Analyst Downgrades Paramount Global on Streaming Costs and Advertising Concerns

Paramount Pictures may be on a roll at the box office thanks to movies such as Top Gun: Maverick and Sonic the Hedgehog 2, and the ongoing rollout of the Paramount+ streaming platform. But global expansion and content production sent costs sky high, and that concerns Wall Street analyst Michael Nathanson.

Banking on the fact that media stocks are “signaling cloudy skies ahead,” Nathanson contends that ongoing inflationary concerns continue to significantly reduce TV and digital advertising revenue forecasts. As a result, the firm is downgrading Paramount Global shares to “underperform” and cutting the the media company’s share price target to $18 from $30.

Michael Nathanson

“As we have consistently said, we have difficulty looking at [direct-to-consumer] revenue and investments in a silo even with execution of its broader playbook and the continued momentum at Paramount+ from its breadth of content (sports, kids, general entertainment and news),” Nathanson wrote in a note to clients.

The analyst said he believes that the growing risk of advertising decelerating further puts additional pressure on Paramount’s ability to grow pre-tax earnings and free cash flow to match prior levels or see any evidence of this improvement for the foreseeable future.

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Nathanson is maintaining a “market perform” rating for his remaining media/entertainment coverage, which includes Disney, AMC Networks, Netflix, Cinemark and Warner Bros. Discovery. He has an “outperform” ranking for Fox Entertainment.

“We are not fully factoring in this recession scenario into our company models, as we believe it is too early for us to call the timing and severity of a recession,” Nathanson wrote. “Nevertheless, the early signs of slowing advertising demand from the digital companies as well as traditional media suggests we are a lot closer to a more material slowdown.”

CFO: Paramount Readying ‘SkyShowtime’ SVOD Launch in Europe

Paramount Global is set to launch SkyShowtime, a joint venture subscription streaming service with Comcast, next month in select European countries, excluding the U.K., Ireland, Germany and Italy — all markets currently covered by Sky TV. Sky will be offering Paramount+ as an add-on service to subscribers.

Speaking May 19 on the MoffettNathanson Media Summit, Paramount Global CFO Naveen Chopra said the service would target 20 countries and 90 million homes featuring content from Universal Pictures, Paramount, Showtime, Sky and Nickelodeon.

Paramount Global CFO Naveen Chopra

“It’s a very powerful content offering when you stitch those two things together,” Chopra said. “And one of the reasons that we entered into that JV is because it allows us to address some of these markets where it doesn’t make sense to do so on a pure [owner/operator] basis.”

The CFO said the JV afforded both Paramount and Comcast to explore new streaming markets that don’t have the requisite scale to support a singular service and returns on investment. In some cases, Chopra said the economic structure of how content is made available in those markets makes it challenging to invest too aggressively from a streaming perspective, considering the availability of free over-the-air content from third-party competitors.

“Every market is a little bit different … so we like that [JV] model in certain situations,” he said.

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Chopra said SkyShowtime isn’t the first streaming JV for Paramount, which previously launched Viacom 18, an ad-supported platform in India with media giant Reliance. The platform is now called Voot, accessed by 100 million users, with plans to launch a branded SVOD service.

“With Reliance’s involvement, there will be great local content, unrivaled distribution capabilities,” Chopra said. “You don’t really bet against Reliance in the Indian market. And for us, we’re able to participate without investing any incremental capital. So, for the skeptics, I think it is a very smart way to plan ahead.”

Disney Executives Expect Most Disney+ Subs to Choose Ad-Supported Option

With Disney planning to launch a less-expensive, ad-supported subscription option for Disney+ later this year, questions about the pending plan featured prominently May 18 for Disney CFO Christine McCarthy and Rita Ferro, president of Disney advertising sales and partnerships, at the MoffettNathanson Annual Media & Communications Summit.

With Disney expecting to operate its branded SVOD platform in 150 markets by the yearend, McCarthy reiterated management confidence that Disney+ could reach 230 million to 260 million global subscribers by the end of fiscal-year 2024. The service ended the most-recent quarter with almost 138 million subs — up from nearly 104 million subs in the previous-year period.

Christine McCarthy

“We still expect a strong second half [2022] of subscribers, because we have two things going on: We have a lot of great content coming [to the platform] … and we were also launching in several new international markets,” McCarthy said.

