Cracks are already showing in big media giants’ once-bulletproof balance sheets as American companies pull back on digital and broadcast advertising, a sign that higher inflation is yanking the economy closer to recession.
Big Tech companies have already teased what Wall Street might see when Warner Bros. Discovery, Paramount, Fox and Lionsgate all report quarterly earnings in the next several days. Ad spending is definitively slowing from the small mom-and-pop business owners who advertise on Facebook to major international brand names hawking products on Amazon.
And that puts Hollywood’s leading entertainment conglomerates in a tough spot — robust ad sales are what’s keeping most of them from careening into the red. Studios are spending billions of dollars to pump up their streaming services and grow subscribers, which is what investors believe will be main revenue drivers as theatergoers dwindle and more consumers cut the cord.
“Sentiment in the online advertising space has softened of late, with more anecdotes of budget cuts as well as advertisers holding back some budget in hopes of a fourth-quarter flush,” UBS analysts declared. “Looking into ’23, we think planning amidst this level of macro uncertainty sets the stage for below-consensus growth in ’23.”
Or maybe investors should have been listening to Lightshed Partners’ Rich Greenfield. For the past six months, the outspoken media analyst has been warning that studios that ignore their ad base in favor of streaming do so at their own peril. Data from iSpot.tv, which monitors television ad spending, showed that big companies like the Home Depot, Macy’s, and automakers Chevrolet, Toyota and Volkswagen have literally dropped off the nation’s top 60 major advertisers list.
“Overall, it feels like big, less price-sensitive ad spenders are fleeing TV,” Greenfield said. “We suspect there has been a meaningful uptick in cancellation behavior, with the glut of inventory available made worse by the lack of live sports content.”
Either way, the quarterly financial performance for Big Tech presaged what may be in store for investors in Hollywood conglomerates this week as Fox kicks off a week of earnings on Tuesday (Paramount and Roku file Wednesday, Warner Bros. Discovery and Lionsgate on Thursday, AMC Networks on Friday and Disney slated for next Tuesday). The chief financial officers of the companies nicknamed “FAANG” — Facebook, Apple, Amazon, Netflix and Google — all reported a revenue drop pinned directly on evaporating ad spending.
And the industry got its first (somewhat depressing) glimpse at how entertainment companies are faring amid economic headwinds — cable behemoth Comcast. Last Thursday, the company reported a paltry 4.4% rise in ad revenue while slugging out another loss from streaming service Peacock, which has been hemorrhaging about $600 million a quarter so far this year.
But one bright spot, likely a glimpse at what will be seen out of Disney’s earnings on Nov. 8, is that the live event and tourism businesses are showing signs of a blockbuster end of the year. Comcast reported strong performance at its Universal theme parks as crowds returned following the pandemic, with revenue for the unit soared 42.4% from last year to $2.1 billion. The Universal Beijing resort had its first profitable quarter since opening in September 2021.
What’s at stake is stock performance. Investors are left wondering about the future of Hollywood’s streaming ambitions and how much advertising can be drummed up during an expected downturn — especially after this year’s ad spending was goosed by a record $7.5 billion spent on political ads for this year’s midterm elections, according to the ad-tracking firm AdImpact.
Entertainment conglomerates would be especially hard hit as TV advertisers reduce budgets, families cancel summer vacations to Disney World and Universal studios and more disruption ahead for streaming services.
Here’s what to watch for:
When Lachlan Murdoch jumps on a call with Wall Street analysts to go over Tuesday’s earnings report, there will be a real live plot to “Succession” playing out in the boardrooms of both Fox and News Corp. as Rupert Murdoch mulls reuniting the empire he spun off into separate companies a decade ago. Nobody will be paying attention to the earnings of $1.14 a share on $3.2 billion of revenue analysts are projecting. Still, Fox may buck the narrative about ad spending’s dry spell with strong contributions from political spots ahead of the midterm elections. (Fox shares are down 22% from the start of the year.)
CEO Bob Bakish makes his quarterly appearance on Wednesday’s earnings call, where odds are he will mention Paramount’s megahit “Top Gun: Maverick” at least a dozen times. We don’t blame him. The blockbuster lorded over the international box office, taking in some $1.5 billion in ticket sales. And the chief executive is expected to say exactly what date the movie will be released on Paramount+. Analysts expect the company to report a profit of 44 cents a share on revenue of $7 billion. (Paramount stock is down 41% year to date.)
Warner Bros. Discovery
Investors still feel stunned by CEO David Zaslav’s decision to scrap HBO Max’s $90 million “Batgirl” just hours before the company reported second quarter earnings. On Thursday, they’ll be even more anxious about the progress in blending HBO Max and Discovery+ together, with plans to add CNN’s streaming future after that. There’s been some well-received momentum on finally getting leadership atop its DC Comics franchise. Analysts are expecting a loss of 21 cents a share on revenue of $10.4 billion. (WBD stock is down 49% since the April merger.)
The company is heading toward spinning off its film and TV studio division rather than its Starz cable and streaming unit, according to people familiar with the matter. That might be a bright idea considering many of the Big Tech firms can deploy massive amounts of cash should one be interested in beefing up its studio capabilities. Lionsgate previously was in talks to sell a 20% stake in Starz to a number of suitors, including France’s Canal+ — but no deal materialized. The company is projected to post on Thursday a loss of 28 cents a share on revenue of $44.6 billion. (Lionsgate shares have fallemn 52% since the start of year.)
Next week, Bob Chapek unveils full-year results that may fall slightly below expectations. The company said during the third quarter that pent-up demand for live events was so high that it may siphon off sales for the final three months of the year. He’s already triple-downed on Disney’s intention to buy Hulu and keep ESPN, and even integrate gambling into the sports network’s platform. Look for earnings analysts expect to hit 58 cents a share on $21 billion of revenue. Oh, he finally woke up about woke culture. (Disney stock is down 32% year to date.)