As the third-quarter earnings train pulled into the station, we expected U.S. diversified media companies to report results reflecting the lack of new original content due to the writers' and actors' strikes and continued weak TV advertising trends. This would appear in earnings reports as weaker linear TV segment revenues and EBITDA, some modest improvements in operating results for the direct-to-consumer (DTC) businesses, and healthy consolidated free cash flow. By and large, the companies met our expectations for advertising and free cash flow (FCF). On the positive side, streaming segment results exceeded our expectations, especially with solid subscriber growth (surprising given the lack of new original content), and a strong improvement in operating losses.

"An Offer He Can't Refuse": Strikes Are Settled

Though the strikes are finally settled, we anticipate operating metrics won't normalize until the second half of 2024.  Results for the third quarter of 2023 were affected by the writers' and actors' strikes, which had shuttered studios since May. The lack of new content upended the 2023-2024 broadcast season as the TV networks had to fill schedules with unscripted programming, reruns, and international content. As a result, advertisers pulled back TV advertising spending, which disproportionately hurt general entertainment and lifestyle cable networks that lack live sports and news.

The strikes also wrecked the film theatrical release slate for the second half of 2023, setting back the nascent domestic box office recovery that had started with the summer releases of Warner Bros. Discovery's (WBD) "Barbie" and Comcast's "Oppenheimer". The theatrical release of some already completed big budget films (such as WBD's "Dune: Part Two") were delayed into 2024 because the actors were prevented from publicizing their films; partially completed films (such as Walt Disney's "Deadpool 3") couldn't be completed in time for their original release dates; also, new projects couldn't get started and so their release dates have been pushed out into 2025 and beyond.

The strikes have also allowed the studios, streaming services, and linear TV networks to make significant cuts to their content budgets and eliminate unwanted projects. As a result, we believe many projects have been eliminated or scaled back. Disney, for example, initially guided for fiscal 2023 content spending in "the low $30 billion range". By the end of the year, that number was $27 billion, partly due to the strikes, but also because the company reassessed its entertainment content needs. Disney then forecast $25 billion in fiscal 2024 content spending, $2 billion below fiscal spending for 2023 and over $5 billion less than its run-rate pace just a year earlier. We expect Disney's peers will similarly lower their 2024 content spending plans.

With the actors' strike recently settled, the studios returning to work, and the new content pipeline beginning to pour forth new movies into the theaters and TV shows onto television and streaming services, we expect the media companies' operating results will normalize in the back half of 2024.

"I'll Be Back": Advertising Growth Returns For Some

After a year of a weak global advertising environment, due to global geopolitical events and fears over a global macroeconomic recession, we believe advertising spending has generally resumed growing. This recovery, however, has been limited to digitally focused advertising media, such as search, streaming, social media, digital commerce, retail media, and connected TVs. Both Meta Platforms and Alphabet reported accelerating advertising growth in the quarter. (Meta reported total advertising grew 23.5%, with advertising in the U.S. and Canada growing 17.2%. Alphabet reported 9% overall advertising growth with YouTube advertising growing 12%.)

Advertising on legacy media, including linear TV, still hasn't recovered and continues to be soft. We believe it is increasingly unlikely that linear TV advertising will return to 2021 levels. We think much of the current weak advertising trends is not due to macroeconomic trends but is the result of secular changes as advertisers are finally abandoning linear TV. While audiences have been leaving linear TV for quite some time, advertisers have been slower to follow because the available impressions and unique viewers on all ad-based streaming services remains too small to make buying on streaming platforms efficient. In addition, the ad-based streaming services still have to solve several major structural issues, especially a lack of industry standards (audience measurement, buying, etc.) between the streaming services, before advertisers more fully embrace advertising on streaming.

General entertainment and lifestyle cable networks are seeing significant advertising weakness with both weak demand and lower prices.   These networks have suffered the biggest audience declines as media companies have prioritized putting new original content on their streaming services instead of their linear TV networks. In addition, these networks have been disproportionately hurt by the writers' and actors' strikes, which have resulted in a lack of original content and delayed the 2023-2024 TV broadcast season.

Live sports programming, either on sports networks like ESPN or broadcasters carrying the NFL and college football, is seeing strong demand from advertisers.   This is not surprising because as audience ratings for general entertainment continue to slide by over 20% year over year, audience ratings for the NFL, in particular, keep increasing. Through week 10 of the NFL season, we believe total audience ratings for the NFL are up about 6%. We believe the linear TV networks have limited advertising inventory for sports programming and are able to charge higher prices. As a result of these higher prices, TV advertising budgets have been drained, leaving less money to be spent on general entertainment networks.

Table 1

"If You Build It, He Will Come": Streaming Path To Profitability Improves

In third-quarter results, we saw a marked improvement in streaming's path to profitability (Table 3). We had expected some improvement in the quarter but were surprised by its extent. We believe the lack of new original content as a result of the two strikes had only a small impact on streaming profit and loss (P&L) because the cost of programming is amortized over three to four years, and new content is a small part of the overall programming costs. The bigger impact was to cash flows because the lack of content production meant that cash programming costs were down significantly.

We believe the improvements to the P&L are a result of cost cutting actions by the streamers, including (1) significant cuts in selling, general, and administrative expenses (SG&A), marketing, and technology spending; (2) removal of little-watched content from their streaming libraries; and (3) better monetization of content as it is shared across multiple distribution platforms including television. We expect these cost reductions, along with the recent spate of price increases will help the streamers reduce operating losses. In particular, Warner Bros. Discovery (WBD) and Walt Disney have made the most progress in cutting costs, (Table 2). We believe WBD can continue to improve profitability in 2024, while Disney will likely reach break-even profitability by the end of fiscal 2024.

Table 2

Table 3

Related Research

• Warner Bros. Discovery Inc. Credit Quality Unaffected By Pulled Leverage Guidance, Nov. 14, 2023