Home Technology The first act of the streaming wars saga is over — Netflix's fall from grace has ushered within the pivotal second act

The first act of the streaming wars saga is over — Netflix's fall from grace has ushered within the pivotal second act

The first act of the streaming wars saga is over — Netflix's fall from grace has ushered within the pivotal second act

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 leisure trade prides itself on its mastery of classical storytelling’s three acts: the setup, the battle and the decision.

It’s protected to declare the primary act of the streaming video wars over. Barring a shock late entrant, each main media and know-how firm that desires to be within the streaming recreation has planted a flag. Disney+, Apple TV+, Paramount+, Peacock and different new streaming providers are spreading across the globe.

“Act one was the land grab phase,” mentioned Chris Marangi, a media investor and portfolio supervisor at Gamco Investors. “Now we’re in the middle act.”

Last month, the central battle of the streaming wars got here into focus. The trade was thrust into turmoil after Netflix disclosed its first quarterly drop in subscribers in additional than a decade and warned subscriber losses would proceed within the close to time period.

Second act issues

  • Netflix’s fast decline after a pandemic-fueled increase has traders questioning the worth of investing in media firms.
  • Streaming is the way forward for the enterprise, no matter latest issues, as customers have gotten used to the pliability the providers supply.
  • There could possibly be extra consolidation to return, and streamers are more and more embracing cheaper, ad-supported tiers.

That information set off worries about streaming’s future and forged doubt on whether or not the rising variety of platforms might turn into worthwhile. At stake are the valuations of the world’s largest media and leisure firms — Disney, Comcast, Netflix and Warner Bros. Discovery — and the tens of billions of {dollars} being spent annually on new unique streaming content material.

As just lately as October, Netflix, whose hit collection “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 round $86 billion. 

Legacy media firms that adopted Netflix’s lead and pivoted to streaming video have suffered, too.

Disney shares are among the many worst performing shares on the Dow Jones industrials this yr, down about 30%. That’s though collection similar to “The Book of Boba Fett” and “Moon Knight” helped Disney+ add 20 million subscribers prior to now two quarters. The extremely anticipated “Obi-Wan Kenobi” premiered on Friday.

Warner Bros. Discovery’s HBO and HBO Max providers additionally added 12.8 million subscribers over the previous yr, bringing whole subscribers to 76.8 million globally. But shares are down greater than 20% because the firm’s inventory started buying and selling in April following the merger of WarnerMedia and Discovery.

Nobody is aware of whether or not streaming’s closing act will reveal a path to profitability or which gamers may emerge dominant. Not that way back, the system for streaming success appeared simple: Add subscribers, see inventory costs climb. But Netflix’s stunning freefall has compelled executives to rethink their subsequent strikes. 

“The pandemic created a boom, with all these new subscribers efficiently stuck at home, and now a bust,” mentioned Michael Nathanson, a MoffettNathanson media analyst. “Now all these companies need to make a decision. Do you keep chasing Netflix around the globe, or do you stop the fight?”

David Zaslav

Bloomberg | Bloomberg | Getty Images

Stick with streaming

The easiest path for firms could possibly be to attend and see whether or not their massive cash bets on unique streaming content material will repay with renewed investor enthusiasm.

Disney mentioned late final yr it could spend $33 billion on content material in 2022, whereas 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 worthwhile but, and losses are piling up. Disney reported an working lack of $887 million associated to its streaming providers this previous quarter — widening on a lack of $290 million a yr in the past. Comcast has estimated Peacock would lose $2.5 billion this yr, after dropping $1.7 billion in 2021.

Media executives knew it could take time for streaming to begin making a living. Disney estimated Disney+, its signature streaming service, will turn into worthwhile in 2024. Warner Bros. Discovery’s HBO Max, Paramount Global’s Paramount+ and Comcast’s Peacock forecast the identical profitability timeline.

What’s modified is chasing Netflix now not seems like a successful technique as a result of traders have soured on the thought. While Netflix mentioned final quarter that progress will speed up once more within the second half of the yr, the precipitous fall in its shares suggests traders now not view the whole addressable market of streaming subscribers as 700 million to 1 billion houses, as CFO Spencer Neumann has mentioned, however moderately a quantity far nearer to Netflix’s whole world tally of 222 million.

That units up a serious query for legacy media chief executives: Does it make sense to maintain throwing cash at streaming, or is it smarter to carry again to chop prices?

“We’re going to spend more on content — but you’re not going to see us come in and go, ‘All right, we’re going to spend $5 billion more,'” mentioned Warner Bros. Discovery CEO David Zaslav throughout an investor name in February, after Netflix had begun its slide however earlier than it nose-dived. “We’re going to be measured, we’re going to be smart and we’re going to be careful.”

Ironically, Zaslav’s philosophy could echo that of former HBO chief Richard Plepler, whose streaming technique was rejected by former WarnerMedia CEO John Stankey. Plepler typically argued “more is not better, better is better,” selecting to concentrate on status moderately than quantity.

While Zaslav has preliminarily outlined a streaming technique of placing HBO Max along with Discovery+, after which probably including CNN information and Turner sports activities on high of that, he is now confronted with a market that does not seem to help streaming progress in any respect prices. That could or could not decelerate his efforts to push all of his finest content material into his new flagship streaming product.

That has lengthy been Disney’s alternative of method; it has purposefully held ESPN’s stay sports activities outdoors of streaming to help the viability of the standard pay TV bundle — a confirmed moneymaker for Disney.

Holding again content material from streaming providers might have downsides. Simply slowing down the inevitable deterioration of cable TV most likely is not an achievement many shareholders would have a good time. Investors sometimes flock to progress, not much less fast decline.

