An uncaptioned image posted on the company’s website appears to show Starshield technology in orbit.
SpaceX
The Pentagon has awarded Elon Musk’s SpaceX its first confirmed contract for the Starshield network it’s developing, a military-specific version of the company’s Starlink satellite internet system, the defense agency said Wednesday.
A Space Force spokesperson confirmed that SpaceX on Sept. 1 was awarded a one-year contract for Starshield with a maximum value of $70 million. The award came alongside 18 other companies through a program run by the Space Force’s commercial satellite communications office.
“The SpaceX contract provides for Starshield end-to-end service (via the Starlink constellation), user terminals, ancillary equipment, network management and other related services,” Space Force spokesperson Ann Stefanek told CNBC.
SpaceX did not immediately respond to CNBC’s request for comment on the Starshield contract.
The company unveiled Starshield last year as a new business line. The Pentagon is already a high-value buyer of the company’s rocket launches and had shown increasing interest in its Starlink satellite internet.
SpaceX has given few details about the intended scope and capabilities of Starshield. It markets the service as the center of an “end-to-end,” dedicated offering for national security with capabilities distinct from its Starlink consumer and enterprise network.
SpaceX’s award for Starshield follows its June win of a Pentagon contract to buy an undefined number of Starlink ground terminals for use in Ukraine.
The initial phase of the Starshield contract obligates $15 million to SpaceX by Sept. 30, to provide services that support 54 military “mission partners” across Department of Defense branches, the spokesperson said.
Jen Van Santvoord rides her Peloton exercise bike at her home in San Anselmo, California.
Ezra Shaw | Getty Images
Peloton shares spiked Wednesday after the company announced a five-year partnership to develop digital fitness content for Lululemon.
As part of the agreement, Lululemon will become Peloton’s primary athletic apparel provider.
Peloton’s stock jumped more than 15% in extended trading. Shares of Lululemon — which has a roughly $48 billion market cap compared to Peloton’s $1.7 billion — were flat in after-hours trading.
Lululemon said it will stop selling the Studio Mirror, which allows users to stream workout classes, by the end of the year. It will still offer service and support for existing Mirror equipment.
The news comes a day after Peloton announced co-founder and Chief Product Officer Tom Cortese is leaving the company. Peloton has shifted its strategy to focus more on subscriptions and less on its pricey exercise equipment.
This is breaking news. Please check back for updates.
Coca-Cola Co.’s Minute Maid and Simply Orange brand orange juices sit on display in a supermarket in Princeton, Illinois.
Daniel Acker | Bloomberg | Getty Images
Orange juice is the latest item to succumb to higher prices at the grocery store, with futures on the commodity good reaching an all-time high this week.
Future prices for the breakfast staple have been steadily climbing over the past few months, hitting a record high of $3.69 per pound Tuesday morning. That number is up 13% month to date and almost 78% year to date.
With the price hike, the juice joins other major grocery store items facing high prices even as inflation slows, including raw sugar and cocoa.
The drink’s price has shot up due to hurricanes and bad weather that slammed Florida — the main producer of orange juice for the U.S. — last year, which reduced the crop to its lowest level in nearly 80 years. A late freeze at the end of last year also devastated the crops.
In July, the U.S. Department of Agriculture said it expected Florida to produce just around 15.9 million boxes of oranges this year, down 70% from the 2020-21 season.
Other exporters such as Brazil and Mexico also lowered their estimated yields for the year, citing crop difficulties from warmer weather.
Pedestrians walk past a Levi’s store in Midtown Manhattan.
Sopa Images | Lightrocket | Getty Images
The CEO of the world’s most famous denim jeans company said he knew from his second day on the job that the best way to turn around the company was to fire more than half of his executives.
“The easiest way to change the culture is to change the people. I had 11 direct reports, and in the first 18 months, nine of them were gone,” Charles Bergh, CEO of Levi’s Strauss, said.
Still, Bergh told CNBC’s Christine Tan that his biggest regret was not firing the wrong people fast enough.
“My biggest regret is that we didn’t lean into some of these great leaders, and we lost some because I held on to somebody longer than I should have.”
Bergh joined the apparel retailer in 2011 at the worst possible time — consumers were no longer buying Levi’s jeans.
“The brand was really lost. We had a whole generation of consumers that didn’t grow up wearing Levi’s like I did when I was a kid,” Bergh said.
“The company’s performance had been really erratic for more than 10 years. One year the revenues would go up, but the profits would go down. The next year, they would fix the profits, but the revenues went down.”
Charles Bergh, CEO of Levis Strauss & Co., speaks during the 2015 Fortune Global Forum in San Francisco, California, U.S., on Tuesday, Nov. 3, 2015.
Bloomberg | Bloomberg | Getty Images
Six years later, Bergh brought what he called a once “broken” brand back into the limelight.
In 2017, Levi’s delivered 8% annual revenue growth — its highest in a decade and well above the 3.1% growth posted a year earlier. The company kept building, notching 14% year-on-year revenue growth in 2018.
Bergh is stepping down as CEO next year and said his biggest legacies will be jolting the company out of complacency and building a team with the brand at the center of culture.
“I am just the orchestra conductor and have built an amazing team around me,” he added.
Still, it’s not all smooth sailing ahead. The company severely cut its 2023 profit outlook after it reported a steep decline in wholesale revenue and soft sales in the U.S., its largest market. It now expects sales to grow between 1.5% to 2.5% this year versus the prior range of 1.5% to 3%.
Like many apparel companies, Levi’s had to adapt to changing consumer preferences, especially the growing demand for comfortable and looser fit garments as workers returned to offices after the pandemic.
A guest wears a blue denim shirt from Levi’s during New York Fashion Week, on September 13, 2022 in New York City.
Edward Berthelot | Getty Images Entertainment | Getty Images
In 2021, the company acquired activewear brand Beyond Yoga, a move that Bergh previously told CNBC would help grow its women’s business. At the time, he said the goal is for women’s wear to account for 50% of Levi’s business.
“It drives me crazy watching a woman walk into our store, buying our bottoms and then walking out and going to an unnamed competitor’s store to buy their top,” Bergh said.
Sales of women’s products made up 35% of net revenue in the first half of the year.
One promising area for Levi’s growth is its expansion in Asia.
“We’re opening bigger stores [and] we’re having more of a consumer impact,” Bergh said, emphasizing how revenge spending among Chinese customers will be a “huge opportunity” for the brand. ho
Pedestrians walk past a Levi´s store in Hong Kong.
Sopa Images | Lightrocket | Getty Images
Still, Asia accounts for less than 20% of the company’s total sales and China makes up less than 3% of the company’s total business, according to Bergh.
“Many of our competitors are 10% or more. Look at Nike, 40% of Nike’s market cap is probably China. So we know we’ve got an opportunity here,” he said.
“We’re adding about 100 doors a year net globally, and about a third of those stores are going to be here in Asia.”
People walk past a Peloton store in Coral Gables, Florida, on Jan. 20, 2022.
Joe Raedle | Getty Images
Peloton co-founder and Chief Product Officer Tom Cortese is leaving the company and will be replaced by longtime Silicon Valley veteran Nick Caldwell, the company announced Tuesday.
Cortese, who helped found the connected fitness company alongside former CEO John Foley in 2012, will move into an advisory role beginning Nov. 1, the company said.
“After nearly 12 years of pouring myself into Peloton and serving our Members, I have decided it is time to move on and create space for new perspectives,” Cortese said in a news release.
“I’m eager for new growth for Peloton and for me personally, but I’m also excited to support and watch this next phase of Peloton’s evolution. I could not be more proud of what we have accomplished, together.”
