Strikes, streaming losses, ad decline

  • Media companies are struggling with two Hollywood strikes, falling advertising revenue and money-losing streaming businesses.
  • Disney CEO Bob Iger recently told CNBC that the company’s legacy TV business may not be its core business.
  • Netflix, which is outperforming its rivals, kicks off its media earnings season on Wednesday.

Striking Writers Guild of America (WGA) members walk out on strike outside Netflix offices as the SAG-AFTRA union announced it had agreed to a “last-minute request” from the Alliance of Motion Picture and Television Producers for federal mediation, but it refused to extend its existing employment contract again after Wednesday’s negotiation deadline at 23.59, in Los Angeles, California, 12 July 2023.

Mike Blake | Reuters

Traditional TV is dying. Advertising revenue is soft. Streaming is not profitable. And Hollywood is virtually shut down as the actors’ and writers’ unions settle what looks set to be a long and bitter work stoppage.

All this turmoil will be on investors’ minds as the media industry kicks off its earnings season this week, with Netflix first on Wednesday.

Netflix, with a new advertising model and push to stop password sharing, looks best compared to older media giants. Last week, for example, Disney CEO Bob Iger extended his contract to 2026, telling the market he needed more time in the Mouse House to address the challenges ahead. At the top of the list is struggling with Disney’s television network, as that part of the business appears to be in worse shape than Iger had imagined. “They may not be the core of Disney,” he said.

“I think Bob Iger’s comments were a warning about the quarter. I think they are very concerning for the sector,” SVB MoffettNathanson analyst Michael Nathanson said after Iger’s interview with CNBC’s David Faber on Thursday.

While the soft advertising market has weighed on the industry for a few quarters now, the recent introduction of a cheaper, ad-supported alternative for services like Netflix and Disney+ is likely to be a bright spot as one of the few areas of growth and concentration this quarter, Nathanson said.

Iger has spoken at length in recent investor calls and Thursday’s interview about how advertising is part of the plan to bring Disney+ to profitability. Others, including Netflix, have echoed the same sentiment.

Netflix will report earnings after closing Wednesday. Wall Street will be keen to hear more details about the rollout of the password-sharing breach in the US and the state for the recently launched ad-supported option. The company’s stock is up nearly 50% this year, after a correction in 2022 that followed the first loss of subscribers in a decade

Investor focus will also be on older media companies such as Paramount Global, Comcast Corp. and Warner Bros. Discovery, which each has significant portfolios of pay-TV networks, following Iger’s comments that traditional TV “may not be the core” of the company and all. options, including a sale, were on the table. These companies and Disney will report earnings in the coming weeks.

Scene from “Squid Game” by Netflix

Source: Netflix

Just a week before the start of earnings, members of The Screen Actors Guild – American Federation of Television and Radio Artists joined the more than 11,000 already striking film and television writers in the walkout.

The strike – a result of the failed negotiations with the Alliance of Motion Picture and Television Producers – brings the industry to an immediate halt. It is the first double strike of its kind since 1960.

The labor battle flared up just as the industry has moved away from streaming growth at all costs. Media companies saw a boost in subscribers – and share prices – earlier in the pandemic, investing billions in new content. But growth has since stagnated, which has resulted in budget cuts and redundancies.

“The strike suggests this is a sector in tremendous turmoil,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. He noted that shareholders, particularly hedge funds and institutional investors, have been “very frustrated” with media companies.

Iger told CNBC last week that the shutdown couldn’t come at a worse time, noting “disruptive forces on this business and all the challenges we’re facing,” in addition to the industry still recovering from the pandemic.

These are the first strikes of their kind during the streaming era. The last writer’s strike took place in 2007 and 2008, which lasted about 14 weeks and gave rise to unscripted reality television. Hollywood writers have already been on strike since the beginning of May this year.

Depending on the duration of the strike, fresh movie and TV content could dry up, leaving streaming platforms and TV networks — other than library content, live sports and news — alone.

For Netflix, the strikes may have a smaller effect, at least in the short term, Insider Intelligence analyst Ross Benes said. Content created outside the US is not affected by the strike – an area where Netflix has invested heavily.

“Netflix is ​​poised to do better than most because they produce shows so well in advance. And if push comes to shove, they can rely on international shows, of which they have so many,” Benes said. “Netflix is ​​the antagonist in the eyes of the strikers because of how it changed the economics of what writers get paid.”

The decline in pay-TV subscribers, which has increased in recent quarters, should continue to accelerate as consumers increasingly switch to streaming.

Still, despite the steep decline, many networks remain cash cows, and they also supply content to other parts of the business – especially streaming.

For pay-TV distributors, increasing the price of cable bundles has been a method of staying profitable. But according to a recent report from MoffettNathanson, “subscriber numbers are falling far too quickly for prices to continue to counteract.”

