Media companies are trying to rein in their spending on content to make their streaming services profitable. An ongoing Hollywood writers' strike may lead them to cut back even more.
Disney (DIS) CFO Christine McCarthy said at MoffettNathanson's Inaugural Technology, Media and Telecom conference on Wednesday that the entertainment giant's content spending will hit around $30 billion this year, but she warned the strike could impact spending for the remainder of the fiscal year: "We'll update that if it's appropriate," she said.
The comments come as Disney aims to cut $5.5 billion in costs, $3 billion of which stems from savings on content.
Meanwhile, Netflix's (NFLX) content spending was already down in the first quarter of this year from the year-earlier period. While the company expects total spending for the year to come in flat at $17 billion, the writers' strike adds further risks as some of the streamer's top-performing shows, including "Stranger Things" and "Cobra Kai," have paused production in the face of the shutdown.
Earlier this month, Hollywood writers began a strike in protest of higher wages and other demands amid the streaming boom. That set off a production shutdown across the entire industry.
While Moody's has warned that some media companies could see credit ratings suffer as a result of the strike, others point out that cutting content costs is a good thing for the industry as investors increasingly focus on profitability.
"A production work stoppage or even a slowdown that simply utilizes scripts on-hand could lead to far less content being delivered to subscription streaming services in 2H 2023," Rich Greenfield, analyst at Lightshed Partners, wrote in a note last month. "If content is not delivered to a streaming service, the expense is not borne by the streamer. In turn, multi-billion dollar operating losses could come in significantly better than expected with free cash flow also ending up being far greater than expected (remember how Netflix free cash flow came in far better than expected during the pandemic)."
Netflix's reduction in spending in the first quarter — $2.5 billion this year, down from $3.6 billion a year ago— helped improve overall free cash flow, which hit $2.1 billion in Q1 compared to just $802 million in the year-ago period. The company also raised its full-year free cash flow projection to "at least $3.5 billion," up from the previous $3 billion.
Strike poses other risks
That doesn't mean the strike is necessarily good for media companies.
Paramount (PARA) CEO Bob Bakish said on the company's latest earnings call that the impact of the strike depends on how long it goes on.
"In terms of financial impact, it really ultimately depends on duration of strike," he said at the time. "But at this point, we think it's probably slightly dilutive to revenue, flat on [operating income before appreciation and amortization] and accretive [to cash spend.]"
JPMorgan analyst Doug Anmuth wrote in a note on Tuesday that Netflix could be weighing a delay of its password sharing crackdown in the US amid the strike — a decision that will likely impact revenue, subscribers, and the growth of its ad-supported tier.
"Paid sharing is effectively a price increase, w/paid members sharing their password receiving less value for the same price, or potentially paying more to add an extra member. And for borrowers who currently do not pay, paid sharing means either activating their own subscription or being added as an extra member, or losing access to NFLX," Anmuth said.
As a result, he argued, "It’s possible that NFLX may not like the optics of implementing paid sharing while 11,500 WGA writers are on strike, w/production suspended or writing paused across at least a handful of NFLX titles including Stranger Things S5 & Emily in Paris S4, among others."
Netflix, which did not immediately respond to Yahoo Finance's request for comment on the impending rollout, previously said 100 million users have shared accounts. Anmuth estimated at least 30 million within that bucket could be converted to paying users whether as add-on members or new subscribers.
Therefore, an ongoing strike "could further postpone revenue & subscriber acceleration."
Anmuth also warned of a ripple effect to Netflix's recently launched ad-supported tier, writing: "Ultimately, advertising is closely tied to paid sharing, w/borrowers likely viewing a $6.99 Standard w/Ads plan as a compelling low-priced option. Therefore, ramp of the ad tier is also delayed if paid sharing is delayed."
Advertising, already under pressure amid macroeconomic headwinds, has been further complicated by the ongoing strike.
As Anmuth pointed out, Netflix's first-ever Upfront presentation shifted from an in-person event to a virtual one. The analyst surmised the shift was "tied to the risk of heavy picketing & protesting at an in-person event, as well as less availability of star talent." Disney, Warner Bros. Discovery (WBD) and NBCUniversal (CMCSA) also dealt with more subdued Upfront presentations amid a lack of acting and writing talent.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected]
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