THR Illustration / Hobbit: Warner Bros. Pictures/courtesy Everett Collection. Zaslav: Santiago Felipe/Getty Images.
If the last five years were about continuing Netflix’s upward trajectory for streaming subscribers, this year begins a pivot in that approach for its rivals. While adding subscribers is always important, Disney, Warner Bros. Discovery, Paramount and NBCUniversal now find themselves envying something else Netflix has in spades: streaming profits.
Like Gollum and The One Ring to Rule Them All, or Thanos and the Infinity Stones, streaming profits have become the entertainment industry’s ultimate MacGuffin, still seemingly out of reach. Netflix now finds itself at the top of the subscription streaming heap, ending 2022 with 231 million paying subscribers and $5.6 billion in profits. Next quarter, the company is forecasting earnings of $1.6 billion, and for 2023 it expects to have operating margins of 21-22%, up from 18-20% in 2022.
The rest of the company, meanwhile, is eyeing 2024. That’s when Disney, NBCU, Paramount and WBD all say they expect — or at least hope — to achieve profits in their streaming business. But even among these legacy entertainment players, not all companies find themselves in the same situation. Nowhere is this more apparent than at David Zaslav-run WBD, which has been the target of a barrage of criticism from Hollywood for taking up to $3.5 billion in writedowns. of content, including some projects that have actually been completed.
Another part of Zaslav’s strategy was to aggressively license the Warners library. Before Amazon’s debut rings of power series last year, the tech giant struck a deal with WBD to license the original Peter Jackson trilogy, as well as the Hobbit films, making them available on the Prime Video platform. “We have a ton of content that has been sitting idle for purely fundamental reasons,” WBD Chief Financial Officer Gunnar Wiedenfels said at a Bank of America event last September. “This is a non-exclusive window (and) we view it as what we’re giving up versus the incremental revenue we generate.”
These moves, however, now seem prescient, with nearly every other space player making similar adjustments. “There is no doubt that the worst is behind WBD after a difficult merger integration period,” Wells Fargo analyst Steven Cahall wrote in a post-earnings take.
WBD executives, led by Chief Financial Officer Wiedenfels, signaled on their Feb. 23 earnings call that its DTC division will roughly break even this quarter, ahead of the combined launch of HBO Max/Discovery+ streaming. (which will be unveiled on April 12) likely requires additional marketing. and technology investments in the next quarter. Cowen analyst Doug Creutz wrote a day later that earnings from his DTC business are “improving much faster than expected.”
Other companies investing in streaming have not been so lucky. At Paramount, led by Bob Bakish, and NBCU, led by Jeff Shell, streaming losses widened last quarter to $978 million and $575 million, respectively. Executives from both companies say they expect streaming losses to peak this year (Peacock is expected to lose $3 billion in 2023).
At Disney, led by Bob Iger, things are moving in the right direction, but losses remain significant, with Disney losing $1.1 billion in its direct-to-consumer segment last quarter. That’s better than expected, and down from $1.5 billion in the prior quarter, but remains a deep hole the company needs to climb out of to become profitable in 2024. Indeed, MoffettNathanson analyst Michael Nathanson , argued after Disney’s latest earnings call that “for us, the investment case for Disney is about earnings potential in fiscal year 2025,” when he believes Disney can generate $2 billion in profits.
But before he can do that, he must continue to cut those losses. WBD, Disney and Paramount are all telling investors their plans involve cutting spending but looking at franchises (like WBD The Lord of the Rings). This would see investment in content level off or decline, and with more of that spending going to marquee properties and intellectual property, potentially leaving riskier original concepts off the table.
At Comcast, Cahall of Wells Fargo wrote in January that “we have no doubt that Peacock’s $3 billion 23 losses will peak, but media revenue might never return to 21’s $4.6 billion.” In other words, streaming won’t quite take NBCU back to the heyday of cable TV.
Meanwhile, Paramount also recently merged Showtime and Paramount+, dramatically cutting costs and focusing on franchises such as Billions And Dexter. “We expect to return the company to earnings growth in 2024,” CEO Bakish said on a Feb. 16 earnings call.
But in taking stock of the streaming giants in their hunt for Netflix-like subscribers and margins, WBD seems to have put itself in pole position. While the combined service will bring investment (JPMorgan’s Phil Cusick estimates the company will pour $400 million into the launch through both marketing and technology), the dramatic cost reduction, price hike and new launch put him in a place where he can be the first of the legacy streamers to make their way to profitability. Whether it’s good enough to replace the ATM that is the cable TV package is another story altogether.
A version of this story first appeared in the March 1 issue of The Hollywood Reporter magazine. Click here to subscribe.