Caldwell most recently served on the board of tech companies Bitly, HubSpot and True Search and previously did stints at Twitter, Google, Reddit and Microsoft, where he worked for nearly 16 years at the start of his career, according to his LinkedIn profile.
He’ll oversee global product development and will start the new role Nov. 1.
“I want to thank Tom for his tireless dedication since launching Peloton nearly 12 years ago as a Co-Founder of the business. We simply wouldn’t be here today without his contributions,” CEO Barry McCarthy said in a statement. “Nick brings impressive engineering, design, and product experience to the Peloton team. Nick joins us at an exciting time as we lean into growing our subscriber base online and on our connected fitness hardware.”
The news comes more than a year into McCarthy’s stint as Peloton’s CEO. Since he took over, he has tapped Leslie Berland as the company’s marketing chief and Dalana Brand as its chief people officer, among other hires. Both Berland and Brand were executives at Twitter before joining Peloton.
With Cortese’s departure, just two executives from Peloton’s early days remain in its C-suite. Jennifer Cotter, the company’s chief content officer, and Dion Camp Sanders, its chief emerging business officer, have both been with the company since Foley was at the helm.
During an interview with CNBC earlier this year, Cortese recalled Peloton’s early days and what inspired him and Foley to start the business.
Peloton co-founder Tom Cortese.
Source: Peloton
“[In] 2013, so 10 years ago now, I was standing in the Short Hills Mall in New Jersey, my kids thinking that I was a mall retail guy, and we were selling people on the idea of being able to access energetic, remarkable fitness from the most convenient place on Earth: their home,” Cortese told CNBC.
“The reason we were doing that is because what we saw happening in the real world … brick and mortar, was that people were turning to boutique studio fitness as something that was starting to excite them, right? So just going to the gym wasn’t quite doing it … hence the Peloton Bike, and all that goes with it, was born.”
Cortese started as the company’s chief operating officer and took over as product chief in August 2021, according to his LinkedIn. Most recently, he was involved in the development of Peloton’s app and the introduction of new product features on its connected fitness products.
Back in the company’s early days, Peloton was a product-first retailer that made the bulk of its revenue selling its pricey connected fitness products, including its Bike, Bike+ and Tread, as an alternative to the gym.
However, in the years since, Peloton’s products have undergone numerous recalls for a series of manufacturing flaws, some that left customers injured.
Its Tread+ treadmill was recalled after a child was killed. The company has since been mired in fines and legal battles related to its products and their recalls.
When Peloton last reported earnings Aug. 23, executives said they believe the most recent recall of its Bike seat post led to increased membership churn and was costing the company far more than it anticipated.
These days, subscription revenue is Peloton’s primary revenue driver. Earlier this year, it announced a massive brand overhaul that elevated Peloton’s subscription offerings and signaled the company is just as invested in its app as it is its hardware.
While the company frequently insists hardware is still one of its primary focus areas, new product development appears to have slowed.
When asked earlier this year if the company had plans to introduce new hardware, Cortese hinted at more to come.
“We maintain a strong hardware development team,” he said. “They are certainly not twiddling their thumbs.”
Hollywood’s writers and studios have a preliminary labor agreement.
Talks between the Writers Guild of America and the Alliance of Motion Picture and Television Producers resumed last week after months of starts and stops, ultimately leading to a tentative deal that would end the ongoing writers strike.
The WGA and AMPTP are still drafting the final contract language.
“What we have won in this contract — most particularly, everything we have gained since May 2nd — is due to the willingness of this membership to exercise its power, to demonstrate its solidarity, to walk side-by-side, to endure the pain and uncertainty of the past 146 days,” the WGA negotiation committee wrote in a letter to members Sunday night. “It is the leverage generated by your strike, in concert with the extraordinary support of our union siblings, that finally brought the companies back to the table to make a deal.”
Striking members of the Writers Guild of America and supporters march toward the La Brea Tar Pits in Los Angeles, June 21, 2023.
Irfan Khan | Los Angeles Times | Getty Images
Hollywood scribes initiated a work stoppage in early May as negotiations broke down with studios including Disney, Paramount, Universal and Warner Bros. Discovery. Television and film writers sought protections against the use of artificial intelligence, in addition to increases in compensation for streamed content.
The WGA did not disclose what provisions ultimately made it into the preliminary contract, but told union members that “this deal is exceptional — with meaningful gains and protections for writers in every sector of the membership.”
Once the WGA and AMPTP agree on the language within the contract, the negotiating committee will vote on whether to recommend the agreement and send it to the Writers Guild of America West Board and the Writers Guild of America East Council for approval. Then, the board and council will vote on whether to authorize a contract ratification vote by membership.
WGA leadership noted that the strike is not over and no members of the guild are to return to work until the agreement is officially ratified. Members were encouraged to continue standing in solidarity with striking actors on the picket lines.
President Joe Biden, who often touts his pro-union stances, cheered the agreement as he prepares to head to a United Auto Workers’ picket line Tuesday in Michigan.
“This agreement, including assurances related to artificial intelligence, did not come easily,” Biden said in a statement released by the White House on Monday. “But its formation is a testament to the power of collective bargaining. There simply is no substitute for employers and employees coming together to negotiate in good faith toward an agreement that makes a business stronger and secures the pay, benefits, and dignity that workers deserve.”
Following negotiations with writers, the AMPTP will need to turn its attention to SAG-AFTRA. The acting guild’s members have been on strike since mid-July and are seeking contract updates similar to those requested by the writers.
Hollywood performers are looking to improve wages, working conditions, and health and pension benefits, as well as establish guardrails for the use of AI in future television and film productions. Additionally, the union is seeking more transparency from streaming services about viewership so that residual payments can be made equitable to linear TV.
“SAG-AFTRA congratulates the WGA on reaching a tentative agreement with the AMPTP after 146 days of incredible strength, resiliency and solidarity on the picket lines,” the Screen Actors Guild-American Federation of Television and Radio Artists wrote in a statement Sunday. “While we look forward to reviewing the WGA and AMPTP’s tentative agreement, we remain committed to achieving the necessary terms for our members.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. NBCUniversal is a member of the Alliance of Motion Picture and Television Producers.
McDonald’s franchisees who add new restaurants will soon have to pay higher royalty fees.
The fast-food giant is raising those fees from 4% to 5%, starting Jan. 1. It’s the first time in nearly three decades that McDonald’s is hiking its royalty fees.
The change will not affect existing franchisees who are maintainingtheir current footprint or who buy a franchised location from another operator. It will also not apply torebuiltexisting locations or restaurants transferred between family members.
However, the higher rate will affect new franchisees, buyers of company-owned restaurants, relocated restaurants and other scenarios that involve the franchisor.
“While we created the industry we now lead, we must continue to redefine what success looks like and position ourselves for long-term success to ensure the value of our brand remains as strong as ever,” McDonald’s U.S. President Joe Erlinger said in a message to U.S. franchisees viewed by CNBC.
McDonald’s will also stop calling the payments “service fees,” and instead use the term “royalty fees,” which most franchisors favor.
“We’re not changing services, but we are trying to change the mindset by getting people to see and understand the power of what you buy into when you buy the McDonald’s brand, the McDonald’s system,” Erlinger told CNBC.
Franchisees run about 95% of McDonald’s roughly 13,400 U.S. restaurants. They pay rent, monthly royalty fees and other charges, such as annual fees toward the company’s mobile app, in order to operate as part of McDonald’s system.
