Media corporations are striving with two Hollywood strikes, diminishing promotional proceeds and streaming services that are not generating profits. Bob Iger of Disney recently informed CNBC that the company's traditional TV activities may not be a part of its central operations. Netflix, which is faring considerably better than its peers, will be beginning media earnings season on Wednesday.
The traditional TV industry is declining, ad revenue is weak, and streaming is not yet profitable. As the actors and writers unions engage in what could be a long and contentious labor dispute, Hollywood is essentially at a standstill. When the media sector begins its earnings season this week, with Netflix in the lead on Wednesday, investors will bear these concerns in mind.Netflix seems to have the best prospects among the legacy media companies, with a new advertising model and an effort to curb password sharing. Bob Iger, CEO of Disney, recently extended his contract through 2026 in order to deal with the difficulties he's faced at Disney, particularly with its television networks. The latter have been in a more dire situation than he anticipated. Following Iger's interview with CNBC's David Faber on Thursday, analyst Michael Nathanson of SVB MoffettNathanson warned, "I think Bob Iger's comments were a warning about the quarter. I think they are very worrying for the sector."Though the flaccid advertising market has already weighed on the sector for some time, the introduction of a cheaper, ad-supported option for streaming services like Netflix and Disney+ may bring a bit of a bright spot, as it is one of the few zones of growth and concentration for this quarter. Iger has explicitly mentioned that advertising is part of Disney+'s plan for eventual profitability, and Netflix has echoed his sentiment.When Netflix reports its earnings Wednesday after-hours, Wall Street will be eager to hear more details on the rollout of its password sharing regulations in the US and the status of its new ad-supported option. Significant increases in its stock price this year - up nearly 50% after a correction in 2022, following its first subscriber loss in a decade - make this news all the more important.Investors will also keep a keen eye on legacy media organizations like Paramount Global, Comcast Corp. and Warner Bros. Discovery, all of which own several pay-TV networks. In light of Iger's conviction that traditional TV may not be core to Disney and his suggestion that they could look into selling those assets, their earnings reports in the coming weeks will be key.
Just ahead of the earnings release, members of The Screen Actors Guild - American Federation of Television and Radio Artists joined the 11,000+ striking film and television writers on the picket line. This strike is a direct result of the failed negotiations between the Alliance of Motion Picture and Television Producers and the industry has been brought to an abrupt standstill - the first dual strike of its kind since 1960. This labor fight arose at a time when the media industry has shifted away from relying on streaming growth at all costs; however, subscriptions had initially increased during the pandemic and billions of dollars were invested in new content, though, since then, growth has stagnated and budgets have been cut. Mark Boidman, head of media and entertainment investment banking at Solomon Partners, commented that shareholders, particularly hedge funds and institutional investors, have been very disgruntled by media companies.
Bob Iger recently stated that the strike comes at an unacceptable time, given all of the disruptive changes and challenges the industry has faced during the pandemic. This is also the first strike of its kind during the streaming era - the last writers strike was in 2007-2008 for fourteen weeks and reality TV began to emerge. Film and TV writers have been striking since the beginning of May and, depending on how long the strike lasts, streaming platforms and TV networks may potentially not have new content aside from library content, live sports, and news.
For Netflix, the strikes may have a lesser impact, at least for the short-term. An Insider Intelligence analyst, Ross Benes, noted that Netflix can rely on international shows since they produce shows way in advance and content made outside the U.S. is unaffected by the strike. Benes concluded that, "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. Netflix is the antagonist in the eyes of strikes because of how it changed the economics of what writers get paid."
Pay-TV subscriber numbers have been on a downward spiral in recent quarters, and this is likely to continue as people shift towards streaming services. Despite this, many networks remain quite profitable, and provide a lot of content for other parts of the business. Pay-TV distributors have used price hikes for cable bundles as a way to remain profitable, but according to a recent MoffettNathanson report, the drop in subscriber numbers is too much for pricing to counteract it. Bob Iger, who began his career in network TV, has said that since returning to Disney last November, the situation he has seen is worse than he expected. Disney is now examining its network portfolio, which consists of ABC and cable channels like FX - this indicates that a potential sale is on the table. Paramount is exploring the option of selling a majority stake in its cable-TV network BET. NBCUniversal has closed networks such as NBC Sport in the past few years, and combined their sports programming on channels like USA Network. MoffettNathanson's report said the weak advertising market has been a source of pain for traditional TV, and has affected the earnings of Paramount and Warner Bros. Discovery. The report also stated that advertising pricing growth, which has been able to balance out audience drops, might not have an increase this year. This is especially true with ad-supported streaming taking center stage, and taking up more inventory. Netflix and Disney+ have both announced their respective platforms, and the introduction of cheaper, ad-supported tiers have once again become a popular topic. Advertising is seen as a major source of income for streaming platforms now - Netflix has cracked down on password sharing and is pushing a cheaper tier with advertising, something that is expected to be seen across the industry.
A federal judge's decision last week to allow Microsoft's $68.7 billion acquisition of video game publisher Activision Blizzard to proceed provides uncommon optimism in the media industry. While the FTC is appealing the ruling, financiers took it as a positive development amid a decelerated phase of mega-deals. Solomon Partners' Boidman expressed his approval, noting, "This was a nice win for bankers to go into board rooms and say we're not in an environment where really attractive M&A is going to be shot down by regulators. It's encouraging." Shareholder frustration and CEO insecurity may generate more transactions since, as Jason Anderson, CEO of Quire, a boutique investment bank, stated, “Dealmaking is going to be an enormous tool going forward to solidify market position and jump your company inorganically in ways you couldn't do yourself.” Unfortunately, not all proposed mergers have been successful, as witnessed by the restricted merger of Penguin Random House and Simon & Schuster, and the cancelled Tegna and Standard General transaction.
Anderson noted that, even though bankers are mindful of potential regulatory pushback, this should not be the reason why deals don't go through. In 2022, Warner Bros. and Discovery merged, leading to an increased portfolio of cable networks and the merging of their streaming platforms, the last of which being the relaunch of their flagship service as Max. That same year, Amazon had also acquired MGM. Deals prior to this included Comcast obtaining Sky in 2018 and the following year, Disney paying $71 billion for Fox Corp.'s entertainment assets, which included gaining control of Hulu and "The Simpsons", although this was just a minor portion of their television properties.
The Street and experts tend to overlook that Comcast and Sky, Disney and Fox, Warner and Discovery were all combined only a few years ago. Peter Liguori, a former CEO of Tribune Media and board member at TV measurement firm VideoAmp, remarked that this has been spoken of as if these deals were ancient history. Liguori surmises that M&A will continue after companies have absorbed the prior mergers and recovered from the pandemic-induced surge in costs associated with gaining subscribers. He went on to say that from now on, it will take a more significant challenge to merge. Still, with the rise of streaming platforms and dwindling profits, M&A could be on the way even if it doesn't necessarily push the companies forward. Alex Sherman of CNBC remarked that the recent Activision-Microsoft ruling would likely lead to more mergers if the FTC is weakened. But he also pointed out that Netflix was able to build its business through content licensing rather than purchasing assets, implying that acquiring a studio may not always have the desired outcome.NBCUniversal, the parent company of CNBC, is owned by Comcast.
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