What will happen next after media stocks lost over $500 billion in value this year?

media

image via Shutterstock.com

The troubled sector was burdened by rising costs, debt-ridden balance sheets, and a renewed emphasis on profitability as investors swiftly penalized businesses that were having trouble making a profit. Shares of Netflix (NFLX) are down about 50% on the year, while those of Warner Bros. Discovery (WBD), Spotify (SPOT), and Roku (ROKU) are down a staggering 80%.

Fox (FOX) and Comcast (CMCSA), two cable operators, saw declines of about 20% and 30%, respectively, as shares of Paramount Global (PARA) fell by more than 45%. The much-anticipated “Avatar” sequel fell short of opening weekend expectations, capping off a difficult year for the House of Mouse. Disney (DIS), once a Wall Street darling, has fallen 45% on the year and is on track to have its worst year since 1947.

The largest media, cable, and entertainment companies in the world saw their market capitalizations wiped out by the stock market by a whopping $500 billion or more just this year alone. More pain is anticipated in 2023 due to rising interest rates and an unfavourable macroeconomic environment.

What exactly happened, then, and what might occur next?

Profit-driven Wall Street: “Time to be a real company”

Media had a definite “soul-searching” year in 2022 after the sector had a rocky ride during the pandemic, with record highs and shocking lows. Peak subscriber penetration levels in the US and Canada caused streaming companies’ growth to abruptly flatten as the “stay at home” trade reached its conclusion. As its market cap dropped from more than $267 billion at the end of 2021 to roughly $130 billion, Netflix, the long-time leader in the streaming wars, experienced its first-ever subscriber loss.

Similar to Peacock, NBCUniversal’s Peacock saw no growth in its second quarter, but subscribers bounced back in the third quarter with 2 million net additions. Production budgets have come under increased fire as a result of stagnant subscriber growth as well as increased competition. Disney increased its budget this year by $8 billion to $33 billion, while Netflix committed $18 billion to content alone in 2022.

Direct-to-consumer content spending increased from $2.7 billion in 2019 to $15.6 billion in 2021 among businesses that have started to switch from linear to streaming (apart from platforms like Netflix, Amazon, and Apple), per Wells Fargo data cited by Variety. This amount is anticipated to increase this year to almost $24 billion despite growing streaming losses.

A staggering $4 billion or more was lost by Disney’s direct-to-consumer division in its fiscal 2022, which ended on October 1. In the meantime, Paramount informed investors that streaming losses would surpass Wall Street predictions and amount to about $1.8 billion this year. Warner Bros. Discovery reported a free cash flow of negative $192 million in the third quarter, down from $705 million in positive cash flow the year prior. As a result of its messy restructuring efforts, the company has seen its market cap cut in half. By 2024, the company now expects to incur write-offs for content impairment and development costs totaling $3.5 billion.

Industry “pivotal” ad-supported content

Despite the global slowdown in ad spending, the race to profitability has made advertising one potential bright spot for investors. This year, Netflix and Disney joined the ranks of services that are ad-supported, including HBO Max from Warner Bros. Discovery, Peacock from NBCUniversal, and Paramount+ from Paramount Global.

According to Kevin Krim, CEO of the advertising measurement platform EDO, “it is unquestionably a pivotal moment for the industry.” There are only so many customers who will pay, Krim said, adding that this is something the industry has learned. Advertising is a very clever way to cover the cost of subscriptions.

All streamers want to avoid churn in the face of increased competition, and experts in the field agree that providing lower-cost, ad-supported options serves as a crucial hedge against this risk. According to Jon Christian, EVP of digital media supply chain at Qvest, the largest consulting firm specializing in media & entertainment, “I’m a big fan of giving consumers an option for an ad tier.”

Data, said Christian, will be a major motivator (and potential money maker) in terms of more specialized advertising in 2023: “Data can increase the cost of the various advertisements they are promoting on the platform.” The advantages of ad-supported will, however, probably take some time to develop. Already, there are signs that Netflix’s ad tier is going through some significant growing pains, such as reports of insufficient sign-ups and broken viewership promises. Analysts point out that it’s still early.

Investors should anticipate more media merger activity next year, along with a focus on content expenditure and advertising.

In a recent note, Wells Fargo analyst Steve Cahall stated: “According to our 2023 projections, the media and cable industries will respond to generally tougher times, both cyclically and structurally. Hard choices must be made in trying times.” The troubled Warner Bros. Discovery is one potential acquisition target for 2023 and beyond.

AMC Networks (AMCX), which is still going through a restructuring that could lead to an acquisition, will also be up for sale, as well as Lionsgate’s film and TV studio, which the entertainment juggernaut plans to spin off into a separate company. In a recent client note, Laura Martin of Needham stated that while smaller players like WWE (WWE), Curiosity Stream (CURIW), and Chicken Soup for the Soul (CSSE) will probably sell due to their size, Paramount could be appealing to unload.

Bob Iger, the CEO of Disney, who returned to the media company in November amid much fanfare, will have to make a number of decisions, including what to do with well-known assets like Hulu (should it be sold to Comcast?) and sports powerhouse ESPN.

Hiring freezes and layoffs affect major media

The world’s largest media companies have implemented hiring freezes and mass layoffs in an effort to stem the tide of declining profitability. Data from Challenger, Gray & Christmas, cited by Axios, shows that more than 3,000 jobs have been lost so far this year through the month of October.