The royalty fee hikes probably won’t affect many franchisees right away. However, backlash will likely come, due to the company’s rocky relationship with its U.S. operators.
McDonald’s and its franchisees have clashed over a number of issues in recent years, including a new assessment system for restaurants and a California bill that will hike wages for fast-food workers by 25% next year.
In the second quarter, McDonald’s franchisees rated their relationship with corporate management at a 1.71 out of 5, in a quarterly survey of several dozen of the chain’s operators conducted by Kalinowski Equity Research. It’s the survey’s highest mark since the fourth quarter of 2021, but still a far cry from the potential high score of 5.
Late Friday, The National Owners Association, an independent advocacy group of more than 1,000 McDonald’s owners, sent out a memo to its membership regarding the news from corporate. The memo, viewed by CNBC, called Friday an “extremely hectic day” as U.S. owners woke up to emails from CFO Ian Borden and U.S. President Erlinger about the decision to increase service fees for new owners and reclassify the name to royalties.
“Although McDonald’s believes they have the right to make changes to their fee structure, franchise agreement terms and the conditions of engagement, these self-proclaimed rights do not establish that the changes are the right thing to do for the business, the relationship, or the future of our Brand,” the memo said, adding that while system gross sales have increased to start this year, resulting in “record-breaking revenue” for corporate, the benefits are not evident in franchisee cash flow. The memo goes on, adding that franchisee restaurant cash flow has not kept pace with inflation, and that owners are flowing less money today than they were in 2010.
“What’s more, per restaurant EBITDA percent is crashing and will likely hit a 12-year low of around 12.25% in Q4, or certainly in 2024. In spite of the incredible sales growth the restaurants are driving, franchisees are making less money per restaurant today than they did in 2010,” the memo states.
The NOA memo also says the change in terminology from service fees to royalties is “very significant” and will have a key impact on the owners’ “rights to receive the all-important services, support and assistance that McDonald’s is now obligated to provide us,” claiming it removes the company’s duty to provide services. It urges owners to carefully review agreements received from the company and have an experienced attorney review them before executing, and says reinvestment decisions should be reconsidered, as those looking to open new restaurants will not have a “historical return” provided, due to the change.
This is the latest outcry from owner advocates against corporate, as the NOA just last week sent out a communication to its members regarding California’s AB 1228, claiming the legislation would have a “devastating financial impact” on operators in the state.
McDonald’s declined to comment on the NOA’s position on both the service fee change and the California negotiations.
Despite the turmoil, McDonald’s U.S. business is booming. In its most recent quarter, domestic same-store sales grew 10.3%. Promotions such as the Grimace Birthday Meal and strong demand for McDonald’s core menu items, such as Big Macs and McNuggets, fueled sales.
Franchisee cash flows rose year over year as a result, McDonald’s CFO Borden said in late July. The company said average cash flows for U.S. operators have climbed 35% over the last five years.
Apple CEO Tim Cook opened the company’s Fifth Avenue store Friday in New York to celebrate the official release of the iPhone 15 lineup, the Apple Watch Series 9 and the Apple Watch Ultra 2.
Customers flocked to the store to get their hands on the new devices, and the line stretched around the corner of 58th Street from Fifth Avenue to Madison Avenue. One man told CNBC’s Steve Kovach that he had been waiting in line since 8 p.m. the night before. Cook unlocked the store and took selfies with people as they entered.
Apple announced its new devices at its annual launch event earlier this month, and preorders opened Sept. 15. Analysts and investors are watching closely to see whether the new iPhones can reignite the global smartphone market, which is on track to hit a decade low this year, according to an August report from Counterpoint Research.
In a Thursday note, before the launch of the devices in stores, analysts at Bank of America wrote that ship dates for the iPhone 15 Pro and Pro Max models were extended but “somewhat lower” on average compared to the preorder cycle last year.
Shares of Apple closed up less than 1% Friday. The company did not immediately respond to CNBC’s request for comment.
The new iPhone 15 lineup starts at $799 and features a USB-C charging port and a new titanium exterior. CNBC’s Kif Leswing tested the two new Pro iPhones, which start at $999 and $1,199, and found that the titanium is a “huge upgrade” because it makes the phone feel much lighter.
Customers can purchase the new devices at their nearest Apple Store or online.
DETROIT — The United Auto Workers is expanding strikes to 38 parts and distribution locations across 20 states, targeting General Motors and Stellantis, UAW President Shawn Fain said Friday morning.
The union will not initiate additional strikes at Ford Motor, as the company has proven it’s “serious about reaching a deal,” Fain said in a Facebook Live comment.
“We still have serious issues to work through, but we do want to recognize that Ford is showing that they’re serious about reaching a deal,” said the outspoken union leader. “At GM and Stellantis, it’s a different story.”
Fain said the union and Ford have made progress on issues including eliminating some wage tiers, reinstating cost-of-living adjustments and an improved profit-sharing formula.
He also said the union won the right to strike over plant closures during the term of the deal as well as an immediate conversion of temporary, or supplemental, workers — those with at least 90 days of employment — upon ratification.
Ford said the company is “working diligently with the UAW to reach a deal,” but “we still have significant gaps to close on the key economic issues.”
(L-R) Supporter Ryan Sullivan, and United Auto Workers members Chris Sanders-Stone, Casey Miner, Kennedy R. Barbee Sr. and Stephen Brown picket outside the Jeep Plant on September 18, 2023 in Toledo, Ohio.
Sarah Rice | Getty Images
“In the end, the issues are interconnected and must work within an overall agreement that supports our mutual success,” Ford said in a statement Friday.
The strikes at the GM and Stellantis parts suppliers will add roughly 5,600 autoworkers, including roughly 3,500 employees at GM, to the UAW’s ongoing strikes at the Detroit automakers.
“Today’s strike escalation by the UAW’s top leadership is unnecessary,” GM said in a statement. “We have now presented five separate economic proposals that are historic, addressing areas that our team members have said matters most: wage increases and job security while allowing GM to succeed and thrive into the future.
“We will continue to bargain in good faith with the union to reach an agreement as quickly as possible,” the automaker said.
Stellantis said in a statement it questions “whether the union’s leadership has ever had an interest in reaching an agreement in a timely manner.”
Roughly 12,700 UAW workers went on strike a week ago at the following locations: GM’s midsize truck and full-size van plant in Wentzville, Missouri; Ford’s Ranger midsize pickup and Bronco SUV plant in Wayne, Michigan; and Stellantis’ Jeep Wrangler and Gladiator plant in Toledo, Ohio.
Parts distribution centers have been a major point of concern during these talks, especially at Stellantis. The automaker has proposed consolidating 10 “Mopar” parts and distribution centers, which are scattered across the country, into larger Amazon-like distribution centers.
GM has agreed to eliminate the wage differences at its parts and components plants, according to Fain. He commended the Detroit automaker for that action but condemned it for resisting further measures that Ford has agreed to with the union.
Targeting the parts and distribution centers is a unique strategy. It does not affect the production and assembly of vehicles but rather the distribution of parts to dealers.
The new work stoppages, if prolonged, could cause significant disruption for dealers, which could in turn delay fixes for customers. Repair wait times have already been problematic due to recent supply chain issues.
“This will impact these two companies repairs operations,” Fain said. “Our message to the consumer is simple: The way to fix the frustrating customer experience is for the companies to end price gauging. Invest these record profits into stable jobs and stable wages and benefits.”
Many, including Wall Street analysts, expected the union to expand work stoppages to full-size truck plants of the Detroit automakers, which are crucial to the profitability of the companies.
