2022 Mid-Year Report: Netflix, Paramount Going in Opposite Directions, Video Game Mega-Mergers, Redbox Lifeline

NEWS ANALYSIS — With half of 2022 in the books, the entertainment industry’s status quo has been turned on its ear as a market heavyweight (Netflix) and subscription streaming video attempt to correct course, Paramount flexes its fiscal muscle and video game publishers seek blockbuster consolidation, among other newsworthy events.

Netflix Sub Loss, Stock Freefall

When Netflix revealed an unexpected 200,000 net subscriber loss in the first quarter, the shockwave was only beginning. The streaming behemoth saw its stock price plummet 35% overnight, with shares down now almost 70% year-to-date. Co-founder, co-CEO Reed Hastings saw his personal stake in Netflix freefall $648 million in value. With the streamer projecting an additional two-million sub loss in the current quarter, layoffs have followed as the service seeks to cut costs and launch an ad-supported plan to inflation-leery consumers.

“Both [co-CEO and CCO] Ted [Sarandos] and I regret not seeing our slowing revenue growth earlier so we could have ensured a more gradual readjustment of the business,” Hastings wrote in a June 23 staff memo. “We plan to return to a more normal course of business going forward.”

Paramount Pictures Tops North American Box Office

Paramount Pictures, which in recent years was on the verge of no longer being viewed as a major studio due to its meager output of films, found itself as the top-grossing studio in Hollywood. Thanks to the enduring box office appeal of Tom Cruise’s fighter jet sequel Top Gun: Maverick and the video game adaptation Sonic the Hedgehog 2, Paramount was the lone studio to break $1 billion in revenue across eight theatrical releases through the midyear. Maverick has topped $570 million at North American screens, and $1.1 billion globally, with Sonic 2 adding $191 million domestically.

Netflix/Disney+ Launching Ad-Supported SVOD Plans

What a difference a few weeks make. Speaking in early March at an investor event, Netflix CFO Spencer Neumann said the streamer would not pursue a less expensive ad-supported subscription plan.

“It’s not in our plans right now,” Neumann said.

Then came the subscriber losses in April, employee layoffs and Wall Street downturn. Now Netflix is joining rival Disney+ in rolling out an ad-supported plan that could attract new subs and generate significant incremental revenue possibilities.

“Never say never,” said Neumann.

North American Box Office Bounces Back
 
Thanks to Tom Cruise’s enduring star power and some wayward dinosaurs, June ended with the highest box office — $953.4 million — since the pandemic began in March 2020. The tally bests previous ticket sale pole sitter, December 2021, which tracked about $920 million in revenue largely on the back of Sony Pictures’ Spider-Man: No Way Home with $573 million in revenue.
 
Last month, Universal Pictures’ Jurassic World: Dominion realized $313.1 million in ticket sales. Other significant revenue generators included Disney/Pixar Animation’s Lightyear with $97.1 million, and Warner Bros. Pictures’ biopic Elvis with $44.7 million.
 
Indeed, the $216 million box office generated during the weekend of June 10 would have ranked as the fourth-highest three-day box office weekend in 2019. Additionally, the weekend of June 17 marked only the fourth time in history that three films generated more than $40 million each at the box office— and the first time since 2013.
 
“We have consistently stated that a steady stream of diverse, compelling new film content, along with improving moviegoer sentiment, would be driving forces behind the reignition of theatrical exhibition,” Sean Gamble, CEO of Cinemark, said in a statement.
 
Chicken Soup for the Soul Entertainment Buying Redbox
 
Chicken Soup for the Soul Entertainment, owner/operator of the ad-supported Crackle+ streaming platform, is set to acquire Redbox Entertainment, operator of more than 38,000 DVD rental kiosks and branded digital properties, in an all-stock transaction valued at $375 million.
 
The deal continues a harried fiscal existence for Redbox since going public last October following a merger with a special purpose acquisition company, or SPAC. Redbox earlier this year disclosed it lost $140 million in 2021, its businesses undermined by the pandemic and supply issues. Last month, it laid off 10% of its workforce, or about 150 employees.
 
