Discovery Communications Inc.’s (Nasdaq: DISCA) agreement to buy Scripps Networks Interactive Inc. (Nasdaq: SNI) is a smoke signal for more M&A to occur throughout the media industry, especially as businesses seek direct-to-consumer capabilities through advanced technologies. Talks between Discovery and Scripps Networks has been in the works for several weeks, and now brings together two of the smaller cable network operators with upside potential in digital streaming technologies.

The television sector, from a business model perspective, has been in an uphill battle as the industry has been searching for ways to combat newer technologies as consumers crave to access their favorite TV shows from the palm of their hands. Due to cord-cutters ditching traditional television platforms and looking to watch shows anywhere at any time, media conglomerates have been forced to shift their attention and revenue dollars towards over-the-top (OTT) video resources. OTT technology allows users to access film, television and other media content using the Internet, or mobile-carrier network, without having to subscribe to a traditional cable or pay-TV service.

“I think you’re going to see additional consolidation and different corporate alignments,” said Kevin Reilly, president of Turner-owned TNT and TBS cable networks, during the 2017 TCA Network Executive Q&A session hosted by Television Critics Association just days before the Discovery deal was announced. Reilly anticipates a contraction of the cable channel ecosystem, which has been due for reconstruction for some time now.

Viacom Inc. (Nasdaq: VIAB), a big media player who ended its talks to buy Scripps Networks nearly a week ahead of Discovery’s purchase agreement, has also done some restructuring of its network portfolio. In February, the media conglomerate announced that its highest priorities and increased resource commitments will go to the company’s six flagship brands: BET, Comedy Central, MTV, Nickelodeon, Nick Jr., and Paramount.

“Viacom has already done their internal contraction, which was arguably overdue,” Reilly said. “It’s a good move, but that’s not going to solve everything overnight. It’s just that the means by which what television is and the means by which we’re delivering it is a transformation that will be picking up steam from here forward, and if you’re overexposed on linear channels, and you haven’t built an infrastructure and connection with an audience, you’ll find your entity under stress.”

With the advancement of OTT technologies and a growing need to reach viewers in a direct manner, there have been several shutdowns of cable networks recently. Esquire, a network centered around programming for metrosexual men, and crime drama network Cloo are among the latest cable channels to be defunct as part of NBC Universal’s strategy to streamline its cable portfolio. This may only be the beginning for what is to come for other cable network operators.

“Floating 15 networks will not be sustainable going forwards,” Reilly said during the executive Q&A session. “In general, fringe networks, the tucked-in on the jet stream of [a] rising tide, they’re not going to sustain.”

The Discovery and Scripps Networks deal brings together a portfolio of cable channels and television shows with uniquely dedicated fans. With the combination of the Food Network, HGTV, DIY and the Cooking Channel, the newly-combined company may finally be considered for some of the industry's newest OTT packages, such as YouTube TV and Sling. Despite television remaining a priority, Scripps and Discovery both have growing web video businesses which is likely to beneficial as part of the merge.

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Kamaron Leach

Kamaron Leach

Kamaron Leach joined SourceMedia in 2016, serving as Reporter of Mergers & Acquisitions. Kamaron writes the Finance Finesse column about investment banking and lending, and also covers the media and entertainment sector.