Holidays, stream losses, ad reduction

Traditional TV is dying. Advertising revenue is soft. Broadcasting is not profitable. Hollywood is practically shutting down as the actors and writers unions agree to what has been a long and bitter work stoppage.

All that turmoil will be on the minds of investors as the media industry kicks off earnings season this week. Netflix first up on Wednesday.

With a new advertising model and a push to end password sharing, Netflix appears to be in a better position than the legacy media giants. Last week, for example, Disney CEO Bob Iger has extended his contract through 2026, saying he needs more time in the House of Mouse to address the issues facing the market. At the top of the list is the fight with Disney’s television networks, as that part of the business appears to be in worse shape than Iger imagined. “They may not be mainstream for Disney,” he said.

“I think Bob Iger’s comments were a warning about the quarter. I think they’re very concerning for the sector,” analyst Michael Nathanson of SVB MoffettNathanson said after Iger’s interview with CNBC’s David Faber on Thursday.

While the soft ad market has been impacting the industry for several quarters now, the introduction of a cheaper, ad-supported option for services like Netflix Nathanson said Disney+ will be a bright spot this quarter as one of several areas of growth and concentration.

Iger spoke at length on recent investor calls and in an interview Thursday about advertising being part of his plan to bring Disney+ to profitability. Others, including Netflix, echoed the same sentiment.

Netflix plans to report earnings after the close on Wednesday. Wall Street will want to hear more details about the US password-sharing crackdown and the status of its newly launched ad-supported option. After a correction in 2022, the company’s shares are up nearly 50% this year, following its first subscriber loss in a decade.

The investor’s attention will also be on old media companies Paramount Global, Comcast and Warner Bros. DiscoveryEach has a significant portfolio of pay TV networks, after Iger commented that traditional TV “may not be core” to the company and that all options, including a sale, are being discussed. Those companies and Disney will report earnings in the coming weeks.

With just one week to go before the win, members of the Screen Actors Guild – American Federation of Television and Radio Artists joined more than 11,000 already prominent film and television writers on the picket line.

The strike, the result of failed negotiations with the Alliance of Motion Picture and Television Producers, brings the industry to an immediate halt. This is the first such double strike since 1960.

A labor struggle erupted as the industry shied away from stream growth at all costs. Media companies have already seen a surge in subscribers and share prices during the Covid pandemic, investing billions in new content. But growth has since stalled, resulting in budget cuts and downsizing.

Mark Boidman, head of media and entertainment investment bank Solomon Partners, said: “The strike that has taken place shows that this sector is in great turmoil.” He noted that shareholders, particularly hedge funds and institutional investors, were “very disappointed” with media companies.

Speaking to CNBC last week, Iger said the shutdown couldn’t have come at a worse time, noting “the disruptive forces in this business and all the challenges we face,” with the industry still recovering from the pandemic.

These are the first such holidays in the flow period. The last writers’ strike occurred in 2007 and 2008, lasting about 14 weeks and giving rise to unscripted, reality TV. Hollywood writers have already started a strike since the beginning of May this year.

Depending on the longevity of the holiday, fresh movie and TV content could dry up and leave streaming platforms and TV networks bare — except for library content, live sports and news.

Insider Intelligence analyst Ross Benes said the strikes may have less of an impact on Netflix, at least in the near term. Content produced outside the US is not affected by the strike – an area in which Netflix has invested heavily.

“Netflix is ​​poised to do better than most because they prepare shows so well in advance. If push comes to shove, they can rely on a large number of international shows,” Benes said. “Netflix is ​​an antagonist in the eyes of strikes because of how it’s changing the economy in which writers get paid.”

The decline in pay-TV subscribers, which has increased in recent quarters, should continue to accelerate as consumers increasingly turn to streaming.

However, despite the widespread decline, many networks remain cash cows, and they also provide content to other parts of the business, particularly streaming.

For pay-TV distributors, raising the price of cable sets has been a way to stay profitable. But, according to MoffettNathanson’s latest report, “subscribers are declining too fast for prices to continue to offset.”

Iger, who began his career in network television, told CNBC last week that while he had a “very pessimistic” view of traditional television before returning in November, he has since found it worse than he expected. Execution Disney has said it is evaluating its network portfolio, which includes broadcast ABC and cable channels such as FX, suggesting a sale could be on the table.

Paramount is currently considering selling most of its cable television network, BET. In recent years, Comcast’s NBCUniversal has shuttered networks such as NBC Sports and consolidated sports programming on other channels such as the USA Network.

