Trading Places: Why Legacy Media Giants Are Suddenly Acting Like Tech Companies
The Walt Disney Co. is one of the most storied brands in history, world renowned for its animated movies and Marvel films, its theme parks and merchandising, and for its singular emphasis on family-friendly entertainment. It’s a legacy that’s been forged over nearly a century, winding back generations to the company’s formation in 1923.
What Disney decidedly is not is some kind of Silicon Valley upstart. And yet, over the course of the past year, as a pandemic has ravaged the traditional ways that Disney used to make money, the entertainment giant has successfully sold Wall Street on a new way of gauging its success. The stunning transformation is due largely to the company’s 2019 launch of Netflix challenger Disney Plus, as well as its massive investment in streaming services such as Hulu and ESPN Plus. Disney’s goal is to create a rich direct-to-consumer bundle controlled outright by the company. Analysts are looking at a whole new set of metrics, instead of profits and revenues, to assess the house that Mickey Mouse built.
“What’s getting measured is no longer the amount of money being generated from a movie or show but bumps in subscription bases and new sign-ups,” says Derek Johnson, professor of media and cultural studies at the University of Wisconsin-Madison.
Disney is not alone among legacy media giants in persuading Wall Street to cut them some slack as they invest in new services and restructuring of operations. Comcast, AT&T and even long-beleaguered ViacomCBS are enjoying a stock run, although not to the same double-digit degree as Disney.
“Honestly, it’s been a bit surprising to me that it seems like all companies have to do is put a plus sign in front of their name, have an investor event and the stock rallies right up,” says Alexia Quadrani, a media analyst at JP Morgan.
And while the old guard is being viewed through a new prism, Netflix executives are suddenly talking about profitability being in sight, as pandemic conditions drove 2020 subscriber growth that surpassed the most bullish expectations. Netflix chief financial officer Spencer Neumann last month even referenced the prospect of using excess revenue to buy back shares as a way of returning cash to shareholders — a move that has been made for years by legacy media giants.
“Any company at this stage is going to want to be able to tell investors, ‘This isn’t forever. We’re going to turn a profit here,’ especially with this crazy [content] arms race going on,” Quadrani observes. “But the emphasis in the marketplace is on subscriber growth. Nobody wants to see any of these [streaming] companies start pulling back on growth strategies to focus more on profitability.”
So far, the role reversal has been most stark with Disney. The company’s stock has been on a tear, growing nearly 50% over the past three months despite the fact that losses have mounted. Some of its theme parks remain shuttered due to COVID-19, and the theatrical movie business is a shell of its former self because cinemas in major cities like Los Angeles and New York remain closed. The reason investors are so bullish on the company is simple: Disney Plus is crushing it when it comes to signing up new viewers.
In the 13 months since its debut on Nov. 12, 2019, the service has attracted 86.6 million subscribers globally. Disney projects it will have as many as 260 million subscribers by 2024, roughly 60 million more than Netflix currently boasts. What’s particularly impressive, analysts say, is that Disney has managed this feat while launching only a handful of original shows like “The Mandalorian.” “WandaVision,” its “Avengers” spinoff series, launched just last month, and other buzzy programming like “The Falcon and the Winter Soldier,” “Loki” and a Star Wars series about Obi-Wan Kenobi remain on tap.
“They’ve been able to get here largely with library content,” says Bernie McTernan, an analyst with Rosenblatt Securities. “Many of their marquee programs don’t premiere for months, and 2021 is filled with new original programming that will drive subscribers. They have a long runway for growth.”
It’s not that Disney Plus is making money — in fact, Disney’s direct-to-consumer arm, which contains its streaming empire, had an operating loss of $580 million during the most recent quarter. But investors believe that that future of media will be streamed, and they’re willing to rack up losses in the short term in anticipation of riches to come.
That requires something of a leap of faith from the investment community, and it calls on companies like Disney to have the intestinal fortitude to say no to easy money. Streaming was lucrative for Disney and its studio brethren nine years ago when Netflix shelled out $300 million for the right to offer Marvel and “Star Wars” movies to its customers. That was a lot of cash for Disney — the kind of steady stream of licensing revenues that helps cushion a rough financial quarter. But Wall Street and media companies got wise to the fact that Netflix was using their content to build market share.
“At some point the light bulb went off and these studios recognized that Netflix was enjoying a crazy valuation that was bigger than the rest of them, and it had done that on the backs of the product they created,” says Peter Newman, the head of NYU’s Tisch School of the Arts’ MBA/MFA program.
On the other side of the streaming standoff, Netflix, which made an art of seeing its market cap rise as it went deeper into hock, is beginning to behave more like a traditional media giant. The company has signaled that it may have maxed out on domestic subscribers and must look to emerging markets in Asia, Africa and South America to keep bringing in new customers. When it reported quarterly earnings last month, its shares rose; the hike was partly attributable to the announcement that it was cash-flow neutral and would be cash-flow positive through 2021 and beyond. That means that the days that Netflix burns through money may be behind it.
