You will be redirected back to your article in seconds

A Look at Key Trends Facing Media and Tech Companies Ahead of Q2 Earnings

At Allen & Co.’s sun-streaked mogulfest in Sun Valley, Idaho, last week, Discovery chief David Zaslav summed up the quandary for traditional media conglomerates in the face of binge-spending internet disruptors.

“Rupert Murdoch can’t just add $2 billion to $3 billion to what he’s going to spend on content,” Zaslav observed in a sideline chat with reporters.

Of course, Zaslav can’t either. Discovery and the rest of Hollywood’s established players have been scrambling to adapt to the new media order — driven by the steady incursion onto their turf by the likes of Netflix, Amazon, YouTube, Apple and Facebook. Old media’s response: Get bigger with M&A, aiming to build sustainable platforms of the future.

As the media biz heads into the second-quarter 2018 earnings season, the biggest story has been consolidation, led by AT&T’s swallowing of Time Warner in June. The big questions concern who’s next.

That’s created an overhang on media stocks, as investors wait for more shoes to drop. Even so, U.S. media company shares outperformed the S&P 500 during the second quarter, with the sector up 10.1% over the market index for the period, according to an analysis by Wall Street firm Evercore ISI.

Here are some key Q2 trends to watch for in the media and technology landscape.

AT&T Randall Stephenson
CREDIT: Jose Luis Magana/AP/REX/Shutters

M&A: Big Moves, Big Uncertainty

Earnings numbers from media congloms could be a sidelight to bigger strategic questions of how the players will — or won’t — be recombining. “In entertainment, fundamentals across the space remain on the back burner,” BMO Capital Markets analyst Dan Salmon wrote in a preview of the quarter.

Currently, AT&T is the proud owner of WarnerMedia, as it has rechristened Time Warner. The telco’s John Stankey has given marching orders to HBO’s team to aggressively step up their competitive attack in the next year, according to a town-hall talk leaked to media outlets. But the chapter on this deal isn’t completely written: The Justice Department has appealed the decision, and the sliver of a chance that AT&T-Time Warner could possibly be unwound pushed AT&T stock down 1.7%.

Meanwhile, Disney appears to have won the fight for 21st Century Fox’s entertainment assets — now that Comcast has abandoned its Fox chase to focus on its pursuit of Sky. Once the dust settles there, the potential merger of CBS and Viacom — and a legal fight over control of the companies’ future — will take the stage. Other M&A plays are expected in the months ahead.

The rationale for consolidation continues to center both on scale and on “aggregation of content creation and international expansion, as the media model continues to pivot to direct-to-consumer propositions,” Evercore ISI analyst Vijay Jayant wrote in a research note.

Reed Hastings, Ted SarandosSouth Korea Netflix Asia, Seoul, South Korea - 30 Jun 2016Reed Hastings, left, CEO of Netflix, poses with Ted Sarandos, Chief Content Officer of Netflix, during a press conference in Seoul, South Korea, Thursday, June 30, 2016. Netflix plans to expand its Asian offerings to its subscribers around the world by tapping more creators in Asia.
CREDIT: Ahn Young-joon/AP/REX/Shuttersto

Netflix Hits a Speed Bump

Amid the media-sector realignments, Netflix’s debt-fueled growth engine choked in the second quarter.

The streaming giant, the first of the big tech and entertainment companies to release quarterly earnings, missed its subscriber forecast target by about 1 million — sending the historically volatile stock down 14% on July 16. The issue? CEO Reed Hastings’ explanation in the firm’s second-quarter earnings interview was basically that Netflix sometimes sees quarterly “lumpiness” in subscriber trends.

Despite the miss, Netflix ended the quarter with 130.1 million global streaming customers, up 25% year over year, and for the first time generated more revenue abroad than in the U.S. And there’s evidence Netflix has captured a level of mind share that beats traditional TV: It was the No. 1 source cited by U.S. consumers for how they watch television, according to a Cowen & Co. survey conducted in the first half of 2018.

The second-quarter results are a “near-term gut punch,” but Netflix remains well positioned for future growth, GBH Insights analyst Daniel Ives wrote in a note. “As we head into the rest of 2018, we believe Netflix has a number of growth levers that should fuel the company’s next phase of strategic penetration among both U.S. and especially international consumers despite some softness seen in 2Q,” he wrote.

CREDIT: Courtesy of ESPN

OTT TV: Cutting In on the Dance

Strong uptake of cheaper streaming-TV services will continue to steal subscribers from cable and satellite TV operators, and the over-the-top migration will have a ripple effect on programmers’ second-quarter results for affiliate fees.

So-called virtual MVPDs (multichannel video programming distributors) continue to experience rapid growth, “largely at the expense of traditional pay-TV subscriber bases, creating winners and losers among content companies based on participation in these services’ channel lineups,” according to Evercore ISI’s Jayant. For example: Viacom, a loser here, is absent from both YouTube TV and Hulu’s live-TV packages.

Look for AT&T to provide an update on DirecTV Now and for Dish Network to report Sling TV growth — with both companies’ satellite services in decline. In a sign of growing OTT traction, AT&T is hiking the prices of DirecTV Now’s bundles by $5 each as of July 26, while Sling TV in late June boosted the price of its plan with ESPN and Disney nets by 20%, to $25 monthly. AT&T also rolled out Watch TV, a 31-channel bundle, included with two new unlimited wireless plans (or $15 as a stand-alone option).

