With Covid easing, economies re-opening and consumers moving about, the boom sectors like streaming video have become less attractive to more and more investors.
A series of weak reports from key streamers led by Netflix well and truly ended the Wall Street love affair.
Symptomatic of that change of heart (loss of affections?) has been the mauling given to shares of ViacomCBS after it revealed ambitious expansion plans for its Paramount streaming service and a change of corporate name to Paramount to reflect that rising importance of streaming in the combined company’s future.
The pounding given the shares tells us that streaming video is now on the nose so far as Wall Street is concerned.
On Thursday, Discovery, which is buying Warner Media (and HBO and its streams) for $US43 billion revealed it lifted its own streaming subscribers to 22 million, up from 20 million the previous quarter and 13 million at the start of the year.
But CEO David Zaslav went out of his way to assure investors in a conference call that the merged company would spend money on content to compete with rivals like Netflix but “not win the spending war.”
It’s an assurance that has been forced on streaming companies in the wake of the weak quarterly reports from the likes of Netflix and especially Paramount (ViacomCBS) which saw its shares slammed after it lifted its projected content spend by $US1 billion to $US6 billion.
There has been a significant change in attitude towards streamers in the wake of the slowdown in subscription numbers after the pandemic driven boom in 2020 and early 2021.
And in turn that’s a warning to News Corp that trying to sell Foxtel later this year as a streamer with growth potential (and not also a cable TV business) will be a tough ask.
A mature streamer of the type that Foxtel is will not cut it with investors any more. There are just too many of them and with the main streams being Australian sport and entertainment from its cable channels (much of which is available elsewhere) doesn’t give Foxtel any growth options outside the small Australian market.
Here it already runs up against Stan (owned by Nine) which is starting to grow its sports stream to take on Foxtel’s Kayo and Optus Sport. That is said to have 2.5 million subscribers (at the end of December, according to Nine’s half year results on Thursday).
That’s more than the total number of subscribers for Foxtel’s two main streams – Kayo with around 1.01 million (at the end of December) and Binge, Foxtel’s general entertainment stream which had 1.04 million subs at the end of December.
The Optus Sport stream (mostly EPL soccer coverage from the UK) had around 1.09 million.
Netflix has vastly more – no figures, but Roy Morgan reported in February claim that upwards of 12.8 million people watch Netflix here over any given four-week period. As well, Roy Morgan says that 7.5 million people watch the BVOD services from the commercial free to air TV channels, plus ABC and SBS.
To build its subscriber numbers, Foxtel will either need more sport – but only AFL, NRL and cricket matter and Kayo has those, or it will have to win people away from the free BVOD services or get Netflix viewers to take Binge seriously.
Some unquestioning Australian retail investors might buy the idea of Foxtel as a growth business thanks to the two big streams – the sports-dominated Kayo and the general entertainment (Netflix light) Binge – but the reality is very different so far as offshore investors are concerned.
Investors here and around the world are now more worried about there being too many streamers spending too much money on content and not enough growth in subscriber numbers.
The weak subscriber growth figures from Netflix (for its forecast for the March quarter) in particular and several smaller operators (and not even the better-than-expected figures from Disney) came at the wrong time for many investors who have wondered how streaming video companies (and there are dozens) would go once the lockdowns and social distancing rules during the pandemic eased and life starting returning to normal.
Would subscriber growth slow? Yep, seems to be the conclusion and are streamers spending too much on content in a madcap race to penury – not quite but multi-billion-dollar bills for new content are a big worry for investors (but not for actors, producers and workers in TV and film).
That concern so far as Netflix is concerned is fatuous – the company is spending around $US17 billion this year, which is not much more than it spent in 2021 and only a couple of billion more than in 2019.
Much of it is being amortised not capitalised, is covered by cash flows and the company has boasted that from now on it will not have to borrow to finance new content each year.
But other big rivals like Disney, Discovery/HBO/Warner Media will have to borrow (and rising interest rates) and will have competing claims on those funds from other parts of the business – which is not a problem for Netflix.
For these companies with other interests, the lingering impact of Covid, rising inflation, labour shortages and now Putin’s antics in Ukraine will add to pressures this year on their non-streaming businesses, especially if oil and commodity prices continue climbing.
These concerns though crystalised earlier this month when Viacom CBS announced a weak set of 4th quarter numbers, a name change to paramount (its streaming service is called Paramount+), revealed it had lifted subscribers by 9 million to 56 million and said it planned to spend more than $US6 billion on streaming content this year. It also projected 100 million subscribers by 2024 – less than what Netflix has now.
That $US6 billion content spend was $US1 billion more than previously revealed. Noooo said investors.
Proportionally it’s a lot more than the $US17 billion Netflix will spend on more than 220 million subscribers and down went ViacomCBS shares on the day after the release of the update, slumping by 21% at one stage before ending down 18% and at their lowest for more than a year. As of this week the shares are down more than 25% over the 9 days since the reports were released.
Analysts were divided on whether the shares slid because of the earnings miss, the higher costs, the streaming content bill or the name change which reminds everyone of the new concerns.
The steady stream of investments required to grow the business, including Paramount+, Showtime and BET+, will “limit margin expansion more than previously expected,” Morningstar analyst Neil Macker wrote in a note.
MoffettNathanson analyst Robert Fishman said Paramount’s losses will continue to mount, peaking at 2023 before improving as its content investment grows, while its traditional network TV business will come under pressure, limiting the company’s ability to fully invest in streaming.
“Despite the big announcement of ViacomCBS changing its name to Paramount … we are left with a similar question as we had last year: will the company be able to grow EBITA and FCF again to match prior levels?” Fishman asked.
BofA analyst Jessica Reif Ehrlich, who downgraded the company’s stock to “neutral”, noted that her earlier “bullish thesis” was predicated on ViacomCBS being an attractive acquisition target amid a wave of media consolidation.
“It does not appear a potential sale is imminent, given the size of its investment in streaming,” she said.
“If Netflix can’t be successful and scale and get leverage from all of their content spend, then nobody can,” another analyst observed.
But that’s what Netflix has been doing for years.
