see how the top brass has picked future winners and losers in a fast-changing media landscape.

Comcast will hold on to the NBC broadcast network, with its NBC News and NBC Sports units, along with its prolific Los Angeles-based Universal film and television studios, Universal Studios theme parks, local TV stations, including KNBC-TV in Los Angeles, and streaming service Peacock, which now has 36 million subscribers.

The lone cable outlet set to remain within NBCUniversal is Bravo, which has a bold brand, cultural cachet and the “Real Housewives” franchises. Company executives reviewed data that showed NBC and Bravo shows had strong viewership on Peacock, insiders said.

The spinoff company will be composed of the remainder of the cable channels, including MSNBC, CNBC, USA, Oxygen, Syfy, E! and the Golf Channel as well as digital properties, including Rotten Tomatoes, Fandango and SportsEngine.

Comcast’s move is the strongest sign yet of alarm reverberating throughout Hollywood’s traditional companies. Cable channels have long been a key economic pillar by generating billions of dollars in cable distribution fees that more than covered up the misses when big-budget movies flopped or during advertising recessions.

No more. Rampant cord-cutting has roiled the television business and linear cable channels — once a mighty draw for couch-potato viewing — have become endangered species.

Industry executives privately acknowledge that they unintentionally contributed to the erosion by making cable channels less appealing — stuffed with endless sitcom reruns, dated movies and extended commercial breaks, contributing to the rise of on-demand streaming services.

Millions of consumers have switched to streaming platforms that offer fewer commercials, or none at all, and lower subscription prices. In the first six months of the year, an additional 4 million customer homes dropped pay-TV, according to a recent MoffettNathanson report.

That’s a 30% decline since 2012, when there were more than 100 million pay-TV homes in the U.S.

Consumers also can cancel streaming services with a click of a button — without haggling with a customer service representative at a pay-TV company call center.

The toll has been enormous. Thousands of entertainment company workers have been laid off in the last four years in seemingly endless waves of restructuring. Traditional media companies have struggled to shore up their slumping stock prices.

In August, Warner Bros. Discovery took a $9-billion write-down on the value of its basic cable portfolio, which includes CNN, TBS, TNT and Cartoon Network. That same month, Paramount Global wrote down $6 billion in value for its cable channels, including MTV, Nickelodeon, VH-1 and Comedy Central.

Pay-TV channel blackouts have become more common. And pioneering satellite TV company DirecTV two months ago announced its plan to buy competing Dish Networks for $1. That merger is expected to face regulators’ scrutiny.

More separations and roll-ups may be coming.

Warner Bros. Discovery Chief Executive David Zaslav has telegraphed his desire to wheel or deal assets now that President-elect Donald Trump is preparing to take office. Zaslav’s company is desperate to pay down debt taken on two years ago when the smaller Discovery merged with WarnerMedia, relieving AT&T of its entertainment headache.

Although Comcast’s move is bold, the reckoning began seven years ago after Netflix had become the go-to destination for younger viewers. That’s also when Rupert Murdoch, the now 93-year-old media baron, decided to sell much of 21st Century Fox to Walt Disney Co. Some investors and analysts believe the $71-billion price for the Fox assets was wildly overvalued.

Since then, Disney has taken steps to de-emphasize cable distribution, and the Burbank powerhouse is planning to launch ESPN directly to consumers next year — a move that many in the industry believe will mark the tipping point for the cable channel business.

“Comcast is accelerating this pressure [in the cable business] with its success with Peacock, which makes the legacy pay-TV model with multi-channel bundling of cable networks a much more difficult prospect going forward,” Raymond James analyst Frank G. Louthan wrote in a note Wednesday.

Comcast executives say they are not entirely pulling the plug on their cable channel business, noting that the new company will have resources to buy additional channels or other properties to build scale..

“The company will have significant cash flow, a strong balance sheet, and the financial flexibility to pursue growth opportunities, both organically and potentially through acquisitions,” Comcast President Mike Cavanagh said in a note to employees.

The spinoff company, which doesn’t yet have a name, will continued to be controlled by Brian Roberts, chair of Comcast.

Mark Lazarus, who currently serves as chair of NBCUniversal Media Group, will shift to the new company as its chief executive.

Comcast shareholders will receive stock in the new company in tax-free transactions.

Moffett, the analyst, said the cable channel company will face considerable challenges maintaining the channels’ position in the pay-TV and advertising markets.

“This [spinoff] is good news for investors but it’s not a guaranteed success,” Moffett said. “We’ve seen this movie before with Viacom and CBS. Separating the broadcast network from the cable channels could leave the cable channels adrift.”

In 2006, the late mogul Sumner Redstone split his media empire consisting of the cable channels and the Paramount film studio. CBS forged forward with its broadcast network, television studio, Showtime and a book publishing house.

Five years ago, Redstone’s daughter, Shari, reunified the company. In July, she decided to unload the entire enterprise, now called Paramount Global, to the Larry Ellison family. That transaction also faces a regulatory review.

Moffett and other analysts say the spinoff company could struggle to maintain the size of distribution fees that Comcast was able to wrangle from pay-TV operators, thanks to the muscle of NBC and its marquee program, “Sunday Night Football.”

Some analysts wonder whether Comcast is preparing the cable channels to be absorbed by another company or a private equity firm.

“It looks like this is set up for [another] transaction,” Moffett said of the Comcast spin.

Wall Street seemed to endorse the spinoff news. Comcast shares gained 1.6% Wednesday to close at $42.99.