With Netflix set to unveil its third-quarter earnings today, it’s only fitting the streaming service is the first of many media-related companies reporting in the coming weeks — because everyone else in the sector seems to toil in its shadow.
Netflix saw subscriber numbers soar earlier this year and was one of a handful of companies that benefited from the culture shift caused by COVID-19. The pandemic has severely challenged the rest of the media industry, though some of the crippling effects are likely to have stabilized during the third quarter, particularly with sports returning to TV (albeit to lower than expected audience levels).
While investors will be paying close attention to several themes this earnings season, nothing will be as closely monitored as efforts to close the gap with Netflix in the streaming business.
As a result, both investors and analysts will be looking for a lot of media companies this quarter to demonstrate how their own streaming services, whether recently launched like HBO Max and Peacock or soon to come from ViacomCBS and Discovery, are making progress.
It worked brilliantly for Disney in the second quarter, which had a strong performance from Disney+ to boast about. Disney+ did well enough to make the market forgive the considerable losses mounting elsewhere in CEO Bob Chapek’s portfolio due to the ongoing damage done by COVID-19. Remember when Disney stock spiked 5% in after-hours trading even though the company reported huge operating losses across the board?
Look for that to be the balancing act many media companies are going to strike in Q3: distracting investors from the current woes with enticing prospects for the future from their own Netflix wannabes.
Also expect Disney and other leading media conglomerates to provide color on the restructuring they’ve announced to their operations in recent months, feeding their TV and streaming arms out of centralized production hubs previously inefficiently dispersed through multiple, duplicative sources that have since been consolidated.
After getting pummeled in the second quarter, advertising revenue in the media sector is expected to have improved notably in Q3. Spending on ads is directly correlated with the health of the overall economy, and although the macroeconomic backdrop is improving, the U.S. economy is still technically in a recession. So while ad revenue is likely to see improvement versus Q2, it won’t be positive compared with last year.
According to ad buying firm MAGNA, second-half media ad spend will likely see a decline of 2% versus last year, compared with an 8% drop in the first half. In the second quarter alone, ad revenue among media companies tumbled 17%, to $46 billion.
With NFL, MLB and NBA back in action on TV and political ad spend surging amid the election, TV advertising is expected to see a decent recovery following the devastating second quarter. But it’s not enough, and a full recovery isn’t expected until 2021.
Meanwhile, cord cutting, a pain point for many media giants, likely accelerated during the most recent quarter. Following a relatively better than expected second quarter, VIP estimates a pay-TV subscriber decline of 1.75 million, which would make it the worst quarterly decline on record.
On the flipside, virtual MVPDs likely got a boost with the recent return of live sports. As a result, affiliate revenues are expected to see improvement in Q3 and an even bigger bump in Q4.
It appears investors are largely aware that the pandemic-induced challenges are likely temporary. When to expect a full recovery is anyone’s guess at this point, but it’s all about demonstrating progress. What matters most is that media companies show they were able to adjust and adapt to the challenging environment in Q3, and it’s about proving that they’re doing all they can to mitigate the damage and charge ahead.