Ferro, who has been tasked with mining incremental revenue from pending Disney+ ad-supported subscribers, said the company internally has been strategizing about an ad-supported option since the SVOD platform launched in late 2019. To help sort through the challenges of an ad-supported plan, Ferro said the company looked no further than Hulu, which Disney owns and operates, with Comcast as a minority stake holder.

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“Hulu was the first … AVOD platform. They had 14 years’ experience in this space,” Ferro said. “Since we took operational control of Hulu, we’ve doubled the ad revenue, [and] we’ve doubled the number of advertisers.”

Rita Ferro

Hulu ended the fiscal period with 41.4 million SVOD subs, of which upwards of 66% subscribe to the ad-supported $6.99 monthly plan, with the rest opting for the $12.99 ad-free plan, according to Ferro.

Disney has not disclosed pricing for the ad-supported Disney+ option.

“We expect about the same percentage [of ad-supported subs] for both Disney+ and Hulu, just based on the experience curve that we’ve witnessed,” Ferro said. “We do expect there to be a premium from that [Disney+] advertising that will enhance the [average revenue per user]. So, we feel really feel good about this opportunity.”

Ferro said the Disney+ ad-supported plan would include about four minutes of commercials per hour (which is less than on Hulu) and include children’s programming, although the user data among that demo would not be collected, unlike other age groups. Targeted ads would differ between episodic content and feature-length movies.

“We know that the movies are the reasons people come to the platform and movies have a different ad load … and different ad breaks,” Ferro said. “We want to start slow, and so we’re not going to just start with 15-second and 30-second spots, but we’ll evolve to a full suite of ad products as we learn and understand how people come online and use the platform.”

CEO: Comcast Added 1 Million Broadband Subs Annually for Past 15 Years

A silver lining to pay-TV operators in the burgeoning over-the-top video ecosystem has been the the requisite need for high-speed Internet to stream Netflix, Hulu, Disney+ and Peacock into homes and on portable devices.

Comcast, the largest cable TV operator in the country, has seen its pay-TV subscriber base hemorrhage members — more than 1.5 million in 2020. At the same time, the cabler has added record numbers of broadband subs — 461,000 in the first quarter, ended March 31. It ended the period with more than 31 million broadband subs, compared with 19.3 million video subs.

Comcast Cable CEO Dave Watson

Speaking May 12 on the virtual MoffettNathanson 8th Annual Media & Communications Summit,  Dave Watson, CEO of Comcast Cable, said the company has added more than 1 million high-speed Internet subs per year for the past 15 years — despite having 40% of its customer footprint beset with competing services.

“It’s a very competitive environment,” Watson said, adding that offering a variety of broadband options, including data speeds, to consumers helps.

“One of the things missed is that yes, most of [our] customers are 200 megabits and above, but we have a wide variety of options,” he said. “And we’ll compete in every segment we go up against.”

Watson said the $3.2 billion in broadband stimulus from the CARES Act available today for the first time for households affected by the pandemic would not have a material impact on Comcast’s connectivity business going forward.

The “Emergency Broadband Benefit” is a federal government program designed to help eligible households pay for higher speed Internet service during the COVID-19 crisis. The program could compete with Comcast’s signature digital equity initiative — Internet Essentials — the nation’s largest broadband adoption program. In 10 years, Comcast claims it has helped connect 10 million low-income Americans to high-speed internet at home, most for the very first time.

“We’re excited and have teams ready to take orders [for monthly service as low as $9.99, which includes a modem],” he said, adding that Comcast has redoubled efforts keeping public schools and libraries connected with broadband.

“We think it’s a good opportunity as well,” Watson said. “We’ll go where the customer wants to go.”

Nathanson: 17-Day Theatrical Window a ‘Dangerous Precedent’

With the coronavirus pandemic shuttering movie theaters, studios have slowly embraced premium VOD and releasing lesser titles early into digital retail channels. When Universal Pictures and AMC Theatres announced plans to shrink the traditional 90-day theatrical window to 17 days for new-release movies, the studio business model was thrown on its ear.

Perennial box office champion Disney — a long-time champion of the traditional theatrical window — broke ranks announcing it would bypass theaters and offer live-action Mulan to consumers in the home next month.

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“We were not surprised by Mulan. We thought [the movie] would go SVOD direct,” Michael Nathanson, analyst with MoffitNathanson, said Aug. 20 on the DEG: The Digital Entertainment Group Mid-Year 2020 Digital Media Entertainment Report webcast. “We’ve speculated changing the theatrical window for years, and here we’re seeing it happen in real time. It’s been a year of experimentation.”

