Written by Keaton Stein
2022 was a tough year for markets as the S&P 500 fell almost 20%, its worst year since 2008. One sector that was hit particularly hard was media, and more specifically streaming. Share prices for Netflix (down ~25%), Disney (down ~40%), and Warner Bros Discovery (down ~60%) all fell dramatically in 2022. This paper will examine the reasons why streaming stocks have fallen in the past year as well as the outlook for 2023 and beyond for these businesses. The main reasons for a fall in streaming stocks has been a slowing pace of customer acquisitions and unsustainable spending. Both are largely driven by intense competition in the industry. Given the large macroeconomic uncertainty at play in 2023, it is likely to be a turbulent year for streaming stocks, however given the aforementioned concerns this piece will argue that the path forward for the industry is consolidation.
The first reason for the recent decline in streaming stocks has been slowing new subscriber growth. Netflix, the market leader and only streaming service with a positive operating income, lost close to 1 million subscribers in the US and Canada in 2022. This was the first time the company has actually lost subscribers and demonstrates an overall industry trend in slowing subscriber growth. Furthermore, during the pandemic, subscriber growth was at a high as people quarantined for long periods of time at home. As the world has started to re-open, high growth rates have fallen below market expectations fueled by the pandemic. Although it is likely that more people will continue cutting cords and switching from linear television to streaming, this growth is slowing and macroeconomic headwinds in 2023 are only likely to compound this issue. Intense competition among streaming service providers is another large reason for slowing subscriber growth. Intense competition forces many consumers to choose only a few streaming services to subscribe to, or even allows them to switch between streaming services based on their favorite content. This slow in subscriber growth has weakened investor confidence in streaming, and has contributed to lower share prices in 2022.
The second reason for weakness in streaming shares in 2022 was unsustainable content spending. This too is a factor of intense industry competition within streaming. Consumers have many services to choose from, all of which are practically identical besides their content. In the streaming industry, good content is the primary way of attaining a competitive advantage and providing a differentiated product. A good example of how this fierce competition for premium content has led to unsustainable spending is with Disney. Since 2017, Disney has cumulatively lost close to $11 billion in its streaming business. Disney has been able to offset these losses though its parks and other businesses, but this is clearly unsustainable and has largely contributed to the recent fall in Disney’s share price. Besides Netflix, all other streaming services had operating losses in 2022 due to high spending.
It can be observed that both of these issues that confront streaming services (slowing growth and unsustainable spending) are largely due to extreme competition. Although there are many ways of confronting issues in the streaming industry, it is likely that the long-term solution involves some form of industry consolidation. Consolidation has the potential to improve both of these issues that streaming platforms face. Firstly, it can address slowing subscriber growth through increased market share and bundling. Consolidation artificially increases one companies market share and therefore subscriber growth, and also eliminates competition, likely improving long-term subscriber growth. Bundling through consolidation allows streaming services to differentiate themselves from competitors by offering a broader and more diverse experience to consumers, which can also help subscriber growth. Secondly, consolidation can massively reduce overspending in streaming. Just like in any merger or acquisition, combining two businesses can result in cost synergies. For example, the consolidation of two streaming services allows the pro forma entity to reduce headcount, marketing, and capital expenditures. The largest of these impacts is that when two streaming platforms combine, there is likely no need for two platforms. The new entity can save money by getting rid of one of the platforms and consolidating their products into one platform. A recent example of consolidation was Amazon’s $8.45 billion acquisition of MGM. Amazon’s goal from this acquisition was to bolster its Prime content library to better compete with streaming giants like Netflix and Disney.
Although consolidation seems to be the most likely solution to the core issues affecting the streaming industry, it is unlikely that any major consolidation would be possible in early 2023. The biggest roadblock in the way of consolidation this year is the cost of funding a large transaction. Taking on debt is unattractive at the moment given high interest rates, and issuing equity is also unattractive given lower valuations. Instead, it is more likely that in 2023, streaming companies will start to chip away at some of their issues through smaller changes. After a brief battle with activist investor Nelson Peltz’s Trian, Disney announced a large company-wide restructuring in which it would eliminate 7,000 jobs and look to slash $5.5 billion in costs. In the short-term, this should help improve Disney’s profitability and issue with overspending. Netflix has also recently begun a crackdown on password sharing to eliminate free riders, and hopefully help subscriber growth. In the short-term, these initiatives will likely help streaming services with issues in subscriber growth and overspending, but in the long-term industry consolidation is likely very necessary.
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