The stock market wiped more than $500 billion out of the media sector this year: Here’s what’s next
The media industry has struggled through a tumultuous 2022.
Rising costs, indebted balance sheets and a renewed focus on profitability weighed on the beleaguered sector as investors were quick to punish companies struggling to turn a profit.
Netflix (nflx) shares are down 50% on the year, while companies like Warner Bros. Discovery (wbd) and Spotify (PLACE) have sunk over 60% with Roku (YEAR) plummeting 80%.
Fox cable operators (FOX) and Comcast (CMCSA) fell roughly 20% and 30%, respectively, as Paramount Global (FOR) shares plunged more than 45%.
Disney (DIS), once a Wall Street darling, is also down 45% for the year, and the stock is headed for its worst year since 1947 after the the long-awaited sequel to “Avatar” it missed opening weekend expectations to cap off a challenging year for the House of Mouse.
In this year alone, the stock market wiped out a whopping more than $500 billion in market capitalization of the world’s largest media, cable and entertainment companies and more pain is expected in 2023 amid higher interest rates. high and an unfavorable macroeconomic environment.
So what exactly happened, and what could happen next?
Wall Street earnings push: ‘It’s time to be a real company’
2022 was a clear “soul searching” year for the media after the industry experienced a bumpy ride during the pandemic with all-time highs and jarring lows.
As the The “stay at home” trade ran its coursePeak subscriber penetration levels in the US and Canada resulted in rapidly stagnating growth for broadcasters.
Netflix, the longtime leader of the streaming wars, lost subscribers for the first time in its history, as its market capitalization plunged from more than $267 billion at the end of 2021 to roughly $130 billion.
Similarly, NBCUniversal’s Peacock experienced zero growth in its second quarter, though subscribers rebounded in the third quarter with 2 million net additions.
Stagnant subscriber growth has led to increased criticism of production budgets, which have risen sharply as competition intensifies. Netflix committed $18 billion to content alone in 2022, while Disney increased its budget by $8 billion this year to $33 billion.
Among companies that have begun to move from linear to streaming (excluding platforms like Netflix, Amazon and Apple), spending on direct-to-consumer content rose from $2.7 billion in 2019 to $15.6 billion in 2021, according to Wells data. Fargo, cited by Variety.
That number is expected to rise to nearly $24 billion this year, despite mounting streaming losses.
Disney’s direct-to-consumer division lost more than $4 billion in its 2022 fiscal year, which ended Oct. 1. Meanwhile, Paramount told investors streaming losses would total about $1.8 billion this year, more than Wall Street expectations.
Warner Bros. Discovery, which has seen its market capitalization cut in half amid its messy restructuring efforts, reported free cash flow of negative $192 million in the third quarter, compared to $705 million in positive cash flow a year earlier. The company now plans to take on $3.5 billion in content deterioration and development cancellations by 2024.
‘Fundamental’ with advertising for the industry
Amid the race for profitability, advertising has emerged as a potential bright spot for investors, despite the global slowdown in ad spending.
Netflix and Disney jumped on the advertising bandwagon this year, joining Warner Bros. Discovery’s HBO Max, NBCUniversal’s Peacock and Paramount Global’s Paramount+.
Netflix launched its $6.99 Sale in Novemberwhile Disney+ followed one month after at a price of $7.99. Wall Street Analysts remain largely bullish on the profitability aspects of ad tiers, while advertising experts have referred to debuts as a decisive moment for the media industry.
“It’s absolutely a pivotal time for the industry,” Kevin Krim, CEO of the advertising measurement platform. EITHERpreviously told Yahoo Finance.
“I think what we’ve learned as an industry is that there’s a limit to how much consumers will pay,” Krim said. “Advertising is a really smart way to subsidize those subscription fees.”
Industry experts agree that offering low-cost ad-supported options serves as an important protection against churn, something all streamers want to avoid amid increased competition.
“I’m a big fan of giving consumers a choice for a level of ads,” Jon Christian, executive vice president of digital media supply chain at Qvest, the largest consulting firm focused on media and entertainment, told Yahoo Finance.