The affected facilities for GM include 18 plants in 13 states: Michigan, Ohio, Colorado, Wisconsin, Illinois, Nevada, California, Texas, West Virginia, Mississippi, North Carolina, Tennessee and Pennsylvania.
For Stellantis, the extended strikes affect 20 facilities in 14 states: Michigan, Ohio, Wisconsin, Minnesota, Colorado, Illinois, California, Oregon, Georgia, Virginia, Florida, Texas, New York and Massachusetts.
“This expansion will also take our fight nationwide,” Fain said. “We will keep going, keep organizing and keep expanding the stand-up strike as necessary.”
UAW began targeted strikes after the sides failed to reach tentative agreements by the expiration of the previous contracts at 11:59 p.m. Sept. 14.
The additional plant strikes come despite record contract offers from the automakers, including roughly 20% hourly wage increases, thousands of dollars in bonuses, retention of the union’s platinum health care and other sweetened benefits.
Stellantis said on Friday it had made a “very competitive offer” that would see current full-time hourly employees earning between $80,000 and $96,000 a year by the end of the contract, constituting a 21.4% compounded increase; a long-term solution for an idled factory in Belvidere, Illinois; and, “significant product allocation that allows for workforce stability through the end of the contract.”
“We still have not received a response to that offer,” the company said.
The union has demanded 40% hourly pay increases, a shortened workweek, a shift back to traditional pensions, the elimination of compensation tiers and a restoration of cost-of-living adjustments, among other improvements.
United Auto Workers members and supporters rally at the Stellantis North America headquarters on September 20, 2023 in Auburn Hills, Michigan.
Bill Pugliano | Getty Images News | Getty Images
The additional strikes come a day after The Detroit News Thursday night reported leaked messages involving UAW communications director Jonah Furman that raised questions about the union’s motives for the work stoppages.
In the undated private group messages, viewed by CNBC, Furman describes UAW’s strategy and targeted strikes as causing “recurring reputations damage and operational chaos.”
Furman, who did not respond for comment, said if the union “can keep them wounded for months they don’t know what to do.”
Fain did not address the messages on Facebook Live beyond discussing the union’s strategy of “doing things differently” to “win record contracts.”
— CNBC’s Gabriel Cortes and John Rosevear contributed to this report.
The company announced Friday that its streaming service — a part of Prime subscriptions that cost $14.99 a month — will now have limited ads in its TV series and movies.
Advertising on Prime Video, known for shows such as “The Boys” and “The Marvelous Mrs. Maisel,” will roll out in the U.S. and other cities in early 2024, with other countries to follow later in the year. If U.S. customers don’t want commercials, they will have to pay an additional $2.99 a month. Live events and sports will continue to feature ads in this tier, the company said in its announcement.
Prime customers will get an email in the weeks leading up to the advertising rollout, which will include the option to sign up for the ad-free tier.
“To continue investing in compelling content and keep increasing that investment over a long period of time, starting in early 2024, Prime Video shows and movies will include limited advertisements,” the company said in a post Friday.
Amazon said it plans to have “meaningfully fewer ads than linear TV and other streaming providers.”
Prime Video will now join rival streaming services, including Netflix, Warner Bros. Discovery‘s Max and Disney‘s Hulu and Disney+, that are leaning on advertising. The ad-supported options are not only giving consumers a cheaper option as the list of streaming apps grows, but are also bringing in an additional revenue source.
Media companies in particular have been trying a variety of ways to make the streaming business profitable, from advertising to password-sharing crackdowns to cost cutting.
Streaming behemoth Netflix switched gears late last year and began offering a cheaper, ad-supported plan. Netflix was slow to embrace advertising, but as subscriber growth slowed, the company instituted the option in an effort to boost revenue.
The company recently removed its cheapest, ad-free plan in a push to get more sign-ups for its ad option. Company executives have said the economics of its ad plan were higher than the basic plan, and that advertising is incremental to Netflix’s revenue and profit.
Cisco is acquiring cybersecurity software company Splunk for $157 per share in a cash deal worth about $28 billion, the company said Thursday, in its largest acquisition ever.
Splunk shares ended Thursday up 21%, while Cisco shares closed down 4%.
Splunk’s technology helps businesses monitor and analyze their data to minimize the risk of hacks and resolve technical issues faster. Cisco has long been the world’s largest maker of computer networking equipment and has been bolstering its cybersecurity business to meet customer demands and fuel growth.
Cisco CEO Chuck Robbins emphasized the importance of artificial intelligence and using the power of AI that comes with Splunk’s technology to protect networks.
“Our combined capabilities will drive the next generation of AI-enabled security and observability,” Robbins said, in a statement. “From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient.”
The deal is expected to close in the third quarter of 2024, and Cisco says it should improve gross margins in the first year and non-GAAP earnings in year two.
The purchase price is equivalent to about 13% of Cisco’s market cap, a big number for a company that has historically avoided blockbuster deals. Prior to Splunk, Cisco’s biggest deal ever was the $6.9 billion purchase of cable set-top box maker Scientific Atlanta in 2006. At the time, Cisco’s market cap was just over $100 billion.
But as the public cloud has gobbled more of Cisco’s traditional back-end business, the company has needed to find new and big revenue streams. Cybersecurity has been the biggest bet.
In fiscal 2022, Cisco changed the name of its core switching and routing business from Infrastructure Platforms to Secure, Agile Networks, focusing on the need to have security built into networking gear. The company has a separate reporting unit called End-to-End Security, consisting specifically of security products.
Revenue in the core business climbed 22% in the fiscal year ended July 29, to $29.1 billion, and the security unit saw sales rise 4% to $3.9 billion.
Cisco shares have underperformed the Nasdaq this year, rising 12% while the tech-heavy index has jumped 27%. Over the past five years, it’s been an even worse investment relative to the broader sector. The stock is up about 10% over that stretch, trailing the Nasdaq’s 66% gain.
Splunk logo displayed on a phone screen and a laptop keyboard are seen in this illustration photo taken in Krakow, Poland on October 30, 2021. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Jakub Porzycki | Nurphoto | Getty Images
Robbins told CNBC’s “Squawk on the Street” on Thursday that he expects organizational synergies between Cisco and Splunk to become clear within 12 to 18 months. The company will finance the deal with a combination of cash and debt, he said.
“Together, we will become one of the largest software companies globally,” Robbins said in a conference call with analysts.
Following the announcement, some analysts raised concerns about potential product overlap, regulatory scrutiny and the price Cisco paid. Oppenheimer’s Ittai Kidron noted on the call that Splunk’s pivot to the cloud has been “underwhelming.”
In recent years, Splunk turned away from an on-premises “customer-managed” approach to focus on a cloud-oriented offering.
Splunk CEO Gary Steele, who will join Cisco’s executive team after the deal closes, said on the call with analysts that, “We still have many large customers who are very dependent upon the capabilities that we allow for in a customer managed environment.”
Steele joined Splunk a little over a year ago. Prior to that, he was CEO of Proofpoint, a cybersecurity firm that was acquired by private equity firm Thoma Bravo in 2021 for $12.3 billion.
If Cisco backs out of the deal or if it’s blocked by regulators, Cisco will pay Splunk a termination fee of $1.48 billion, according to a regulatory filing. Should Splunk walk away, it will pay a $1 billion breakup fee to Cisco.
In 2023, Cisco has acquired four companies focused on security: Armorblox, a threat detection platform; Oort, which does identity management; and Valtix and Lightspin, both in cloud security.
Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore advised Cisco. Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.
