Cord-cutting, in which (usually younger) pay-TV subscribers walk away from cable and embrace new ways of accessing media, has been a known phenomenon since at least 2011. But it’s been a slow-rolling snowball, even as services like Netflix soar into the stratosphere. This year, however, it seems that Wall Street traditionalists have finally caught on to the change, and they’re not happy.

The Wall Street Journal reports (paywalled, sorry) that investors are following audiences’ leads, and trying to cut their ties with big traditional cable programmers.

A huge number of companies have reported their second-quarter earnings over the past 48 hours, and for the cable networks, the numbers aren’t good. The WSJ, looking at Wednesday’s trading, describes media stocks as “battered.” After announcing their quarterly results yesterday, Time Warner stocks dropped by 9% and Discovery Communications fell 15%. Fox and Viacom both dropped 7% or more on Wednesday — even though their earnings calls weren’t until Thursday morning.

But, the WSJ points out, the real driver behind media uncertainty is Disney (which dropped over 9%). EPSN’s parent company, considered the absolute tentpole of cable, had to spend their investor call late Tuesday defending the high-cost sports behemoth as they admitted “some subscriber losses” due to cord-cutting and skinny bundles.

Disney is suing Verizon over the latter’s exclusion of ESPN from some of those skinny FiOS bundles. But it also seems that maybe consumers just don’t care as much about ESPN as conventional wisdom has held, and for the big mouse that’s a big problem.

It’s not exactly that nobody’s watching programming anymore; everyone still is. But they’re getting it in new ways, and viewers are being pickier about where their pennies go in an ever-more fragmented media landscape.

Content companies and distribution companies are going head-to-head against each other now, as more viewers get their fix online. Slim, over-the-top bundles of channels from incumbent providers like Dish and Comcast are competing not only against Netflix, Amazon, and even Sony but also directly against networks like CBS, Showtime, and HBO.

That’s a huge challenge for content companies that don’t (yet) have their own streaming services. A business like Discovery or Viacom traditionally gets its revenue from two main streams: advertising, and affiliate fees. The former is pretty straightforward. The latter is the amount that distributors pay to content companies per customer that gets their network. In other words, if 15 million of Comcast’s 22 million customers get Network A in their bundles, and the agreed-upon rate for Network A is $0.15 per month per customer, then Comcast would pay Network A’s parent company about $27 million per year.

Up until the last few years, both revenue streams have been lucrative, and affiliate fees have been stable and predictable even as ad markets fluctuated. But as consumers’ tastes change and new businesses emerge, those fees are suddenly in doubt. Network A and a cable company can negotiate a 10-year deal, but if there are 20% fewer subscribers to the cable company at the end of that deal than there were at the start, Network A is going to be in trouble.

That’s basically what investors are concerned about, the WSJ explains. This June and July, Nielsen ratings show that the top 30 cable networks had 10% fewer prime-time viewers and 20% fewer viewers between 18 and 49 (a key advertising demographic). Yesterday, Dish’s CEO flat-out called the linear TV (cable/satellite) business “mature-to-declining”

Viacom, among others, has complained that Nielsen ratings do not accurately capture how many people are watching their programming. If you watch tonight’s Daily Show finale online tomorrow at work, for example, Nielsen won’t capture that data.

Investors, though, don’t seem to care about that logic. As of noon, Viacom stock is still down about 16% from where it started the day.

Cord-Cutting Weighs on Pay TV [Wall Street Journal]

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