Why media firms will triumph over the cord-cutting threat

Cord-cutting appears to be all the rage with consumers, and that has put pressure on media stocks dependent on cable TV. But maybe it is not such a big threat to media companies, after all.

You can see the appeal of cutting the cord: It's a real savings to abandon expensive cable packages — which often give 150 channels, many of them of little use to viewers — in favor of streaming services over the internet, where people can cherry-pick their favorites.

Cord cutting
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Cable TV is getting more expensive all the time. According to Leichtman Research Group, the average cable bill is up 39 percent since 2010, some four times the inflation rate. On-demand platforms such as Netflix and Sling TV charge a fraction of cable's fees to stream programs.

The cord-cutting trend began in 2013 when, according to Leichtman data, cable providers lost 100,000 subscribers. The departures accelerated to 150,000 in 2014 and 385,000 last year. That looks like an ominous trend, right? Well, in fact, the loss is minuscule: The number of households with cable is 94 million, so cable providers have lost just 0.7 percent.

True, from here this trend could expand exponentially. But given the slow advance of cord-cutting, other factors will come into play that will save media companies from death by streaming. The pay TV industry has some advantages that likely will thwart cord-cutting.

New technology has disrupted the media for decades. Yet change has never led to the extinction of old media formats. While TV replaced radio as the chief medium that delivered entertainment, news and sports, radio has survived. Cable TV, which originally focused on movies, first appeared as a deadly menace to movie theaters. The number of movie screens has doubled in the last 30 years.

For a look at how traditional media may survive cord-cutting, consider ESPN, the sports channel sponsored by Walt Disney. Last November, Disney was trading at a 52-week high of $122 per share.

Then came the baleful news that ESPN had lost 7 million subscribers, falling to 92 million, which means a noticeable revenue loss.

Trouble is, the sports channel has expensive built-in costs from its contracts with sports leagues and teams to cover sporting events. Despite an enormous surge from its hit movie "Star Wars: The Force Awakens," Disney's stock tumbled 26 percent.

Well, the company's stock is inching back up to around $100 from $90, because the market is waking up to ESPN's canny defensive move. It is making a bid for inclusion in skinny bundles, which are designed to fight cord-cutting as well as appeal to younger "cord-never" folks who never signed up for cable to begin with.

Here are three reasons not to count out traditional cable-dependent media:

1. Alternatives to streaming are rising. Skinny bundles are custom packages that offer fewer channels than cable typically does — and charges less for them, often half as much. If you don't want channels devoted to food or history or nature, these offerings are a good alternative to streaming.

Verizon pioneered the concept last year with a version that excluded ESPN in its basic package. Disney sued the telecom giant, saying the omission was in violation of their contract. Verizon surrendered in February and now features the sports channel.

The mainstream outfits also are trying to co-opt the streaming upstarts. HBO, the extremely successful subsidiary of content provider Time Warner, has started its own streaming service, called HBO Now.

Lately, other big outfits are getting in on the streaming game, and some, such as Hulu, actually started a while ago. Founded in 2007 and now a big force in streaming, Hulu is jointly owned by Disney, Twenty-First Century Fox and cable/entertainment powerhouse Comcast.

"Data caps serve as an upper limit on how much of a streaming service you can use, and thus stymie the cord-cutters."

2. Live sports and news remain robust attractions. ESPN's core strength is that a lot of people like to watch sports live. The same goes for CNN and Fox News for politics, especially in this hotly contested election year.

Streaming appeals more to entertainment. Someone could happily stream "House of Cards" on Netflix weeks after the new season first appeared. This summer, no one will want to tune into party-convention coverage or baseball's All-Star Game, days after they happened.

3. Streaming has an Achilles heel: data caps. The problem with streaming is that broadband providers — which may be telecoms, like Verizon, or cable outfits, like Comcast — limit the amount of data that a household can use.

Streamed movies and TV shows consume a lot of data. These data caps serve as an upper limit on how much of a streaming service you can use and therefore stymie the cord-cutters.

What are the best plays in this fluid field? Sturdy, tested companies, which combine TV programming with film production and other good assets, such as these three:

Comcast. Starting out as a cable provider (it now is No. 1 in that arena), Comcast also operates a TV network, a movie studio and theme parks through its 2011 acquisition of NBCUniversal. It also carries TV channels such as USA and Syfy. Blessed with solid cash flow from its many properties, Comcast stock changes hands for a reasonable 16.1 times projected 2017 earnings. That's only slightly more than the Standard & Poor's 500 Index forward multiple of 15.1.

Fox. Gearing up to stream its content, Fox has a huge following for its news and sports. Fox News is the most highly rated U.S. news operation and has a loyal conservative following. It also boasts lucrative overseas properties: Star TV in Asia and Sky in Europe. In 2013 it spun off its newspaper division, removing a drag on earnings. The stock's forward price/earnings multiple is 13.6 for its fiscal year ending in June 2017.

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Time Warner. With its laudable revenue growth, the company benefits mightily from its HBO unit (home to megahit "Game of Thrones," for instance), and CNN has done very well during this election season. What's more, Time Warner's forward P/E multiple is a thrifty 12.5.

Streaming's advocates say this concept is the future. It surely has one. But not at the expense of innovative fortresses such as the trio of Comcast, Fox and Time Warner.

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.

By John E. Maloney, chairman and CEO of M&R Capital Management