When the Numbers Don't Add Up: Recession Fears Weakening Hollywood's Streaming Ambitions

When the Numbers Don’t Add Up: Recession Fears Weakening Hollywood’s Streaming Ambitions

At every major studio, economic emergency brakes have been pulled, with hiring freezes, tighter controls on travel and entertainment spending and, yes, layoffs. In the world of legacy media, where studios have bet on streaming to offset declining cable revenue, it has also provided a gut check. Profits are still years away for many, and economic headwinds are accelerating cost-cutting measures that may have already been implemented as executives and Wall Street become more pragmatic about streaming.

AMC Networks explicitly exposed this case in its November 29 memo, in which the executive chairman James Dolan explained the need for “widespread layoffs as well as cuts in all areas of business” at the company. “We thought the cord-cutting losses would be offset by streaming gains. It didn’t,” Dolan wrote. “We are first and foremost a content company and content monetization mechanisms are in disarray.” Wall Street was initially surprised by the direct statement (as well as the departure of recently appointed CEO Christina Spade), but a source close to Dolan said The Hollywood Reporter that he was surprised by this reaction, given how “obvious” the problem facing the industry is.

Macroeconomic trends are hurting linear ad dollars, which companies had used to support streaming investments. And while companies offering live sports can leverage these events to minimize the damage to their advertising businesses (Fox, for example, says its sports advertising business continues to thrive), pure entertainment companies will feel the pain. more pain, due to the macroeconomic blow, in addition to the secular challenges.

Many pure-play entertainment companies face an “existential threat,” says Peter Csathy, president of Creative Media, largely because the pivot to streaming has yet to be fully realized. “The economy just isn’t working,” Csathy adds. “In this streaming-centric world, content budgets are too high. The revenue generated is too low in a hyper-competitive world where everyone is looking for the same streaming dollar.

Meanwhile, the cord-cutting is accelerating, with the largest pay-TV providers in the United States posting a loss of 785,000 net video subscribers in the last quarter, compared to a loss of 650,000 a year ago, according to a report by Leichtman Research.

As a small studio competing with giants, AMC Networks was particularly hard hit. The company just hit 11.1 million paid streaming subscribers (compared to Disney’s 236 million streaming subscribers and Netflix’s 223 million) and grew its streaming revenue by 40% over the past quarter, but still saw its overall net revenue decline 16% year over year. . Part of that comes from a drop in ad revenue related to the economic climate, but the company has also seen lower ratings on the linear side as more consumers cut the cord.

And even as subscriber growth has increased among streamers, analytics firm Antenna has seen a growing level of churn among top premium streaming services (including Netflix, HBO Max and Disney+), potentially a sign of shrinkage. consumers in a context of rising inflation. There were over 32 million cancellations across these 10 premium services in Q3 2022, up from 28 million in the previous two quarters.

While some of these trends have been happening for some time, over the past year Wall Street has turned more against streaming-focused companies that have yet to turn a profit. And in response, leaders have become more focused on the bottom line. That, combined with current fears of an economic recession, hastened the cuts and layoffs that should have happened eventually, Csathy said.

“These forces existed before the fall of the Dow Jones, but certainly the difficult times that everyone is facing right now give companies the opportunity to act now,” he said. “It’s easier for Company A to make big layoffs when you see your competitors are already doing the same.”

Bob Bakish, CEO of Paramount Global emphasized this thesis at an investor conference on December 6. The company recently revamped its ad sales division, and Paramount Studios and CBS TV saw dozens of layoffs in November. “We are embarking on a series of initiatives, which we were planning to do anyway, but we are definitely accelerating and using the current market as a catalyst,” Bakish said.

At Disney, Bob Iger said he plans to maintain former CEO Bob Chapek’s hiring freeze as he analyzes the company’s spending, including its record-breaking investments in streaming. It already plans to restructure the Disney Media and Entertainment Distribution division, with other business units expected to follow.

At Warner Bros. Discovery, the company is deleveraging and expects to incur up to $1.1 billion in restructuring charges as it cancels projects and cuts departments in a bid to cut costs and achieve the profitability of streaming. AMC Networks expects to bear up to $75 million in charges related to its layoffs.

The other savior for these media companies may be the addition of ad-supported streaming tiers, which many are rolling out. The ability to lower prices in times of rising inflation could offset the temporary challenge of a weak advertising market.

Consulting firm Deloitte, in its 2023 forecast report published on November 30, said that by the end of 2023, two-thirds of consumers in developed markets will use at least one ad-supported streaming service, and that ‘even more major ad-free streaming services will launch ad-supported tiers. Disney+ and Netflix have already announced their deals, and Warner Bros. CEO David Zaslav says there’s one planned at his company. Additionally, by the end of 2024, Deloitte predicts that half of all video-on-demand streaming providers will have a free, ad-supported option, similar to Paramount’s Pluto TV.

Speaking at an investor conference Dec. 5, NBCUniversal CEO Jeff Shell said there was “no doubt the cord-cutting is accelerating” and had an impact on business this quarter. It comes as employees meeting certain age and seniority requirements have been eligible for early retirement packages, and layoffs are expected to follow in the coming months. But Shell said it was only part of a larger “reorganization” as the company finds new ways to invest more in streaming, adding: “You need to reduce linear costs to as that business declines and try to maintain your margins”.

line chart showing decline in pay TV subscribers from 2010 to 2022

Source: Company reports, MoffettNathanson estimates and analysis

A version of this story first appeared in the December 7 issue of The Hollywood Reporter magazine. Click here to subscribe.

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