Traditional television is on its way out. Ad income is declining. Streaming is not a profitable business. And Hollywood is practically shut down as the actors’ and writers’ unions prepare for a long and brutal work strike.

All of this uncertainty will be on investors’ minds as the media industry begins its earnings season this week, with Netflix leading the way on Wednesday.

With a new advertising strategy and an effort to curb password sharing, Netflix appears to be the best positioned among traditional media behemoths. For example, Disney CEO Bob Iger extended his contract through 2026 last week, telling the market that he needed more time at the Mouse House to confront the difficulties ahead. At the top of the list is competing with Disney’s TV networks, which look to be in worse shape than Iger anticipated. “They may or may not be core to Disney,” he said.

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

Although the industry has been weighed down by a soft advertising market for several quarters, Nathanson believes that the recent introduction of a cheaper, ad-supported option for services such as Netflix and Disney+ will be one bright spot as one of the few areas of growth and concentration this quarter.

Iger has spoken at length about how advertising is part of the plan to bring Disney+ to profitability in recent investor calls and in Thursday’s interview. Others, including Netflix, have expressed similar sentiments.

Netflix is expected to publish profits after the market closes on Wednesday. Wall Street will be interested in learning more about the deployment of its password sharing crackdown in the United States, as well as the status of its recently introduced ad-supported option. After a drop in 2022 that followed its first subscriber loss in a decade, the company’s stock is up nearly 50% this year.

Following Iger’s comments that traditional TV “may not be core” to the company and that all options, including a sale, were on the table, investors will turn their attention to legacy media companies such as Paramount Global, Comcast, and Warner Bros. Discover, which each have significant portfolios of pay-TV networks. These corporations, as well as Disney, will report earnings in the coming weeks.

Members of The Screen Actors Guild – American Federation of Television and Radio Artists joined the more than 11,000 already striking film and television writers on the picket line only a week before the earnings season began.

The strike, which is the consequence of failed discussions with the Alliance of Motion Picture and Television Producers, effectively shuts down the sector. It is the first such dual strike since 1960.

The labor dispute erupted just as the business was shifting away from streaming expansion at all costs. Earlier in the Covid epidemic, media businesses witnessed an increase in subscribers – and stock prices – after investing billions in new content. However, growth has now stalled, necessitating budget cuts and layoffs.

“The strike happening suggests this is a sector in tremendous turmoil,” said Mark Boidman, head of media and entertainment investment banking at Solomon Partners. He mentioned that shareholders, notably hedge funds and institutional investors, were “very frustrated” with media businesses.

Last week, Iger told CNBC that the strike couldn’t have come at a worse moment, citing “disruptive forces on this business and all the challenges that we’re facing,” on top of the industry’s ongoing recovery from the pandemic.

These are the first strikes of their type in the era of streaming. The latest writers strike happened in 2007 and 2008, lasting around 14 weeks and giving rise to unscripted, reality television. Since early May of this year, Hollywood writers have been on strike.

Depending on how long the strike lasts, new film and TV programming may dry up, leaving streaming platforms and TV networks with nothing but library content, live sports, and news.

According to Insider Intelligence analyst Ross Benes, the strikes may have less of an impact on Netflix in the short run. The strike has no effect on content produced outside of the United States, an area in which Netflix has made significant investments.

“Netflix is poised to outperform the competition because it produces shows so far in advance.” And, if necessary, they may rely on overseas shows, of which they have a plethora,” Benes explained. “Netflix is the strike’s antagonist because it changed the economics of what writers get paid.”

The drop of pay-TV subscribers, which has accelerated in recent quarters, should continue to accelerate as customers increasingly turn toward streaming, according to Disney CEO Bob Iger.

Despite this, many networks continue to be cash cows, and they also supply material to other sectors of the business, particularly streaming.

Increasing the price of cable packages has been a strategy of keeping profitable for pay-TV distributors. However, according to a recent MoffettNathanson study, “the quantity of subscribers is falling far too fast for pricing to continue to offset.”

Iger, who started his career in network television, told CNBC last week that while he had a “very pessimistic” opinion of traditional TV before his return in November, he has now discovered that it is much worse than he thought. The CEO stated that Disney is evaluating its network portfolio, which includes broadcaster ABC and cable networks such as FX, implying that a sale is possible.

A majority interest in Paramount’s cable-TV network BET is being considered for sale. Comcast’s NBCUniversal has closed networks like NBC Sports and merged sports programming on other channels like USA Network in recent years.