Discovery Closes $43 Billion WarnerMedia Acquisition
 
Discovery and WarnerMedia on April 8 announced the completion of their $43 billion merger, a union that creates a streaming-focused media giant that brings together a leading Hollywood movie studio (Warner Bros. Pictures) with a top producer of documentary and other non-fiction programming.
 
Warner Bros. Discovery as the new company is known, is headed by Discovery CEO David Zaslov and CFO Gunnar Wiedenfels. The company combines WarnerMedia’s premium entertainment, sports and news assets with Discovery’s non-fiction and international entertainment and sports businesses, including the Discovery Channel, Discovery+ SVOD service, Warner Bros. Entertainment, CNN, CNN+, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, Investigation DIscovery, TLC, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies and others.
 
Amazon Completes $8 Billion MGM Studios Purchase
 
Amazon and MGM Studios on March 17 announced the completion of a $8.5 billion merger first announced in May 2021. The companies made the announcement after the deadline for the Federal Trade Commission to block the deal passed. Amazon gets access MGM’s library of more than 4,000 movies, including the lucrative “James Bond” franchise, and 17,000 TV shows. The European Union March 15 gave its regulatory approval of the transaction.
 
“MGM has a nearly century-long legacy of producing exceptional entertainment, and we share their commitment to delivering a broad slate of original films and television shows to a global audience,” Mike Hopkins, SVP of Prime Video and Amazon Studios, said in a statement. “We welcome MGM employees, creators, and talent to Prime Video and Amazon Studios, and we look forward to working together to create even more opportunities to deliver quality storytelling to our customers.”
 
SVOD Password Sharing
 
With Netflix testing charging subscribers in Chile, Costa Rica and Peru a reduced fee if they share their passwords with third parties, the streamer is attempting to put a lid on a growing trend: password mooching.
 
While Netflix initially encouraged the practice as an organic way to entice subscriber growth, with the SVOD behemoth now realizing lower quarterly net sub adds, new data from Cordcutting.com estimates the service will lose more than $790 million in membership revenue this year due to unauthorized password sharing — tops among all SVOD services.
 
Other streaming platforms such as HBO Max, Disney+ and Hulu would lose $477 million, $440 million and $436 million, respectively. That “breakage” revenue collectively tops $2.3 billion in annual membership revenue lost when including Paramount+, Amazon Prime Video and Peacock.

Of the 215 million people in the U.S. using SVOD services, the report contends 25% are using someone else’s paid-for account. Indeed, the average account borrower accesses up to two, third-party accounts, which equates to almost 86 million shared accounts.

The report, citing a survey of 790 U.S. adults early this year, found that the most-shared accounts include HBO Max, Disney+ and Amazon Prime Video. Among survey respondents, Netflix remains the overwhelming favorite platform with 92% market share.

Video Game Mega Mergers

The gaming industry made headlines when Take-Two completed its acquisition of Zynga priced at more than $12 billion), and Microsoft made a $75 billion bid for Activision Blizzard, which has not closed yet.

With 3 billion people globally actively playing video games, including 200 million Americans, and fueled by a new generation of interactive features, gaming is now the largest and fastest-growing form of home entertainment.

Activision properties include the Call of Duty, Candy Crush, Diablo, StarCraft, Warcraft and Overwatch franchises. The acquisition aims to accelerate the growth in Microsoft’s Xbox gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse — described as a virtual-reality space in which users can interact with a computer-generated environment and other users.

Indeed, Call of Duty: Mobile reportedly surpassed $1.5 billion in revenue since launching in October 2019.

“Microsoft’s desire to bolster its metaverse … [underscores the] fact the metaverse is the next frontier of interactive entertainment,” Stifel analyst Drew Crum wrote in a January note.

Meanwhile, the Take-Two/Zynga merger combines the publishers of some of the biggest-selling game franchises. Take-Two properties include Grand Theft Auto, Red Dead Redemption, Midnight Club, NBA 2K, BioShock, Borderlands, Civilization, Mafia, and Kerbal Space Program. Zynga’s portfolio includes CSR Racing, Empires & Puzzles, FarmVille, Golf Rival, Hair Challenge, Harry Potter: Puzzles & Spells, High Heels!, Merge Dragons!, Toon Blast, Toy Blast, Words with Friends and Zynga Poker.