January 1, 2020

Thoughts on 2020 and Beyond

Netflix, Disney+, ViacomCBS, WarnerMedia, and the NFL

2020 will be a year of transition, turmoil, and tipping points! The headlines will continue to be filled with the chaos of the impeachment trial before giving way to a competitive Democratic primary. Underneath the surface, a period of economic reality will hit Wall Street. Investors are likely to take a deeper and more serious look into the potential earnings of some of the highest PE stocks.

For the media industry, specific high-performing companies will be affected by this retrenching.

Netflix
Netflix underperformed on the S&P 500 in 2019, up 13.8% over the past year compared with the S&P index that grew by 15.6% year over year. For 2020, I predict that Netflix will have a lackluster year, with its stock price again performing well below the S&P 500.

The primary risks for Netflix include:

  • Extremely high programming costs combined with downward pressure on pricing;
  • Untenable valuation – As of December 16, 2019, Netflix had a 97.2 PE ratio, extremely high when compared to its more diversified competitors:
    • Disney’s PE ratio is 25.3, AT&T is 10.9, ViacomCBS is 8.0;
    • Industry averages for film & television production and distribution forward PE is 20.2 and for broadcast & cable it is 14.3; and
  • Powerful, experienced competition will put a dent in its domestic and international growth vis-à-vis Disney+, Peacock, HBO Max, and AppleTV+.

Should there be a market turndown, Netflix stock prices will take a painful hit. There are, of course, some mitigating factors to my forecast, including:

  • Netflix’s seasoned management team;
  • The option to create an ad-supported entry tier, for which TDG first made the case in 2018;
  • Possible acquisition of other studios/entertainment companies;
  • Possible acquisition of Netflix by a deeper-pocketed tech-media firm; and
  • Heavy investments in original content producing multiple hit shows.

At the end of the day, Netflix will underperform the market in 2020, with the odds of a downturn much greater than the odds of an upside surprise. This will present an opportunity for very few firms: those with market capitalizations above $100B who consider high-priced acquisitions key to accelerated growth.

ViacomCBS – “That’s the Way it is”
ViacomCBS will announce the end of its evening news broadcast in early 2021, with the final show to air just after the Presidential inauguration. While times are turbulent and news is top of mind, putting on a hard news program is expensive and draws poor ratings. The promotional power of having an evening news broadcast in primetime just doesn’t exist anymore. Thus, 2020 will be the year that ViacomCBS seriously considers ending its flagship news program, CBS Evening News.

ViacomCBS’s path to short-term profitability and long-term viability revolves around:

  • Renewing its NFL contract;
  • Maintaining its position as a top content developer; and
  • Being in a position to be acquired by a deeper-pocketed rival.

The latter may sound wacky given that the two companies have just merged, but keep in mind that ViacomCBS’s market cap as of December 16, 2019 was $25.2 billion, relatively small when compared with Disney ($267.3B), Comcast ($194.3B), and Netflix ($138.3B). The M&A fever that has characterized the entertainment industry for the last decade has, by definition, diminished the number of acquisition opportunities for growth-minded leviathans making ViacomCBS an interesting candidate (with anti-trust concerns a plenty).

Disney+ Roars, WarnerMedia to Face Challenges
While Disney+ may be unable to meet the lofty expectations laid upon it, I believe it will cross the 20-million-subscriber mark in 2020. This is hardly inconceivable as 10 million signed up before and during the first day of service (2-3 times initial expectations). There is no reason to doubt that Disney+ will continue to experience strong growth in 2020.

The content offering by Disney+ is quite deep. Disney opened its vault to over 500 movies and 7,500 TV episodes on day one, with an eventual promise to have every Disney film available to stream over time. At $6.99 per month, the price is affordable to most and also will act as a strategic hedge against any economic downturn. Importantly, TDG sees Disney+ becoming a bedrock OTT service, much like Netflix. While consumers will “hop” between some subscription apps, Disney+ has such a deep library that it’s more likely to be a regular feature in the household’s OTT roster.

On the other hand, WarnerMedia’s HBO Max will find it difficult to grow its US user base beyond current HBO/HBO Now subscribers. To be clear, the content will be compelling, featuring all of HBO’s shows, plus content from across the WarnerMedia group, all for $14.99 per month. That’s not a bad deal until you compare it with basic Netflix at $9 or Disney+ at $6.99 per month. And that is unfortunately how most consumers will view it, which will make it difficult for the company to meet its goal of 50 million US subscribers by 2025.

For younger subscribers, the value of an HBO subscription post Game of Thrones may be problematic. Then again, HBO has a long record of generating compelling content, so betting against its ability to continue doing so would be shortsighted. But the competitive context is very different today than it was pre-streaming. Netflix is not Showtime, and Disney is not Cinemax, and any SVOD service at $14.99/month will inherently be viewed with skepticism by non-believers (i.e., those that do not already subscribe to HBO).

That being said, WarnerMedia is aware of these challenges, with plans to offer a less-expensive ad-supported HBO Max service in 2021. While a smart move, TDG believes that Netflix will do the same to rekindle domestic subscriber growth, which may render WarnerMedia’s efforts less effective. The “race to the bottom” via ad-supported versions of full-price services was successful for Hulu, and new entrants are following this precedent. However, ad-supported “SVOD lite” services are precisely the types of apps most susceptible to subscription hopping, which brings its own unique set of challenges.

NFL Work-Stoppage
There is a universal feeling that the NFL will reap a huge windfall from the upcoming broadcast rights renewals. Add to this the legalization of gambling, and players expect to secure these rewards in their new 2021 agreement. Key negotiation elements include the following:

  • Guaranteed contracts – The NFL does not guarantee the contracts of its players.
  • Player pay – The players feel that they are responsible for league’s success and should receive a greater share of the new collective bargain agreement.
  • Length of Season – The players would like to see a shorter season (limited preseason), while the owners are arguing for a longer season (18 games).
  • Expansion – Players do not want a team based in London.

It has been reported that the head of the NFL Players Association sent out a letter telling players that the work stoppage could last one year. A work stoppage of that magnitude could have long-term ramifications for the NFL brand as well as NFL television ratings, something that neither party wants to happen. However, the NFLPA seems entrenched in the idea that they need to win, while the owners will likely lock out the players and use their proven strategy of waiting until the younger players realize that they cannot afford to be without salary for such a long period of time. This lockout will be longer than anybody desires.

 

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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