THB #234: Wall St x Hollywood = Madness

I have been churning on this piece about how insane Wall Street is when it comes to content companies for over a month. What I haven’t been able to do is to figure out to express my general unease with the current generation of industry leadership chasing stock price over building their core businesses when it is completely clear that Wall Street has no real interest in the realities of the industry.

A mouthful.

Next week, we enter this industry’s quarterly 20 days of stock market madness, as financial reports get released by the 5 major players whose businesses are closely enough connected to content that they can be fully read.

Netflix - Oct 19
Comcast - Oct 27
Paramount - Nov 2
WBD - End of Oct/Early Nov
Disney - Nov 8

What got me moving on this story again today is noticing that Disney is near it’s stock price low since the very beginning of the COVID shutdown in March 2020.

WTF?

You can see here that at 12:34p pacific today, the stock was at $92.94 and that the only lower mark was in the week of March 16-23, 2020. Before that, you have to go back to 2015 to find a lower price for Disney stock.

Why?

Beats the hell out of me. The surface answer is that some analysts have questioned the ongoing business, especially in light of a coming recession and questions about the long-term value of streaming. But then there is this…

That is Netflix in the same 6 month period. You can easily see when the November and January quarterly reports landed. Those are the 2 massive dips. Fair enough. When subscriber growth stalled, Wall St, woke up from their magical thinking dreams about Netflix and the stock price returned to earth, albeit at a comfortable place on earth.

Look closer at just the last 3 months. You can see the the rise of Netflix that came with the announcement that they were going to bring an advertising-based tier to the streamer (that green E at the bottom). The stock price rose from its low, in the $170 - $180 range where it lingered after the April quarterly to $214, which is pretty much where is closed today. The stock has gone as high as $249 a share, but $214 has remained the low.

Maybe this is just the market re-setting the Netflix baseline again. Okay. A little high, but not insane.

Disney, on the other hand, didn’t really offer any major announcements, aside from pricing, which raised each of the 3 individual Disney streaming services with the goal of pushing people to the Disney Bundle, which is available for a price that is still less than Netflix’s non-single-screen options. They had already announced that an ad-driven Disney+ product was coming and both Hulu and ESPN+ already have ads unless you pay extra.

But as you can see, after a couple days of the stock price jumping about 10% (after the E), the price has worked its way down steadily for 2 months, $27 lower than it was in mid-August. (Disney’s quarterly was announced on August 10, Netflix’s on July 19.)

What is the difference between these companies, in context of their own recent histories, in the last 2+ months?

The advertising thing does separate Netflix from Disney+, but only a little in reality. It is likely that Disney+ will be offered domestically with ads well before Netflix offers their ad tier domestically. It is not in fashion to think that Netflix will launch ads earlier than expected… but there is no reason for that. The bigger challenge to Netflix is domestic, as America is easily the #1 market with the #1 Average Revenue Per User (ARPU).

But what is more odd than Netflix resetting its bottom $35 above the crash level? The Disney dump. What did Disney do to deserve this? At least in the short term.

I have all kinds of issues with Disney strategies in broadcast, streaming, and theatrical. But nothing that calls for a 20% drop for a company at which a $200 million market cap on $80 billion of annual revenues seems reasonable. (Netflix’s market cap is currently $100 million on $30 billion in annual revenues.)

And the stock price charts of the other 3 content-dominant companies look more like Disney’s than Netflix’s.

I can make - or find - arguments for and against each of these three companies, but what is true of both Netflix and Disney is true of all 3… they aren’t doing anything particularly dramatic right now. Nothing game changing. Nothing destructive.

Maybe it just comes down to Netflix being the ex-romantic interest that Wall Street just wants to have another fling with before it hits middle age.

Almost all the talk about advertising I hear is about Netflix, since they have had none in the past. Maybe that is it. There are Paramount Global diehards who talk about their sub increases, but I don’t find that all that compelling. So it’s Netflix, Netflix, Netflix.

So a quick look at that ad future…

The domestic market delivers about half of Netflix’s overall revenues, about $15 billion a year. About 74 million paying households averaging $15.95 each.

Let’s say that the ad-supported version is $6 less than the commercial-free option.

So, for every million subscribers who switch to ad-based, the company has $72 million a year less revenue from subscriptions. If 20% of subscribers make the switch (14.8 million), that means $1.07 billion less revenue that needs/seeks to be made up with ad sales. Of course, the goal is to increase revenues.

30% switch - $1.6 billion
40% switch - $2.1 billion
50% switch - $2.7 billion

As for expansion, I don t expect there are more than 6 million new households that would sign up because of a $6 month difference in the subscription fee. So if they got 6 million new subs, that would generate, with my presumed discount, $720 million a year.

If Netflix wants to make the churn to the ad-version less enticing, they can discount less than $6 a month. But that is the double-edged sword here… you can’t sell ads for subs who aren’t seeing ads and you don’t know if you can sell enough ads to make up the difference in revenue if you push people to switch to the ad-based programs.

We’ll all know in a year or so. Or at least have a much better idea. There will be a lot of tea leaves to read.

And keep in mind, this is just domestic. Two-thirds of Netflix’s subs are international. About half of those are paying just over $11 a month and the other half is paying just under $9 a month. Ads will, mostly, have to be tailored to individual countries. The price per 1000 eyeballs is unlikely to be as high as the domestic rate.

Netflix is already facing challenges with deep discounting in many markets across the globe, like Disney, whose ARPU for India is under $2. So the question remains… how many international households who haven’t signed up will sign up at how much of a discount?

Disney’s new pricing proposition is not quite as strong a swing. Basically, the Bundle most people have - no ads on D+, ads on Hulu & ESPN+ - goes up $2 from the current $13 pricing to $15 a month. Accept ads on D+ and you get a $2 discount, $13 a month. If you want no ads on D+ and Hulu (ESPN+ will always have ads on most things), that’s $20… same as it is today.

In other words, all Disney plans either stay at the same ARPU or they go higher. Plans for single segments (D+, Hulu, ESPN+) are prohibitively overpriced.

This doesn’t suggest a ton of added revenue from these pricing adjustments. $1.2 billion a year if 50 million Bundle subs are paying $2 more. That isn’t the real math, but the is no way to come up with a real number on this because of how Disney reports. Probably more like $900 million, I’m guessing. About $20 billion a year in Direct-To-Consumer revenue at this point, so maybe a 5% bump? 4%?

And what I am not guessing at here… because it would be insane… is how increased ad activity affects the entire ecosystem… especially at a place like Disney, where there are major broadcast, cable, and steaming businesses all in play. (Not to mention theatrical, which the company is undervaluing at this time. ‘Nuff said.)

Will the arrival of Netflix improve the streaming ad revenues for Disney and will that trigger reconsideration of broadcast and cable more? Or not? Real answers will only come in the doing. And if any of these companies expanding ad-based streaming is overly shy about moving forward, they will fall behind.

Comcast has been dumping cable nets, network time slots, and is discussing a withdraw from the 10p time slot for NBC. This suggests that they see the transition coming in a more complex way than anyone else already… the execution will be the issue.

People forget that one of the prime values of Hulu for the networks is that it made the 2nd, 3rd, and 4th exploitations of the same shows a lot cheaper, having negotiated a completely different set of rules for streaming re-runs instead of broadcast. Everything old is new again.

If you think you have seen change in the last few years, just wait… it’s only just begun.

But unless you want to lose your mind, don’t look to Wall St for insight in this industry. It only really cares when they think your content business isn’t a content business. The model has changed and is changing, make no mistake. But in the end, eyeballs and cash flow are all that matters. There is no magic headset.

Until tomorrow…