Multiple sets of analysis from Wall Street researchers show cable television as an industry in decline, with over 1.9 million subscribers cutting the cord in the second fiscal quarter of 2022, and over 5.4 million users leaving top pay-TV providers over the past year. 

These losses, at an increasing rate, were “mostly driven” by traditional “linear” providers such as Comcast, Charter, Altice, DirecTV, Verizon, and others, according to Wells Fargo analyst Steven Cahall. 

Cord cutting is not a new phenomenon, but it is speeding up, and has been for years.

The trend poses a threat to the financial health of institutional media companies, especially Fox Corp., due to the high proportion of revenue that comes from affiliate fees. Affiliate revenue comes from a small fee included in the cost of a cable bill that consumers pay in exchange for carriage of that channel. The rates of these fees are set during negotiations between channels like Fox News and the cable companies. Fox News’ affiliate fees are disproportionately high (around $2) due to the exodus of advertisers from the network as a result of it’s toxic and bigoted programming.

Big picture: Cable companies are serving up smaller and smaller audiences to the channels they carry. Fox’s strategy to guard against this negative trend is to squeeze this shrinking consumer base with higher affiliate fees. This new analysis shows that cable companies will lose even more if they give in to Fox’s strategy.

In fact, Fox was among the companies that Wells Fargo identified as having ”the highest exposure among entertainment companies” with “little/no offsets to cord cutting” built into their business model. It was listed alongside Paramount Global and AMC Networks.

Fox Corp. CEO Lachlan Murdoch and CFO Steve Tomsic have repeatedly emphasized on their earnings calls their plan is to continue to raise fees on their earnings calls, mentioning it on each of the last three calls.

In February, Tomsic announced that 70% of Fox Corp.’s affiliate revenue is due for renewal over the next two fiscal years. During these negotiations, Fox will pressure cable providers to set higher affiliate fee rates and will likely leverage their most divisive talent and rabidly loyal audiences to squeeze out more money, as they have done in the past.

Later in the call, Murdoch said “the smaller renewals we’ve had this year are setting a tremendous benchmark for what we expect coming in renewals over the next couple of years.” This implies that even though the cable consumer base is shrinking at an accelerating rate, Fox will rely on already inflated affiliate fees at the same or a higher rate in years to come.

Since February, Murdoch has continued to tout higher affiliate revenue on the quarterly earnings call. This signals to investors that Fox expects they will be able to bully cable companies into giving them higher rates for smaller audiences, passing the cost onto consumers.

The media coverage of the May 10 third quarter earnings call was dominated by the announcement that Tom Brady would join Fox as a football analyst upon his retirement, but Murdoch also told investors that “Cable affiliate revenues increased 3% over the prior year period, the result of healthy pricing gains across all of our networks.”

Murdoch repeated the strategy on their most recent call from August 10, again touting increased revenue from affiliate fees, and expressing confidence that “the market appreciates the value of our brands.”

This is an inaccurate characterization of the state of play. Murdoch’s comment about the “value” of Fox’s brands roughly describes how affiliate fee rates are theoretically set: by what the market estimates cable subscribers are willing to pay for each channel.

But this is not the case for Fox. Over the next renewal cycle, Fox will likely rely on public pressure from their biggest names and radicalized audience to force cable companies to charge their subscribers more to carry Fox News, even though the overwhelming majority of households that pay for cable don’t watch the network.

Cable companies, facing likely irreversible trends in which their customers are flocking to more cost-effective options, shouldn’t fall for this shell game.