From a consolidation of historic Hollywood studios and the reunification of two major media companies to Apple taking the leap into content as the streaming wars ensue, 2019 was a massively turbulent year that changed everything in the ecosystem of the entertainment business. As the calendar turns, 2020 is shaping up as a critical marker for high-stakes execution — when those in the C-suite have to prove they made the right decisions to realign their businesses for media’s next epoch.
Last month saw the launch of two huge bets on the direct-to-consumer streaming model pioneered by Netflix: Apple TV Plus (Nov. 1) and Disney Plus (Nov. 12). Two more mega-platforms are on the way next spring from NBCUniversal (Peacock, set for April) and WarnerMedia (HBO Max, in May).
Billions of dollars are flowing into transformative ventures. Studios and corporate structures are being revamped to reflect the demands of a business that is increasingly playing out on a global scale. When the dust settles on the disruptive events of 2019, there will be winners and there will be losers. The biggest sport for players in media and entertainment over the next few years will be sussing out which teams are going all the way to the Super Bowl and which are headed for the showers.
“The next 18 months are going to determine where this business goes for the next 20 years,” says industry veteran Steve Mosko, CEO of Village Roadshow Entertainment Group. “The ground is shifting.”
Industry observers say the rollicking pace of events over the past year have put a klieg light on fundamental shifts in the entertainment marketplace that are ricocheting around the world.
In the core film and TV arena, ownership of major studio and network assets is more consolidated than ever among six major conglomerates: Disney, AT&T, Comcast, ViacomCBS, Sony Corp. and, to a lesser extent, Lionsgate. Towering over them all is Disney, thanks to its $71.3 billion purchase of 21st Century Fox in March, which brought two historic film and TV studios under the same roof.
The competition in television is steadily playing out on a global scale rather than a country-by-country basis. Netflix flipped on the switch in 130 countries en masse in January 2016, demonstrating the potential for streaming players to think globally and produce locally to drive a worldwide subscriber base. Now Disney, AT&T, Comcast, Apple and others are spending billions on the launch of direct-to-consumer streaming platforms designed to span borders to get maximum bang for every buck invested in programming and marketing. This is a sea change for U.S.-based conglomerates that has broader implications for the American economy, experts say.
The divide in TV between outlets that largely focus on scripted and unscripted entertainment programs and those driven by news and sports content is widening. The streaming on-demand binge model is fast becoming the dominant delivery system for entertainment programming. Sports and news increasingly drive the vast majority of live linear viewing because of the urgency to tune in on a timely basis. Companies like ViacomCBS, NBCUniversal, AMC Networks and Discovery with big investments in general entertainment cable channels are feeling the pinch from the transition in all key metrics: Linear-subscriber losses, affiliate-fee declines and stagnant or dwindling advertising revenue.
“The scripted business is so expensive from a production and marketing perspective that you really need scale to be profitable,” says Ben Swinburne, head of U.S. media research for Morgan Stanley. “That means it will be a very small number of players that will be able to achieve that scale and profitability in the direct-to-consumer business.”
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| Clockwise from right: Apple Plus spent big on “The Morning Show”; popular HBO series like “Watchmen” will help drive interest in HBO Max; “Star Trek: Discovery” has been a workhorse for CBS All Access. Courtesy of CBS/Apple plus/HBO |
Traditional cable operators, the bedrock of the pay-TV universe, are increasingly marketing themselves to consumers and Wall Street as providers of broadband service rather than video programming. Comcast, Charter Communications and other large operators say they are no longer chasing video customers with discounts but rather focusing on the high-end subscribers still willing to shell out $100 or more a month for the big bundle. Cable operators are girding for the onslaught of competition from high-speed 5G services that AT&T, Verizon and other major telcos are rolling out nationwide.
Perhaps most sobering for industry leaders at a time of enormous disruption are signs that the pool of consumer dollars devoted to video is not growing. The results of the past few quarters have made it clear that the new breed of virtual MVPDs — YouTube TV, Hulu Live, Sling, DirecTV Now — are not adding subscribers fast enough to offset the erosion of traditional cord-cutting, which hits entertainment giants hard. According to research by Cowen & Co., the average U.S. home in 2019 spent about $73 on video services: $60 a month on MPVDs and $13 on streaming platforms. That ratio is set to shift to $50 and $26 by 2024. But total consumer spending on video is projected to grow only about 1% by 2024, to $76 a month. Those numbers indicate that the business of attracting video subscribers is becoming more of a zero-sum game than Hollywood would like to admit.
“There’s massive change happening right now at every level,” says Tony Vinciquerra, chairman-CEO of Sony Pictures Entertainment, who likens the atmosphere today to the early 1980s, when cable began to boom. But this time around, the combatants have deeper pockets and the playing field is far more cutthroat than it was in the era when cable operators enjoyed local monopolies on multichannel service offerings.
