Hollywood Reporter; Hollywood’s Elusive Goal This Year: Streaming Profits

Story from Hollywood Reporter:

“So You’re Sayin’ There’s a Chance.” Wells Fargo analyst Steven Cahall channeled a famous line from Dumb and Dumber in the title of a Nov. 3 report, in which he analyzed how Hollywood giants and their investors started off the final earnings season of 2023 with the hope that it would provide proof that the sector was finally making progress toward streaming profitability.

“This earnings season feels like a potential shift for direct-to-consumer (DTC),” Cahall wrote even before sector powerhouses Warner Bros. Discovery and Disney had shared their latest quarterly results. “DTC trends this earnings season indicate a potential earnings inflection. It’s potentially a fundamental moment that makes media more investable longer-term.” But he argued it was “too early to call it a turning point, too important to call it nothing.”

With the latest quarterly results all in and the year coming to an end, entertainment companies’ streaming losses for the first nine months of 2023 are indeed mostly down compared with the same period in 2022. But only one company is showing a streaming profit year-to-date before final quarterly results are reported in early in 2024. Wall Street will keep a close eye on progress in the new year.

Early on in the final earnings season of 2023, Comcast’s NBCUniversal said it grew its subscribers to streamer Peacock to 28 million as of the end of September. And it shared improved 2023 financial guidance for Peacock, lowering its previous “peak losses” estimate for this year from $3 billion to $2.8 billion. Plus, while streaming losses for the January-to-September period grew compared to the same period in 2022, losses related to Peacock narrowed to $565 million in the third quarter from a year-ago loss of $614 million, marking a turning point after a time of growing quarterly losses.

Meanwhile, Paramount Global grew its global streaming subscribers to 63 million and predicted narrowed streaming losses for 2023 compared with 2022. “We continue to execute our strategy and prioritize prudent investment in streaming while maximizing the earnings of our traditional business,” CEO Bob Bakish said on his earnings conference call. Highlighting that his team expects streaming losses this year to “be lower than in 2022,” he touted: “streaming investment peaked ahead of plan.”

At the end of Hollywood earnings season, Disney reported its latest narrowed quarterly streaming loss and cut its calendar year 2023 year-to-date losses in half, while it grew its core Disney+ subscribers to more than 150 million.

Disney CEO Bob Iger touted his restructuring efforts as helping drive the improvements. “Our new structure also enabled us to greatly enhance their effectiveness, particularly in streaming, where we’ve created a more unified, cohesive and highly coordinated approach to marketing, pricing and programming,” he said on the earnings call. “This has helped us improve operating results of our combined streaming businesses by approximately $1.4 billion from fiscal [year] 2022 to fiscal 2023 [ended in September]. And we remain confident that we will achieve profitability in the fourth quarter of fiscal 2024.”

So far, only Warner Bros. Discovery has managed to turn a profit in its streaming business over the course of the first nine months of this year, swinging from a loss of $1.85 billion for the January-to-September 2022 period to a $158 million profit for the first three quarters of 2023 and saying it would break even or even post a profit for all of 2023. The conglomerate ended the third quarter with 95.1 million global streaming subscribers, down from 95.8 million at the end of the second quarter.

“Only 19 months into the combined operation as Warner Bros. Discovery and a few months after the launch of Max, we are now on track to at least break even or even [be] profitable across the DTC segment, to swing up approximately $2 billion versus last year and very well ahead of our own plan,” WBD CFO Gunnar Wiedenfels touted on the company’s Nov. 9 earnings conference call. “This is an incredibly valuable asset and provides a strong vantage point for our path to long-term sustainable growth.”

Macquarie analyst Tim Nollen noted in a Nov. 13 report some negative trends won’t allow entertainment giants and their investors to celebrate much. ”The third quarter marked the third consecutive quarter of nearly 10 percent year-over-year linear pay TV sub declines as cord cutting continues,” Nollen pointed out. And media networks “posted another 12 percent average decline in linear ads, which is continuing into the fourth quarter, so the question becomes when and by how much will this recover?” he noted. “We expect underlying ad growth to remain negative in ’24 excluding major sports.” His conclusion was to cut earnings estimates and stock price targets across the entertainment sector, warning: “Life is tough for media networks when ad spending falls.”

MoffettNathanson analysts Michael Nathanson and Robert Fishman were less bullish on Hollywood’s streaming efforts. Sharing key takeaways from their latest L.A. visit in a report, they noted: “For much of the past four years, the entertainment industry spent money like drunken sailors to fight the first salvos of the streaming wars. Now, we are finally starting to feel the hangover and the weight of the unpaid bar bill. As a result, Netflix has been crowned victorious and the shakeout among the other combatants has begun.”

Nathanson and Fishman also argued that Disney has “amassed decent scale” in streaming, which the experts see as key to long-term success. “With its Hulu negotiations soon to be behind it, management will hopefully soon be free to proceed with a clearer strategy to capitalize on that scale,” they suggested.

But for now, they summed up the state of the streaming video space this way: “The Streaming Wars are over, and Netflix has won. While this has likely been the case for at least the past year or two, it has never been more clear from all our conversations around town.”

Why? “To date, only Netflix has succeeded in coming out the other side of deep investments with sustainable, cash-flow-positive scale,” MoffettNathanson analysts explained. “Whether due to rising interest rates, poor management/execution, or simply not being first, no other service has emerged from that trough, and there is growing uncertainty any will — at least not in a form currently recognizable.”

However, industry firm Ampere Analysis has predicted that “a significant turnaround for studio direct streaming is just around the corner, with all major studio streaming divisions (excluding sports operations) set to turn a consistent profit within 18 months.” In a Dec. 20 report, the research firm suggested: “The scene is now set for the streaming businesses of Disney, Warner Bros. Discovery, Paramount and NBCUniversal to head achieve consistent quarter-on-quarter profitability with the narrative switching from ‘when will studio streaming make money?’ to ‘who will get there first?'”

The firm’s analysis here focuses on “consistent profitability, taking into account income from subscription and advertising against content costs, staff and marketing costs, depreciation and amortization to predict the point that businesses reach consistently positive earnings before interest and tax (EBIT),” it explained.

Ampere predicts that Disney is likely to get there first, as early as calendar first quarter of 2024, which would be two quarters earlier than the company itself has predicted, and that “Warner Bros. Discovery will be a close second, reaching consistent profitability by calendar third quarter 2024, with both Paramount and NBCU not far behind, achieving the goal by the first quarter of 2025.”

And the research firm forecasts: “By 2028, studios will earn between $1 billion and $2 billion EBIT a year from streaming based on current market footprint alone. Additional geographic expansion would lead to even more upside.”

Ampere executive director Guy Bisson noted, “With studios now able to position streaming correctly as a profit-making direct subscription window that is complementary to theatrical exhibition, transactional and free television, sectors that had previously been deprioritized, should also see a boost. The rationalization of streaming is already seeing renewed support among studios for the theatrical window and revisiting of the content licensing model.”

© 2023 The Hollywood Reporter.