Big Media Has to Make Some Big Decisions

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Netflix’s recent troubles after a pandemic-fueled boom has investors questioning the value of investing in media companies.

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At stake are the valuations of the world’s largest media and entertainment companies — Disney, Comcast, Netflix, and Warner Bros Discovery — and the tens of billions of dollars being spent each year on new original streaming content.

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

As detailed by CNBC, Disney shares are among the worst performing stocks on the Dow Jones industrial Average this year, down about 30%. Warner Bros. Discovery shares are down more than 20% since the company’s stock began trading in April following the mega merger.

While Netflix suggests that growth will accelerate again in the second half of the year, the precipitous fall in its shares suggests investors no longer view the total addressable market of streaming subscribers as 700 million to 1 billion homes, as Netflix CFO Spencer Neumann has said, but rather a number far closer to Netflix’s total global tally of 222 million.

That sets up a major question for legacy media chief executives: Does it make sense to keep throwing money at streaming, or is it smarter to hold back to cut costs?

“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,’” Warner Bros. Discovery CEO David Zaslav said during an investor call in February. “We’re going to be measured, we’re going to be smart and we’re going to be careful.”

However, Zaslav needs to decide if a super-mega bundle of HBO Max and Discovery+, and potentially CNN news and Turner sports is the best strategy or to take a leaf of Disney’s book and hold back on the streaming.

Disney has purposefully held ESPN’s live sports outside of streaming to support the viability of the traditional pay TV bundle — “a proven moneymaker for Disney,” says CNBC.

Consolidation among the major streamers is considered inevitable. It’s only a question about how many will survive.

One major acquisition could alter how investors view the industry’s potential, Chris Marangi, a media investor and portfolio manager at Gamco Investors, tells CNBC. “Hopefully the final act is growth again. The reason to stay invested is you don’t know when act three will begin.”

If Warren Buffett’s radar is any indicator (he’s been right before…) then buying 69 million shares of Paramount Global is a sign that he believes the company’s business prospects will improve or the company will get acquired with an M&A premium to boost shares.

Could ad-supported streaming subscriptions ride to the rescue? Eyes will be on Disney’s launch of a new ad-laden Disney+ late this year. Netflix is also announcing their plans to launch an advertising-supported service after years of refusing to consider commercials.

While a cheaper Netflix may lead to some of its existing customers paying less, an advertising-supported service could actually help with profitability. Comcast’s Brian Roberts early on in 2022 said that the blended average revenue per user at Peacock, which already offers cheaper subscriptions with ads, is about $10 per month. That illustrates the value of advertising, given the vast majority of Peacock subscribers either pay nothing or $4.99 per month. HBO Max announced its $9.99 per month ad-supported service last year.

Yet advertising is an inherently volatile business and the world’s markets are borderline recession.

“The slowdown which started in the fall has accelerated in the last few months,” confirms Patrick Steel, former CEO of Politico. “We are now in a down cycle.”

CNBC (owned by Comcast) thinks investors could reward the best content rather than the most powerful model of distribution. But it remains to be seen if Netflix can compete with legacy media’s established content engines and intellectual property when the market isn’t rewarding ever-ballooning budgets.

“Netflix may have underestimated how hard it is to consistently come up with great content,” Bill Smead, chief investment officer at Smead Capital Management, tells CNBC.

Media analyst Rich Greenfield advocates for Disney to acquire gaming company and metaverse gateway Roblox, “to show investors it’s leaning into creating experiential entertainment.”

It’s a good time to buy: Roblox’s enterprise value is about $18 billion, down from about $60 billion at the start of the year.

“Acquisitions can help companies diversify and help them plant a flag in another industry, but they can also lead to mismanagement, culture clash, and poor decision making,” CNBC advises. Comcast recently rejected a deal to merge NBCUniversal with video game company EA, reports Puck.

Apple and Amazon have developed streaming services to bolster their services around their primary businesses. “Apple TV+ is compelling as an added reason for consumers to buy Apple phones and tablets,” says Eric Jackson, founder and president of EMJ Capital, “but it’s not special as an individual stand-alone service. Amazon Prime Video makes a Prime subscription more compelling, though the primary reason to subscribe to Prime continues to be free shipping for Amazon’s enormous e-commerce business.

“Big media companies are no longer compelling products on their own,” continues Jackson. “The era of the stand-alone pure-play media company may be over.”