Reed Hastings, Co-CEO, Netflix speaks on the 2021 Milken Institute Global Conference in Beverly Hills, California, U.S. October 18, 2021.
David Swanson | Reuters
The media and entertainment industry prides itself on its mastery of classical storytelling’s three acts: the setup, the conflict and the resolution.
It’s protected to declare the primary act of the streaming video wars over. Barring a surprise late entrant, every major media and technology company that desires to be within the streaming game has planted a flag. Disney+, Apple TV+, Paramount+, Peacock and other recent streaming services are spreading across the globe.
“Act one was the land grab phase,” said Chris Marangi, a media investor and portfolio manager at Gamco Investors. “Now we’re in the center act.”
Last month, the central conflict of the streaming wars got here into focus. The industry was thrust into turmoil after Netflix disclosed its first quarterly drop in subscribers in greater than a decade and warned subscriber losses would proceed within the near term.
Second act problems
- Netflix’s rapid decline after a pandemic-fueled boom has investors questioning the worth of investing in media corporations.
- Streaming is the longer term of the business, no matter recent problems, as consumers have gotten used to the flexibleness the services offer.
- There might be more consolidation to return, and streamers are increasingly embracing cheaper, ad-supported tiers.
That news set off worries about streaming’s future and solid doubt on whether the growing variety of platforms could develop into profitable. At stake are the valuations of the world’s largest media and entertainment corporations — Disney, Comcast, Netflix and Warner Bros. Discovery — and the tens of billions of dollars being spent annually on recent original streaming content.
As recently as October, Netflix, whose hit series “Stranger Things” returned Friday, had a market capitalization greater than $300 billion, topping Disney’s at $290 billion. But its shares are down over 67% from the beginning of the yr, slashing the corporate’s price to around $86 billion.
Legacy media corporations that followed Netflix’s lead and pivoted to streaming video have suffered, too.
Disney shares are among the many worst performing stocks on the Dow Jones industrials this yr, down about 30%. That is although series similar to “The Book of Boba Fett” and “Moon Knight” helped Disney+ add 20 million subscribers previously two quarters. The highly anticipated “Obi-Wan Kenobi” premiered on Friday.
Warner Bros. Discovery’s HBO and HBO Max services also added 12.8 million subscribers over the past yr, bringing total subscribers to 76.8 million globally. But shares are down greater than 20% because the company’s stock began trading in April following the merger of WarnerMedia and Discovery.
No person knows whether streaming’s final act will reveal a path to profitability or which players might emerge dominant. Not that way back, the formula for streaming success seemed straightforward: Add subscribers, see stock prices climb. But Netflix’s shocking freefall has forced executives to rethink their next moves.
“The pandemic created a boom, with all these recent subscribers efficiently stuck at home, and now a bust,” said Michael Nathanson, a MoffettNathanson media analyst. “Now all these corporations have to make a choice. Do you retain chasing Netflix across the globe, or do you stop the fight?”
Bloomberg | Bloomberg | Getty Images
Stick to streaming
The best path for corporations might be to attend and see whether their big money bets on exclusive streaming content can pay off with renewed investor enthusiasm.
Disney said late last yr it might spend $33 billion on content in 2022, while Comcast CEO Brian Roberts pledged $3 billion for NBCUniversal’s Peacock this yr and $5 billion for the streaming service in 2023.
The efforts aren’t profitable yet, and losses are piling up. Disney reported an operating lack of $887 million related to its streaming services this past quarter — widening on a lack of $290 million a yr ago. Comcast has estimated Peacock would lose $2.5 billion this yr, after losing $1.7 billion in 2021.
Media executives knew it might take time for streaming to begin being profitable. Disney estimated Disney+, its signature streaming service, will develop into profitable in 2024. Warner Bros. Discovery’s HBO Max, Paramount Global’s Paramount+ and Comcast’s Peacock forecast the same profitability timeline.
What’s modified is chasing Netflix now not appears like a winning strategy because investors have soured on the concept. While Netflix said last quarter that growth will speed up again within the second half of the yr, the precipitous fall in its shares suggests investors now not view the whole addressable market of streaming subscribers as 700 million to 1 billion homes, as CFO Spencer Neumann has said, but fairly a number far closer to Netflix’s total global tally of 222 million.
That sets up a significant query for legacy media chief executives: Does it make sense to maintain throwing money at streaming, or is it smarter to carry back to chop costs?
“We’ll spend more on content — but you are not going to see us are available and go, ‘All right, we will spend $5 billion more,'” said Warner Bros. Discovery CEO David Zaslav during an investor call in February, after Netflix had begun its slide but before it nose-dived. “We’ll be measured, we will be smart and we will watch out.”
Paradoxically, Zaslav’s philosophy may echo that of former HBO chief Richard Plepler, whose streaming strategy was rejected by former WarnerMedia CEO John Stankey. Plepler generally argued “more isn’t higher, higher is best,” selecting to deal with prestige fairly than volume.
While Zaslav has preliminarily outlined a streaming strategy of putting HBO Max along with Discovery+, after which potentially adding CNN news and Turner sports on top of that, he’s now faced with a market that does not appear to support streaming growth in any respect costs. That will or may not decelerate his efforts to push all of his best content into his recent flagship streaming product.
That has long been Disney’s selection of approach; it has purposefully held ESPN’s live sports outside of streaming to support the viability of the normal pay TV bundle — a proven moneymaker for Disney.
Holding back content from streaming services could have downsides. Simply slowing down the inevitable deterioration of cable TV probably is not an achievement many shareholders would have fun. Investors typically flock to growth, not less rapid decline.