Nathanson said the theatrical business has been Disney’s domain for years (64% of all industry pre-tax earnings in 2019, according to Nathanson), and CEO Bob Chapek’s decision to alter traditional distribution models will “ripple” through the industry (including home video) for years to come. The analyst contends the country has too many movie screens operating under current market conditions.

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“The number [of screens] has to fall,” he said in response to the slate of original movies moving to SVOD and other digital channels. The analyst said that trend will accelerate as studios and their media parents roll out digital distribution platforms such as HBO Max, Peacock and Disney+.

Nathanson said he believes Disney has no plans to abandon the theatrical window altogether since the studio makes money ($1.4 billion operating profit) on most of its major releases at the box office. And theatrical releases often inspire amusement park rides and consumer goods.

“Disney is not all-in [on shrinking the window],” Nathanson said, adding he never expected the window to shrink below 30 days.

“We were shocked at AMC’s deal,” he said. “We think it’s a very dangerous precedent.”

The analyst said that when analyzing the percentage of box office revenue in the 90-day window, upwards of 30% of most $100 million movies’ box office is generated beyond 17 days.

“It didn’t make sense to us to cannibalize days 17 to 30,” he said. “We’re still puzzled by that decision to go to the shorter timeframe.”

He said much of the economics will be determined by how much Universal charges for the home video releases, but said that at the end of the day it will be a “bad outcome” for exhibitors.

Indeed, despite a saturation of movie screens, rising SVOD, AVOD and digital distribution for non-blockbuster movies has left plenty of opportunity for the traditional 90-day window, according to Nathanson.

“We are the most over-screened country in the world,” he said. “We don’t understand why we won’t see a reduction in screens first. We’ve been waiting for changes in the theatrical business for some time. And this crisis has really escalated behavior by some media companies that feel they have the green light to experiment.”

Analyst: AVOD ‘Under Appreciated’ Market Dynamic

While the growth of subscription streaming video services led by Netflix has dominated home entertainment headlines over the years, growth of ad-supported VOD platforms still remains a lurking presence, according to analyst Michael Nathanson with MoffettNathanson in New York.

Speaking Aug. 20 on the DEG: The Digital Entertainment Group Mid-Year 2020 Digital Media Entertainment Report webcast, Nathanson said during the first three months of the coronavirus pandemic streaming video consumption in the United States increased 86% from the previous-year period — driven by Netflix with 32% market share. Nathanson said that among the 28% of streaming services other than competitors Amazon Prime Video and Disney+, ad-supported VOD is gaining the most traction among consumers.

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Major AVOD services include ViacomCBS’s Pluto TV, Disney’s Hulu, Fox Corp.’s Tubi, The Roku Channel, Redbox TV, IMDb TV, Peacock and Shout! TV, among others.

“That 28% of streaming minutes is where we think the streaming wars are actually happening,” Nathanson said. Calling the ongoing COVID-19 pandemic a “once-in-a-lifetime” moment for SVOD, underscored by Netflix adding as many new subscribers in the first half of the year than it did in 2019, Nathanson said AVOD represents a cost-efficient alternative.

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“If you don’t think you want to get into the streaming wars and chase Disney and Netflix down a rabbit hole of spending, you can have advertisers underwrite the cost of content [via AVOD],” he said. “We think this is a place where [media] companies that don’t want to play in the streaming wars, but have content libraries looking for a home will play the game.”

Nathanson projects a quadrupling of revenue for AVOD over the next four years as traditional linear pay-TV  consumption falls and content holders look for alternative distribution channels outside of SVOD. The analyst believes AVOD and other forms of digital distribution will account for 75% of all ad spending by 2024 as linear TV consumption declines and broadcasters move away from original content spending.

“It’s pretty much going to be a digital-only world,” Nathanson said.

Analyst: Apple TV+ Should ‘Reconsider’ Business Model

Apple TV+ may have been the first of several big-name subscription streaming video services (Disney+, HBO Max, Peacock) to take on Netflix, Amazon Prime Video and Hulu, but its market penetration continues to lag, according to new data from Wall Street analyst MoffettNathanson.

Citing an online quarterly survey of 8,500 homes, the New York-based research firm found that just 7% of respondents used the $4.99 monthly service, that’s down from 8% in the previous survey in May.