(L-R) Supporter Ryan Sullivan, and United Auto Workers members Chris Sanders-Stone, Casey Miner, Kennedy R. Barbee Sr. and Stephen Brown picket outside the Jeep Plant on September 18, 2023 in Toledo, Ohio.
Sarah Rice | Getty Images
DETROIT — With a deadline for expanded strikes by the United Auto Workers against the Detroit automakers closing in, the “serious progress” called for by the union seems all too elusive.
The UAW and General Motors, Ford Motor and Stellantis are all holding their ground on demands, and it appears likely the union will strike additional plants at some, if not all, of the automakers at noon Friday — as it’s warned.
While talks are ongoing, there has been little reported movement in proposals since the strikes were initiated on Sept. 15 at assembly plants in Michigan, Ohio and Missouri. Sources familiar with the talks describe a “big” gap in demands and the parties being “far apart.”
Headline economic issues and benefits such as hourly pay, retirement benefits, cost-of-living adjustments, wage progression and work-life balance remain central to the discussions. All issues play into one another and can change based on demand priorities.
Each automaker has its own unique issues, but overall the companies want to avoid fixed costs and what they’ve called “uncompetitive practices” such as traditional pensions. The union, in contrast, is attempting to regain benefits lost during past talks and secure significant increases to pay and other benefits, while retaining platinum health care for members.
In the end, it comes down to money, and how much a deal will cost the companies. Wall Street is currently expecting record costs to come from a settlement, though still below the $6 billion to $8 billion in demands the union would like, according to Wells Fargo.
Here’s a general overview of where the union and companies stand on key issues.
Union leaders have been highly transparent during collective bargaining this year with the automakers. However, they’ve largely been quiet on any potential for compromise around a demand of 40% wage increases over four and a half years.
Media reports indicate the union has adjusted that demand to the mid-30% range. UAW President Shawn Fain last week said the union has not made an offer below 30%.
The automakers have countered with wage increases of around 20% over the length of the contract — what would still be a record — to a top wage of more than $39 per hour for a majority of workers.
Sources familiar with the talks say if the companies do increase hourly wages beyond that 20% level, they’re likely to lower other benefits or reduce jobs in the future to try to make up the difference.
A Ford source said the company’s current proposals would offer entry-level employees starting salaries of about $60,000, potentially increasing to $100,000 or more during the life of the deal. That includes base pay, expected overtime, profit-sharing and other cash bonuses.
Under GM’s latest proposal, President Mark Reuss said about 85% of current represented employees would earn a base wage of about $82,000 a year. That’s compared with the average median household income of $51,821 in nine areas where GM has major assembly plants, he said.
Wage tiers — putting autoworkers into distinct pay ranges or classifications — is a tricky, moving target.
The companies and union have defined tiers differently during past negotiations as well as during the talks this year. Tiers can signify the following scenarios: workers doing the same job for different pay and benefits; similar but different job responsibilities; or differences between workers at assembly and components plants, depending on the talks.
The UAW has called broadly for “equal pay for equal work.” It’s a cornerstone of the group’s platform, while automakers have historically argued for pay to be based on seniority, job classification and responsibilities.
So-called tiers were established in 2007 as a concession by the union to allow lower wages and benefits for workers hired after the contracts were ratified that year — what became known as a second tier. The starting pay of these workers was roughly half that of the incumbent workers, and they would not be eligible for the same active health-care benefits, pensions or retiree health-care coverage.
The union has won some similar benefits back for newer workers compared to veteran, or “legacy” ones, but there remains different classifications of workers and pay tiers that amount to “in-progression” wages, in which a worker earns more the longer they’re employed.
For this year, the automakers have largely proposed cutting an existing eight-year pay progression in half and eliminating some pay discrepancies between workers who do similar jobs such as parts and components.
The union would like to eliminate the in-progression pay structure entirely and have workers across the contract earning the same wage (after a 90-day adjustment period) including temporary, or supplemental, workers.
One source familiar with the talks said there’s a “philosophical difference” between the sides. Ford, which utilizes the fewest temporary workers, has agreed to move all current temps with 90 days of work to full-time employees.
The UAW suspended cost-of-living adjustments in 2009, as the companies attempted to cut costs. COLA helps employees maintain the value of their compensation against inflation.
The union now wants to reinstate COLA, especially following a period of decades-high inflation. But the automakers, in general, have proposed either lump-sum payments or suggested utilizing calculations based on inflation levels that the union argues wouldn’t be sufficient to offset increased costs.
Automakers have further argued that profit-sharing payments that have traditionally been based on North American profits of the companies have assisted in offsetting inflation.
The companies are attempting to change or lower profit-sharing payments to offset other increased costs, while the union would like an enhanced formula.
The UAW previously outlined a calculation of providing $2 for every $1 million spent on share buybacks and increases to normal dividends.
The union has proposed better work-life balance, including a potential 32-hour workweek for the pay of 40 hours. It has argued that salaried workers are allowed remote or hybrid work, giving them more time at home with their families.
A shorter workweek has been a non-starter for the automakers, which have countered with additional vacation time, added holiday pay such as for Juneteenth and two-week paternal leave, in some cases.
For the UAW, product commitments equal jobs, meaning more members for the union.
UAW leaders are specifically concerned with vehicle production commitments at Stellantis, which has proposed closing, selling or consolidating 18 facilities. The locations included its North American headquarters, 10 parts and distribution centers and three manufacturing components facilities (two of which have already been fully or partially decommissioned).
A source familiar with the talks said GM has committed product to all of its facilities, following three closures four years ago.
The UAW has demanded a “significant” increase in pay for retired workers. The union last week said the companies had rejected all such increases. However, GM CEO Mary Barra said the automaker included in its offer a lump-sum cash payment of $500 for retirees.
A Ford source said the company’s current offer includes a health-care retirement bonus program with lump sums of either $50,000 or $35,000, upon retirement, based on seniority, for newer workers.
Automakers also have pushed back on returning to traditional pensions in lieu of 401(k) plans.
A proposal last week by Ford included a 6.4% contribution from the company and $1 per hour for every hour worked, with a previous cap removed, according to a company source.
GM also offered an unconditional 6.4% company 401(k) contribution for employees who are not eligible for pensions.
When looking for a stock that pays a higher dividend than Treasury yields, investors don’t have too many choices these days. U.S. government bonds are enjoying yields not seen in over a decade thanks to the Federal Reserve’s interest rate hikes, which began in March 2022. On Thursday, the 10-year hit 4.482% , the highest since 2007 and up from 1.6% in January 2022 , after initial jobless claims came in lower than expected. That played into concerns that the central bank would continue with its tight monetary policy. On Wednesday, the Fed indicated it would hike one more time this year, and cut rates fewer times in 2024 than previously anticipated. Dividend stocks, on the other hand, are getting harder to find as companies hold on to their cash amid concerns about the economy. At the same time, they are generally thought of as a way to play defense during a slowing economy since they can offer stability and income. To find stocks that pay dividends higher than the 10-year Treasury yield, CNBC used the new CNBC Pro Stock Screener tool to search for names with yields higher than 4.5%. We also removed stocks with a yield above 8% to rule out yield traps, which are potentially troubled companies that offer a high payout to attract investors. In addition, we screened for stocks with a debt-to-equity ratio above 60% to avoid companies with too much debt. Pioneer Natural Resources has the highest dividend yield at 7.2%, as well as a debt-to-equity ratio of 24.2%. The oil and gas exploration and production company, which is down about 2% year to date, could also benefit from the recent rally in oil prices. Brent crude futures were trading near $94 per barrel on Thursday, up from the low to mid-$70s seen over the summer. West Texas Intermediate crude futures were hovering around $90 a barrel, also up significantly from summer lows. Meanwhile, Goldman Sachs recently raised its 12-month forecast for Brent to $100 per barrel and $95 per barrel for WTI. The bank also named Pioneer as one of its top plays on higher oil prices, forecasting 13% upside for the stock. “We believe that the company has turned the corner on both capex and volume execution, as seen by strong performance in 2Q,” analyst Neil Mehta wrote in a Thursday note. Other energy names on the list include Coterra Energy , which yields 6.1% and has a 17.3% debt-to-equity ratio. Several financial firms also made the cut, including Citizens Financial . Citizens’ stock, which has a 6.1% dividend yield and 43.1% debt-to-equity ratio, was hit alongside other regional banks during the banking crisis earlier this year. While it is up 11% from its 2023 closing low of $24.80 on May 11, it is still down 30% year to date. Lastly, Best Buy has a 5.2% dividend yield and 40.9% debt-to-equity ratio. The retailer posted fiscal second-quarter earnings in late August that beat on both the top and bottom lines. Best Buy also said it anticipates this year will be the low point in demand for technology, with the consumer electronics industry seeing stabilization and possibly growth in 2024. Shares are down about 12% year to date.