“All of these companies are going to have to find their pathway over time,” Vinciquerra says. “There will be consolidation, and some will go out of business if they can’t find a way to define their audience clearly.”
This evolution has bifurcated the largest studio conglomerates into two types of companies: those marshaling content armies (Disney, AT&T and Comcast) and those who aim to be content arms dealers (ViacomCBS, Sony Pictures, Lionsgate).
In the long run, consumers will benefit as demand drives innovation. But in the short term, there will be some bumps, which benefits the companies with the strongest marketing platforms (read: Disney).
“We’ve seen this coming. The amount of content spending going on is amazing,” says Jessica Reif Ehrlich, senior media analyst for Bank of America Merrill Lynch. “But it’s going to be absolutely incredibly confusing to consumers.”
Swinburne predicts that the initial enthusiasm for streaming platform launches will give way to a more familiar form of packaging video content in the future.
“Direct-to-consumer is an over-used phrase,” Swinburne says. “The reality is we will be re-bundling these things over the next five years. It will be probably look more like what we’re used to seeing (with cable). That’s better for consumers and better for content creators.”
For Sony Pictures, the arms-dealer approach was the natural choice in what is already a crowded direct-to-consumer market. Next month, its parent company will shutter PlayStation Vue, the four-year-old experiment that offered a skinny bundle of channels through its video-game set-top box. Sony was ahead of its time in developing the alternative channel-distribution platform, but the service never gained enough traction to make it viable.
Demand for high-end TV and film content, however, has never been stronger. Sony’s vast archive of movies and TV shows gives the company a wealth of IP to draw on as the studio shops its wares to the highest bidders. The numbers being put up by content-hungry platforms, from Netflix and Amazon to the nascent studio-backed streamers, are staggering, Vinciquerra says. “Everybody building streaming services feels like they need to buy so many things. The anxiety is pervasive. You can just feel it in the room.”
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| Clockwise from top left: “The Mandalorian,” with Baby Yoda, has been a hit for Disney Plus; Amazon’s “The Marvelous Mrs. Maisel” and Netflix’s “Russian Doll” have won multiple Emmys. Courtesy of Disney +/Amazon Studios/Netflix |
ViacomCBS is hoping to forge a third path that encompasses support for in-house streaming operations — notably CBS All Access and Pluto TV — with a renewed push to mine the Viacom, Paramount and CBS vaults and development infrastructure to produce content for outside buyers. The long-awaited remerger of CBS Corp. and Viacom, which closed Dec. 4, makes this juggling act possible on an international scale, according to ViacomCBS president-CEO Bob Bakish.
Bakish’s challenge in 2020 is to demonstrate that the combined company can effectively use its market clout to make one plus one equal three. He acknowledges that ViacomCBS is “exceptionally undervalued” at present on Wall Street, where shares of both companies slipped double digits after the initial merger agreement was sealed in August. “Backed up by the content assets of the combined company, our library capabilities and new production gives us a compelling, differentiated lane to play in,” he says.
The industry scratched its head when Viacom agreed to shell out $340 million in January to buy Pluto TV. The advertising-supported streaming platform allows content owners to assemble channels of on-demand programming in exchange for giving Viacom a portion of the advertising time in each program, or a cut of total revenue. Viacom has a range of its own library programming available on Pluto TV, which has given the company an entirely new source of targeted digital advertising inventory to sell. That was a crucial component to facilitating Viacom’s investment during the past decade in advanced advertising technology.
Next up for Pluto TV is a big consumer marketing push and a broader international rollout in 2020, starting in Latin America with Spanish- and Portuguese-language versions. “Pluto TV is an integral part of our growth strategy,” Bakish says. “It’s not something off to the side for us. It’s a core use of content assets and allows us to work in a more meaningful way with distributors and advertisers.”
While much of the entertainment industry is focused on the growth of commercial-free premium platforms, Viacom is firmly focused on restoring the luster to the advertising line of its quarterly earnings reports, much like NBCUniversal with Peacock. One of the first orders of business for the Viacom-CBS integration process was to assemble a global advertising sales unit to hawk every scrap of inventory the company has to offer — a far cry from the past diffuse approach by different units within the two separate companies. “Viacom for years has been lagging [behind] the market on ad growth,” Bakish says. “Now you will see us leading the market. Pluto was the last piece of the equation.”
The onset of the streaming wars has become Hollywood’s overwhelming obsession — even more so than Baby Yoda, the unexpected star of the Disney Plus breakout original series “The Mandalorian.” The Baby Yoda craze and the staggering 10 million-plus downloads of the Disney Plus app (albeit some in free-trial mode) just 48 hours after the service’s launch underscore Disney’s dominance in just about every inch of entertainment.
