(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)
The SAG-AFTRA/AMPTP standoff remains the most important story, but after that, there were a lot of smaller, yet very interesting stories…
Before we get into all the news, I’ve been quoted or cited in a few different places recently, so here’s another update of ESG shout outs and interviews:
- Early last month, Ben Dreyfuss, in his terrific/hilarious newsletter, mentioned me in his analysis of streaming viewership.
- Box office guru and all around great writer Scott Mendelson interviewed me for his article on The Exorcist debacle.
- My Ankler article on the WGA got cited by CNN’s Reliable Sources newsletter.
Okay, on to the news, including Hollywood spending shifts, Disneyland prices going up, writer pay going down, worries about sports media rights, a broadcaster team-up in Europe, and more…
Strike Updates – SAG-AFTRA…Not Over Yet.
As of last week, everyone in town was hopeful that, because the WGA made a deal with the AMPTP, SAG-AFTRA wouldn’t be far behind, and we’d all soon be back to work.
But that didn’t happen.
I don’t have a hot take on when the strike will end. Maybe this goes to the end of the year, as Matt Belloni predicted on his podcast, or maybe Richard Rushfield’s take, that it’s darkest before dawn, holds true instead.
Until all the labor unions are working, this is the most important story of any week. (Or two weeks.) My gut is that the 2% share of revenue request is an exceptionally hard pill to swallow for the studios. If SAG-AFTRA holds to that demand, this strike could go on for a while. I wouldn’t predict the studios give on it, but never say never.
Most Important Story of the Week – Five Signs That Hollywood Has Started Cutting Costs
Somehow, back in 2021, I missed the little news story that Comcast/Universal paid $400 million for the rights/production of a new trilogy of Exorcist films. Seriously, $400 million. Normally the reason production companies make and invest in horror films is the tremendous return on investment (ROI). But it’s not because the “return” part is so high, but because the “investment” part is usually so low.
Spending $400 million is not a low investment!
Today, this seems like an inconceivable amount to spend on a B (or C) level film franchise. That “inconceivability” really captures the shift in priorities for entertainment companies. A series of news stories from the last few weeks have have started to provide the evidence that this new, cost-conscious entertainment industry is here to stay.
Let me make the case…
Exhibit 1: Sports Media Rights
As an avid basketball fan, I’ve heard on quite a few podcasts that everyone in the NBA expects the next NBA media deal will be huge. Massive. Gigantic.
But what if it…isn’t?
That’s my cautious reading on the tea leaves. For example, when the USA Network took back WWE rights, the price was “only” a 40% increase over 5 years, lower than the market expected. This actually caused the stock in the newly formed TKO Group (remember, Endeavor merged WWE and UFC) to fall. Though I don’t love using “stock price” as a metric, I do think this shows that the WWE deal failed to live up to expectations.
This potential warning sign is now being rumored about by other observers. The Sports Business Journal’s John Ourand warned that media companies are being very careful with their sports spending. It doesn’t mean it’s “dead”, but it may not be growing nearly as fast.
As a reminder, sports leagues often hype new media deals as huge increases—the value of the deal doubled!—when they actually aren’t, but instead are very long term deals. If a deal increases by six percent per year that doubles in twelve years (The rule of 72). As I’ve calculated before, most increases in sports rights are about 4 to 5% for year. That’s a good return, but not as eye-popping as the total increases imply, because the deals often last for ten or more years. If future increases are only 1-2% per year, for example—a nightmare scenario for the sports leagues—that’s a big loss in value for sports media rights.
Exhibit 2: M&A
Beyond antitrust scrutiny—which has had some ups and downs recently—the lack of future growth in entertainment is also likely dampening prices for mergers & acquisitions.
For example, since June, All3Media—a production company co-owned by Warner Bros Discovery and Liberty Global—has been looking for a buyer. It looked like it would close a sale with ITV in June, but that deal fell through. The rumored price was $1.3 billion, and you wonder if that price will drop going forward. (Discovery invested in All3Media in 2013 for a nearly $700 million valuation.)
Or take Candle Media. After I published my two articles arguing that their investments (among other companies) in celebrity production companies weren’t working, we got confirmation by Bloomberg that, yes, their revenue and profits weren’t hitting targets. (Hello Sunshine—valued at $900 million at one time—only had $10 million in earnings, for example.) Of course, someone let The Ankler know Candle Media is still hunting for deals, but I doubt the valuations announced for new deals come anywhere close to those 2019 to 2021 prices.
Exhibit 3: Content
I trust Sean McNulty’s take on the pace of deals. As someone collecting nearly every new deal or announcement in his daily newsletter, his feel for the pace of the town is probably a great leading indicator. So read this from one of his recent newsletters:
“…It is interesting to see the relatively muted reported deal activity in the essentially 2.5 weeks now since the writers have been back to work…A few folks mentioned how quite a few shows whose productions were suspended with the strikes, are either:
A) Simply now being scrapped
B) Having their orders cut
Suggesting that “ordering a lot of new shows” to make up for the time off isn’t high on the marching orders for several players around town.”
Partially, some of this is due to the still ongoing SAG-AFTRA strike, as McNulty mentions. But even after that resolves, I think the lack of new orders will continue. And almost no one in town thinks we’ll return to a world of nearly 600 scripted English language shows.
Exhibit 4: Talent
One of the neglected stories in the post-WGA strike resolution landscape is, for me, the fact that the studios collectively decided to not extend their overall deals with writers. As Matt Belloni reported on his podcast and in his newsletter, several hundred writers who had their deals “paused” during the strike will not see their overall deals extended to match the pause, as has been done by the studios during past strikes. That means the writers—earning about $2-3 million per year—lost five months of pay during the strike:
So do that math:
Say 250 writers…
Making say $2.5 million per year…
Lose 5 months of salary…
The studios saved approximately $260 million in salary this year on that alone. Given that the WGA expects $233 million in wage gains in their new deals, that means that the studios actually saved money, this year, due to the strike. And the reporting indicates that many of these writer overall deals won’t be renewed.
I’d add that both Netflix Animation and DreamWorks Animation are also cutting headcount. Again, we’re seeing decreased spending on talent, both writers and employees.
The World is Flat. Or Entertainment Spending Will Be.
Streaming just isn’t as good of a business as the old theatrical/linear distribution system was. But let’s be precise: when we say streaming is a “bad” business, what we really mean is two things:
- It will be smaller in terms of revenue.
- And it will be less profitable as a percentage of revenue.
That’s it. That’s the worry I’ve had since streaming started disrupting linear TV.
If I were trying to “hot take” this conclusion, this is where I’d lead with a headline along the lines of “Entertainment spending is about to fall off a cliff into a deep chasm that itself falls into a deeper Mariana Trench and never will recover!!!” But that’s not what I do. I pride myself on being “aggressively moderate”, right?
To be clear, I don’t think we’ll see spending plummet in the next few years. I think it will be “flat”.
But “flat” is still bad for business. Often really bad.
When an industry isn’t growing, it doesn’t keep pace with inflation in the rest of the economy. Employees don’t see raises because the company can’t afford them. (Or they see raises, but the company cuts headcount.) Companies don’t invest, because there isn’t growth to be had. Stock prices shrink.
Flat is bad.
As this reality sinks in, the studios and streamers will have to adapt. You can’t spend the same amount if you’re making less. Unfortunately, that means lowering costs to align with the new profit reality.
That’s the future of content spending in this town: flat.
Almost Most Important Story of the Week – Taylor Swift Film Doesn’t Match Expectations
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