Covid-19 home test kits are pictured in a store window during the Covid-19 pandemic in the Manhattan borough of New York City, Jan. 19, 2022.
Carlo Allegri | Reuters
The Biden administration on Wednesday said it will resume offering free at-home Covid tests to American households Monday as the virus gains a stronger foothold nationwide.
Americans will soon be able to use COVIDtests.gov to request four free tests, the administration said in a release.
The government had offered free test kits through that website since January 2022, but the site stopped taking orders June 1 of this year to conserve supplies of the tests.
The government is relaunching the program in time for the fall and winter when the virus typically spreads at higher levels. Covid hospitalizations have already increased for eight straight weeks — an uptick primarily driven by newer strains of the virus.
But the Biden administration noted that the at-home tests set to be delivered will detect currently circulating Covid variants. The kits are intended for use through the end of 2023 and will come with instructions for how people can verify if a test’s expiration date has been extended, the administration added.
Testing is a critical tool for protection as Covid infections climb again.But lab PCR tests — the traditional method of detecting Covid — have become more expensive and less accessible for some Americans since the U.S. government ended the public health emergency in May.
The end of that declaration also changed how public and private insurers cover at-home tests, potentially leaving some people unable to get those tests for free through their plans.But certain local health clinicsand community sites still offer at-home tests to the public at no cost.
Also on Wednesday, the Biden administration said it will provide $600 million to strengthen manufacturing capacity at 12 Covid test manufacturers across the country. The administration expects to secure about 200 million tests from those companies.
“These critical investments will strengthen our nation’s production levels of domestic at-home COVID-19 rapid tests and help mitigate the spread of the virus,” Health and Human Services Secretary Xavier Becerra said in a statement.
Los Angeles Dodgers center fielder Cody Bellinger (35) steals second base as St. Louis Cardinals second baseman Tommy Edman (19) takes the late throw at Dodger Stadium in the 2021 National League Wild Card game.
Beginning on Oct. 5, Max will include a tier that will simulcast live sports events that already appear on the company’s traditional TV networks TNT and TBS. The tier kicks off in time for Major League Baseball’s postseason, which airs on TBS.
The membership, called “Bleacher Report (B/R) Sports Add-On,” will also include NHL, NBA, NCAA March Madness, and U.S soccer games. Max subscribers will get free access through Feb. 29. Then it will cost an additional $9.99 a month.
CNBC previously reported Warner Bros. Discovery’s plans to add sports to Max under the Bleacher Report brand, as it tries to target a younger audience that has increasingly sidestepped the traditional pay-TV bundle.
Media companies have been doing a delicate dance to make their streaming services more attractive in a push to get to profitability, and are now trying a variety of methods to do so.
Warner Bros. Discovery’s streaming segment was profitable in the first half of the year, and the company has said it expects that to continue for the full year.
Max has undergone various changes in the last year and has been bulking up on content for the fall.
In May, the streamer was renamed Max after the parent company blended the content of HBO Max and Discovery+ apps together. The move came more than a year after the merger of Warner Bros. and Discovery.
The company also struck a deal with AMC Networks to feature more than 200 episodes of recent shows from the cable-TV network for two months. The arrangement, which kicked off earlier this month, runs through Halloween.
But sports and news were long-awaited additions to the app. CEO David Zaslav said during the company’s earnings call this summer that the change would happen in short order.
On Sept. 27, the app will also include CNN Max, a 24/7 live news hub that will feature content from the network’s top anchors.
The company hiked the price of Max earlier this year and has yet to increase it again since. Currently, Max’s ad-free tier costs $15.99 a month, and a cheaper option with commercials is $9.99 a month. Company executives have said in investor calls that they see the potential to raise prices again in the future.
In addition to MLB’s postseason, the Max sports tier will also include 60 live NHL regular season games, 65 NBA regular season matchups and postseason games for both leagues. It will also include live video and other content from Bleacher Report.
The company’s Electron rocket carrying the CAPSTONE mission lifts off from New Zealand on June 28, 2022.
Rocket Lab
Rocket Lab stock fell in premarket trading after the company suffered its first launch failure in over two years early Tuesday morning.
The company confirmed its 41st Electron rocket launch – lifting off from New Zealand and carrying the Acadia 2 satellite for San Francisco-based Capella Space – failed about 2 minutes and 30 seconds into the flight. Rocket Lab said it has begun working with the Federal Aviation Administration on investigating the root cause of the issue, which appeared to happen around the time the rocket’s first and second stages separated.
“We are deeply sorry to our partners Capella Space for the loss of the mission,” Rocket Lab said in a statement.
Shares of Rocket Lab fell as much as 26% in premarket trading from its previous close at $5.04. The stock was up 34% for the year as of Monday’s close.
The company’s 42nd Electron mission was set to launch before the end of the third quarter. But Rocket Lab warned it will be postponed while it resolves the launch failure. As a result, Rocket Lab expects to issue revised third quarter revenue guidance. In its second quarter report, Rocket Lab forecast about $30 million of launch services revenue – the minority of its overall forecast revenue between $73 million and $77 million, as the bulk was expected to come from its space systems unit.
Rocket Lab’s failure comes after the company built up a steady rhythm of successful launches, becoming the second-most active U.S. rocket company behind Elon Musk’s SpaceX. The Electron rocket hadn’t suffered a mission failure since May 2021, stringing together 19 successful launches in 28 months since then.
A rocket can remain grounded for an uncertain amount of time, with the length of investigations depending upon the severity and complexity of the issue. After its previous launch failure, Rocket Lab launched its next Electron mission 70 days later.
Colorox brand toilet bowl cleaner sits on display at a supermarket in Princeton, Ill.
Daniel Acker | Bloomberg | Getty Images
Clorox on Monday warned of a material financial hit from ongoing production disruptions caused by a cyberattack last month.
The company, which produces its namesake bleach products and Pine-Sol, among other household items, also said it doesn’t have an estimate for when it will be able to resume full operations.
The cybersecurity breach will impact fiscal first quarter results due to product outages and delays, Clorox said.
Nonetheless, the company said it believes the threat is contained. It expects to start bringing systems back up to speed next week, and will ramp up to full production “over time.”
Clorox had disclosed the attack Aug. 14, saying that its systems had been breached. After learning of the attacks, the company took systems offline and involved law enforcement.
