Members of the Striking Writers Guild of America (WGA) walk through a picket line in front of Netflix offices because the SAG-AFTRA union announced it had agreed to a “last-minute request” by the Motion Picture and Television Producers Alliance for federal mediation, but refused to increase it again existing employment contract beyond the Wednesday negotiating deadline at 11:59 p.m. in Los Angeles, California, July 12, 2023.
Mike Blake | Reuters
Traditional TV is dying. Ad revenue is soft. Streaming just isn’t profitable. And Hollywood is practically shut down as actors’ and writers’ unions prepare for what guarantees to be an extended and bitter hiatus.
All this turmoil will probably be on the minds of investors because the media industry kicks off earnings season this week Netflix first on Wednesday.
Netflix, with its latest advertising model and deal with stopping password sharing, looks the very best in comparison with the older media giants. Last week, for instance, Disney CEO Bob Iger prolonged his contract until 2026, telling the market he needs more time at Mouse House to fulfill the challenges ahead. At the highest of the list is the rivalry with the Disney TV networks, as that a part of the business appears to be in worse shape than Iger had imagined. “They is probably not the core of Disney,” he said.
“I feel Bob Iger’s comments were a quarterly warning. I feel they’re very worrying for the sector,” said analyst Michael Nathanson of SVB MoffettNathanson after Iger’s interview with CNBC’s David Faber on Thursday.
While the soft advertising market has been weighing on the industry for several quarters now, the recent introduction of lower-priced, ad-supported service options similar to Netflix and Disney+ is prone to be one among the few areas of growth and focus this quarter, Nathanson said.
Iger spoke at length in recent investor talks and an interview on Thursday about how the ad is an element of a plan to drive Disney+ to profitability. Others, including Netflix, shared the identical opinion.
Netflix is expected to report financial results after it closes on Wednesday. Wall Street would really like to know more details in regards to the US rollout of password sharing and the status of the newly launched ad-supported option. The corporate’s shares are up nearly 50% this 12 months, following a 2022 correction that followed the primary lack of subscribers in a decade
Investors may also deal with older media firms similar to Paramount Global, Comcast AND Discovery Warner Bros, each with significant pay-TV network portfolios, following Iger’s comments that traditional TV “won’t be the idea” of the corporate and all options, including a sale, were on the table. These firms and Disney will report the outcomes in the approaching weeks.
Strike misfortunes
A scene from the Netflix movie “Squid Game”.
Source: Netflix
Just per week before the earnings announcement, members of the Screen Actors Guild – American Federation of Television and Radio Artists joined greater than 11,000 already striking film and tv writers on the picket line.
The strike – the results of failed negotiations with the Alliance of Film and Television Producers – brings the industry to an instantaneous halt. It’s the primary double strike of its kind since 1960.
The labor struggle erupted because the industry moved away from streaming growth in any respect costs. Media firms saw their subscribers – and share prices – surge firstly of the Covid pandemic, investing billions in latest content. Nevertheless, growth has since stagnated, resulting in budget cuts and layoffs.
“The strike suggests that there’s quite a lot of chaos in this sector,” said Mark Boidman, head of investment banking, media and entertainment at Solomon Partners. He noted that shareholders, especially hedge funds and institutional investors, were “very frustrated” with media firms.
Iger told CNBC last week that the stoppage couldn’t have come at a worse time, noting the “destructive forces in this business and all of the challenges we face” in addition to an industry still recovering from the pandemic.
That is the primary of its kind in the streaming era. The last writers’ strike was in 2007 and 2008, which lasted about 14 weeks and spawned unscripted reality TV. Hollywood screenwriters have been on strike for the reason that starting of May this 12 months.
Depending on the longevity of the strike, latest film and TV content could dry up and leave streaming platforms and TV networks – aside from library content, live sports and news – empty.
For Netflix, strikes could have less of an impact, at the least in the short term, said Insider Intelligence analyst Ross Benes. Content created outside of the US just isn’t affected by the strike, an area where Netflix has invested heavily.
“Netflix can outperform most since it produces shows up to now in advance. And if things worsen, they’ll depend on international programs, of which there are such a lot of,” Benes said. “Netflix is an antagonist in the eyes of the strikes due to the way it has modified the economics of how writers receives a commission.”
Traditional TV disaster
The decline in pay TV subscribers, which has intensified in recent quarters, should proceed to speed up as consumers shift an increasing number of towards streaming.
Nevertheless, despite the rampant decline, many networks remain money cows in addition to supplying content to other parts of the business – streaming in particular.
For pay TV distributors, increasing the worth of cable packages was a approach to maintain profitability. But based on recent report from MoffettNathanson, “subscriber numbers are declining far too fast for prices to proceed to balance.”
Iger, who began his profession in network television, told CNBC last week that while he had a “very pessimistic” view of traditional television prior to his return in November, since then it has turned out to be even worse than he expected. Executive said Disney is evaluating its network portfolio, which incorporates broadcaster ABC and cable channels like FX, indicating a sale may very well be on the table.
