Striking WGA members picket line in front of Netflix offices as SAG-AFTRA union announces it has agreed to federal mediation proposed by Alliance of Motion Picture and Television Producers “last minute request” but declined to re-extend the existing labor contract after 11:59 p.m. Wednesday, July 12, 2023 in Los Angeles, California.
Mike Black | Reuters
Traditional TV is dying. Advertising revenue was weak. Streaming is not profitable. Hollywood is effectively shut down, and the actors’ and writers’ unions face a long and painful shutdown.
All of that turmoil will be in focus for investors as the media industry kicks off earnings season this week. Netflix first Wednesday.
With a new advertising model and a push to stop password sharing, Netflix looks to be in the best position compared to traditional media giants. For example last week, disney CEO Bob Iger extended his contract through 2026 and told the market he needs more time at the Mouse House to address the challenges ahead. At the top of the list is competition with the Disney TV network, as that part of the business appears to be in worse shape than Iger imagined. “They’re probably not core to Disney,” he said.
“I think Bob Iger’s comments were a warning for the quarter. I think they’re very concerned about the industry,” SVB MoffettNathanson analyst Michael Nathanson said after Iger’s interview with CNBC’s David Faber on Thursday.
While the advert market has been weighing on the industry for several quarters, a cheaper, ad-supported service option has recently launched such as Netflix Disney+ will likely be a bright spot in one of the few areas of growth and concentration this quarter, Nathanson said.
Iger discussed at length how advertising is part of Disney+’s monetization plan during a recent investor call and in an interview on Thursday. Other companies, including Netflix, have expressed the same sentiment.
Netflix is scheduled to report earnings after the market close on Wednesday. Wall Street will be eager to hear more details on the rollout of a password-sharing crackdown in the U.S., as well as new ad-supported options. The company’s shares, correcting for the first subscriber loss in a decade in 2022, are up nearly 50% this year
Investor attention will also focus on traditional media companies such as Paramount Global, Comcast and Warner Bros. DiscoveryIger commented that traditional TV “may not be core to the company” and that all options, including a sale, were on the table. The companies and Disney will report earnings in the coming weeks.
A scene from Netflix’s A Squid Game
Just a week before the earnings report, the Screen Actors Guild – a member of the United Television and Radio Artists Join more than 11,000 screenwriters who have gone on strike.
The strike was the result of failed negotiations with the Union of Motion Picture and Television Producers, which brought the industry to an immediate standstill. It was the first such double whammy since 1960.
Labor fights erupted just as the industry was desperate to escape streaming growth at all costs. In the early days of the pandemic, media companies saw gains in subscriber numbers and stock prices, and invested billions in new content. But growth has since stalled, leading to budget cuts and layoffs.
“The fact that the strikes are happening shows that this is an industry in great turmoil,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. Funds and institutional investors are “very frustrated” with media companies.
Iger told CNBC last week that the timing of the shutdown could not have been worse, noting that “the industry is facing disruptive forces and we are facing all the challenges” and that the industry is still recovering from the pandemic.
This is the first hit of its kind in the streaming era. The last writers’ strike, in 2007 and 2008, lasted about 14 weeks and spawned unscripted reality TV. Hollywood screenwriters have been on strike since early May this year.
Depending on how long the strike lasts, fresh movie and TV content could dry up, leaving streaming platforms and TV networks (except for library content, live sports and news) empty.
For Netflix, at least in the short term, the strike is likely to have less impact, said Insider Intelligence analyst Ross Benes. Content produced outside the US will not be affected by the strike — an area Netflix has invested heavily in.
“Netflix is expected to do better than most because they have shows well in advance. If it comes to a pinch, they can rely on international programming because they have a lot of it,” Baynes said. “Netflix is an adversary in the eyes of the strike , because it changes the economics of writer compensation.”
The decline in pay-TV subscribers in recent quarters should continue to accelerate as consumers increasingly turn to streaming.
Yet despite the slump, many networks remain cash cows that also supply content to other business segments — notably streaming.
For pay-TV distributors, raising prices on cable packages has been one way to stay profitable.However, according to a recent Report MoffettNathanson said, “The number of subscribers has declined too quickly for pricing to continue to offset.”
Iger, who started his career in network television, told CNBC last week that while he was already “very pessimistic” about traditional television ahead of his return in November, he has since found things to be worse than he expected.executive officer said Disney is reviewing its network portfolio, which includes cable channels such as broadcasters ABC and FX, suggesting a sale may be considered.