Now, a month later, the attack is still causing “widescale disruption” to the companies operations, according to a Clorox securities filing. While systems are being repaired, the company has had to go manual on many of its procedures. As a result, the company has scaled back its order processing, meaning fewer products are making their way onto store shelves.
The breach at Clorox comes as Las Vegas casino companies MGM and Caesars reckon with their own cyberattacks. MGM also warned of a potential material impact on its finances.
People carry signs as SAG-AFTRA members walk the picket line in solidarity with striking WGA workers outside Netflix offices in Los Angeles, July 11, 2023.
Mario Tama | Getty Images News | Getty Images
Picket signs have lined the gates of Hollywood’s studios for nearly five months, as the industry’s writers and actors rally for AI protections, better wages and a cut of streaming profits.
The problem is streaming isn’t yet profitable for many studios.
Sparked by the creation of Netflix’s direct-to-consumer platform in 2007, streaming has upended the economics of the media industry. Yet, it’s still unclear whether it’s a sustainable business model for the future.
“Without sounding hyperbolic, the change in the economics of the North American media industry in the last five years has been breathtaking,” said Steven Schiffman, an adjunct professor at Georgetown University.
Legacy media companies like Disney, Warner Bros. Discovery, Paramount and NBCUniversal scrambled to compete with Netflix when it began creating original content in 2013 and slowly pulled market share over the next five years. The studios padded their platforms with massive content libraries and the promise of new original shows and films for consumers.
However, the subscription-based streaming model proves vastly different than the ad-revenue-fueled traditional TV bundle. High licensing costs and low revenues per subscriber quickly caught up with studios, which had previously placated shareholders with massive subscription growth.
Netflix was the first streamer to report a loss in subscribers in 2022, sending its stock and other media companies spiraling. Disney has followed suit. Since then, both have set subscription numbers aside in favor of advertising, a password-sharing crackdown and raising prices.
Media companies also have begun slashing content spending budgets. Disney CEO Bob Iger has promised the company will focus on quality over quantity when it comes to both its streaming and theatrical businesses, pointing to Marvel as an example of too much content.
Yet streaming remains the focus for all of these companies as consumers rapidly cut the cord and opt for streaming. To make up for the losses, media organizations are now relying on methods that once made the traditional bundle so successful.
“What’s the fundamental solution? In some way, shape or form, it’s everything brought together,” said CEO Ken Solomon of the Tennis Channel, owned by Sinclair, of the various business models in media. “It’s about understanding where to put a little more resources and how they all are glued together to satisfy the consumer.”
Two strategies media companies long relied upon — windowing content to various platforms and creating more cable channels to reap higher fees from the bundle — proved lucrative and still reap profits.
“This gun has been cocking itself for decades,” said Solomon, noting that the pay TV bundle was a good value proposition until it became too expensive for consumers. That gave Netflix an opening to upend how the entertainment industry makes and spends money.
Legacy media companies scrambled to follow suit, unsure if the model actually worked. But they were desperate to keep up with changing consumer demand, and in the process they depleted other revenue streams.
Now turmoil rules the industry. Companies like Disney and Warner Bros. Discovery are in the midst of reorganizations — slashing jobs and content costs while trying various ways to piece together profits.
An image from Netflix’s “Stranger Things.”
Source: Netflix
“All of these companies spent more money than they likely should have,” said Marc DeBevoise, CEO and board director of Brightcove, a streaming technology company.
Netflix, with a considerable head start, is the only company to make a profit off of streaming. “For everyone else, it’s still dictated by linear TV,” said UBS analyst John Hodulik. “That’s a problem as the decline in customers accelerates and streaming is not a big enough opportunity to offset that.”
Although subscriber growth initially ramped up streaming subscriber growth and bolstered many media stocks, it was short-lived. Fears of a recession, inflation and rising interest rates led Wall Street to reassess these companies and focus on profitability as subscriber growth slowed.
Netflix’s entrance into media signaled the beginning of a content arms race that, ultimately, hasn’t paid off for any media company.
Content spending ballooned across the industry, with each company spending tens of billions of dollars for new shows and films in an effort to lure in new subscribers — and keep the ones they already had.
“The networks had aligned with their streaming services and taken all the elasticity out of it. They were throwing money at a problem and hoping that it was going to solve itself,” said Solomon. “There was no economics behind it.”
Race to launch
Netflix — launched streaming service in January 2007, first original content launched February 2013
Hulu — launched streaming service in March 2008
Paramount+ — launched as CBS All Access in October 2014, rebranded as Paramount+ in March 2021
Disney+ — launched streaming service in November 2019
Peacock — launched streaming service in April 2020
Max — launched as HBO Max in May 2020, rebranded as Max in May 2023
There were also massive one-off licensing deals for shows like “The Office,”“Friends” and “Seinfeld,” which viewers were actively watching on repeat.
Studios even struck exclusive contracts with some of Hollywood’s biggest writer-producers — Ryan Murphy, Shonda Rhimes, J.J. Abrams, Kenya Barris and the duo of David Benioff and D.B. Weiss — in the hope that they could create new projects that could capture the attention of audiences.
Show budgets draw a lot of attention these days. But Jonathan Miller, a former Hulu board member and current CEO of Integrated Media, doesn’t recall that being a focus when it was just the four major broadcast networks creating all of the content.
DeBevoise, a former ViacomCBS (now Paramount) executive, said he doesn’t remember greenlighting a show, including “Star Trek Discovery,” in the mid-2010s at CBS for more than $10 million an episode, noting many were “much, much less expensive.”
Meanwhile, Solomon, who once ran Universal Studios Television, recalled when his budgets for top TV shows like “Law & Order” were below $2 million an episode. “I thought budgets were out of control back then,” he said.
Shonda Rhimes attends 2018 Vanity Fair Oscar Party on March 4, 2018 in Beverly Hills, CA.
Presley Ann | Patrick McMullan | Getty Images
Disney sought to capitalize on the success of its Marvel Cinematic Universe by developing more than a dozen superhero shows for its Disney+ platform. Although the seasons were shortened, often only six to 10 episodes, each episode cost around $25 million. Similar production budgets were seen for the company’s foray into the new live-action Star Wars TV series.
Netflix has poured money into multiple seasons of political drama “The Crown,” science fiction darling “Stranger Things” and a series based on The Witcher video game franchise. Production costs per episode for these series ranged from $11 million to $30 million.
And Warner Bros. Discovery is adding more Game of Thrones series to its catalog of direct-to-consumer offerings with “House of the Dragon,” which cost around $20 million per episode, and the upcoming “A Knight of the Seven Kingdoms: The Hedge Knight,” which has not begun filming.
Meanwhile, e-commerce giant Amazon shelled out a record $465 million on its first season of a Lord of the Rings prequel series, which was met with tepid responses from critics and fans alike.
“The price of content isn’t always determinant of success. ‘The Simpsons’ were crudely animated initially, right? So, it’s not necessarily that if you go spend a lot of money, it works,” Solomon said.
Bart Simpson plays esports in an episode of “The Simpsons” that aired on March 17, 2019.
Fox
At the same time the economics for actors, writers and the industry as a whole changed.
“The problem is that the cost increases don’t make sense given the revenue models. Something got broken in this part of the business if that kind of increase happened and actors and writers don’t feel like they got their fair share,” DeBevoise said.
While many of Hollywood’s biggest studios are publicly traded and must share quarterly financial reports, there are no rules about providing streaming-viewership data. This lack of transparency has made recent contract negotiations between studios and the industry’s writers and actors especially contentious.
“There’s a frustration about how these people can get together and share this information and come up with something that is reasonable for both sides,” said Schiffman, the Georgetown professor. “But until that happens, in my view, this thing goes on until next year.”