Brian Roberts, chief government 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 additionally lacks the pliability of streaming, which many viewers have come to choose. Digital viewing permits for cell watching on a number of gadgets at any time. A la carte pricing provides customers extra selections, in contrast with having to spend practically $100 a month on a bundle of cable networks, most of which they do not watch.

More offers

Consolidation is one other prospect, given the rising variety of gamers vying for viewers. As it stands, Amazon Prime Video, Apple TV+, Disney+, HBO Max/Discovery+, Netflix, Paramount+ and Peacock all have world ambitions as worthwhile streaming providers.

Media executives largely agree that a few of these providers might want to mix, quibbling solely about what number of will survive.

One main acquisition might alter how traders view the trade’s potential, mentioned Gamco’s Marangi. “Hopefully the final act is growth again,” he mentioned. “The reason to stay invested is you don’t know when act three will begin.”

U.S. regulators could make any deal among the many largest streamers tough. Amazon purchased MGM, the studio behind the James Bond franchise, for $8.5 billion, however it’s unclear whether or not it could wish to purchase something a lot bigger.

Government restrictions round broadcast station possession would nearly definitely doom a deal that put, say, NBC and CBS collectively. That possible eliminates a straight merger between guardian firms NBCUniversal and Paramount Global with out divesting one of many two broadcast networks, and its owned associates, in a separate, messier transaction.

But if streaming continues to take over because the dominant type of viewership, it is potential regulators will ultimately soften to the concept broadcast community possession is anachronistic. New presidential administrations could also be open to offers present regulators could attempt to deny.

Warren Buffett and Charlie Munger press convention on the Berkshire Hathaway Annual Shareholders Meeting, April 30, 2022.


Warren Buffett’s Berkshire Hathaway mentioned this month it purchased 69 million shares of Paramount Global — an indication Buffett and his colleagues both consider the corporate’s enterprise prospects will enhance or the corporate will get acquired with an M&A premium to spice up shares.

Advertising hopes

Evan Spiegel, CEO of SNAP Inc.

Stephen Desaulniers | CNBC

“Advertising is an inherently volatile business,” mentioned Patrick Steel, former CEO of Politico, the political digital media firm. “The slowdown which started in the fall has accelerated in the last few months. We are now in a down cycle.”

Offering cheaper, ad-supported subscription will not matter until Netflix and Disney give customers a purpose to enroll with persistently good reveals, mentioned Bill Smead, chief funding officer at Smead Capital Management, whose funds personal shares of Warner Bros. Discovery.

The shift within the second act of the streaming wars might see traders rewarding the very best content material moderately than probably the most highly effective mannequin of distribution. Netflix co-founder and co-CEO Reed Hastings instructed the New York Times his firm “is continuing to have some of the most popular shows in America and around the world.” But it stays to be seen if Netflix can compete with legacy media’s established content material engines and mental property when the market is not rewarding ever-ballooning budgets.

“Netflix broke the moat of traditional pay TV, which was a very good, profitable business, and investors followed,” mentioned Smead. “But Netflix may have underestimated how hard it is to consistently come up with great content, especially when capital markets stop supporting you and the Fed stops giving away free money.”

Try one thing else

The main downside with staying the course is it isn’t an thrilling new alternative for traders who’ve soured on the streaming wars.

“The days of getting a tech multiple on these companies are probably over,” mentioned Andrew Walker, a portfolio supervisor at Rangeley Capital, whose fund additionally owns Warner Bros. Discovery. “But maybe you don’t need a tech multiple to do well at these prices? That’s what we’re all trying to figure out right now.”

Offering a brand new storyline is one approach to change the stale funding narrative. Media analyst Rich Greenfield advocates Disney purchase Roblox, a gaming firm based mostly on digital multiplayer interactive worlds, to point out traders it is leaning into creating experiential leisure.

“I just keep thinking about Bob Iger,” Greenfield mentioned of the previous Disney CEO, who departed the corporate in December. “When he came in, he made his mark by buying Pixar. That transformative transaction was doing something big and bold early on.”

Bob Chapek, Disney CEO on the Boston College Chief Executives Club, November 15, 2021.

Charles Krupa | AP

Given the intense pullback on Roblox shares, Greenfield famous Disney CEO Bob Chapek has a chance to make a transformative deal that would alter the best way traders view his firm. Roblox’s enterprise worth is about $18 billion, down from about $60 billion firstly of the yr.

But media firms have traditionally shied away from gaming and different out-of-the-box acquisitions. Under Iger, Disney shut down its recreation growth division in 2016. Acquisitions will help firms diversify and assist them plant a flag in one other trade, however they’ll additionally result in mismanagement, tradition conflict, and poor resolution making (see: AOL-Time Warner, AT&T-DirecTV, AT&T-Time Warner). Comcast just lately rejected a deal to merge NBCUniversal with online game firm EA, in accordance with an individual aware of the matter. Puck was first to report the discussions.

Yet massive media firms are now not compelling merchandise on their very own, mentioned Eric Jackson, founder and president of EMJ Capital, who focuses on media and know-how investing.

Apple and Amazon have developed streaming providers to bolster their providers choices round their major companies. Apple TV+ is compelling as an added purpose for customers to purchase Apple telephones and tablets, Jackson mentioned, however it’s not particular as a person stand-alone service. Amazon Prime Video quantities to a profit making a Prime subscription extra compelling, although the first purpose to subscribe to Prime continues to be free delivery for Amazon’s huge e-commerce enterprise.

There’s no apparent purpose the enterprise will immediately be valued in another way, Jackson mentioned. The period of the stand-alone pure-play media firm could also be over, he mentioned.

“Media/streaming is now the parsley on the meal — not the meal,” he mentioned.

Disclosure: CNBC is a part of NBCUniversal, which is owned by Comcast.

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