Commentary
Painful Adjustments As Cash (Not Market Cap) Becomes King Again For Media Companies
- by Dave Morgan , Featured Contributor, December 8, 2022
No matter what you feel about the strides made at HBOMax over the past few years, it’s pretty clear that Netflix achieved Sarandos’ goal. It has become the world’s leading video subscription service and absolutely owns the same kind of premium content cachet that always separated HBO from everyone else.
Except for the very prescient work done at Hulu, most of the large media companies didn’t try to “become Netflix” until probably five years ago, as they started to lose real viewership to Netflix (and Amazon Prime).
Of course, if these companies were totally transparent, most would admit that what they were really chasing in Netflix was its market cap. Netflix’ stock market valuation grew extraordinarily over that time period, culminating at just a shade under $700 billion.
That market cap number always came up when anyone in the press or at conferences were discussing the big streaming launches of the major television and movie companies (HBOMax, Disney+, Paramount+, Discovery+, etc.).
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Those media companies were trading on multiples of profits and cash flow -- and all wanted to be traded just like Netflix, at an enormous multiple to revenue and subscribers, with scant attention to profit. Of course, the potential that they each might be bought for a comparable multiple by one of the big tech/video players was a big driver as well.
How quickly times have changed. Today, Netflix has a market capitalization of $138 billion. The large TV media companies are each losing billions and billions investing in their platforms, massively cannibalizing their linear TV offerings and cinematic releases to ensure differentiation and focus for their streamers. Each of their market caps is also just a fraction of where they were a few years before.
Netflix is now quite profitable, with annualized profits in the $6 billion to $8 billion range -- and, incredibly, has done that all with only a single revenue stream: viewer subscriptions. With Netflix's recently launched advertising tier, we can only expect profits to go up if the Hulu model is any guide. Hulu makes more money on those who both pay a lower fee and take ads than those who pay premium subscription fees for an ad-free experience.
The shift of strategy at the big media companies from optimizing to be just like Netflix to achieve its stock market multiple to now be more like they used to be -- all about cash flow -- is having wrenching effects on the entire ecosystems.
The strategies of the large TV media companies of the past few years accelerated audience shifts to streaming, which meant that billions of dollars of distribution fees were lost. Now, there is a question on whether billions of dollars of advertising will be lost. For sure, many, many thousands of jobs have been lost, and that is likely to only accelerate.
I do believe that the best TV media companies will not only survive, but will thrive, as they make these shifts. But it won’t be easy, and it won’t be pretty.
What do you think?
We are having a similar dilemma here in Australia. But being a much smaller market we have a lot less ammunition to defend our networks.
Reactivity rather than creativity has become the dominant mindset (apart from the annual accounts).
As one example, our previous government abolished the modest annual Australian children's television quotas as a cost saving for the broadcasters, despite it being the biggest export sector and one of the biggest local employers. Sadly few are left.
It is not the only sinking sector of local content, and the cumulative result is more imported content - some good and expensive, but many are cheap. Each broadcaster has around six channels which used to have a variety of different content (i.e. audience choice) that is increasingly now just a 'road-block' of the same simultaneous content on their secondary channels.
Further, they are launching their own streaming channels. And guess what ... a diminishing audience on their main revenue raiser (FTA ads). Yes, they definitely need 'viewer-choice' and live streaming channels, which is being amplified by their reliance on overseas content given their affilaitions (or ownership) by overseas entities (primarily US of course).
But the rapid decline in the TV ratings says a lot about what the audience thinks. They are confused as to which of the six channels or 40 streaming channels has the content they would like to watch - on just THAT network. And when you have multiple broadcasters going down the same path there is increasing ennui in the populus. And in doing so, it is highly likely that their nett income will decline sooner rather than later.
While there is financial logic in such strategies i.e. cost reduction to retain profit, I am not convinced that the behavioural logic has been properly considered. In essence the network audience is being fragmented across an increasing number of available channels. In media speak, the CPM for an advertising campaign will almost certainly increase for each channel option. And also almost certainly the campaign reach will fall because of the increased CPM.
John, you've hit the essence of the issue. Finanical logic and reactivity are driving programming distrbution, promotion and user experience, not long-term audience development and creativity in long-term business building.