“Networks are a shrinking business, and Wall Street doesn’t like shrinking businesses,” Nathanson said. “But for some companies, there’s no way around it.”

Making matters worse, the weak advertising market has been a source of pain, especially for traditional TV. That includes Paramount and Warner Bros., each with a portfolio of large cable networks. It has affected Discovery’s earnings in recent quarters.

According to a recent report by MoffettNathanson, a major source of concern is rising advertising prices, which have offset long-term viewership declines. The firm noted that this could be the first non-recession year in which ad preemption does not drive TV price growth, especially as the ad-supported streaming market hits and inventory grows.

Streamers offering cheaper, ad-supported tiers will be a hot topic again this quarter, especially after Netflix and Disney+ announced their platforms late last year.

“The soft ad market affects everybody, but I don’t think Netflix is ​​affected as much as TV companies or other established ad broadcasters,” Benes said. He noted that while Netflix is ​​the most established streamer, its level of advertising is new and there is plenty of room for growth.

Advertising is now considered an important mechanism in platforms’ broader efforts to achieve profitability.

“It’s no coincidence that Netflix suddenly started thinking about freeloaders when they were pushing a cheaper tier, which is advertising,” Benes said, referring to Netflix’s crackdown on password sharing. “This is pretty common in the industry. Hulu’s ad plan generates more revenue per user than the ad-free plan.”

A federal judge ruled last week Microsoft‘s acquisition of the game publisher for $68.7 billion Activision Blizzard moving forward serves as a rare piece of good news for the media industry. Even with temporary regulatory intervention, it is a signal that significant consolidation may be underway.

Although the Federal Trade Commission appealed the decision, bankers saw it as a victory for deals in a slow period for megadeals.

“It was a nice win for bankers to go into their boardrooms and say we’re not in an environment where really attractive M&A is going to get hit by regulators. That’s encouraging,” said Solomon Partners’ Boidman.

Boidman added that as media giants struggle and shareholders get frustrated, the judge’s ruling could spur more deals because “many of these CEOs are on the defensive.”

Regulatory hurdles are widespread beyond the Microsoft deal. A federal judge ordered book publisher Penguin Random House to buy Simon & Schuster from Paramount last year. Tegna, the owner of the broadcast station, canceled its sale to Standard General this year due to regulatory reasons.

“The fact that we’re paying so much attention to the Activision-Microsoft deal is indicative of the reality that deals are going to be a great tool going forward to strengthen your market position and jumpstart your company in ways you can’t do inorganically on your own,” said Jason Anderson, CEO of Quire, a boutique investment bank. .

Bankers are always thinking about regulatory pushback, Anderson noted, and that shouldn’t be the reason deals don’t come together.

Warner Bros. and Discovery merged in 2022, expanding the combined company’s portfolio of cable networks and bringing together streaming platforms. Recently, the company relaunched its flagship service as Max, combining content from Discovery+ and HBO Max. Amazon bought MGM that year.

There have been other mega deals before that. Comcast bought UK broadcaster Sky in 2018. The following year, Disney paid $71 billion for Fox Corp.’s entertainment assets — which gave Disney “The Simpsons” and a controlling stake in Hulu, but make up a small portion of its television holdings.

“The Street and the forecasters forget that Comcast and Sky, Disney and Fox, Warner and Discovery — it happened just a few years ago. But the industry talks like these deals happened in BC, not BC,” said former Tribune CEO Peter Media, board member at TV measurement firm Liguori VideoAmp.

Consolidation will continue after companies finish working through these past mergers and get past the lingering effects of the pandemic, such as increased costs to acquire subscribers, he said. “These CEOs are not going to make a deal just for the sake of making a deal. From this point forward, a higher level of consolidation will be required.”

Still, with the rise of streaming and its lack of profitability and the hemorrhaging of pay-TV customers, more consolidation may be on the way.

Whether M&A helps these companies move forward is another question.

“My strong reaction to the Activision-Microsoft decision was that there would be more M&A if FTC protections were removed,” Nathanson said. “But the truth is, Netflix has built its business on licensing content and doesn’t have to buy assets. I’m not sure the big deal of buying studios is paying off.”

— CNBC’s Alex Sherman contributed to this article.

Disclosure: Comcast is owned by NBCUniversal, the parent company of CNBC. NBCUniversal is a member of the Motion Picture and Television Producers Alliance. Comcast co-owns Hulu.