Sometimes, you really need to make sure your perspective is in order. As you’ll see below, when I looked for the “most important story” for July, I had a few fun options to choose from—thank you to all the great suggestions on Twitter!— but I risked missing the forest for the trees.
And that forest is currently being slashed-and-burned by the market. Specifically, Wall Street. So let’s talk stock prices and entertainment today.
Before that, here’s some of my other writing from the last month in case you missed it.
First, after Netflix’s latest earnings report, I wrote two long Twitter threads summarizing my thoughts. We didn’t have a lot of news, so it didn’t make my bi-weekly column. Also, on my website, I defined the phrase “Dog Not Barking”, and obviously I had an entire series on that last week. But you may have missed my take at The Ankler, adding up how many bombs each streamer had.
Also at the Ankler, I re-entered into the “binge vs weekly” fray again, arguing that yes, streamers should at least release their big series weekly. Also, I imagined the worst case scenario for Apple TV+.
On to the main event…
Most Important Story of the Week – What Falling Stock Prices Could Mean for Entertainment
One of my favorite articles I wrote last year was my take on the Scarlett Johansson and Disney kerfuffle/blow up over Black Widow profits. As I wrote at the time, their incentives weren’t really aligned: Johansson wanted real world revenues, and Disney wanted to maximize their long term stock price. Or specifically the “growth” of their stock price as they pivot to streaming.
Growth in finance equations is captured by the variable “g”, so basically it was all about the “g” for Disney. And that’s a devilish thing to split, for a variety of reasons, not least of which is that stock prices are notoriously volatile. (Read that article for a definition of “g”. Or this one on “terminal values”.)
And, boy, we’ve seen that for the last few months, am I right?
While nothing happened in July that was “the prices of stocks kept falling” specifically, the fact that the S&P 500—to use just one proxy for stock prices—had one of their worst six month stretches since the 1950s is notable. Arguably the fall of all stock prices over the last six months—and potential recession worries—is the story of the year so far.
So let’s dig into that. What do falling stock prices mean for entertainment companies?
But first a few “meta” thoughts on stock prices and the “discourse/narrative/conversation”…
Are Stock Prices “the Thing” or a “Conversation About the Thing”?
Back during the media blow up over Disney (and presumably Bob Chapek) firing Peter Rice, I wrote a thread on Twitter to capture my burgeoning idea that we should always, in the media, distinguish between “the thing”—which we hope to get information about—and the “conversation about the thing”—which is the media coverage of said information.
Sometimes we get confused about what is really important. By “we”, of course, I mean journalists, who sometimes think that their coverage of the thing is the important part. I see this a lot when discussing “bad PR”. The presumption is that bad PR is usually horrifically damaging when often it sort of…isn’t? Not to say the media coverage doesn’t matter, but many firms have survived horrific PR scandals. And later thrived. Sometimes too much focus goes to “The Bad PR” itself, rather than the thing that happened.
The Thing: Peter Rice got fired.
The Conversation about That Thing: A series of negative articles in the trades.
The Conversation about the Conversation About the Thing: Look at all the bad press Bob Chapek is getting, is his job in jeopardy?
Many of the people arguing that Bob Chapek could get fired last spring were focused on “the conversation”—meaning his bad PR—instead of “the thing”—which was the day-to-day management of Disney. And while Disney+ isn’t growing as fast as last year, as a company Disney is still mostly fine.
This got me thinking about stock prices. In a way, a growing stock price is the goal of a firm. So it is “the thing”. But if you think of stock prices as information—a fun theory in finance—then stock prices aren’t “the thing”; they’re a “conversation about the thing”. The thing, really, is the future discounted cash flows of a given business. (At least it should be the future discounted cash flows.)
The trouble with that “thing” of discounted future cash flows is the future part. Since we’re valuing the future, there’s a lot of inherent uncertainty. And that uncertainty ends up being filtered through a collective narrative about a given stock. When the narrative was that Netflix would take over all of TV, the predictions of future growth were sky high. Same for the rest of the traditional entertainment companies leaping into streaming. Now that some data has changed that narrative, the stock price has come way down.
The point? We should be a pinch careful about using stock prices as a proxy for success in any industry. As Netflix itself showed, when the narrative changes, the stock price can change quickly too, even as the underlying fundamentals stay mostly the same.
Entertainment as A Whole Is Down
The second caution about stock prices is that, whenever anyone uses them as a proxy for success in the last few months or years, be skeptical. For one, picking dates alone can rig the game. As you can see in the next section, if you take Netflix’s stock price starting in November, you’re looking at a stock falling off a cliff. If you take a longer look, then Netflix’s growth is closer to flat. If you take the longest look, Netflix has one of the best performing stocks of the century.
The other problem with stock prices is they can lack crucial context. Take Disney, who has had a bad run in 2022. If the entire S&P 500 is down and entertainment companies are down even further as an industry, then it’s not an indictment on Disney itself, is it?
That last point though brings us to the topic of the day: are streaming stocks down more than the stock market as a whole?