Paramount is currently considering selling a majority stake in its cable network BET. In recent years, Comcast’s NBCUniversal has shut down networks such as NBC Sports and merged sports programming from other channels such as USA Network.
“The online business is shrinking, and Wall Street doesn’t like shrinking businesses,” Nathanson said. “But for some companies, there’s no way around that.”
Worse, a weak ad market has been a source of pain, especially for traditional TV. That has weighed on earnings in recent quarters for Paramount and Warner Bros. Discovery, both of which have large portfolios of cable networks.
According to a recent report by Moffitt Nathanson, increases in ad prices have long offset declines in audiences, a major source of concern. The company noted that this could be the first non-recession year in which ad upfront costs don’t lead to higher TV pricing, especially as ad-supported streaming enters the market and builds inventory.
The launch of cheaper, ad-supported packages from streaming will once again be a hot topic this quarter, especially after Netflix and Disney+ announced the launch of their respective platforms late last year.
“The soft ad market affects everyone, but I don’t think Netflix is as affected as the TV companies or other established ad streamers,” Benes said. He noted that while Netflix is the most established streaming company, its ad tier is new and has a lot of room to grow.
Advertising is now considered an important mechanism in a platform’s broader efforts to monetize.
“It’s no coincidence that Netflix suddenly got wise to the cheap eaters and launched cheap packages with ads,” Benes said of Netflix’s crackdown on password sharing. “It’s pretty common in the industry. Hulu’s ad program generates more revenue per user than a program without ads.”
Will there be more mergers?
last week’s federal judge ruled Microsoft$68.7 billion acquisition of game publisher Activision Blizzard Should move forward is a rare piece of good news for the media industry. It’s a signal that major consolidation can proceed despite temporary regulatory disruptions.
While the FTC appealed the ruling, bankers still viewed it as a win for deals during the off-season for big deals.
“It’s a good win for the bankers to come to the board and say we’re in an environment where really attractive mergers won’t be blocked by regulators,” said Boydman of Salomon Partners. It’s encouraging.”
Boydman added that as the media giant struggles and shareholders become frustrated, the judge’s ruling could prompt more deals because “many CEOs are on the defensive.”
Regulatory hurdles are also prevalent beyond the Microsoft deal. Last year, a federal judge blocked a proposal by book publisher Penguin Random House to acquire Paramount’s Simon & Schuster. Radio station owner Tegna called off its sale to Standard General this year amid regulatory headwinds.
“The fact that we’re paying so much attention to the Activision-Microsoft deal shows the reality that a deal can be a huge tool to solidify market position and inorganically drive your company in ways you couldn’t do on your own,” Boutique said Jason Anderson, chief executive of investment bank Quire.
Regulatory headwinds are always on the mind of bankers, Anderson noted, but that’s not necessarily why deals fall through.
Warner Bros. and Discovery Channel merge in 2022, expanding the combined company’s portfolio of cable networks and bringing together its streaming platforms. Most recently, the company relaunched its flagship service, Max, combining content from Discovery+ and HBO Max. amazon MGM was acquired that same year.
There have been other big deals before that. Comcast bought British broadcaster Sky in 2018. The following year, Disney paid $71 billion for Fox’s entertainment assets, which gave Disney a controlling stake in The Simpsons and Hulu, but only a small portion of its TV holdings.
The Simpsons: Homer and Marge
“Wall Street and the prognosticators forgot that Comcast and Sky, Disney and Fox, Warner and Discovery only happened a few years ago,” said Peter Liguori, former CEO of The Wall Street Journal. But the industry as if these transactions took place in B.C. instead of A.D.” Media, a board member of the TV measurement company VideoAmp.
Consolidation is likely to continue once the company completes past consolidation efforts and shakes off lingering effects of the pandemic, such as increased spending to acquire subscribers, he said. “These CEOs are not going to do deals just for the sake of doing deals. From now on, there will be a higher bar for integration.”
Still, with the rise of streaming and its lack of profitability and the loss of pay-TV customers, more consolidation may be on the horizon anyway.
Whether mergers and acquisitions help drive these companies forward, however, is another question.
“My instinctive reaction to the Activision and Microsoft rulings is that if the FTC is weakened, there will be more M&A activity,” Nathanson said. “But to be honest, Netflix’s business was built by licensing content without having to buy assets. I’m not so sure that the big deal to buy a studio is going to work.”
– CNBC’s Alex Sherman contributed to this article.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC. NBCUniversal is a member of the Film and Television Producers Union. Comcast is a co-owner of Hulu.