The media industry is in turmoil, and that’s not changing any time soon

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Striking Writers Guild of America (WGA) members picket in front of the Netflix offices as the SAG-AFTRA union announced it has agreed to the Alliance of Motion Picture and Television Producers’ ‘last-minute request’ for federal arbitration , But it declined to renegotiate its existing labor contract after the negotiation deadline Wednesday night at 11:59 p.m. July 12, 2023, in Los Angeles, California.

Mike Blake | reuters

Traditional TV is dying. Advertising revenue is soft. Streaming is not profitable. And Hollywood has practically shut down as actors’ and writers’ unions prepare for a long and bitter work stoppage.

All this turmoil will be on investors’ minds as the media industry begins its earnings season this week. Netflix first up on Wednesday.

Netflix, with a new advertising model and an effort to curb password sharing, is in a better position than the older media giants. For example, last week, disney CEO Bob Iger extended his contract to 2026, telling the market that he needed more time in the Mouse House to address the challenges facing him. At the top of the list is competition with Disney’s TV networks, as that part of the business appears to be in worse shape than Iger imagined. “They may not be important to Disney,” he said.

“I think Bob Iger’s comments were a warning about the quarter. I think they are very worrying for the sector,” analyst Michael Nathanson of SVB MoffetNathanson said after interviewing Iger. CNBC’s David Faber on Thursday,

Although the soft advertising market has been putting pressure on the industry for the past few quarters, a cheaper, ad-supported alternative to the services has recently been introduced. Netflix And Disney+ will likely be one of the few areas of growth and concentration to be a bright spot this quarter, Nathanson said.

Iger spoke at length in a recent investor call and Thursday interview about how advertising is part of a plan to bring Disney+ to profitability. Others, including Netflix, have expressed the same sentiment.

Netflix will report earnings after the end of Wednesday. Wall Street will be eager to hear more details about the rollout of its password sharing crackdown in the US and the status of its newly launched ad-supported option. The company’s stock is up nearly 50% this year, following a correction after its first subscriber in 2022. Harm in a decade

Investors’ focus will also be on legacy media companies Paramount Global, Comcast Corporation And warner bros discovery, each of which has significant portfolios of pay-TV networks, following comments from Iger that traditional TV “can’t be core” for the company and that all options, including a sale, were on the table. These companies and Disney will report earnings in the coming weeks.

strike crisis

Scene from “The Squid Game” by Netflix

Source: Netflix

Just a week before earnings begin, members of The Screen Actors Guild – American Federation of Television and Radio Artists got included in more than 11,000 already striking Film and television writers on strike.

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 twin attack after 1960.

As industry has moved away from accelerating growth at all costs, the workers’ fight has intensified. Media companies saw an increase in subscribers — and stock prices — by investing billions in new content at the start of the pandemic. But since then growth has stalled, resulting in budget cuts and layoffs.

“The fact that the strike is happening shows that the sector is in tremendous turmoil,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. He said shareholders, particularly hedge funds and institutional investors, are “very disappointed” with the media companies.

Iger told CNBC last week that worse times than this may not stop, given the “disruptive forces in this business and the challenges we face,” adding that the industry is still reeling from the pandemic.

This is a first of its kind strike during the streaming era. The last writers’ strike occurred in 2007 and 2008, lasting approximately 14 weeks and spawning unscripted, reality TV. Hollywood writers have been on strike since the beginning of May this year.

Depending on the duration of the strike, fresh film and TV content may dry up and streaming platforms and TV networks may remain empty except for library content, live sports and news.

Insider Intelligence analyst Ross Benes said that for Netflix, the strikes may have little impact, at least in the near term. Content created outside the US is not affected by the strike – an area where Netflix has invested heavily.

Bynes said, “Netflix is ​​prepared to do better than most because they produce shows so far in advance. And if the pressure mounts, they can rely on international shows, of which they have plenty.” “Netflix is ​​a rival in the eyes of strikes because it has changed the economics of what writers get paid.”

traditional tv doom

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

Yet, despite massive declines, many networks remain cash cows, and they supply content to other parts of the business — especially streaming — as well.

For pay-TV distributors, raising the price of cable bundles has been a way to stay profitable. But according to a recent news reports According to Moffetnathanson, “subscribers are falling so fast that pricing cannot continue to compensate.”