They are. For context, the S&P 500 is down 10.5% from the start of the year, and 6.5% from a year ago. When it comes to entertainment, we have a few “pure play” entertainment firms, meaning no ancillary businesses like search (Google), devices (Apple), devices (Sony), ecommerce (Amazon) or cable (Comcast) mucking up the numbers.
And everyone is down.
Of course, as I just mentioned it depends when you count. Here’s the same three stocks, over the last year:
And here’s an even longer time frame:
So stocks are down across entertainment about 30-40% more than the S&P 500. Why?
Why Did Entertainment Stocks Fall? The “G” Came Down
Before 2020, some influential media and tech analysts heavily pushed the narrative that streaming was the future of TV. They weren’t wrong, but they were very aggressive/bullish in their view of the near term upside. The idea was before 2030 was out, and maybe even 2025, Netflix could have raised prices to $20, had 90 million U.S. subscribers and another 400 million global subscribers. That was the ceiling—and some would say likely outcome—of Netflix’s future. (This scenario is not exaggeration; some Wall Street firms really believed in and touted those exact upside numbers.)
When the traditional entertainment firms got into streaming and saw big growth—especially Disney+—their stock price also benefited in part from those big assumptions. As long as the streamers kept growing, the prize seemed huge.
And then the growth slowed. We started to see hints of this last fall when both Disney and Warner Bros. announced flat quarters for subscriber growth. But many analysts were willing to label it “traditional entertainment company” problems. Then Netflix joined the “Hey, our growth might be flat too” crowd and the bottom fell out of that stock as well.
I’d put a few other factors as warning signs too:
– The “total addressable market” for streaming in the near term (say next ten years) seems much smaller than the potential 1 billion global subscribers some folks estimated.
– Churn remains a problem for most streamers, which also leads to lower “customer lifetime values” than previously forecast.
– Competition is high across the industry, leading to increased content spending, which cuts into margins.
– Being able to grow margins—the difference between revenues and costs—could offset lower TAM…but even that may not be growing.
Then everyone started to ask, “Is streaming even a good business to be in?” And that implicitly changed the narrative…meaning the perceived growth. So the “g” at the end of a lot of those models became a lot smaller.
And when the “g” changes, it can really swing a stock price down. Which we’ve seen this year.
So Stocks Are Down…What Should Streamers/Studios/Conglomerates Do?
This will sound really lame, but just keep executing the best strategy they know how.
Which sounds…boring. But to tie back to my first point, stock prices worry me less than bad strategy. Again, stocks are a “conversation” about the thing, and the thing is maximizing future cash flows. If Warner Bros and Disney shortened theatrical windows to goose their share price, but cost themselves long term cash flows, then that was a bad decision. (And yes, there is a way to model the tradeoffs between near term gains and long term growth called “net present value”. That’s a future article that I haven’t written yet.)
That said, I can’t pretend falling stock prices won’t change things. When stock prices do fall, financial discipline suddenly returns to the world. If this financial discipline results in sound strategy, so much the better. Studios could trim their head counts, reduce their content budgets, make fewer shows for less money, or make shows that cater to broader audiences, not critics and awards voters. (A potential recession could also inspire the same discipline, but that’s also a topic for a future article.)
It could also inspire studios to return to a world of windows. Windows like linear TV, theaters and home entertainment could maximize near-term revenue. And maybe even long-term growth. Another window is old-fashioned advertising, and I wouldn’t be surprised to see more streamers focusing more on advertising revenue, especially if subscription revenue has a much lower ceiling.
Speaking of which, let’s move on to our next topic…
Almost Most Important Story of the Week – Advertising Revenues Look Bleak
Want to see a news story evolving in real time? Here’s the outlook on advertising at the end of 2021:
And by June, it got much worse:
And over the last couple of weeks, the earnings reports of all the big ad companies—Facebook (you’ll never be Meta to me), Google, Twitter, SnapChat, etc—reinforced the idea that yes advertising was taking a hit due to the potentially recessionary/inflationary environment.
Yeah, this news is grim.
Longer term, I’m not sure there is much any streamer or studio can “do” about this. If advertising is a key part of your strategy—think Hulu for Disney, Roku for Roku, all the Free Ad-Supported Streaming TV (FASTs)—what are you gonna do, not try to sell ads? Should this change Netflix’s mind about an ad-supported tier? Not really.
Of course, if revenues could come down, we discussed what you do in the section above: you cut costs, like headcount, production budgets, and so on.
Or you try to be the part of the advertising pie that advertisers hold onto. Cautiously, some of the data supports the idea that the biggest losers are cheaper digital advertising (think social media driven) and not streaming video. After Peacock announced a big boost in upfront digital revenue and their top upfronts in ten years, Disney came in over the top with even bigger advertising upfront revenue. Sure, this was back in May before the recession winds picked up full blast, but those are still big numbers.
