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Everything is on the table.

That’s the overriding message from media giants after a parade of earnings reports covering the first three months of the year. The unprecedented economic conditions sparked by the global coronavirus outbreak are testing Hollywood’s biggest players and accelerating seismic shifts that were already underway.

The immediate pain of the COVID-19 shock was evident in sudden advertising declines, revenue falling off a cliff at Disney and Universal theme parks and grim forecasts for the current quarter.

The long-term impact is evident in studios taking bold steps such as releasing movies that had been bound for theaters on premium VOD or steering buzzy titles to in-house streaming platforms. Disney made more waves May 12 by opting to send the filmed version of Lin-Manuel Miranda’s “Hamilton” stage musical to Disney Plus on July 3 rather than proceed with a theatrical release that had been dated for next year. Paramount Pictures couldn’t refuse an “attractive monetization opportunity,” in the words of ViacomCBS president-CEO Bob Bakish, to sell the action-drama “The Lovebirds” to Netflix given the uncertain outlook for theater reopenings in the U.S.

Those are two short-term decisions that indicate the larger challenges ahead. For the past few years, it’s become apparent that the entertainment industry was in the throes of a massive transition away from a linear-based model in which studios were the ultimate gatekeepers for consumers and content creators alike. The challenge of the moment is to understand what needs to change when it’s still not entirely clear what shape the delivery and profit-generating systems of the future will take.

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Paramount sold off rights to action-comedy “The Lovebirds,” toplining Issa Rae and Kumail Nanjiani, to Netflix, due to the uncertainty over theatrical reopening dates. Courtesy of Netflix

What has become abundantly clear in the past quarter is that the coming recession, which was inevitable but surely exacerbated by the coronavirus, will force a Darwinian winnowing out of the weak and add more muscle to those that are strong. That also represents a speeding up of the media consolidation trend that was well underway. Disney’s 2019 purchase of 21st Century Fox was a historic union of two seminal Hollywood brands. It won’t be the last.

“Periods of economic duress accelerate shifts in consumer and corporate behavior,” media analyst Michael Nathanson wrote in a recent research note. “It is not an accident that radio advertising, compact disc sales, newspaper advertising and DVD sales were all mortally wounded by U.S. recessions. It is also not an accident that the disruption from emerging technologies hastened the demise of those subsectors during points of maximum financial stress.”

The entertainment industry was already leaning toward streaming platforms as the driver of future growth — with subscription revenue supplanting the MVPD affiliate fees that have been the bedrock of corporate media earnings for 20-plus years. The energy and excitement within Disney and WarnerMedia during the past two years has been directed toward Disney Plus and the nascent HBO Max rather than long-established channels like Freeform or TNT. The advent of Disney’s FX on Hulu platform speaks volumes about the status of linear platforms even for top channels.

J.J. Abrams and Greg Berlanti, two of the industry’s top producers, have extremely rich overall deals with WarnerMedia. Both of them are shepherding big projects not for TNT or TBS but for HBO Max — albeit delayed by the production shutdown. The blueprints for resource allocation are being rewritten within Disney, Comcast and WarnerMedia to prioritize the streaming ventures that are now losing money. The companies hope this period of investing in subscriber-bait original content, despite making the trough of startup losses deeper, will yield long-term benefits in the form of a stable sub base.

WarnerMedia parent AT&T is deep in planning how to prioritize the entertainment-related operations that will come back to full strength once the pandemic threat has eased.

“Periods of economic duress accelerate shifts in consumer and corporate behavior.”
Michael Nathanson, media analyst

“This experience will change many things, including customer behaviors and expectations,” said John Stankey, AT&T’s incoming CEO, during the April 22 earnings call. “We’re evaluating our product distribution strategy, relooking at volumes and the required support levels we need in a down economy. We’re rethinking our theatrical model and looking for ways to accelerate efforts that are consistent with the rapid changes in consumer behavior from the pandemic.”

Among the hard choices coming soon to TV titans is the fate of advertising-based business. Advanced advertising formats are seen as the future for ad-supported digital platforms, whose ranks are growing thanks to the introduction of Comcast’s Peacock and ViacomCBS’ Pluto TV. The migration of viewers to broad national platforms is shaping up to put another big dent in the notion of localism in media. Just as community and regional newspapers are hurting mightily, so are local TV stations amid the sudden downturn.

Fox Corp. CEO Lachlan Murdoch got attention by flatly stating that ad sales at Fox’s 29 owned-and-operated local TV stations are pacing down about 50% compared with the year-ago frame. If not for the promise of a presidential campaign political advertising windfall on the horizon later this year, the outlook for local TV would be bleak.

The shutdown of virtually all live sports has been a blow with ripple effects across the television ecosystem in terms of ad sales, sponsorship deals and ratings and as a marketing platform for other products. (To wit: WarnerMedia had intended to promote the heck out of the May 27 HBO Max launch in TBS/TNT/TruTV coverage of the March Madness college basketball tournament.)

Sports rights have become a source of friction within the pay TV world because the high cost of ESPN, Fox Sports and regional sports channels is seen as inflating the cost of MVPD service for consumers, which in turn fuels cord-cutting. Disney and Comcast are in the tight spot of trying to build streaming platforms for the future — including Disney’s ESPN Plus — while protecting their linear sports turf. The spiraling cost of rights packages for big league sports is going to force hard choices in the near future as to whether the investment makes sense, particularly if leagues seek to restrain streaming options for rights holders with linear platforms.

Bob Chapek, Disney’s newly installed CEO, was pressed about this dilemma during the company’s May 5 earnings call. His answer boiled down to: Only time will tell.

“Existing consumer trends play a real big part on how we think about the value of sports rights as they make the transition from linear over to digital,” said Chapek. “It’s a bit premature to give any specific details on what the strategy is other than we’re obviously highly interested in those and we think we want to make the evolution along with the consumer as they go from linear to digital.”