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The stock market wiped $500 billion plus from the media sector this year – here’s what happens next




The media industry has fought against a turbulent 2022.

Rising costs, debt-ridden balance sheets and a renewed focus on profitability weighed on the struggling sector as investors quickly punished companies struggling to make a profit.

Netflix ( NFLX ) shares are down about 50% year-to-date, while companies like Warner Bros. Discovery (WBD) and Spotify (SPOT) are down more than 60%, while Roku (ROKU) is down 80%.

Cable operators Fox ( FOX ) and Comcast ( CMCSA ) fell roughly 20% and 30%, respectively, as shares of Paramount Global ( PARA ) plunged more than 45%.

Disney ( DIS ), once a Wall Street darling, also fell 45% on the year, and the stock is headed for its worst year since 1[ads1]947 after the much-anticipated “Avatar” sequel missed opening weekend expectations to end a challenging year for the house of mice.

This year alone, the stock market wiped a whopping $500 billion-plus in market value from the world’s largest media, cable and entertainment companies, with more pain expected in 2023 amid higher interest rates and an unfavorable macroeconomic environment.

So, what really happened – and what might happen next?

Wall Street’s profit push: ‘Time to be a real company’

2022 was clearly a “soul-searching” year for the media after the industry experienced a bumpy ride through the pandemic with record highs and jarring downturns.

As the stay-at-home trade took its course, peak levels of subscriber penetration in the US and Canada resulted in streaming companies quickly seeing their growth flatten out.

Netflix, the longtime leader of the streaming wars, lost subscribers for the first time in its history as its market capitalization dropped from more than $267 billion at the end of 2021 to roughly $130 billion.

Similarly, NBCUniversal’s Peacock experienced zero growth in its second quarter, although subscribers rebounded in Q3 with 2 million net additions.

Stalling subscriber growth has led to increased criticism of production budgets, which have risen sharply as competition intensifies. Netflix committed $18 billion to content in 2022 alone, while Disney increased its budget by $8 billion this year to $33 billion.

Among companies that have begun to pivot from linear to streaming (excluding platforms such as Netflix, Amazon and Apple), spending on direct-to-consumer content increased from $2.7 billion in 2019 to $15.6 billion in 2021, according to data from Wells Fargo. cited by Variation.

That figure is expected to rise to nearly $24 billion this year – despite rising streaming losses.

Disney’s direct-to-consumer division shed a whopping $4 billion-plus in its 2022 fiscal year, which ended Oct. 1. Meanwhile, Paramount told investors that streaming losses would total about $1.8 billion this year — higher than Wall Street’s expectations.

Warner Bros. Discovery, which has seen its market capitalization halved due to its messy restructuring, reported free cash flow of negative $192 million in the third quarter, compared with $705 million in positive cash flow a year earlier. The company now plans to take on $3.5 billion in impairment and development write-offs by 2024.

Advertising-supported “pivotal” for the industry

Amid the race to profitability, advertising has become a potential bright spot for investors – despite the global decline in ad spending.

Netflix and Disney jumped on the ad-supported bandwagon this year, joining Warner Bros. Discovery’s HBO Max, NBCUniversal’s Peacock and Paramount Global’s Paramount+.

Netflix launched its $6.99 offering in November, while Disney+ followed a month later at a price of $7.99. Wall Street analysts remain largely bullish on the profitability aspects of ad teams, while advertising experts have hailed the debuts as a make-or-break moment for the media industry.

“It’s certainly a pivotal moment for the industry,” Kevin Krim, CEO of ad measurement platform EDO, previously told Yahoo Finance.

“I think what we’ve learned as an industry is that there’s a limit to the number of consumers out there who will pay,” Krim said. “Advertising is a very smart way to subsidize these subscription fees.”

Industry experts agree that offering cheaper, ad-supported alternatives is an important safeguard against churn – something all streamers want to avoid in the face of increased competition.

“I’m a big fan of giving consumers an option for an ad team,” Jon Christian, EVP of digital media supply chain at Qvest, the largest media and entertainment-focused consultancy, told Yahoo Finance.