Meanwhile Madison Avenue is chomping at the bit to sell ads on Netflix. The big news a few weeks back was that Netflix chose Microsoft as their partner to sell advertising. Building out an entire advertising infrastructure is not easy, so partnering with someone who does have that capability makes sense, and Netflix seemingly chose the Big Tech company with the least exposure to video. (And yes, cue the “Should Microsoft buy Netflix sound clips?” As soon as this deal happened.)
Does this make sense for Netflix? I don’t know the various ad-sellers well enough to budget Microsoft’s capabilities over say Comcast or Roku, so it’s probably fine. I still would have liked to have seen a Roku/Netflix merger to benefit both sides, but that didn’t happen, probably for valuation reasons on both side. However, if I am Netflix, they have a lot of programmers and I’d still try to bring this capability in-house as opposed to outsourcing it in perpetuity.
Other Contenders for Most Important Story
One day, I’ll write a most important column and say, “Hey we didn’t go long, so let’s linger on these topics”.
Today is not that day.
HBO Max Dials Back on Original Production in Parts of Europe
The story is that HBO Max—under new leadership—put a stop to a lot of original content production in some European territories. Whether this is smart strategy depends a lot on the future, but it’s interesting that HBO Max seems much more choosy about where to make originals than some of the other streamers, who are touting hundreds of global originals a year (Netflix, Disney+/Hotstar and Paramount+ come to mind). Personally, having been reviewing the U.S. data on foreign-language originals, I don’t think they perform as well globally as some media coverage suggests.
(Relatedly, David Zaslav extended Casey Bloys as head of content for HBO/HBO Max. I like this as Bloys is very, very close to being an elite development executive in terms of hit rate. Though I do think the content he chooses to put on HBO has generally outperformed HBO Max Originals, and indeed HBO Max has a few “dogs not barking” to their name.)
TelevisaUnivision Launches Vix+ a Spanish Language Streamer
I’m probably too bullish on this streamer, but I like its prospects. I’m not sure it can be global, but a “super regional” streamer that covers all of Latin America plus the United States makes a lot of sense to me. They’re private, meaning we won’t get subscriber updates regularly, but I hope they do disclose those.
NFL+ Launches Too!
NFL+ is the NFL bringing some sports rights in-house in of course a streamer with a “+” on the end. (FIFA also launched a FIFA+, and of course, Discovery, Apple TV, Disney and Paramount have their “+”.) Unlike Vix+, this really feels like a bit of a sideshow. But it’s a smart strategy that, if someday the NFL Sunday Ticket bundle runs out of gas, they can pivot to wholly-owned.
Prime Video Starts to Fix Their UX
I haven’t made my UX rant in a while, but here goes. Right when Disney+ launched, quite a few folks who were pessimistic about Disney+ happily opined—mostly on Twitter—that its UX sucked. I saw this about HBO Max too. And I see it among Netflix bears too, complaints that the UX has endless scroll and weird offerings.
Basically, if you like a company’s strategy, you like their streamer’s UX. If you hate the company’s strategy, you hate their UX. So mostly I ignore “UX” coverage.
Except for Amazon. Everyone agreed their Prime Video UX was the WORST.
They’ve finally started fixing it, with a new UX that’s been getting mostly positive reviews. Now I’ll be the first to acknowledge the challenges facing Amazon. They’re trying to hold onto their TVOD sales of renting shows/films, while adding an ad-supported tier in FreeVee while selling other subscriptions. It’s a lot to cram into one UX. (Arguably, it should be multiple apps, but if they want it all in one place, they need a better UX and they’ve started rolling it out.
T-Mobile Added 560K Broadband Subscribers
If we’re talking disruption, there’s a version where the cellular companies can disrupt cable broadband faster than even linear TV. I mean probably not, but that’s the pitch T-Mobile is putting out there, and they added 560K broadband customers in the last quarter. (Another article to write is a check in on “the pipes”.
M&A Updates – One Deal Cleared and Another Purchased
First off, the UK’s competition authority approved the Warner Bros. Discovery joint venture with BT to combine sports efforts. So M&A is back! (Kidding, of course. Even the scrutiny of this deal is higher than say five or ten years ago.)
Second, Netflix bought an animation studio called Animal Logic. I saw a headline somewhere asking if this was Netflix’s Pixar. Uh, no. When Disney bought Pixar, they’d already started cranking out blockbuster films and, no offense to Animal Logic, but they aren’t in that tier.
Lots of News with No News – The Latest Executive Moves
Normally, I eschew executive transitions, but Adam Fogelson departing STX for Lionsgate has to be a bad sign for STX’s future. I still recommend this New Yorker article (subheadline: “As the movie business founders, Adam Fogelson tries to reinvent the system”. Narrator voice: He did not.) as a case study (in a bad way) for entertainment strategy.
Also, Sony Pictures TV found their replacement in Katherine Pope. Again, the volume of coverage for Sony Pictures TV—who makes a LOT of TV shows—paled compared to the Peter Rice news, and I think that says more about “the conversation” then it does about “the thing”.