The reasoning behind Disney’s aggressive pursuit of 21st Century Fox became crystal clear less than a month after the transaction closed on March 19, when Disney gave investors the first glimpse at Disney Plus. The array of titles and brands paraded — from Mickey Mouse to National Geographic to Bart Simpson — was a stunning display of the combined company’s unparalleled content wealth.
Since then, Wall Street has been nodding along with Disney’s streaming plans, energized by the company’s focus on direct-to-consumer platforms Disney Plus and ESPN Plus, taking the spotlight off ESPN subscriber losses and other cable sub erosion. Disney has also bundled both streaming services with Hulu, of which it has now taken full operational control after years of splitting ownership with NBCUniversal, Fox and Time Warner.
“They’ve done a fairly masterful job,” says Pivotal analyst Jeff Wlodarczak. “I used to say — and I was wrong — that a fatal flaw with the media companies as potential competitors of Netflix is they’ve got business models where people are focused on earnings and operating income. And trying to create a realistic competitor for Netflix, which is not focused on any of those metrics, they’re going to blow out their financials, and the market’s going to punish them for it. And Disney did a great job of getting people focused on sub growth and turning the narrative.”
Disney has thus far been the only legacy entertainment conglomerate whose streaming plans have fueled investor optimism in a manner akin to the years-long bullishness surrounding Netflix. But that may not extend to players like AT&T and its plans for HBO Max, says Wlodarczak, who sees “more pain” in the overall pay-TV space in 2020. Note that Disney’s stock spiked nearly 12% after it unveiled Disney Plus in April. After WarnerMedia parent AT&T unveiled HBO Max, its shares drifted slightly lower although AT&T stock has rebounded in recent weeks.
“You look at the other guys, who’ve all now [launched streaming plans] of one variety or another, and the stocks are trading at historical lows on a multiple basis,” echoes Cowen analyst Doug Creutz. “I think, given the dynamics, it’s very likely margins for this industry will continue to compress for the foreseeable future. That’s generally not good for stock prices.”
Of course, says Creutz, the market is willing to forgive quite a lot, if you can clearly articulate a path forward to growth.
In Disney’s case, its aggressive push into the direct-to-consumer space means squeezing margins to 14% in 2020, down from a “fairly high margin” of 29% in 2018, according to a recent Cowen deep dive on the over-the-top space. That translates to a $2 billion slide in operating income. Still, it’s a risk that’s likely to pay off. The firm sees profitability reaching new highs even as margins stay slimmer, expecting Disney to reap $1.9 billion in operating income between 2018 and 2024. HBO’s margins are likely to be similarly pressured, with $900 million in projected operating income over the same six-year span. But over time, the bad is much more certain than the good. “While we have relatively high visibility on the negative profit impacts for both companies expected in 2020,” per the report, “the return to higher profitability by 2024 is quite a bit more speculative.”
Analysts generally agree that in 2020, traditional MVPD subscriber losses are likely to accelerate, content spending is going to increase and the competition isn’t going to get any less cutthroat, particularly with tech giants Amazon, Apple and Netflix seemingly flush with cash.
If Netflix is the streamer with the target on its back, you’d never be able to tell from speaking with the company’s originals chief, Cindy Holland, who — unlike many Street analysts — maintains that the current environment is not a zero-sum game. “We’re really just focused on running our race,” she says.
But the market in the U.S. is increasingly a saturated one, and Netflix, perhaps more than any other major domestic player, has been focused on growing its international subscriber base (which is more than 50% larger than its U.S. base). The company spent 2019 staffing up local offices — Mumbai, Mexico City, Paris and Berlin, among others — in the countries in which it makes original content, says Netflix’s head of international non-English originals, Bela Bajaria. This year saw the launch of better than 50 new scripted seasons of local-language programming on the service; next year, it will debut 130.
In the coming year, the company will have to continue to outperform subscriber growth expectations in order to maintain its streaming dominance. Unlike its Silicon Valley counterparts, Netflix has a business that is entirely centered on content and subscriptions. It has no smartphones to sell or web services to expand or retail empires to manage.
In some ways, that aligns Netflix more with its traditional-studio peers than, say, Amazon or Apple, two companies whose apparent seriousness about being Hollywood players is often undermined by their interests elsewhere. Many industry watchers wave off Amazon Prime Video or the newly launched Apple TV Plus as mere “line items” that won’t pose problems for their parent companies should their efforts go south.
At the same time, those arguably lower stakes give Apple and Amazon the freedom to take more risks on content, since they don’t have the same expectations from shareholders. “I don’t think Jeff Bezos cares 1% if their media business ever makes money,” says Cowen’s Creutz. “Which is part of the problem for the other guys.”
