This article was written by Mason McCaffrey, Market Specialist from Bloomberg LP.
Background
With the start of the WGA strike in May, late night television in the US was the first segment of the entertainment industry to be affected. As the strike continues into its third month, scripted TV programs for the fall season and new film productions are starting to become more impacted. Traditional media companies continue to rely on Live Sports coverage, reality TV shows, and pre-recorded content for offerings. Conversely, streaming options are able to lean on their backlog of content to weather the storm, similar to their Covid-19 practices. Broker estimates are writing two different scripts depending on if streaming is the primary revenue driver for companies. While negotiating parties remain hopeful, the possibility of an enduring strike continues. Deals reached by the Directors Guild of America with a new contract that offered an increase in wages, better compensation from streaming platforms and other rights protections may not mean similar deals for the WGA strike and current SAG strike.
Ad revenue
The initial impact of the strike was felt unequally across the industry. Less established streaming services who lack a deep backlog of content, and traditional cable providers that rely on ad dollars and licensing, may be at a disadvantage compared to an industry streaming giant like Netflix. Along with lawsuits and cord-cutting, economic headwinds are starting to be felt by legacy media firms. Fox may see a YoY decline in Ad Revenue for the period ending 12/31, its first in 5 years. Using MODL<GO>, the impact of these multiple factors can be seen on Fox’s estimates in the upcoming year. Brokers are estimating a 14% decrease in ad revenue in their best performing period each year.
The seasonality of the industry shows the first half of the year tends to see a decrease in Ad sales while the second half booms. The lack of content drawing viewers to their couches during these primetime months hasn’t yet shaken investor faith, with many major media firms having seen stock price increases since the strike began.
The future of ad revenue
Even with the headwinds of growing competition and strikes, Netflix seems to be unfazed by headwinds thus far. Netflix President, Ted Sarandos, in the 2023 Q1 earnings call, has previously stated that their robust backlog of content better positions the company to weather the incoming headwinds. While these thoughts came as the writer’s prepared to strike, this remains true with the continuing SAG strike threatening to push back further releases. During Gabelli’s 15th Annual Media & Entertainment Symposium in June, Naveem Chopra, EVP of Paramount Global, expressed that the ‘the Ad market really hasn’t changed in the last few weeks just to recap a bit of what we’ve said in the past[…]’ showing the short-term resilience of Ad Revenues for these major companies. Similar thoughts were mirrored by Disney in their prior earnings call, even as the strike came underway.
Industry headwinds
As streaming solidified its presence in the entertainment industry, companies must generate profits by operating efficiently and finding new avenues for generating revenue. As cord-cutting continues, advertisers seem to have been buying less advertising time slots. With Paramount+, Disney+, Hulu, and the SVOD industry providing ad-based tiers, these companies are poised to attract advertisers that have been spending less on television advertising. The Bloomberg Terminal allows analysts to see the decline in advertising time sales across the TV industry over the last five years. Long term ramifications can persist for the companies in the industry and increasing production costs will decrease the overall profitability from advertisers.
Estimates for advertising revenue for key streaming companies are on the rise signaling an increase in support from advertisers. This paradigm shift can be visualized on KPIC <GO> by comparing a handful of streaming advertising revenues. Already, the strike has caused a halt to production for several network tv programs and streaming originals; the final season of Netflix’s “Stranger Things” and ABC’s successful comedy “Abbott Elementary” to name a few. If the strike continues for the foreseeable future, the industry will have to be creative as to how they work through these potential production shortages. The established streaming based companies still appear to be in a better position due to their extensive catalogs and wallet friendly ad-based tiers that provide viewers lower cost options.
Tracking
As the WGA strike persists, the Screen Actors Guild has officially joined the line as negotiations between SAG-AFTRA and studios couldn’t come to an agreement. Cord-cutters continue to find alternative means to view programming, and headwinds brokers will update their estimates as companies issue guidance updates and remarks on the current situation. Leverage functions like MODL <GO> to view company fundamentals and broker estimates for specific companies and KPIC <GO> to analyze important KPI’s across the streaming peer group. Continue to leverage these functions as the strikes continue to see how companies and brokers react to the increasingly tumultuous economic landscape.
Bloomberg
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