The past five years have seen most of Hollywood’s major media companies all adopt their Be Like Mike model, and launch a proprietary and functional streaming service to compete with it. black beast/Netflix’s big book.
It also saw the companies that run the service – Disney’s Disney+ and Hulu, Warner Bros. Discovery’s Max, Paramount’s Paramount Plus, and Comcast’s Peacock – amassing record losses totaling nearly $15 billion, all while their legacy film, broadcast and cable operations are over, fast.
Things are starting to improve. Disney added its streaming services to cash flow last quarter. Max took a look at the profit before going back to the loss. The budget slots formerly known as Peacock and Paramount Plus appear to be largely, if not completely, closed.
Now is the time to think about whether streaming can be a real business, you know, that makes money in a stable way and replaces at least the huge profits that the film and TV operations have given for a long time to the giants of Hollywood? That’s the question that analysts at research firm MoffettNathanson answer in a recently released report.
And the answer is, maybe, eventually, if you’re big enough.
“It’s a streaming world whether we like it or not,” wrote the MoffettNathanson team led by co-founder Michael Nathanson. “However, the question is whether we old curmudgeons should start liking it.”
It all depends on the measure. Bigger is better when it comes to covering the gargantuan operating costs of today’s big streaming company, including enough programming to feed the expectations of the audience, the cost of streaming content in the millions tens of users, and marketing to keep that audience signed up. and living everywhere.
“The voracious appetite for content, technology and development costs means that the way to make money is to monetize as much as possible with fixed costs,” MoffettNathanson’s team wrote. “And as revenue increases, there is greater ability to reinvest in content and drive subscriber and engagement growth.”
Scale, how many subscribers you have, and how much they watch, is even more important now that all streaming services (except Apple TV+) are ad-supported. . Ads need viewers to make money, so keeping your audience watching longer equates directly to profits.
Coming out on top of all this is Netflix, one of the first subscription streaming services and the first to receive many anti-industry inquiries, as it grew to 290 million subscribers worldwide in width. Netflix was late to the ad-supported game, launching a low-cost tier in late 2022, and has seen slow if steady growth since then. But they’re the cherry on top of the profits that Netflix and its investors have been eating for the past few years.
“Netflix has clearly achieved the required scale from a subscriber and engagement perspective,” MoffettNathanson wrote. “While the company has taken a long time to build its advertising business, we still believe its efforts will click, and when it does it should transform its existing business. except for big business. It may take time to get there, though.”
The rest are left very hungry:
- Disney has the second-highest subscribers but the total is spread across kids-friendly Disney Plus, adult Hulu and underrated sports service ESPN Plus, which is waiting to become a reality service this year. comes when it acquires cable giant ESPN’s. a large collection of sports rights. MoffettNathanson wrote: “Its DTC business is already profitable, but investors need more confidence in the network’s potential as well as the story that provides a clear vision of the integrated distribution product.” “Furthermore, how will sports, especially ESPN Flagship, play into these plans?” Of course, uncertainty about Disney’s plans, for its streaming operation and its next CEO, may have contributed to the price’s continued decline at $93, below $120-plus the conditions of the final proxy wars with Norman Peltz and other activist investors. .
- Max, Peacock, and Paramount Plus are no longer hemorrhaging money with billion-dollar fees, a boon to investors, but at a price that has seen them drastically cut back on original programming. “It’s true, they’re no longer big draws on their parents’ standard sheets,” MoffettNathanson wrote. “Even if they start generating modest profits, how sustainable can they be without capital investment? going forward? Streaming may prove to be a business where the winners get rich, but it’s still not clear that there will be much left for the rest.”
The research piece does not delve into the tech and entertainment giants – Amazon Prime Video and Apple TV+ – and most consider Netflix to be the best case for what’s possible. , now a sustainable multi-billion dollar business. with free cash flow.
But even lower-end services are seeing, on average, significant increases in net income and earnings before interest and taxes, even Paramount Plus, whose parent company is being sold and has limited resources. a lot. Its revenue rose 115 percent to $700 million in the first half of the year.
