Strikes, Shmikes: Q2 Will Bring a Whole Other Headache to Media Biz 

If you think a pair of strikes freezing all film and television production is all media companies have to worry about right now, think again.

With second-quarter earnings season kicking off with Netflix on Tues., July 19, the cost savings that will come from cameras not rolling might help some in terms of free cash flow in the near future, but it will surely aggravate an even bigger problem that was already making itself evident in the first quarter of the year.  

Much like in Q1, the theme this earnings season remains all about profits. It’s what’s driven all the cost-cutting — in the form of mass layoffs and canceled programming — that has already been implemented at the major media companies over the past year or so. That cost-cutting has been necessary to cover the huge losses from the streaming ventures inside most companies in the space, minus Netflix. 

But thus far, one major way these companies were able to offset those losses was with profits from their traditional TV businesses. Unfortunately, those profits are diminishing by the quarter to levels that are getting dangerously low. 

This has all been bad news for the biggest broadcast TV operators. In the first quarter, operating income from Disney’s linear TV segment fell by a whopping 35% to $1.8 billion, which was the sharpest year-over-year decline in at least three years. Comcast’s media segment saw its adjusted EBITDA sink 25% in Q1 from last year, and Paramount’s TV media biz reported a 15% decline in adjusted OIBDA during the first quarter.

These dips are being driven by a mix of key metrics. According to Wall Street analysts, the annual rate of cord-cutting hit 6.9% in Q1 of 2023, the steepest decline on record. More than two million households canceled their traditional TV plans in the quarter.  

And according to recent data from Nielsen, summer broadcast viewing was down 13% year-over-year. The top 20 shows declined an average of 9% so far, to 3.14 million viewers, compared with 3.45 million last year.  

Another troubling sign is the decline in affiliate fee revenues for some companies recently, a data point that for decades was reliably low double-digit increases. At Comcast, distribution revenue rose 4% in 2022, but that was mostly thanks to its Olympics broadcast rights. Still, that 4% jump was a steep slowdown from the nearly 19% increase in 2021. In 2022, Disney linear networks affiliate fee revenue fell about 1% from the prior year, to $18.53 billion. 

Not that every company is feeling the pain. Warner Bros. Discovery’s networks Q1 adjusted EBITDA rose 69% year-over-year, and Fox reported a modest 2.7% increase in adjusted EBITDA. 

Though those figures aren’t exactly making analysts ring the alarm just yet, they could be signs of further cracks forming in linear biz. Much of the bull case for linear TV was around the strength of sports and news. However, those arguments are looking weaker by the quarter. That's why it’s even harder to ignore the warning signs, and it is imperative that the streaming business reaches profitability to help keep the media giants afloat.  

In addition, companies such as NBCUniversal and Disney have even more to worry about as new reports of demand cooling at theme parks this summer have begun to emerge. Ever since the end of the COVID-19 pandemic, theme parks have been on an absolute tear and driving up free cash flow for Disney and NBCU. Profits from the theme parks were another way to offset the losses from streaming, but with a possible slowdown on the horizon for the theme parks, there’s even more pressure to find other ways to bring up profits.  

With TV revenue declines, a slowdown in theme parks and now a writers and actors strike disrupting production of precious content, there’s no shortage of hurdles in the way of stability for the entertainment and media industry. No matter how you look at it, time is ticking for the sector, and clear messaging is needed from the C-suite this earnings season. Investors are looking for any reason to be bearish, and it will be an uphill battle to regain investor trust and instill confidence.