Islands in the stream: Analysing WBD, Paramount and Netflix's strategies

12 April, 2023

Navigating the labyrinth of executive speak during each quarterly earnings season is a Herculean feat. Attempting to parse out any true meaning from carefully calculated spin is practically impossible. CEOs are deftly trained verbal gymnasts when it comes to side stepping potentially problematic business realities. So it’s perfectly understandable if you’re left reeling after all the double-talk from the first round of 2023’s media earnings reports. 

But by honing in on key quotes from Warner Bros. Discovery CEO David Zaslav, Paramount Global President & CEO Bob Bakish and Netflix co-CEO Ted Sarandos made during these quarterly updates, we can piece together overarching ideas about the strategies that will define these companies in 2023.

“Last year was a year of restructuring. 2023 will be a year of building.” — David Zaslav

Last year we saw Zas' hyper focus on cutting costs. Now, he says 2023 will be a year of building. But building requires investment and capital, plus patience. Is the company really in a position to provide those?

In Q4 2022, WBD revenue fell 11%, EBITDA declined by 5%, cash on hand fell 22% year-over-year to just $2.42 billion while long-term debt still stands at a prodigious $48.63 billion. It’s newly stated goal of $4 billion in cost savings is unmet.

Of course, it’s not all bad. The aggressive cost-saving measures did shrink the company’s direct-to-consumer unit losses down to just $217 million at a time when major rivals like Disney and NBCUniversal are losing around $1 billion per quarter on streaming. The stock is up 58% year-to-date (as of March 9). There’s a reason other major media players have been copying Zas’ playbook in recent months. It’s a great way to buy financial runway as Hollywood attempts to figure out how to make streaming profitable. 

But the reality is that WBD’s pockets aren’t as deep as hoped and, not surprisingly, the downsizing stunted growth. The company added just 1.1 million new streaming subscribers in Q4, the lowest quarterly total of all the major global SVODs. The vast majority of this growth came from the US market, where it’s actually on par with other platforms, so the slow-down is also global. It’s fair to wonder how the company plans to fuel this rebuilding after halting HBO Max’s original production and rollout in a handful of European countries last summer and lacking the cash for a fast-acting infusion of resources for market expansion.

Discovery+ will remain an independent streamer, but with much of its content being integrated into a new-look HBO Max. Parrot Analytics data reveals that if you combine the 2022 US audience demand share for their total catalogs — which weighs both licensed and original movies and TV series — it results in an industry-leading 19.4% share of audience demand. Plus, the Discovery titles will help serve the older female audience Max is currently lacking. 

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But if cost-conscious consumers aren’t blown away by the complementary, yet not necessarily overlapping portfolio of unscripted lean-back TV like Flip or Flop and prestige dramas such as The Last of Us, where is the backup growth engine? It’s a question WBD likely hopes it won’t have to answer. 

“Our content and platform strategy is working. And even with more exceptional content coming this year, we expect to return the company to earnings growth in 2024." – Bob Bakish

Every CEO makes bold boasts during quarterly earnings season. It’s the nature of the business. But Bakish’s claims may actually ring truest of all, not that Wall Street seems to care. 

CBS is primed to lead all broadcast networks in total viewers for the 15th consecutive broadcast season. Six different Paramount Pictures films opened at number one at the US box office in 2022, including the eventual top overall grosser Top Gun: Maverick ($718 million). Paramount+ led all streaming services in Q4 ‘22 subscription growth with 9.9 million. New and expanded partnerships with Walmart, Delta, Sky, Canal+, Corus, Amazon and Roku helped gain international marketshare. Overall company revenue increased 5% from 2021. 

Paramount Global isn’t without its blemishes (see: sharp decline in year-over-year operating income), but one would think this foundation would elicit some optimism from investors.

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Instead, the company’s stock is down 43% over the last 12 months (as of March 14). The share price has tumbled around 49% from its 52-week high and 21% from its year-to-date peak. The company’s market cap stands at $13.22 billion, significantly lower than rivals Warner Bros. Discovery ($34.63 billion), Netflix ($131.30 billion), Comcast ($150.18 billion) and Disney ($170.71 billion).

The financial world is reluctant to reward no matter what Paramount Global does. If investors are seemingly waiting for a juicy sale, the dour economic landscape has dulled the M&A market while leaving potential buyers skittish of piling on loads of debt. All of this leaves PG in something of an awkward holding pattern for 2023, which Bakish notes will reach peak D2C investment. 

The company will rely on the burgeoning Taylor Sheridan-universe, theatrical franchises including ScreamMission ImpossibleTransformers and PAW Patrol, and a more closely integrated Paramount+/Showtime package that emphasizes popular brands to reach its goal of free cash flow in 2024. But even if Paramount Global rolls out hit after hit across its portfolio of platforms this year, there’s no guarantee it’ll matter to investors. What happens then will likely reshuffle the Hollywood hierarchy. 

“The benefit of that kind of local language investment and the benefit of doing that early was that we become exceptional on the ground in those countries. Those content teams generate not just content people want to see, but content that’s leading the industry.” — Ted Sarandos

It’s no secret that launching international sensations outside of Hollywood is Netflix’s primary focus right now in its quest for global domination. It makes sense — production costs outside of the US are typically less expensive. Since Q4 2021, subscription growth in the LATAM (2.7 million), EMEA (6.24 million) and APAC (7.98 million) regions has far outstripped the saturated UCAN market (260,000). So with the market-leading streamer attempting to keep annual content budgets from soaring above the $17 billion range without sacrificing growth, it’ll need these non-English series to pop. (It’s worth noting that Netflix plans to increase content spend in Asia in 2023). 

 Alas, the problem: the mature UCAN market still boasts Netflix’s highest Average Revenue per User (ARPU) at $16.23 as of last quarter, significantly better than APAC ($7.69), LATAM ($8.30) and EMEA ($10.43). Netflix can’t simply hike prices to make up the difference as flexible cost is what helps the streamer stay competitive in these regions. The company is even reducing prices in certain countries to compensate for expected churn from its password sharing crackdown. So to maximize value from these international productions, Netflix needs breakout-regional hits turned global victories that penetrate the UCAN market. Easier said than done.

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Looking at Netflix’s self-reported Top 10 most-watched English-language titles in global hours viewed within their first 28 days, the average consumption is 743.6 million hours, while the average for non-English series is 563.6 million. From Jan. 1, 2022 to March 6, 2023, the top 10 most in-demand non-English Netflix originals in the US averaged 9.56x more demand than the average series in that market in that span. For English series, that number rose nearly 200% to 28.36x.

None of this means non-English content can’t make it in the US, but it’s far more difficult and the non-Squid Game heights are not yet comparable to English series. Netflix will work hard to close the gap this year in order to get more bang for their buck.

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