In May, Netflix cut about 150 jobs from its 11,000-person workforce, blaming the move on “sluggish revenue growth” and greater spending cuts. Following the cancellation of CNN+, the elimination of additional CNN employees, and the 14% reduction in HBO Max staff this year, Warner Bros. Discovery revealed prominent Discovery executives will be leaving the company earlier this month.

The world’s largest media companies have implemented hiring freezes and mass layoffs in an effort to stem the tide of declining profitability. Data from Challenger, Gray & Christmas, cited by Axios, shows that more than 3,000 jobs have been lost so far this year through the month of October.

In May, Netflix cut about 150 jobs from its 11,000-person workforce, blaming the move on “sluggish revenue growth” and greater spending cuts. Following the cancellation of CNN+, the elimination of additional CNN employees, and the 14% reduction in HBO Max staff this year, Warner Bros. Discovery revealed prominent Discovery executives will be leaving the company earlier this month.

In 2022, the theatrical sector continued to bounce back from pandemic losses, but it is still unclear whether it will fully recover. Records were broken by movies like “Top Gun: Maverick,” while Marvel’s “Black Panther: Wakanda Forever” and “Doctor Strange in the Multiverse of Madness” snagged opening weekends with more than $100 million in the country.

Even so, over the course of its three-day opening weekend, Disney’s “Avatar: The Way of Water” only brought in $134 million domestically, falling short of projections and driving Disney share prices to their lowest point since March 2020. Theater executives supported the opening despite the failure, predicting the film will steadily add box office revenue over the holidays and well into 2023.

Netflix’s “Knives Out: Glass Onion” enjoyed a successful limited theatrical run over the Thanksgiving holiday, and Amazon is reportedly investing $1 billion to make 12 to 15 movies a year that are only released in theatres. These streaming behemoths have also embraced the theatrical experience.

According to Box Office Pro, the domestic box office will bring in about $7.4 billion overall for the entire year. There is hope that next year’s more robust release schedule will help close the gap, even though that number still falls behind pre-pandemic figures by about 30%

Changes in streaming and potential media mergers

Market analysts are beginning to wonder more and more whether consumers will pay more for streaming services so they can watch movies and TV shows at home. Another issue hurting companies like Netflix, Disney, and others is the onset of subscription fatigue. According to Tony McCutcheon, an analyst with BNP Paribas Securities Corp., “media is in a state of transition (linear legacy TV to streaming), which becomes more difficult when traditional revenue streams see pressure (advertising on weak macro and affiliate revenue on cord cutting), as will be the case in 2023.

AMC Networks’ recent layoffs indicate a difficult time for the media industry. Some analysts are optimistic that the recovery of the movie industry will partially offset the weakness of streaming. According to analysts at Tigress Research, “the return of former CEO Bob Iger drives a return to creativity dominance, and the ongoing release of blockbuster content will continue to drive its flywheel of growth.” Disney is the king of content because “content is king.” Due to the possibility that weaker players will want to band together in an effort to more effectively compete with Netflix and Disney, Wall Street is also beginning to make predictions about a potential new round of media mergers.

In a report, UBS analysts noted that Paramount considers industry consolidation to be “inevitable.” Bob Iger has returned to Disney. These are the issues he must resolve. It will be interesting to see if that prediction was correct. However, Wall Street is undoubtedly more optimistic about the future of media stocks.

For instance, analysts expect Comcast, owner of NBC/Peacock, to increase its stock price by about 25% from its current levels, while they anticipate a 30% increase in Disney’s stock price. Wall Street believes Warner Bros. Discovery may almost double. Therefore, media stocks may have already reached their bottom, despite the feeling that there is still more bad news to come.


Challenges faced by the media industry

These formats allow for the distribution of content for a variety of purposes, including entertainment, education, and idea promotion. These formats can be roughly divided into two categories: (1) Traditional media (those we’ve already named above), and (2) New media (like blogs, vlogs, websites, podcasts, websites, etc). These are some common issues that both of these formats encounter:

Transparency Issues

Since the beginning of the industry’s recognition, this has been a problem. The media houses have always been concerned about issues relating to the complexity of contracts, advertising, handling (and settlement) of funds, acquisition and retention of personnel and content, and ambiguity in having clients and producers on board.

Compliance with laws/regulations

The media industry finds it very challenging to act in accordance with all applicable laws and to adhere to all rules and regulations within the specified time frames. From handling the finances to filing returns to meeting reporting requirements with SEBI and other authorities to abiding by local laws governing the lease of the property, electricity, and other requirements, to employment laws and intellectual property laws, etc. Legal compliance is crucial because it protects businesses from lawsuits and financial losses while also allowing for the detection of violations. However, finding them can be difficult because laws are constantly changing. To overcome this obstacle, an organization needs a solid team.

Challenges in the taxation field

Each business is required to pay taxes to the local, state, and federal governments. The income tax department punishes defaulters severely, levying steep fines and even imprisoning them. Taxation is a very slippery slope, so it’s crucial to exercise caution as the media sector expands and expands safely (without being a target of the tax structure). Therefore, it is crucial that this sector has a very reliable section to manage taxes.

Threat to media channels

With the shift to digitization, attacks like social media account hacking, phishing, fraud, etc. have gotten faster and easier in addition to the transmission of news, facts, and information. Social media accounts are currently one of the most valuable assets in the media industry, and hackers can easily hack into them to spread false information that could hurt many people’s feelings and bring bad reputations to the media house. Additionally, the attackers might post a link to a malicious website using these handles, tricking the users into visiting it. These attackers have a history of robbing media outlets while disguising themselves as employees.