Iger, who began his career in network television, told CNBC last week that while he already had a “very pessimistic” view of traditional television before his return in November, he has since found that it is even worse than he expected . The executive said Disney is reviewing its network portfolio, which includes broadcaster ABC and cable channels such as FX, indicating a sale could be on the table.

Paramount is currently considering a sale of a majority stake in its cable television network BET. In recent years, Comcast’s NBCUniversal has closed networks such as NBC Sports and combined sports programming on other channels such as the USA Network.

“The networks are a shrinking business, and Wall Street doesn’t like shrinking businesses,” Nathanson said. “But for some companies, there’s no way around it.”

To make matters worse, the weak advertising market has been a source of pain, especially for traditional TV. It weighed on the revenues of Paramount and Warner Bros. Discovery in recent quarters, each of which has large portfolios of cable networks.

Growth in ad prices, which have long offset declining audiences, is a major source of concern, according to MoffettNathanson’s recent report. The firm noted that this could be the first non-recession year that upfront advertising does not drive increases in TV prices, especially as ad-supported streaming enters the market and increases inventory.

Streamers’ introduction of cheaper, ad-supported tiers will be a hot topic again this quarter, especially after Netflix and Disney+ announced their platforms late last year.

“The soft advertising market affects everyone, but I don’t think Netflix is ​​as affected as the TV companies or other established advertising streamers,” Benes said. He noted that while Netflix is ​​the most established streamer, the ad tier is new and has plenty of room for growth.

Advertising is now considered an important mechanism in platforms’ broader efforts to achieve profitability.

“It’s not a coincidence that Netflix suddenly got wise to freeloaders while pushing a cheaper tier that has advertising,” Benes said, referring to Netflix’s crackdown on password sharing. “It’s pretty common in the industry. Hulu’s ad plan gets more revenue per user than the ad-free plan.”

Last week’s ruling by a federal judge that Microsoft’s $68.7 billion purchase of game publisher Activision Blizzard should go ahead serves as a rare bit of good news for the media industry. It is a signal that significant consolidation may continue despite temporary regulatory disruptions.

Although the Federal Trade Commission appealed the ruling, bankers took it as a victory for dealmaking in a slow period for megadeals.

“This was a nice win for bankers to go into the boardrooms and say we’re not in an environment where really attractive M&A is going to be shot down by regulators. That’s encouraging,” Solomon Partners’ Boidman said.

As the media giants struggle and shareholders grow frustrated, the judge’s ruling could fuel more deals as “a lot of these CEOs are on the defensive,” Boidman added.

Regulatory roadblocks have been widespread beyond the Microsoft deal. A federal judge blocked book publisher Penguin Random House’s proposed purchase of Paramount’s Simon & Schuster last year. Broadcast station owner Tegna scrapped the sale to Standard General this year due to regulatory pushback.

“The fact that we’re so focused on the Activision-Microsoft deal is indicative of a reality that dealmaking is going to be a huge tool going forward to strengthen your market position and jumpstart your business inorganically in ways you couldn’t do yourself,” Jason said Anderson, CEO of Quire, a boutique investment bank.

These CEOs won’t just make a deal for the sake of making a deal. From this point on, it will require a higher bar to consolidate.

Peter Liguori

former CEO of Tribune Media

However, Anderson noted that bankers are always thinking about regulatory pushback, and that shouldn’t necessarily be the reason deals don’t come together.

Warner Bros. and Discovery merged in 2022, bringing together the combined company’s portfolio of cable networks and bringing together its streaming platforms. Recently, the company launched its flagship service as Max, merging content from Discovery+ and HBO Max. Amazon bought MGM that same year.

Other mega deals happened before that too. Comcast acquired British broadcaster Sky in 2018. The following year, Disney paid $71 billion for Fox Corp.’s entertainment assets — which gave Disney “The Simpsons” and a controlling stake in Hulu, but make up a small portion of its TV properties.

“The Simpsons”: Homer and Marge


“The Street and prognosticators forget that Comcast and Sky, Disney and Fox, Warner and Discovery – happened only a few years ago. But the industry talks as if these deals happened in BC and not AD times,” said Peter Liguori , former CEO of Tribune Media who is a board member of TV measurement company VideoAmp.

Consolidation is likely to continue as companies finish working through these earlier mergers and get past the lingering effects of the pandemic, which increased spending to acquire subscribers, he said. “These CEOs won’t just do a deal for the sake of doing a deal. From this point on, it will require a higher bar to consolidate.”

Still, with the rise of streaming and the lack of profitability and hemorrhaging of pay-TV customers, more consolidation may be on the way, no matter what.

Whether M&A helps push these companies forward, however, is another question.

“My knee-jerk reaction to the Activision-Microsoft decision was that there’s going to be more M&A if the FTC is going to be defanged,” Nathanson said. “But truth be told, Netflix built its business on licensing content and not having to buy an asset. I’m not really sure that the big transactions to buy studios have worked.”

—CNBC’s Alex Sherman contributed to this article.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

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