Christian added that data will be a big driver (and potential money maker) when it comes to more targeted advertising in 2023: “Data can drive up the price of the different ads you’re promoting on the platform.”
Still, the benefits of advertising are likely to take time to mature.
Netflix’s level of ads already seems to be going through some severe growing pains — including reports of undersubscriptions and failed audience guarantees. Analysts, however, caution it’s still early.
Analysts point to upcoming media merger
Along with an increased focus on content and advertising spending, investors should also expect more media merger activity next year.
Wells Fargo analyst Steve Cahall wrote in a recent note: “Our 2023 predictions indicate that the media and cable sectors will react to generally tougher times, both cyclical and structural. Tough times mean tough decisions.”
Potential acquisition targets in 2023 and beyond include embattled Warner Bros. Discovery.
Lionsgate’s TV and movie studio, which the entertainment giant plans to turn into a separate company, will also be up for sale, while AMC Networks (AMCX) is still in the process of restructuring that could result in an acquisition.
Laura Martin de Needham wrote in a recent client note Paramount could be attractive to download, while smaller players like WWE (WWE), Curiosity Flow (CURIW), and Chicken Soup for the Soul (CSSE) will likely sell due to their size.
Bob Iger, CEO of Disney, who returned to the media conglomerate with much fanfare in Novemberalso going to face a series of decisions — including what to do with notable assets like Hulu (sell it to Comcast?) and sports giant ESPN (rotate it?).
Layoffs and hiring freezes affect mainstream media
Amid heightened profitability concerns, the media giants have enacted mass layoffs and hiring freezes in an attempt to stem the bleeding. More than 3,000 jobs have been cut through October this year, according to data from Challenger, Gray & Christmas, cited by Axios.
Netflix laid off about 150 positions of the broadcaster’s 11,000 workforce in May, blaming the downsizing on “slowing revenue growth” and a further drain on spending.
Earlier this month, Warner Bros. Discovery revealed prominent Discovery executives will leave the company after fired CNN+, turned down more CNN employees Y chopped up 14% of its workforce from HBO Max this year.
So far, the company has cut more than 1,000 jobs across all units like WBD CEO David Zaslav. double down on restructuring effortswhich have also included discarded projects and programs.
Paramount Global began cutting jobs in November, targeting its ad sales group, according to Termwhile AMC Networks (AMCX) announced plans to lay off about 20% of its US workforce. amid the departure of CEO Christina Spade.
AMC Chairman James Dolan reportedly told employees the network has struggled to make up for cable drops as cable cutting accelerates, citing company-owned broadcast entities. like AMC+ and the horror platform Shudder.
Similarly, Comcast’s cable unit made job cuts in November, while Roku (YEAR) cut 200 jobs, or 5% of its workforceshortly after its third-quarter earnings results.
Theatrical return yet to be determined
The theater industry continued to recover from losses from the pandemic in 2022, although whether a full recovery will occur remains to be seen.
Movies like “Top Gun: Maverick” broke recordswhile Marvel “Black Panther: Wakanda Forever” Y “Doctor Strange in the Multiverse of Madness” he easily nabbed $100 million+ national starters.
Still, Disney’s “Avatar: The Way of Water” secured only $134 million in domestic markets during its first three-day weekend, missing expectations and sending Disney shares to their lowest level since March 2020.
Despite the glitch, theater executives defended the debut, assuming the film will steadily add dollars over the holidays and well into 2023.
The streaming giants have also embraced the theatrical, with Netflix’s “Knives Out: Glass Onion” enjoying a limited theatrical release success during Thanksgiving week, while Amazon supposedly invest $1 billion produce 12 to 15 films a year exclusively for theaters.
Overall, the domestic box office is estimated to bring in about $7.4 billion for the year, according to Box Office Pro. Although that number is still down from pre-pandemic figures by about 30%, there is hope that the next year’s stronger launch schedule will help close the gap.
Alexandra is a Senior Media and Entertainment Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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