In 2024, the world’s biggest traditional entertainment companies will have to face the consequences of losing $5bn from streaming services built by them in order to compete with Netflix.
Disney, Warner Bros Discovery Comcast, and Paramount – US entertainment conglomerates which have grown ever larger over the past decades – are under pressure to sell or shrink legacy businesses, reduce production, and cut costs after billions of dollars in losses on their digital platforms.
Shari Redstone has been putting the company up for sale in recent weeks. People familiar with the situation say that she has talked aboutselling Hollywood’s studio to Skydance. Skydance is the production company responsible for Top Gun: Maverick.
Bob Bakish, the chief executive of Paramount, also discussed and a possible combination with Warner CEO David Zaslav over lunch in mid-December. People familiar with both talks said that the discussions are still at an early stage.
The traditional media are also facing challenges beyond their streaming losses, including a declining advertising market, a decline in television revenues, and increased production costs as a result of Hollywood’s strike.
Rich Greenfield, a LightShed Partners analyst, said that Paramount’s discussions about a deal were reflected in the “complete panic” of the industry.
He said: “TV advertising falls far short. Cord-cutting continues to accelerate. Sports costs are increasing and the movie industry is not performing.” “Everything that could go wrong is happening.” “The only thing that [the companies] can do to survive is to try to merge and reduce costs.”
Netflix, a tech company that invented the streaming model over ten years ago, is now the clear winner in the fight to redefine video distribution.
In November, Michael Nathanson of MoffettNathanson wrote that the entertainment industry had spent like drunken sailors in order to wage the first salvos in the streaming wars. Now, we’re finally feeling the effects of the bar bill and the hangover.
Nathanson said that “the shakeout” has already begun for companies who have tried to compete with Netflix.
After a bumpy ride in 2022, Netflix is now profitable. The company’s earnings for the most recent quarter exceeded Wall Street expectations, as it added nine million new subscribers. This is the biggest increase since early 2020 when Covid-19 lockdowns caused a surge.
John Martin, former CEO of Turner Broadcasting and co-founder at Pugilist Capital, says that Netflix has pulled away. He said that the question for its competitors is: “How do you create an attractive streaming service with an attractive business model?” They’re not working.”
In 2023, the leading streaming services raised their prices aggressively. Analysts, investors, and executives now predict that consolidation could occur next year, as smaller streaming services combine or withdraw from the streaming wars.
Warner, the company that owns HBO and Warner Bros, made a modest profit on its US streaming service this year. This was due to a combination of raising prices, aggressively removing some series, and licensing other series to Netflix. Warner has paid a heavy price for this: it lost over 2mn streaming subscriptions in the two most recent quarters.
Comcast is seen as the most likely takeover candidate. The company, which was merged last year with Discovery, has been mentioned as a possible takeover candidate for a long time. Zaslav hinted in November that his group was interested in being an acquirer, not a target.
There are many. . . There are too many players on the market. This will allow us to not only grow the business in the coming year but also to maintain a stable balance sheet. . . He said this on a earnings call.
Two years was the time period set by the merger agreement between Warner-Discovery. This period ends on April 8th.
Disney, the world’s largest traditional media firm, is undergoing a gutting reorganization, which has seen 7,000 jobs cut and activist investors attack the company. In the first nine-months of 2023, Disney+ gained 8mn new subscribers while losing more than $1.6bn. The company claims it will start making money in streaming by late 2024.
Disney’s chief executive Bob Iger questioned this year whether certain assets were still relevant to the company. This led to speculation that Iger was considering disposing of some assets. No deals were made, which led some investors to believe that private equity and tech companies are not interested in acquiring legacy businesses.
Paramount shares are up almost 40% since the beginning of November, as speculation about a sale has increased. Stocks rose after Skydance discussions were reported. However, both Paramount’s and Warner’s shares dropped after news broke of their talks.
Analysts stated that the high debt levels of both companies were an immediate concern to investors. Citi analysts wrote last week that they believed investors would focus on pro-forma leverage before all else. The analysts estimated that a merger of Warner and Paramount based on stock would yield synergies of at least $1bn.
Greenfield, however, said that merging two companies which had loss-making streaming services as well as large portfolios of declining TV assets was not going to solve their problems.
He said, “The correct answer is to stop trying so hard to be in streaming business.” “The solution is to get smaller, focus on what we do and stop trying so hard to be a large company,” he said. Let’s drastically shrink.”