“The networks are a dwindling business, and Wall Street doesn’t like dwindling businesses,” Nathanson explained. “However, for some businesses, there is no way around it.”

Worse, the sluggish advertising market has been a source of anguish, particularly for traditional television. It hurt on the earnings of Paramount and Warner Bros. Discovery in previous quarters, both of which have sizable cable network portfolios.

According to a recent MoffettNathanson analysis, advertising pricing rise, which has long countered viewership decreases, is a major source of concern. According to the business, this could be the first non-recessionary year in which advertising upfronts do not result in rises in TV prices, especially as ad-supported streaming enters the market and consumes inventory.

The launch of lower-cost, ad-supported tiers by streaming services will be a big subject again this quarter, especially after Netflix and Disney+ unveiled their platforms late last year.

“The soft advertising market affects everyone, but I don’t think Netflix is as badly affected as TV companies or other established advertising streamers,” Benes explained. While Netflix is the most established streamer, its ad tier is fresh and has plenty of space for growth, according to him.

Advertising is now regarded as a crucial factor in platforms’ overall efforts to achieve profitability.

“It’s not a coincidence that Netflix suddenly became judicious about freeloaders while pushing a cheaper tier that has advertising,” Benes said, referring to Netflix’s crackdown on password sharing. “It’s fairly common in the industry.” Hulu’s ad package generates more income per user than the non-ad plan.”

Will there be additional mergers?
A federal judge’s decision last week to allow Microsoft’s $68.7 billion acquisition of game developer Activision Blizzard to proceed is a rare bit of good news for the media business. It’s a sign that even if there’s brief regulatory intervention, considerable consolidation may take place.

Despite the fact that the FTC challenged the verdict, bankers saw it as a win for deal-making amid a quiet moment for megadeals.

“This was a nice win for bankers to go into board rooms and say we’re not in an environment where really appealing M&A will be shot down by regulators.” “It’s encouraging,” said Boidman of Solomon Partners.

As media conglomerates struggle and shareholders become dissatisfied, the judge’s decision could spur additional mergers and acquisitions since “a lot of these CEOs are on the defensive,” according to Boidman.

Beyond the Microsoft transaction, regulatory stumbling obstacles have been common. Last year, a federal judge blocked Penguin Random House’s proposed acquisition of Paramount’s Simon & Schuster. Due to regulatory opposition, Tegna’s sale to Standard General was canceled this year.

“The fact that we are so focused on the Activision-Microsoft deal is indicative of a reality that deal-making will be an enormous tool going forward to solidify market position and jump your company inorganically in ways you couldn’t do yourself,” said Jason Anderson, CEO of Quire, a boutique investment bank.

These CEOs will not simply do a deal for the sake of doing a deal. Consolidation will require a higher standard from this point forward.

However, Anderson emphasized that bankers are constantly concerned about regulatory opposition, which shouldn’t be the reason deals don’t come together.

In 2022, Warner Bros. and Discovery amalgamated, expanding the combined company’s portfolio of cable networks and merging its streaming platforms together. The firm recently relaunched its primary service as Max, combining content from Discovery+ and HBO Max. The same year, Amazon purchased MGM.

Other megadeals occurred prior to that as well. Comcast purchased Sky in the United Kingdom in 2018. The next year, Disney spent $71 billion for Fox Corporation’s entertainment holdings, which gave Disney “The Simpsons” and a majority position in Hulu, but only accounts for a minor percentage of its TV properties.

“The Street and forecasters forget that Comcast and Sky, Disney and Fox, Warner and Discovery—these events occurred only a few years ago.” “However, the industry talks about these deals as if they happened in BC, not AD,” said Peter Liguori, former CEO of Tribune Media and board member of TV measurement startup VideoAmp.

Consolidation is expected to continue until companies have finished working through previous mergers and have moved past the pandemic’s lasting effects, such as higher spending to recruit subscribers, he said. “These CEOs will not simply do a deal for the sake of doing a deal. From now on, consolidating will require a higher bar.”

Regardless, with the development of streaming and its lack of profitability and loss of pay-TV consumers, more consolidation may be on the horizon.

The question is whether M&A helps these companies move forward.

“My gut reaction to the Activision-Microsoft ruling was that if the FTC is defanged, there will be more M&A,” Nathanson said. “However, Netflix built its business by licensing content rather than purchasing assets.” “I’m not sure the big studio acquisition deals worked out.”


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