Paramount Global Races to Make Streaming a Profit Center – But the Clock Is Ticking | Analysis

While speculation about a sale continues to hover over Paramount Global, CEO Bob Bakish made clear on Wednesday that he is focused on solving the core problem plaguing all of Hollywood’s major studios: making streaming work before linear TV drags profits down too far.

As Paramount released its fourth-quarter results, Bakish and CFO Naveen Chopra told analysts that the struggling company — which S&P Global put on a negative credit watch last week — was a year ahead of schedule on realizing “peak losses” and could make domestic streaming profitable sooner than expected.

Revenue for three-year-old streaming service Paramount+ shot up 69% in the fourth quarter, year over year, “and we now expect to reach domestic Paramount+ profitability in 2025 — a significant milestone,” Bakish said in a statement on Wednesday.

Total revenue from its Direct-to-Consumer segment ballooned 34% to $1.87 billion in the quarter, buoyed by Paramount+ adding 4.1 million subscribers to reach 67.5 million. Overall, the platform expanded its average revenue per user (ARPU) by 31%, the company reported.

But streaming profits are another matter. In the fourth quarter of 2023, Paramount narrowed its streaming losses to $490 million, a 15% year-over-year improvement. But that’s still nearly a half-billion dollars in losses, a stunning number. For the full year, the company posted a DTC loss of $1.66 billion, compared to $1.82 billion in 2022.

Paramount is hardly alone in its streaming challenge, which has all entertainment companies racing to get ahead of the simultaneous decline of linear and the rise of streaming. Paramount+ has some of streaming’s most popular content, including the Western “Yellowstone” franchise with its hit “1883” spinoff; the video game-inspired “Halo;” and a vast library of popular archived shows, from “Freaks and Geeks“ to “Cheers” and “Beverly Hills 90210.”

Last week, Warner Bros. Discovery posted a loss of $55 million in its direct-to-consumer division for the quarter, down from a loss of $217 million. For the full year, it swung to a profit of $103 million, compared to a loss of $1.59 billion in 2022. The company said its DTC business would have modestly negative EBITDA in the first half of 2024 before turning profitable in the second half of the year. WBD is targeting $1 billion of direct-to-consumer EBITDA in 2025.

Disney narrowed its total streaming losses by 79% year over year to $216 million in its first quarter of 2024 and expects to reach streaming profitability by the end of the fiscal year.

One comparative bright spot: Paramount is finding more success in executing price hikes while continuing to scale its streaming business, while rival Warner Bros. Discovery has seen subscribers leave Max over the past year, said Jamie Lumley, an analyst at Third Bridge.

As entertainment companies scramble to realize elusive streaming profits, the scale of the linear losses in the fourth quarter — compounded by the Hollywood strikes’ production delays — has galled Wall Street.

Warner Bros. Discovery demonstrated this matter just last week. After reporting a 12% decline in TV advertising revenue to $1.9 billion — and a worse-than-expected overall quarterly loss — investors dumped the company’s shares 13%. That, despite WBD being the first traditional Hollywood studio to report a yearly streaming profit.

The complexity of combining linear assets that have not shown signs of rebounding likely contributed to WBD’s deciding not to pursue a merger with Paramount. “We’ve been hearing from our experts that the challenges in combining linear assets outweighed the benefits of the combined sports rights and streaming base,” Lumley said.

While the specter of further consolidation hangs over the entire entertainment industry, Paramount is running out of time for Bakish and his team. The company’s controlling shareholder, Shari Redstone, has indicated she is kicking the tires hard on a possible sale, and other big investors like Berkshire Hathaway, which sold off about one-third of their Paramount holdings last week, appear to be losing faith that the company’s share price has more upside.

When questioned by an analyst on Wednesday, Bakish provided little clarity on potential consolidation — but also didn’t shoot down the possibility. Bakish said the company is “always looking for ways to create shareholder value,” adding that “it’s obviously something we are focusing on.”

Sliding ad revenues, which fell 11% for Paramount in the quarter, are adding to the pressure. The strikes and a pullback on political ad spending “were clearly a headwind in Q4,” Bakish said.

All the entertainment companies have been trying to hack their way to streaming — and overall — profits by slashing costs. Disney is the furthest along on that path, saying it cut about $7.5 billion in costs in fiscal 2023. Paramount is dragging behind in aggressively looking to trim spending, with analysts recently questioning whether the company has been over-investing in Paramount+ to try to catch up to its rivals.

On Wednesday, some costs were one-offs. Paramount reported that its quarterly results included $215 million in restructuring costs, including $155 million for severance. In the first half of 2023, the company booked programming charges related to integrating Showtime into Paramount+ and to “rationalize and right-size” international operations to align with the streaming strategy.

The company anticipates booking another $1 billion or so in programming and restructuring charges in the first quarter of 2024, about $200 million related to the restructuring. Earlier this month, the company said it would lay off nearly 750 domestic positions, or about 5% of its domestic workforce.

The programming initiatives have resulted in Paramount pulling content from some of its platforms overseas, where viewers “spend nearly 90% of their time with our global Hollywood hits,” Chopra said.

Despite the challenges, Bakish sought Wednesday to celebrate some of Paramount’s recent wins — including the Super Bowl, the early box office success of “Bob Marley: One Love” and strong Golden Globes and Grammys viewer totals.

“Regardless of current market sentiment, we’re convinced that the value of our assets today, combined with the execution of our strategy as we move forward, represents a significant value creation opportunity,” Bakish said. “We are dedicated to unlocking that value.”

Still, “with revenue declines and profitability pressure, Paramount is going to be happy to have 2023 in the rearview mirror” Lumley said.

Lucas Manfredi contributed to this article.

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