Paramount is currently considering selling a majority stake in its BET cable TV network. In recent times, Comcast’s NBCUniversal has shut down networks like NBC Sports and merged sports programming on other channels like USA Network.
“Networks are a shrinking business, and Wall Street doesn’t like shrinking businesses,” Nathanson said. “But for some firms, there isn’t any way around that.”
To make matters worse, the weak advertising market has been a source of pain, especially for traditional television. This weighed heavily on Paramount and Warner Bros.’s revenues. Discovery in recent quarters, each with large portfolios of cable networks.
Rise in ad prices, which has long been offsetting declines in viewership, is a serious source of concern, based on a recent report by Moffett Nathanson. The corporate noted that this may very well be the primary recession-free 12 months where upfront advertising doesn’t drive up TV prices, especially as ad-supported streaming hits the market and boosts inventory.
The introduction of cheaper, ad-supported tiers by streamers will probably be a hot topic again this quarter, especially after Netflix and Disney+ announced their platforms late last 12 months.
“The soft advertising market affects everyone, but I do not think Netflix will probably be affected as much as TV firms or other established advertising streamers,” said Benes. He noted that while Netflix is probably the most established streamer, its level of advertising is latest and has loads of room for growth.
Advertising is now considered a very important mechanism in platforms’ wider efforts to realize profitability.
“It’s no coincidence that Netflix has suddenly began to be sensible about freeloaders while promoting a less expensive ad tier,” Benes said, referring to Netflix’s crackdown on password sharing. “It’s pretty common in the industry. Hulu’s ad plan provides more revenue per user than the ad-free plan.”
Are more mergers coming?
Last week’s ruling by a federal judge that Microsoftacquisition of a game publisher for $68.7 billion Activision Blizzard should move forward is rare excellent news for the media industry. This can be a signal that significant consolidation can happen even in the event of temporary regulatory interference.
Although the Federal Trade Commission appealed the ruling, bankers saw it as a win for dealmaking during a downturn for mega-trading.
“It was a pleasant win for the bankers who walked into the boardrooms and said we aren’t in an environment where regulators will turn down really attractive mergers and acquisitions. That is encouraging,” said Boidman of Solomon Partners.
As media giants struggle and shareholders develop into frustrated, the judge’s ruling may lead to more deals, as “a lot of these CEOs are on the defensive,” Boidman added.
Regulatory blockades were common outside of the Microsoft deal. A federal judge last 12 months rejected Penguin Random House’s proposed purchase of Paramount’s Simon & Schuster. Broadcasting station owner Tegna abandoned the sale to Standard General earlier this 12 months on account of regulatory objections.
“The undeniable fact that we’re focusing a lot on the Activision-Microsoft deal points to a reality where making deals will probably be an enormous tool for strengthening your market position and inorganic leap for your corporation in ways you would not give you the option to do on your individual,” said Jason Anderson, CEO of Quire, a boutique investment bank.
These CEOs won’t just make a deal to make a deal. From this point, the consolidation will take a better bar.
Peter Liguori
former president of Tribune Media
Nevertheless, Anderson noted that bankers are all the time excited about regulatory rejection, and that will not necessarily be the rationale why deals don’t stack up.
Warner Bros. and Discovery merged in 2022, expanding the combined company’s cable network portfolio and merging its streaming platforms. The corporate recently relaunched its flagship service, Max, combining content from Discovery+ and HBO Max. Amazon bought MGM that very same 12 months.
There have been other megadeals before. Comcast acquired British broadcaster Sky in 2018. The next 12 months, Disney paid $71 billion for Fox Corp’s entertainment assets. – which gave Disney “The Simpsons” and a controlling stake in Hulu, but is a small a part of its television properties.
The Simpsons: Homer and Marge
Getty / FOX
“The Street and the forecasters forget that Comcast and Sky, Disney and Fox, Warner and Discovery – all happened just a couple of years ago. However the industry says these deals were in BC, not AD,” said Peter Liguori, a former CEO of Tribune Media who’s on the board of video-monitoring firm VideoAmp.
He said consolidation is prone to proceed as firms complete work on past mergers and cope with the lingering effects of the pandemic, similar to increased spending on subscriber acquisition. “These CEOs won’t just make a deal to make a deal. To any extent further, consolidation will take a better bar.”
Still, with streaming growing and becoming unprofitable, and pay-TV customers bleeding out, there may very well be more consolidation regardless of what.
Nevertheless, whether mergers and acquisitions help move these firms forward is one other matter.
“My knee-jerk response to the Activision-Microsoft ruling was that there could be more M&A if the FTC was to be distorted,” Nathanson said. “But in truth, Netflix has built its business by licensing content and without having to purchase assets. I’m not entirely sure whether the large studio acquisitions have been successful.”
– CNBC’s Alex Sherman contributed to this text.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC. NBCUniversal is a member of the Alliance of Film and Television Producers. Comcast is a co-owner of Hulu.