By comparison, 73% of respondents used Netflix, which was up 1%, with Prime Video up 1% as well at 52%. Disney-owned Hulu use was unchanged at 36%, while Disney+ increased to 28% (from 27%).

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“The Apple TV Plus data points should force Apple to reconsider their [SVOD] strategies and options at this point,” Michael Nathanson wrote in a note.

Apple TV+ is currently included for free (for 12 months) with the purchase of any Apple hardware product, including iPhone, iPad, iPod Touch and Mac desktop computers. Disney+, which has offered Verizon subscribers a free year of service, saw the number of telecom users decline 18% in the quarter.

Nathanson contends much of the Disney+ shrinkage could be attributed to the lack of new episodes of original series “The Mandalorian” — despite the July 3 premiere of the Hamilton movie.

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“In short, both services are in danger of losing momentum during the current production shutdown,” Nathanson wrote.

Regardless, the analyst, who is bullish on Netflix, believes the SVOD pioneer can add 30 million subs worldwide in 2020. Motivating force behind SVOD growth: pay-TV costs. Nathanson found that 57% of Netflix subs opted for SVOD due to the exorbitant monthly cable bill. Data points reflected by Prime Video (59%), Hulu (56%) and Disney+ (49%).

Netflix reports second-quarter fiscal results at market close today.

Comcast Rethinking OTT Opposition?

NEWS ANALYSIS – Comcast’s surprise $30.9 billion bid last month for British satellite TV operator Sky may be more than an effort to thwart Disney’s global ambitions. It could signal that the country’s largest cable operator is finally coming to terms with over-the-top video.

In December, Disney announced it would acquire select 21st Century Fox assets, including Sky, for more than $52 billion.

To be sure, Comcast CEO Brian Roberts said all the right things: Sky has “great people” and “capable management,” in addition to 23 million subscribers across the U.K., Italy and Germany. What he also admired is Sky’s technological innovation.

After Disney spent billions acquiring New York technology company BAMTech from MLB Advanced Media to further its branded OTT video platforms, Comcast had to reconsider its longstanding opposition to distribution channels other than linear television.

As Netflix revolutionized video distribution by creating the SVOD business model, Comcast responded with TV Everywhere, which attempted to give subscribers on-demand access to programing on digital devices. It then became the first pay-TV operator to offer transactional VOD and digital sell through of Hollywood movies.

While TV Everywhere has finally taken hold with consumers – after lengthy indifference – Netflix has more 117 million subscribers, including 53 million in the United States compared to Comcast’s 21.3 million.

At the same time, executives at Comcast Cable and NBC Universal continued to downplay OTT distribution. In a fiscal call last year, Steve Burke, CEO of NBC Universal, said that while the media company had deals with online TV services such as Sling TV, DirecTV Now, Hulu Live and YouTube TV, he doubted the platforms would make much of an impact.

“They’re off to a relatively slow start,” Burke said.

Indeed, NBC’s attempt at a standalone OTT comedy platform (SeeSo) shuttered after 18 months.

Neil Smit, former CEO of Comcast Cable, in 2016 infamously declared that he hadn’t seen an “OTT model that really hunts.” Less than a year later Smit stepped down as CEO, replaced by company veteran Dave Watson, whose stance on OTT is only slightly changed from his predecessor’s.

But opinions can change in the face of market reality.

NBC, working with Roku, announced the launch of a reality TV streaming service in the U.K. Dubbed, “hayu,” the service offers more than 5,000 episodes of U.S. and British reality TV shows, including “Keeping Up with the Kardashians,” and spin-off, “Life of Kylie,” in addition to “The Real Housewives” and “Million Dollar Listing” franchises.

“[Comcast’s purchase of] Sky brings with it a trove of exclusive content and rights that could be the basis of an OTT service with a genuine moat, capable of rivaling Netflix itself,” analyst Craig Moffett with MoffettNathanson Research wrote in a March 12 note.

Indeed, while Comcast CEO Roberts has embraced Netflix to the point of offering it seamlessly to cable subscribers, he understands well enough that the SVOD pioneer has morphed into much more than global distributor.

“One can assume that Comcast believes that the combination of Sky’s and NBC Universal’s proprietary content will be enough of a deterrent to ensure that the margins available to an OTT provider don’t simply get competed away,” Moffett wrote.