Iger, who began his career in network TV, told CNBC last week that he had a “very pessimistic” view of traditional TV before his return in November, but has since found it to be worse than he expected. . executive Disney is assessing its network portfolio, which includes cable channels such as broadcaster ABC and FX, indicating sales promotion may be on the table.

paramount is currently Considering The sale of a majority stake in its cable-TV network BET. In recent years, Comcast’s NBCUniversal Close Combined sports programming on networks such as NBC Sports and other channels such as USA Network.

“Networks are a declining business, and Wall Street does not like a declining business,” Nathanson said. “But for some companies, there’s no way to avoid it.”

Making matters worse, the weak advertising market has been a source of pain, especially for traditional TV. That impacted earnings in recent quarters for Paramount and Warner Bros. Discovery, which each have large portfolios of cable networks.

Ad price increases, which have offset long-term viewership declines, are a major source of concern, according to a recent report by MoffetNathanson. The firm noted that this could be the first non-recession year that ads don’t drive upfront TV pricing increases, especially as ad-supported streaming hits the market and drives inventory.

The introduction of cheaper, ad-supported tiers by streamers will once again be a hot topic this quarter, especially after Netflix and Disney+ announced their platforms late last year.

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

Advertising is now considered important Mechanism in the platform’s broader efforts to reach profitability.

“It’s no coincidence that Netflix has suddenly become prudish about freeloaders, pushing the cheap advertising tier,” Benes said, referring to Netflix. action Password sharing. “It’s very common in the industry. Hulu’s advertising plan gets more revenue per user than the no-ads plan.”

Are there more mergers to come?

Last week ruling A federal judge’s ruling that Microsoft’s $68.7 billion acquisition of game publisher Activision Blizzard must proceed is rare good news for the media industry. This is a sign that significant consolidation may be ahead even if there is temporary regulatory intervention.

Although the Federal Trade Commission appealed Ruling, the bankers took this as a victory for dealmaking during the slow period of megadeals.

“It was a nice win for the bankers to go into the board room and say we’re not in an environment where really attractive M&As are going to be rejected by regulators. That’s encouraging,” said Solomon Partners’ Boidman.

As media giants struggle and shareholders grow frustrated, Boidman said, the judge’s ruling could spur more deals because “a lot of these CEOs are on the defensive.”

Regulatory hurdles abound even after the Microsoft deal. a federal judge shut down Book publisher Penguin Random House made a proposed purchase of Paramount’s Simon & Schuster last year. broadcast station owner Tegna put an end to It was sold to Standard General earlier this year due to regulatory pressure.

“The fact that we’re focusing so much on the Activision-Microsoft deal is indicative of the reality that dealmaking is going to be a huge tool for strengthening market position and growing your company inorganically in ways that doing what you can’t do yourself,” said. Jason Anderson, CEO of boutique investment bank Quire.

These CEOs will not make a deal just for the sake of making a deal. From this point forward, it will need a higher bar to consolidate.

Peter Liguori

Former CEO of Tribune Media

Andersen said bankers are always thinking about regulatory pushback, and that’s not necessarily the reason why deals don’t come together.

Warner Bros. and Discovery Merged In 2022, enlarging the combined company’s portfolio of cable networks and bringing together their streaming platforms. Most recently, the company relaunched its flagship service as Max, merging content from Discovery+ and HBO Max. Amazon bought In the same year M.G.M.

There were other megadeals before this as well. comcast acquired UK broadcaster Sky in 2018. next 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 tiny fraction of its TV assets.

“The Simpsons”: Homer and Marge


“The Street and forecasters forget that Comcast and Sky, Disney and Fox, Warner and Discovery – happened only a few years ago. But the industry talks as if these deals happened in BC and not AD era,” said Peter Liguori, former CEO of Tribune Media who is a board member of TV measurement company VideoAmp.

He added that once companies finish working through these past mergers and overcome the long-lasting effects of the pandemic, such as increased spending to acquire customers, consolidation is expected to continue. There is a possibility. “These CEOs won’t make a deal just for the sake of making a deal. From this point forward, it will require a higher level of consolidation.”

Still, with the rise of streaming and its lack of profitability and lack of pay-TV subscribers, more consolidation may be on the way, no matter what.

However, whether M&A helps propel these companies is another question.

“My gut reaction to the Activision-Microsoft decision was that if the FTC were to be disbanded, there would be more M&A,” Nathanson said. “But truth be told, Netflix has built its business around licensing content and hasn’t had to buy any assets. I’m not really sure that large transactions to buy studios have worked.”

— CNBC’s Alex Sherman contributed to this article.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.