Brian Roberts, chief executive officer of Comcast, arrives for the annual Allen & Company Sun Valley Conference, July 9, 2019 in Sun Valley, Idaho.
Drew Angerer | Getty Images
Traditional TV also lacks the flexibleness of streaming, which many viewers have come to prefer. Digital viewing allows for mobile watching on multiple devices at any time. A la carte pricing gives consumers more decisions, compared with having to spend nearly $100 a month on a bundle of cable networks, most of which they do not watch.
Consolidation is one other prospect, given the growing variety of players vying for viewers. Because it stands, Amazon Prime Video, Apple TV+, Disney+, HBO Max/Discovery+, Netflix, Paramount+ and Peacock all have global ambitions as profitable streaming services.
Media executives largely agree that a few of those services might want to mix, quibbling only about what number of will survive.
One major acquisition could alter how investors view the industry’s potential, said Gamco’s Marangi. “Hopefully the ultimate act is growth again,” he said. “The rationale to remain invested is you do not know when act three will begin.”
U.S. regulators may make any deal amongst the biggest streamers difficult. Amazon bought MGM, the studio behind the James Bond franchise, for $8.5 billion, however it’s unclear whether it might wish to buy anything much larger.
Government restrictions around broadcast station ownership would almost actually doom a deal that put, say, NBC and CBS together. That likely eliminates a straight merger between parent corporations NBCUniversal and Paramount Global without divesting one in all the 2 broadcast networks, and its owned affiliates, in a separate, messier transaction.
But when streaming continues to take over because the dominant type of viewership, it’s possible regulators will eventually soften to the concept broadcast network ownership is anachronistic. Latest presidential administrations could also be open to deals current regulators may try to disclaim.
Warren Buffett and Charlie Munger press conference on the Berkshire Hathaway Annual Shareholders Meeting, April 30, 2022.
Warren Buffett’s Berkshire Hathaway said this month it bought 69 million shares of Paramount Global — an indication Buffett and his colleagues either imagine the corporate’s business prospects will improve or the corporate will get acquired with an M&A premium to spice up shares.
Evan Spiegel, CEO of SNAP Inc.
Stephen Desaulniers | CNBC
“Promoting is an inherently volatile business,” said Patrick Steel, former CEO of Politico, the political digital media company. “The slowdown which began in the autumn has accelerated in the previous couple of months. We at the moment are in a down cycle.”
Offering cheaper, ad-supported subscription won’t matter unless Netflix and Disney give consumers a reason to enroll with consistently good shows, said Bill Smead, chief investment officer at Smead Capital Management, whose funds own shares of Warner Bros. Discovery.
The shift within the second act of the streaming wars could see investors rewarding one of the best content fairly than probably the most powerful model of distribution. Netflix co-founder and co-CEO Reed Hastings told the Latest York Times his company “is constant to have among the hottest shows in America and all over the world.” But it surely stays to be seen if Netflix can compete with legacy media’s established content engines and mental property when the market is not rewarding ever-ballooning budgets.
“Netflix broke the moat of traditional pay TV, which was a excellent, profitable business, and investors followed,” said Smead. “But Netflix can have underestimated how hard it’s to consistently provide you with great content, especially when capital markets stop supporting you and the Fed stops making a gift of free money.”
Try something else
The main problem with staying the course is it is not an exciting recent opportunity for investors who’ve soured on the streaming wars.
“The times of getting a tech multiple on these corporations are probably over,” said Andrew Walker, a portfolio manager at Rangeley Capital, whose fund also owns Warner Bros. Discovery. “But possibly you do not need a tech multiple to do well at these prices? That is what we’re all attempting to work out without delay.”
Offering a recent storyline is one option to change the stale investment narrative. Media analyst Wealthy Greenfield advocates Disney acquire Roblox, a gaming company based on digital multiplayer interactive worlds, to indicate investors it’s leaning into creating experiential entertainment.
“I just keep serious about Bob Iger,” Greenfield said of the previous Disney CEO, who departed the corporate in December. “When he got here in, he made his mark by buying Pixar. That transformative transaction was doing something big and daring early on.”
Bob Chapek, Disney CEO on the Boston College Chief Executives Club, November 15, 2021.
Charles Krupa | AP
Given the acute pullback on Roblox shares, Greenfield noted Disney CEO Bob Chapek has a possibility to make a transformative deal that might alter the best way investors view his company. Roblox’s enterprise value is about $18 billion, down from about $60 billion at first of the yr.
But media corporations have historically shied away from gaming and other out-of-the-box acquisitions. Under Iger, Disney shut down its game development division in 2016. Acquisitions may help corporations diversify and help them plant a flag in one other industry, but they may also result in mismanagement, culture clash, and poor decision making (see: AOL-Time Warner, AT&T-DirecTV, AT&T-Time Warner). Comcast recently rejected a deal to merge NBCUniversal with video game company EA, based on an individual aware of the matter. Puck was first to report the discussions.
Yet big media corporations aren’t any longer compelling products on their very own, said Eric Jackson, founder and president of EMJ Capital, who focuses on media and technology investing.
Apple and Amazon have developed streaming services to bolster their services offerings around their primary businesses. Apple TV+ is compelling as an added reason for consumers to purchase Apple phones and tablets, Jackson said, however it’s not special as a person stand-alone service. Amazon Prime Video amounts to a profit making a Prime subscription more compelling, though the first reason to subscribe to Prime continues to be free shipping for Amazon’s enormous e-commerce business.
There isn’t any obvious reason the business will suddenly be valued otherwise, Jackson said. The era of the stand-alone pure-play media company could also be over, he said.
“Media/streaming is now the parsley on the meal — not the meal,” he said.
Disclosure: CNBC is an element of NBCUniversal, which is owned by Comcast.
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