“It signals that they won’t have to keep borrowing,” says Newman. “Debt has been so cheap for so long, but the question has always been is it sustainable and how will that impact Netflix as an ongoing venture?”
Netflix presented its fourth-quarter results as an inflection point for the company, which has defined disruption in contemporary Hollywood.
“We’re super proud of where we are from a free cash flow perspective,” says Netflix’s Neumann, “and we talked a bit internally before the calls, what was a bigger milestone for us: [passing the] 200 million member mark or kind of turning to this next chapter in terms of our free cash flow and the ability to self-fund our growth going forward? We think that’s a pretty big milestone for us.”
Be careful what you wish for. Netflix may soon come to experience the kind of yoke that traditional media companies used to bridle against — getting assessed in terms of how much money they bring in relative to how much they spend.
Take Comcast and AT&T, both of which took deep write-offs in the most recent quarter to adjust for restructuring costs and the diminished value of the 2021 Warner Bros. movie slate that AT&T had shipped off to HBO Max. Comcast wrote off $828 million for the full year “as we took actions to position our businesses for success in a post-COVID world,” the company’s chief financial officer, Mike Cavanagh, explained. Part of that presumably involves devoting money to Peacock, the streaming service being sent out into the world by NBCUniversal, Comcast’s entertainment arm.
Comcast chairman-CEO Brian Roberts demonstrated the repositioning effort by legacy media players in a comment he made toward the end of the company’s Jan. 28 earnings call. Roberts noted that about 70% of the firm’s operations are now “broadband-centric.” “Broadband,” of course, is now synonymous with on-demand streaming entertainment.
Comcast’s ability to take big write-downs without the stock getting pulverized is a sign that Wall Street is encouraging the major studios to invest deeper in streaming businesses. Hollywood filmmakers may want Jason Kilar’s head, but investors are happy to see entertainment CEOs taking what Kilar’s boss, WarnerMedia chief John Stankey, called a “bold and aggressive swing” with the movie slate decision. Those moves are putting pressure on Netflix, which may have kicked off the streaming era but is no doubt painfully aware that revolutions have a way of eating their own. Its strategy has been to capitalize on its early entry into the digital video space — for many consumers, streaming and Netflix are interchangeable — in the hopes of building an insurmountable head start.
“Being first was a tremendous advantage for Netflix, but that’s changing now that Disney has followed in its path and there are all these other companies going after the same customers,” says Hal Vogel, a veteran media analyst. “It’s crowded with Peacock and Discovery Plus and Apple and Amazon and all these other guys.”
Netflix has scored with hits like “The Queen’s Gambit” and “The Crown,” but it faces more competition from new entrants in the space. It’s responded to the challenges by locking up key talent, bringing on board the likes of Shonda Rhimes (“Bridgerton”) and Ryan Murphy (“Ratched,” “Hollywood”), and announcing that it will release a new movie every week. Some analysts believe that the rising costs of producing this content will make Netflix’s moves toward fiscal prudence more of a flirtation than a wholehearted embrace. Plus, some of the companies that are now trying to elbow into Netflix’s territory, such as Apple and Amazon with market capitalizations of $2.2 trillion and $1.7 trillion, respectively, have tremendous financial resources they can tap.
“It’s not like Apple or Amazon are short of cash,” says Vogel. “The cost of talent is going to rise exponentially because there are so many more outlets to approach.”
So far, subscriber growth has been a useful way for Wall Street to measure the relative heat of a streaming service, but there are risks for companies that get overly reliant on that rubric. Subscribers are fickle: They add and drop streaming services with relative ease — a keystroke or two rather than the old-school hassle of having to return cable or satellite equipment. If there’s nothing compelling to watch on Disney Plus for a month, they can always hit the “cancel” button and take their business to Paramount Plus.
The fresh look at the media business is a welcome change for a sector that has been mostly out of favor with investors during the past decade or so — fueled by concerns about cord cutting and audience fragmentation. The business has also benefited from the mounting public relations issues faced by formerly red-hot companies like Facebook and Twitter, which have been plunged into the political maelstrom as the arena for larger debates about privacy and free speech. In the old days, it was MPAA chief Jack Valenti who was getting hauled before Congress to defend Hollywood content from charges of indecency. Now it’s Facebook pooh-bahs who are getting grilled in various Senate subcommittees.
From a financial perspective, change and disruption have been profitable even if no one is quite sure how this will all work out in the end. Wall Street is applauding companies taking dramatic steps today. But the patience won’t be infinite. There’s a strong feeling that clear winners (beyond Disney Plus) and losers will emerge in short order.
“The sentiment right now is, if a company is leaning into investment and trying to reinvent for the future, give them the benefit of the doubt,” says JP Morgan’s Quadrani. “But that won’t always be the mentality. It’ll become clear in the next six to 12 months who has momentum on the subscriber-acquisition front. At that point the investment community will become more skeptical of dollars allocated to something that doesn’t seem to be a winning strategy.”