“If you don’t have to make money on the content,” he adds, “then just spend hundreds of millions of dollars on ‘Lord of the Rings’ and give it a Season 2 renewal before Season 1 is even out, and you don’t care. Because all you care about is getting people to your platform so they can buy s—.”
Amazon Studios, of course, begs to differ, and is quick to accent its synergies. The company sees itself as a “home for talent,” which, says Amazon co-head of TV Vernon Sanders, is “excited” about the possibility of collaborating with the company’s other divisions.
“The challenge is making sure that we figure out how all of those systems work, and it also represents incredible opportunity for us to partner” with Amazon’s music or fashion units or Amazon-owned Comixology, Twitch, Audible or Kindle, he says. “It’s really where we’re putting a lot of effort to make sure we’re delivering not only great content to customers but also extensions that enhance the experience.”
Apple TV Plus remains possibly the greatest question mark in the year or two ahead. Its launch of relatively few original series includes the big-budget “The Morning Show,” which garnered lukewarm reviews, though all four scripted dramas scored early renewals, pointing to some sense of commitment to the endeavor from the iPhone maker.
The Chernin Group chief Peter Chernin, a respected industry thinker and investor and alum of News Corp./Fox, believes that the industry is entering what he sees as the fifth era of the modern media business, which began with live entertainment through the 1920s, followed by advertising-driven radio in the ‘40s and the growth of broadcast television, the bloom of cable and pay TV in the ’80s, and now the streaming landscape.
“The fifth thing I believe we are just on the cusp of, but is unbelievably important, is you’re now seeing mega-companies use content as a branding exercise for different businesses,” Chernin said on Dec. 6 during his keynote conversation at Variety’s annual Dealmakers event. Chernin pointed to Amazon’s ability to use its studio arm to increase Prime subscriptions and the potential for Apple TV Plus to expand the device giant’s overall platform and hardware sales.
“You’re talking about some of the biggest companies in the world — Google, Apple, Facebook, Amazon — who are now saying, ‘We can afford to use content on what may appear to be a loss leader but will do the overall mothership so much good,’” he said. “And that is another huge paradigm shift.”
Whether the fierce competition will spur a price war — or further consolidation — is a matter of mixed opinion. Disney Plus’ “really aggressive” price, including its freebie for nearly 20 million Verizon users, will have a broad impact on the rest of the industry, Pivotal’s Wlodarczak believes. “Because they’re so aggressive, it makes it very difficult for more than a few other players to compete,” he says. “That’s the big one.”
As a new decade dawns, Hollywood’s major players are revving engines and positioning themselves like drivers at the starting line of Le Mans. But industry veterans caution that the evolution of the video marketplace will be a marathon, not a sprint.
Disney has about a five-year window to deliver on the promise of Disney Plus, in the view of Bank of America Merrill Lynch’s Reif Ehrlich. “Ultimately, the traditional media companies will have their feet held to the fire; they’ll have to show profits. That’s so different than the FAANG companies,” Ehrlich says, adding new-media firms to the comparison. “For Disney, Disney Plus subs will absolutely be the biggest driver. They’ve gotten off to an impeccable start.”
JPMorgan analyst Alexia Quadrani sees some traditional media companies winding up between “a rock and a hard place” as they divert investment to streaming initiatives at the expense of linear channels that still deliver profits. That’s why Disney has started to hedge its bets by showcasing FX on Hulu and building up ESPN Plus as a subscription offering. Both of those initiatives pave the way for a larger shift of those brands to streaming if the direct-to-consumer marketplace takes off faster than expected. “They have laid an even more robust pipeline for growth down the road,” Quadrani explains.
The challenges of achieving scale amid skyrocketing production costs was one of the motivators for Rupert Murdoch to sell his Hollywood empire to Disney. The surviving Fox Corp. represents Murdoch’s acknowledgment that he couldn’t catch Netflix and Disney, but he can grow faster with a smaller entity focused on the live audiences that drive news and sports. The discipline to understand where priorities and resources should be placed is a key test of management strength in uncertain times, observers say.
“Companies are going to get a lot of pressure from boards to develop a streaming strategy, but that may not necessarily be in the best interest long term,” Quadrani says. “There can’t be hundreds of these things out there and have them all be successful.”
And as the competition for direct-to-consumer success shifts into a higher gear, the only certainty for 2020 is that more uncertainty is on the way.
“Trust me, there’s a helluva lot more disruption coming,” predicts Chernin. “Those people who thrive will be those who figure out where that disruption is going first, and those people who don’t figure it out won’t be here in three years, four years, five years.”