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‘Idiots’: Wall Street Analysts Unload on Hollywood
Sympathy is in short supply for the town's CEOs as earnings season kicks off
Claire Atkinson is a new contributing editor to The Ankler. She is currently also host of her own The Media Mix podcast, and founder of the newsletter of the same name.
If you want to know what investors think about the Hollywood strikes and the media sector right now, take a look at stock prices.
Two years ago, as cinema chains were re-opening post pandemic and Disney was wrestling with actress Scarlett Johansson after shifting Black Widow to streaming, the company’s stock price was a buoyant $176. On Friday, the stock closed at $87.
Over the same period, Shari Redstone’s Paramount Global has plummeted from $40 on July 21, 2021 to $15.50, and shares in Jim Dolan’s AMC Networks have slid from $52 to $13. Indeed, even factoring in the Netflix correction of last year, entertainment stocks are still down an additional 30-50 percent.
The media business is hurting and the strikes, mandated by actors’ union SAG-AFTRA and writers’ union WGA, are making things worse.
Despite criticisms from Hollywood leaders about poor timing of the strikes, some Wall Street analysts see the wisdom of a fast settlement.
Michael Pachter, research analyst at Wedbush Securities, is more pointed: “The market thinks all of the corporate bosses are idiots, and generally sides with the unions.”
He adds: “Higher pay might be difficult to endorse, but protections for residual uses of content and against AI make perfect sense to most people, and the media companies are intransigent and unapologetic.”
Indeed, it’s hard to find anyone on the analyst side feeling warm and fuzzy toward Hollywood right now.
“Investors were down on the media sector before the strikes and this hasn’t helped,” says James Dix, a former Wedbush analyst now covering the TMT sector with CryptoOracle, a New York-based investment advisory.
“I think investors are thinking about it in terms of what issues it raises; the implications of those issues from subscription growth and retention of new shows. The fact that [share] prices are down indicates concerns about the overall model. Cord cutting has come to streaming.”
He says investors are taking a moment to stand back and crystalize where things stand, weighing a much broader set of topics beyond the strikes, such as the impact of AI, and how the rapidly accelerating new technology will affect such things as time spent watching entertainment or interacting on social media.
Dix thinks there’s a chance that AI makes social media even stickier than before and could hurt the value of library programming, and have a knock-on effect on residuals paid to writers and actors. “AI becomes your best friend, it knows you well. It can know the habits of and likes of 100 people like you,” he says. “More time spent on social networks, less goes to media companies.”
TikTok for instance has a projected user base of 834 million subscribers by the end of this year and is expected to grow to a billion in the next two years, according to Insider Intelligence. There are signs its growth is eating into traditional media coffers. It is projected to take $6 billion in ad revenue this year. (TikTok is making a counter argument that it is also driving discovery, boosting video viewership on other streaming services.)
What if the Strikes Grind On
In a phone interview, Moody’s senior vice president Neil Begley said if the Hollywood strikes continue past the end of the year, it will result in weaker balance sheets and weaker credit metrics. He estimates the costs of a settlement in a new report out last week. “For all three [unions], it’s a range of $450 million to $600 million (including the DGA). That is what we believe would be the increased annual cost to the studios that would last for three years.”
While Hollywood unions have been on strike before, Begley describes the current moment as “a perfect storm,” since traditional media companies are still figuring out how to slow the declining profits in their broadcast and cable businesses while still pouring billions into loss-making streaming services and battling interest rates, and continued inflation.
Alice Enders, director of research at Enders Analysis in the U.K., notes that big media companies also had to shoulder much higher production costs as a result of Covid-19 protections: “This strike is really centered on the top tier of studios because they’re the ones with the big bucks.”
Simply put, strike-related higher costs is a credit negative at a time when Paramount, Warner and Disney are weighed down with big borrowings. The costs of streaming “has caused debt to EBITDA to be very elevated for some of these companies. Paramount Global is in the five times range which is not consistent with where their credit rating is by about two times multiple,” says Begley, pointing out that Warner and Disney are also at elevated levels relative to their debt ratings.
To make matters worse, as we now know, Wall Street rewarded media companies that could scale fast until that narrative hit the buffers in April 2022, when Netflix lost 200,000 subscribers, reported a bad quarter and saw its stock price plunge.
After that, Wall Street decided to replace subscriber growth-at-all-costs with profits, Begley says. And media companies have had to pivot fast, laying off thousands of workers, canceling shows and putting assets into play, along with bundling plans.
“We’re in the ‘show me’ phase for many of these companies,” says Begley. “They will continue to be depressed.” He says traditional media stocks will suffer unless they can get back to growing scale and become tier-one streamers with 200 million plus subscribers globally (for context: Max is at 97 million as of Q1; Paramount+ at 60 million). That scenario requires more content spending and expansion, not price increases for consumers that shrink the base, he believes. As yet, only Netflix and Disney are there.
LightShed Partners Rich Greenfield told CNBC on July 13, “This is not what the industry needed… Some of the CEOS are talking about how it will help free cash flow, I think that’s very short term.”
The strikes are helping Netflix in some ways. Co-CEO Ted Sarandos said on the earnings call on July 19 that the reduced spending as a result of strikes would increase projected free cash flow outlook by $1.5 billion to $5 billion in 2023. (Free cash flow is operating cash flow minus expenditure.) That’s more money to invest in IP and overseas productions.
Enders adds that Netflix is protected in ways others aren’t. “The BBC licenses to Netflix and no strike would affect that,” she says, adding that Netflix also doesn’t have the problem of a big theatrical business.
Greenfield raises another tricky issue in terms of how the strikes can be resolved — determining what is success. Squid Game was a big Netflix hit but no one can say what the dollar contribution to Netflix is. “Is it because you stay longer and don’t cancel or is it because a lot of people watch this week?” Greenfield said on CNBC. Even so, he argued, “The studios would admit the writers’ compensation needs to change.”
Despite the criticisms about the poor timing of the strikes where the media companies are concerned, some Wall Street analysts see the wisdom of a fast settlement. Wedbush Securities’ Pachter adds: “Higher pay might be difficult to endorse, but protections for residual uses of content and against AI make perfect sense to most people, and the media companies are intransigent and unapologetic.”
He says Disney CEO Bob Iger’s comments about the strikers being unreasonable don’t resonate with investors. “It’s his job to find a reasonable compromise and not to shut down production, and he’s failing miserably.”
Are there any reasons for cheer given the strikes, generative AI, the switch to streaming, and competition from social networks? “The positive story for Wall Street,” concludes Dix, “is that it’s going to force people to look for new business models and you’re negative until you find one.”