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It is the third act of the streaming wars. That is the time a hero, seemingly beaten and broken, rises up and saves the day. But Wall Street is frightened that hero may never come for Hollywood.
Legacy media firms including Disney, Warner Bros. Discovery, Comcast and Paramount Global are attempting to determine the answer to self-inflicted financial wounds, particularly big spending as they chased streaming subscribers to compete with Netflix.
Firms have since slashed their budgets and adjusted their strategy for licensing homegrown movies and shows. Several streamers have added services supported by ad revenue, cracked down on password-sharing and raised prices.
Yet, Wall Street still is not satisfied. Warner Bros. Discovery and Comcast outperformed the S&P 500 in 2023, though just barely. Disney and Paramount underperformed. Netflix, then again, overperformed significantly, with shares up 65%.
“We’re in search of someone to recommend a reputable vision of how this industry goes to have a sustainable business model,” said Doug Creutz, managing director and senior research analyst at Cowen.
The reply may appear easy: a cable-style bundle, only with streaming. But, getting all these rivals to collaborate is sort of as difficult as navigating increasing regulatory scrutiny, Creutz said. Similarly, prospects for mergers and acquisitions are uncertain, as several firms hold massive debt loads already and regulators are wary of limiting competition in the industry.
Wall Street wants an answer, or, on the very least, an organization to set the stage for a possible solution. It was clear how to generate income from linear TV, but thus far it’s unclear how investors can money in on streaming beyond investing in Netflix.
“The one thing that gets people back into the media investing has to be some style of hope that they’ll construct an economic position in the streaming world,” said Michael Nathanson, MoffettNathanson founding partner and senior research analyst.
Determine the bundle
There’s momentum for bundling subscription streaming services into something that resembles traditional cable TV, as media firms seek a way to create and sustain streaming profitability. Bundling, in turn, could ease the patron experience, bringing content all into one hub.
“In theory, that is a very good idea,” said Creutz. “But, there’s quite a lot of details that may have to be hammered out.”
The most important hurdle is getting all of the media firms to agree on what it will appear to be.
“You might have to get a bunch of individuals in a room together to agree on something,” he said, “individuals who will not be necessarily inclined to be cooperative.”
Certainly one of the most important hurdles is how these firms would calculate average revenue per user, or ARPU, and subscriber growth when offering their services at a reduction. A bundle would shrink ARPU, but when enough subscribers enroll, the fee may very well be offset.
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Consider M&A difficulties
Mergers and acquisitions present one other path to a much bigger bundle, but Wall Street is not sure there can be a giant deal in 2024.
“I feel that there is still an expectation that somebody’s going to ride right across the horizon with some M&A that is gonna fix problems,” Creutz said. “And I do not think that is going to occur.”
No company really wants to be a buyer immediately, he said. Disney continues to be holding a high debt load from its acquisition of twentieth Century Fox in 2019, and the identical is true for Warner Bros. Discovery after its 2022 merger.
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“What I’ve seen as a fundamental problem is that [these companies] have balance sheets built on linear cable network economics which can be not stable,” Nathanson said. “The challenge to overcome is what do you do about your linear cable networks? Just given those headwinds, the mix of debt, plus instability of a core business that was good and sticky and stable — that is the most important conundrum.”
The most important goal is Paramount. Controlling shareholder Shari Redstone is reportedly eager to make a deal. She controls Paramount through her company National Amusements.
Warner Bros. Discovery CEO David Zaslav and Paramount CEO Bob Bakish met in late December for a preliminary discussion, but some speculate the leaked talks were a way for Warner Bros. to position itself as a viable asset for Comcast’s NBCUniversal.
There could also be regulatory issues, too. Universal and Warner Bros. were two of the highest three domestic movie studios by revenue in 2023, according to data from Comscore.
“I do not think the regulatory environments can be supportive of consolidation,” said Creutz.
Leave ’em wanting more
A scene from “Barbie.”
Courtesy: Warner Bros.
Legacy media firms are also grappling with a beleaguered theatrical industry, which has yet to get better from the pandemic. Yet, Wall Street still sees value in this distribution avenue.
In any case, Warner Bros.’ “Barbie” tallied greater than $1.4 billion at the worldwide box office, while Universal’s “The Super Mario Bros. Movie” and “Oppenheimer” snared $1.3 billion and $950 million, respectively.
“The message we sent to Hollywood in 2023 is we do not need superheroes or Star Wars to return to the theater,” Josh Brown, CEO at Ritholtz Wealth Management, wrote in a LinkedIn post last month. “We’d like events. Great scripts. Big stories. Real movie stars. Cinema!”
Film production stalled in the course of the pandemic and again during dual Hollywood labor strikes last 12 months. All of that resulted in fewer releases and smaller box-office returns. Because it stands, the 2024 calendar is filled with sequels, prequels and spinoffs — the sort of content that failed to capture audiences in 2023.
“As we have now seen with the stock prices of exhibitors, the reduced film slate outlook for 2024 has [clearly weighed] on investor sentiment heading into this 12 months,” said Eric Wold, senior analyst at B. Riley Securities. “While the slate for 2025 has benefited from the slate delays in 2024, we don’t imagine investors are willing to step up to the plate immediately and should wait until later in the 12 months when visibility into 2025 improves.”
While cinema chains wait for Hollywood production to ramp back up, Wall Street foresees heavy investments in premium screens — similar to IMAX, Dolby, Screen X and 4DX — that supply elevated experiences at the next ticket price.
“The predominant focus of investors is a return to pre-pandemic profitability levels even with a reduced level of film output and attendance,” Wold said.
Moreover, Hollywood continues to be checking out the way it wants to handle theatrical windowing. Before the pandemic, movies stuck around in theaters for at the very least 90 days before making the transition to on-demand, home video and streaming. Now, there is not any set timing. It’s up to the studio to make that decision.
On one side of the spectrum, “Barbie” and “Oppenheimer” each spent greater than 120 days in cinemas before coming to the house market. Then there was “Five Nights at Freddy’s,” which was released in cinemas and on NBCUniversal’s Peacock on the identical day. Each strategy has its own rewards.
For “Barbie” and “Oppenheimer,” grassroots efforts led tens of millions to see double features of the movies on opening weekend, and word-of-mouth kept cinemagoers coming for months. For “Freddy’s,” horror-movie buffs and fans of the video game the film is predicated on turned out in hordes for its debut, and repeat viewings were held via streaming.
Either way, though, the lesson is evident: People still want to watch movies.
“There’s already too many TV shows,” Brown wrote. “Start making movies again.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.