Christian added data will be a big driver (and potential money maker) when it comes to more targeted advertising in 2023: “Data can increase the prices of the different ads they push on the platform.”

Still, the benefits of ad support will likely take time to mature.

Netflix’s ad team already appears to be going through some serious growing pains — including reports of insufficient sign-ups and failed viewership guarantees. However, analysts caution that it is still early days.

Analysts are looking at the next media merger

Along with a greater focus on content spending and advertising, investors should also expect more media consolidation activity next year.

Wells Fargo analyst Steve Cahall wrote in a recent note: “Our predictions for 2023 indicate that the media and cable sectors are responding to generally tougher times, both cyclical and structural. Tough times mean tough decisions.”

Possible acquisition targets in 2023 and beyond include the contentious Warner Bros. Discovery.

Lionsgate’s film and television studio, which the entertainment giant plans to spin off into a separate company, will also be up for sale, while AMC Networks ( AMCX ) continues to undergo a restructuring that could result in an acquisition.

Needham’s Laura Martin wrote in a recent client note that Paramount could be attractive to offload, while smaller players such as WWE ( WWE ), Curiosity Stream ( CURIW ) and Chicken Soup for the Soul ( CSSE ) are likely to sell because of their size.

Disney CEO Bob Iger, who returned to the media conglomerate to much fanfare in November, will also face a number of decisions — including what to do with notable assets like Hulu (sell it to Comcast?) and sports behemoth ESPN (spin it off? ).

Redundancies, hiring freezes affect major media

The stock market wiped 0 billion plus from the media sector this year – here’s what happens next

Layoffs hit media giants such as CNN under pressure for profitability

Amid wider profitability concerns, media giants have adopted mass layoffs and hiring freezes in an attempt to stem the bleeding. More than 3,000 jobs have been cut through October this year, according to data from Challenger, Gray & Christmas, cited by Axios.

Netflix laid off about 150 positions out of the streamer’s 11,000-strong workforce in May, blaming the reduction in headcount on “slow revenue growth” and a wider drain on expenses.

Earlier this month, Warner Bros. revealed Discovery that prominent Discovery executives will leave the company after it terminated CNN+, removed several CNN employees and cut 14% of its HBO Max workforce this year.

So far, the company has eliminated a reported 1,000-plus jobs across units as WBD CEO David Zaslav doubles down on restructuring efforts, which have also included scrapped projects and programs.

Paramount Global began cutting jobs in November, targeting its ad sales group, according to Deadline, while AMC Networks ( AMCX ) announced plans to lay off about 20% of its U.S. workforce amid CEO Christina Spade’s departure.

AMC Chairman James Dolan reportedly told employees that the network has struggled to compensate for cable declines as cord-cutting accelerates, citing the company’s owned streaming units such as AMC+ and horror platform Shudder.

Similarly, Comcast’s cable unit cut costs in November, while Roku ( ROKU ) cut 200 jobs, or 5% of its workforce, shortly after its third-quarter earnings results.

Theatrical comeback still TBD

Avatar: The Way of the Water

Avatar: The Way of the Water

The theater industry continued to recover from pandemic losses in 2022 – although it remains to be seen whether a full comeback will be made.

Movies like “Top Gun: Maverick” broke records, while Marvel’s “Black Panther: Wakanda Forever” and “Doctor Strange in the Multiverse of Madness” easily took $100 million-plus domestic openers.

Still, Disney’s “Avatar: The Way of Water” secured just $134 million domestically in its three-day opening weekend, missing expectations and sending Disney shares to their lowest level since March 2020.

Despite the miss, theater executives pushed for the debut, predicting the film will steadily increase the box office over the holidays and well into 2023.

Streaming giants have also embraced the theatrical, with Netflix’s “Knives Out: Glass Onion” enjoying a successful limited theatrical release over Thanksgiving week, while Amazon is reportedly investing $1 billion to produce 12 to 15 movies a year exclusively for theaters.

Overall, the domestic box office is estimated to bring in roughly $7.4 billion for the year, according to Box Office Pro. While this number still lags pre-pandemic by roughly 30%, it is hoped that next year’s more beefed-up release schedule will help close the gap.

Alexandra is a senior entertainment and media reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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