Advertising has helped everyone, even though a lot of advertising has driven down prices for everyone, even the most guilty of that loneliness, Amazon Prime, which turned millions tens of thousands of ad-free subscribers to the ad-supported category last night in February. .
“All in all, we believe that Netflix, Paramount + and Max each make more money for their users today than their ad-free subscribers, while Hulu, Disney + see the opposite, and Peacock that bang even,” MoffettNathanson wrote.
Netflix’s ad efforts are still “in their infancy” about two years into the future, but those efforts may drive the company’s next “series,” MoffettNathanson wrote.
Of course, that’s what subscribers are betting on. Shares have been hovering around $700 lately, and are up 75% in the past year. Morningstar analysts rate the company very high, with two stars, with a “fair price” of $500 per share. MoffettNathanson has revised its annual estimates for Netflix’s ad revenue to less than 1 percent, while it expects to cut costs to balance some of it.
“On a company-wide basis, we are now -8% below the consensus of the company’s total revenue in 2027 and -9% below the operating income, with the same expectations of network expansion -rang forward,” MoffettNathanson wrote. When a stock is close to a record high, “how much room is there for the stock to end?”
As the question rose, analysts left their price target unchanged, at $570, some $129 below Wednesday’s closing price. They still rate Netflix’s neutral status, which is equivalent to “hold”.
MoffettNathanson had scathing words for Disney’s distribution portfolio, calling it “stuck between the middle ground and the promised future, full of unknowns and possibilities.”
Disney’s three services topped 186 million subscribers in Q2, though that includes its money-losing Indian unit, HotStar, which it inherited from the Fox takeover and is now selling to a joint venture with Reliance. Minus HotStar, Disney has 150 million subscribers or more, and as many as Netflix in the United States-Canada market.
“However, Disney has not seen the benefits of that scale because of the fragmentation of its product,” MoffettNathanson wrote. About half of the company’s subscribers see all three services as part of the bundle, meaning about half still don’t, reducing the potential for a better experience user experience in a single interface, and reduce the likelihood of ad-supported programs.
“What we think Disney needs is a unified vision of what it wants its streaming product to look like,” MoffettNathanson wrote. “By committing to buy Comcast’s remaining third of Hulu, Disney has committed itself to becoming a comprehensive entertainment company that competes head-to-head with Netflix. By committing to bring all of ESPN OTT, Disney is committed to trying to reinvent its streaming channel portfolio. Disney wants to be a place for original, non-user-generated content, but it’s hard for us to see what that looks like right now.”
Analysts project Disney Plus will “go from being unprofitable in FY 2023 to becoming a profitable contributor in FY 2027#. We also project Hulu to grow its profits gradually from a loss in FY 2023 to $1.4 billion in FY 2027.” What happens when ESPN+ becomes a full-fledged cable-based sports service? ESPN is a great “wild card” in Disney’s deck.
The strong ratings of Disney Plus and Hulu mean that “investors need to have more confidence in this direction and understand the key KPIs on the way to give Disney credit for this profit in their price.”
So, is running a business a good business? If you’re Netflix, yes. For Disney, it still arrives, even though it is still “buds,” with many questions. Everyone has faced challenges that have reached the scale without bleeding, in part because they already have debt.
“New avenues of growth may be opened up if companies rely more on bundles and JVs. WBD has already moved in this direction with its recent partnership with Max, Hulu and Disney + ‘Ultimate’ bundle, and Paramount’s leadership discussed exploring a different partnership of different properties,” MoffettNathanson wrote.
The bottom line for the Other Guys, however, is that streaming can be a good business for only a few companies in the lucrative game.
“After the goods have been directed to those two platforms, it is difficult to see that there is much left for others,” MoffettNathanson concluded. “Streaming may no longer be an endless money pit for Warner Bros. Discovery and Paramount, but it’s hard to see their path to becoming significant profit centers in their own right.” .”
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