Then there’s ESPN+, the $5-per-month direct-to-consumer sports package that debuted in April. Investors will look for Disney to provide guidance on the company’s foray into the OTT arena.

Mark Zuckerberg

Internet Giants Deflect Punches, Attract Ads

Google and Facebook are subject to regulatory actions, as governments look to check the power of the two online-ad behemoths as well as address brand-safety concerns among marketers. But for now, nothing is slowing them down.

Evercore ISI’s Anthony DiClemente expressed excitement for Google stock in a preview note last week, citing revenue growth at “massive scale, with sustained ad growth of over 20%.”

Facebook’s stock has rallied to record highs, up around 34% since a trough in March after the Cambridge Analytica scandal. In the second quarter, analysts expect Facebook to post 41%-45% topline growth, with revenue forecasts averaging $13.3 billion.

Amazon, for its part, will continue to take a share of the ad market in Q2, with 37% of respondents to a recent Cowen survey of ad buyers saying they spent more on Amazon ads in the first half of 2018 than they expected. The company’s advertising, Prime subscription and Amazon Web Services businesses will generate $25 billion of operating profit this year, per estimates by Morgan Stanley’s Brian Nowak, enabling Amazon “to invest at record levels while also delivering upside to estimates.”

But according to Pivotal Research Group analyst Brian Wieser, longer term, there will be limits to the growth of digital-media advertising, suggesting some forecasts may be overly optimistic.

This Is Us - Season 2
CREDIT: Ron Batzdorff/NBC

Upfronts: Steady as She Goes

Back in the traditional TV world, the ad market remained stable during the 2018 upfront selling season throughout the second quarter, according to Evercore ISI’s Jayant.

The big broadcast and cable players were able to generate both price and volume increases in advertising sales. At the same time, however, networks have lowered their expectations for marketers in the face of ongoing deterioration of TV viewership — with Netflix, for one, obviously peeling away viewers. “TV ratings continued to slide at a mid single-digit pace, but lower audience-delivery guarantees made in last year’s upfronts have meant fewer make-good deliveries in the current TV season,” Jayant wrote.

Cynthia Littleton contributed to this report.

Popular on Variety

More Biz

  • Leonardo Dicaprio Once Upon a Time

    Leonardo DiCaprio's Earth Alliance Commits $5 Million to Amazon Fires

    Earth Alliance, an environmental initiative backed by Leonardo DiCaprio, has committed $5 million toward the preservation of the Amazon rain forest following an alarming surge in wildfires. After launching Sunday, the organization’s emergency Amazon Forest Fund is working to support local partners and indigenous communities in their efforts to protect the sensitive habitats within the [...]

  • Harvey Weinstein

    Weinstein Can Get a Fair Trial in Manhattan, Says D.A.

    The Manhattan District Attorney’s office argued on Friday that Harvey Weinstein can get a fair trial in Manhattan, and blamed the producer’s defense team for much of the pre-trial publicity in the case. Weinstein’s attorneys have asked an appellate court to transfer the case — which is set to begin on Sept. 9 — to [...]

  • Leonardo DiCaprio Madonna

    Leonardo DiCaprio, Madonna Call for Action on Amazon Wildfires

    As wildfires rage at an alarming rate in Brazil’s Amazon rain forest, celebrities are using their platforms to bring awareness to the deforestation’s impact and to call for action. In the past week, stars like Leonardo DiCaprio, Madonna, Cara Delevingne and Ariana Grande have taken to Instagram to express their frustration with the lack of [...]

  • 'The Durrells' TV Show

    Greece Sweetens Production Incentives as Struggling Country's Economy Rebounds

    It’s taken the better part of a decade for Greece to show signs of recovery from the crippling crisis that almost pushed it out of the Eurozone. Now, with the economy slowly on the mend, the government is doubling down on efforts to jump-start the local film industry, giving a dramatic overhaul to the incentive [...]

  • Warner Music Group Partners With Audiomack

    Warner Music Group Partners With Audiomack

    Warner Music Group announced it has entered a partnership with the music streaming and discovery service Audiomack, marking the platform’s first licensing deal with a major label. According to the announcement, the two companies will work together on content concepts and explore ways to break emerging artists, connecting music fans with rising talent before they [...]

  • Scooter Braun Congratulates Taylor Swift on

    Scooter Braun Congratulates Taylor Swift on ‘Brilliant’ Album and Campaign

    Two days after Taylor Swift fired off the latest salvo in her battle with Scooter Braun, the manager congratulated the singer on the campaign around her “brilliant” new album, “Lover,” which arrived last night. The message came after Swift said she will be re-recording songs from her first six albums, which are now owned by [...]

  • David Koch Obit

    David Koch, Libertarian Activist and Billionaire Philanthropist, Dies at 79

    David Koch, brother of Charles Koch and one of the owners of Koch Industries, the second-largest private company in the U.S., has died at 79. According to the New York Times, Charles Koch announced the news of his brother’s death in a statement. Though he did not attribute to David’s death to a particular cause, [...]

More From Our Brands

Access exclusive content