Streaming studios, in particular, have long been reluctant to share data around viewership and don’t want compensation to be tied to the popularity of shows, including those that have been licensed from other studios.
This is in stark contrast to how linear television has handled popular shows. Traditionally, studios pay residuals, long-term payments, to those who worked on film and television shows after their initial release. Actors and writers get paid every time an episode or film runs on broadcast or cable television or when someone buys a DVD or Blu-ray Disc.
When it comes to streaming, there are no residual payments. Studios that get a licensing fee pass on a small sum to actors and writers, but no additional compensation is given if the show performs well on the platform. Actors, in particular, are looking to change this.
“Why I think the streaming model has been a difficult model for the actors and writers, and I was part of helping that model, is that there was a fundamental shift of long-term versus short-term economics that likely wasn’t properly understood or explained,” said DeBevoise.
Media companies’ effort to make streaming profitable is drawing out many of the old business models that were successful in the past.
The subscription streaming model is being subsidized now by tried and true models like advertising, licensing content to other platforms, cracking down on password sharing, and windowing content to different platforms with longer stretches of time in between.
“Netflix understood finally, because of the Street, that subscriber numbers don’t mean jack, if the economics don’t pencil out,” said Peter Csathy, founder and chair of advisory firm Creative Media.
Even the pay TV bundle, despite rampant cord cutting by consumers, remains a reliable source of revenue.
The recent dispute between Charter Communications and Disney highlighted this fact, and led to Disney+ and ESPN+ being bundled with some pay TV subscriptions.
“We, the distributors, are funding the streaming experience. And it’s frankly a better content experience on streaming than what is provided to us on linear TV,” said Rob Thun, chief content officer at DirecTV. “These companies will cease to exist without the funding of distributors’ licensing fees. Perhaps this is a moment of awakening.”
Disney and even Netflix, which long resisted ads, are among the companies relying more on ad-supported offerings to boost subscriber growth and bring in another revenue stream, even as the ad market has been soft.
This is especially true as free, ad-supported streaming services like Fox Corp.’s Tubi and Paramount’s Pluto — which are likened to broadcast networks — have also exploded. Besides the parent companies leaning on the ad revenue from these platforms, other media companies, like Warner Bros. Discovery, are funneling content there for licensing fees.
“In terms of the business models, they all ‘work,’” said DeBevoise. He noted paid tiers for the more expensive, timely content will remain, while free and options with commercials will support the older library shows and movie. “There are going to be hybrid models that reincarnate the dual-revenue cable TV model with both a subscription fee and ads. It’s all going to be about price-to-value and time-to-value for the consumer.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
Chief executive officer of The Walt Disney Company Bob Iger and Mickey Mouse look on before ringing the opening bell at the New York Stock Exchange (NYSE), November 27, 2017 in New York City.
Getty Images
Usually when a person or company sells something, the primary motivation is getting back as much money as possible.
Disney‘s motivation to potentially sell ABC and its owned affiliates, linear cable networks and a minority stake in ESPN isn’t predicated on what these assets will fetch in a sale. It’s about signaling to investors the time has come to stop thinking about Disney as old media.
Disney’s market capitalization is about $156 billion. The company has about $45 billion in debt. Selling assets can help the entertainment giant lower its leverage ratio while buffering the continued losses from its streaming businesses.
Still, that’s not the prime rationale for why Disney Chief Executive Bob Iger told CNBC in July he’s contemplating selling off media assets — something he’s long resisted. Rather, a sale of ABC and linear cable networks would be a message to the investment community: The era of traditional TV is over. Disney is ready for its next chapter.
“Disney almost has a good bank and a bad bank at this point,” Wells Fargo analyst Steven Cahall said in a CNBC interview. “Streaming is its future. It’s its strongest asset, next to the parks. The linear business is something Disney has clearly signaled is going to be in decline. They’re not looking to necessarily protect it. If they can move some of that lower, negative-growth business off of the books and to a better, more logical operator, we think that’s good for the stock.”
Nexstar has held preliminary conversations with Disney to acquire ABC and its owned and operated affiliates, Bloomberg reported Thursday. Media mogul Byron Allen has made a preliminary offer to pay $10 billion for ABC and its affiliates along with cable networks FX and National Geographic, according to a person familiar with the matter.
Disney released a statement Thursday saying “while we are open to considering a variety of strategic options for our linear businesses, at this time The Walt Disney Company has made no decision with respect to the divestiture of ABC or any other property and any report to that effect is unfounded.”
The value of broadcast and cable networks has significantly declined from the 1990s and early 2000s as tens of millions of Americans have canceled cable in recent years.
Cahall values ABC and Disney’s eight owned affiliate networks at about $4.5 billion. That’s a far cry from the $19 billion Disney paid for Capital Cities/ABC in 1995 — the deal that brought Iger to the company.
ESPN has a valuation of about $30 billion, according KeyBanc Capital Markets analyst Brandon Nispel, “though we view it as a melting iceberg,” he added in a September note to clients. LightShed analyst Rich Greenfield values ESPN at closer to $20 billion.
Disney would like to keep a majority stake in ESPN, Iger told CNBC. It currently owns 80% of the sports media business, and Hearst owns the other 20%.
Disney’s most interesting decision may be deciding what to do with the ABC network. The company can easily sell off its eight owned and operated affiliate stations — located in markets including Chicago, New York and Los Angeles — without changing the trajectory of the media industry.
But divesting the ABC network would be a bold statement by Disney that it sees no future in the broadcast cable world of content distribution.
Selling ABC would be particularly jarring given Iger’s comments both to CNBC and in Disney’s last earnings conference call that he wants the company to stay in the sports business.
“The sports business stands tall and remains a good value proposition,” Iger said last month during Disney’s third-quarter earnings conference call. “We believe in the power of sports and the unique ability to convene and engage audiences.”
There’s clear value, at least for the next few years, in keeping a large broadcast network for major sports leagues. NBCUniversal executives hope ownership of the NBC network will convince the NBA that it should be cut into a new rights agreement to carry NBA games. NBC is a free over-the-air service and can increase the league’s reach, they plan to argue. Even if the world is transitioning to streaming, millions of Americans still use digital antennas to watch TV.
Currently, ESPN and ABC split sports rights. Selling ABC may trigger certain change-of-control provisions that force existing deals with pay TV operators or the leagues to be rewritten, according to people familiar with typical language around such deals.
Moving on from the network also may obstruct ESPN’s ability to land future sports rights deals. Without ownership of ABC, leagues may choose to sell rights to other companies, thus further weakening ESPN.
If Iger is true to his word and Disney stays in the sports broadcasting business, the company will have to weigh the negative externalities of losing ABC with the positive gains of showing investors it’s serious about shedding declining assets.
“Obviously, there’s complexity as it relates to decoupling the linear nets from ESPN, but nothing that we feel we can’t contend with if we were to ultimately create strategic realignment,” Iger said last month.
If Disney does land a deal to sell ABC, and investors cheer the move, it may also function as a catalyst for other large legacy media companies to sell their declining assets. NBCUniversal, Paramount Global and Warner Bros. Discovery all have legacy broadcast and cable networks in addition to their flagship streaming services.
Disney may become the leader in pushing the industry forward.
“We see this as a real bullish sign at Disney.” said Cahall. “There’s a lot going on now at Disney, between ESPN and partnerships and divesting some of this stuff. Disney is suddenly feeling a little more catalyst-rich than it was recently.”
– CNBC’s Lillian Rizzo contributed to this article.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
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