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It’s the third act of the streaming wars. That’s the time a hero, seemingly beaten and broken, rises up and saves the day. But Wall Street is worried that hero may never come for Hollywood.
Legacy media companies including Disney, Warner Bros. Discovery, Comcast and Paramount Global are trying to figure out the solution to self-inflicted financial wounds, particularly big spending as they chased streaming subscribers to compete with Netflix.
Companies have since slashed their budgets and adjusted their strategy for licensing homegrown movies and shows. Several streamers have added services supported by ad revenue, cracked down on password-sharing and raised prices.
Yet, Wall Street still isn’t satisfied. Warner Bros. Discovery and Comcast outperformed the S&P 500 in 2023, though just barely. Disney and Paramount underperformed. Netflix, on the other hand, overperformed significantly, with shares up 65%.
“We’re looking for someone to put forward a credible vision of how this industry is going to have a sustainable business model,” said Doug Creutz, managing director and senior research analyst at Cowen.
The answer might seem simple: a cable-style bundle, only with streaming. But, getting all these rivals to collaborate is almost as difficult as navigating increasing regulatory scrutiny, Creutz said. Similarly, prospects for mergers and acquisitions are uncertain, as several companies hold massive debt loads already and regulators are wary of limiting competition in the industry.
Wall Street wants a solution, or, at the very least, a company to set the stage for a potential solution. It was clear how to make money from linear TV, but so far it’s unclear how investors can cash in on streaming beyond investing in Netflix.
“The only thing that gets people back into the media investing has to be some type of hope that they can build an economic position in the streaming world,” said Michael Nathanson, MoffettNathanson founding partner and senior research analyst.
Figure out the bundle
There’s momentum for bundling subscription streaming services into something that resembles traditional cable TV, as media companies seek a way to create and sustain streaming profitability. Bundling, in turn, could ease the consumer experience, bringing content all into one hub.
“In theory, that’s a really good idea,” said Creutz. “But, there’s a lot of details that would have to be hammered out.”
The biggest hurdle is getting all the media companies to agree on what it would look like.
“You have to get a bunch of people in a room together to agree on something,” he said, “people who are not necessarily inclined to be cooperative.”
One of the biggest hurdles is how these companies would calculate average revenue per user, or ARPU, and subscriber growth when offering their services at a discount. A bundle would shrink ARPU, but if enough subscribers sign up, the cost could be offset.
Consider M&A difficulties
Mergers and acquisitions present another path to a bigger bundle, but Wall Street isn’t sure there will be a big deal in 2024.
“I think that there’s still an expectation that someone’s going to ride right across the horizon with some M&A that’s gonna fix problems,” Creutz said. “And I don’t think that’s going to happen.”
No company really wants to be a buyer right now, he said. Disney is still holding a high debt load from its acquisition of 20th Century Fox in 2019, and the same is true for Warner Bros. Discovery after its 2022 merger.
Rafael Henrique | Lightrocket | Getty Images
“What I’ve seen as a fundamental problem is that [these companies] have balance sheets built on linear cable network economics that are no longer stable,” Nathanson said. “The challenge to overcome is what do you do about your linear cable networks? Just given those headwinds, the combination of debt, plus instability of a core business that was good and sticky and stable — that’s the biggest conundrum.”
The biggest target is Paramount. Controlling shareholder Shari Redstone is reportedly eager to make a deal. She controls Paramount through her company National Amusements.
Warner Bros. Discovery CEO David Zaslav and Paramount CEO Bob Bakish met in late December for a preliminary discussion, but some speculate the leaked talks were a way for Warner Bros. to position itself as a viable asset for Comcast’s NBCUniversal.
There may be regulatory issues, too. Universal and Warner Bros. were two of the top three domestic movie studios by revenue in 2023, according to data from Comscore.
“I don’t think the regulatory environments would be supportive of consolidation,” said Creutz.
Leave ’em wanting more
A scene from “Barbie.”
Courtesy: Warner Bros.
Legacy media companies are also grappling with a beleaguered theatrical industry, which has yet to recover from the pandemic. Yet, Wall Street still sees value in this distribution avenue.
After all, Warner Bros.’ “Barbie” tallied more than $1.4 billion at the global box office, while Universal’s “The Super Mario Bros. Movie” and “Oppenheimer” snared $1.3 billion and $950 million, respectively.
“The message we sent to Hollywood in 2023 is we don’t need superheroes or Star Wars to go back to the theater,” Josh Brown, CEO at Ritholtz Wealth Management, wrote in a LinkedIn post last month. “We need events. Great scripts. Big stories. Real movie stars. Cinema!”
Film production stalled during the pandemic and again during dual Hollywood labor strikes last year. All of that resulted in fewer releases and smaller box-office returns. As it stands, the 2024 calendar is packed with sequels, prequels and spinoffs — the kind of content that failed to capture audiences in 2023.
“As we have seen with the stock prices of exhibitors, the reduced film slate outlook for 2024 has [clearly weighed] on investor sentiment heading into this year,” said Eric Wold, senior analyst at B. Riley Securities. “While the slate for 2025 has benefited from the slate delays in 2024, we do not believe investors are willing to step up to the plate right now and may wait until later in the year when visibility into 2025 improves.”
While cinema chains wait for Hollywood production to ramp back up, Wall Street foresees heavy investments in premium screens — such as IMAX, Dolby, Screen X and 4DX — that offer elevated experiences at a higher ticket price.
“The main focus of investors is a return to pre-pandemic profitability levels even with a reduced level of film output and attendance,” Wold said.
Additionally, Hollywood is still sorting out how it wants to handle theatrical windowing. Before the pandemic, films stuck around in theaters for at least 90 days before making the transition to on-demand, home video and streaming. Now, there’s no set timing. It’s up to the studio to make that call.
On one side of the spectrum, “Barbie” and “Oppenheimer” both spent more than 120 days in cinemas before coming to the home market. Then there was “Five Nights at Freddy’s,” which was released in cinemas and on NBCUniversal’s Peacock on the same day. Each strategy has its own rewards.
For “Barbie” and “Oppenheimer,” grassroots efforts led millions to see double features of the films on opening weekend, and word-of-mouth kept cinemagoers coming for months. For “Freddy’s,” horror-movie buffs and fans of the video game the film is based on turned out in hordes for its debut, and repeat viewings were held via streaming.
Either way, though, the lesson is clear: People still want to watch movies.
“There’s already too many TV shows,” Brown wrote. “Start making films again.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
