Amid speculation about whether the market is finally oversaturated, Wall Street does not expect major streaming services to cut back on content spending — at least in the near future.
After losing 200,000 subscribers, reporting slower revenue growth and giving guidance that it’s expecting to lose an additional 2 million subscribers next quarter, Netflix CFO Spencer Neumann said April 19 that the streaming giant would be “pulling back” on “spend growth across both content and non-content spend.” That only fueled chatter that Hollywood — after years of fueling “Peak TV” through a streaming spending arms race — will finally undergo a course correction of belt-tightening ahead.
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But despite Netflix’s stock stumble, the streaming giant is expected to spend more this year than in years past. And so are many others. But if more streaming platforms see slowing subscriber growth, that trajectory is less clear. “Is this next 12 months as good as it ever gets in Hollywood?” asked Rich Greenfield, general partner at LightShed Ventures. “Is this the best of times, and it’s downhill from here?”
But so far, it’s too soon to tell. In December, Morgan Stanley forecast that the top spending Hollywood giants — Disney, Comcast, Warner Bros. Discovery, Amazon, Netflix, Paramount, Fox, Apple, Lionsgate and AMC Networks — would collectively spend north of $140 billion across entertainment and sports content in 2022.
This includes Disney planning to spend $33 billion in its fiscal 2022 year, an $8 billion increase from the previous year, with the conglomerate issuing guidance that Disney+ won’t break even until fiscal 2024. “Where that [spend is] going is primarily into content for our Direct-to-Consumer platforms, and our other platforms, including some Linear,” said Disney CFO Christine McCarthy at a Morgan Stanley conference in March, adding: “About $11 billion of that, about a third, is designated for sports rights.”
NBCUniversal has pledged to double its spending on Peacock in 2022, allocating more than $3 billion to streaming content. “You got to be able to make money and you’ve got to have a road map to get there, and we believe we can do that,” Comcast CEO Brian Roberts told a Morgan Stanley investor conference in March. “We think we’re positioned, as I just said. But we have about $20 billion a year in content spend between Sky and NBC, and we ought to — in addition to some increase in that, we ought to be able to repurpose a lot of that toward helping Peacock make money.”
Warner Bros. Discovery positions itself as somewhat of an anomaly, with new CEO David Zaslav pledging not to overspend on content and quickly shutting down the fledgling CNN+, which had sunk costs of several hundreds of millions before it launched in March. That balancing act was echoed by CFO Gunnar Wiedenfels when the company disclosed its earnings April 26.
“I’m working very closely with our creative and financial leadership teams to examine the totality of our $23 billion plus of annual content spend to analyze the ROI of each dollar spent,” said Wiedenfels on the earnings call. “The goal of this exercise is not to identify ways to reduce what we spend on content, but to harmonize processes and analytics, so as to be more consistent and efficient in how we allocate our content spend across the entire global portfolio to optimize returns.”
That strategy has yet to fully materialize as the new leadership team takes over the merged Warner Bros. Discovery. “Will reallocating linear content spending impact the cable network revenue drivers? Will the new company sell more internally to HBO Max, which will hurt Warner Bros. TV’s high-margin third-party licensing revenues?” asked a team of analysts at research firm MoffettNathanson in an April 26 report.
At Netflix, the company said it will cut back on spending as a way to keep its margins in check after slowed performance. But it’s only cutting back on “spend growth,” as in increases to the budget, rather than the budget itself. Netflix spent $17 billion on content in its fiscal year 2021.
When questioned by a JP Morgan & Chase analyst about spending “around $18 billion” on content this year, Netflix co-CEO Ted Sarandos said investment will keep up. “I think we’ve got to continue to invest in the content, both in the quality and the variety of the content. And we will continue to grow the content spend relative to prior years,” Sarandos noted.
Further, because of the life cycle for production expenses — in which much of the money has already been spent — the only way to cut back on content costs this year may be to delay the release of some already completed projects, so that the expense is not immediately realized, said Moody’s analyst Neil Begley.
And while the move is intended to offset subscriber loss, analysts say that loss cannot just be attributed to the streaming service losing its touch. In the most recent quarter, Netflix was contending with the loss of 700,000 subscribers due to its suspension of service in Russia, as well as potential churn from its recent price tier increases — what Begley sees as a major issue for subscriber retention.
If subscriber growth continues to stagnate, implying that the streaming space has run up against a wall, that will be of concern. But the second quarter is typically the weakest of the year for Netflix, so its prognosis and that of others will likely be decided later on. “I think that we need to wait and see what the third and fourth quarter look like before they take any drastic moves,” Begley said. “They still sound pretty confident that they are going to grow their subscribers this year.”
However, there’s reason to believe many streaming platforms will continue to increase spending, as the need to acquire franchises becomes more of a competitive necessity, said Peter Csathy, chairman of advisory firm CreaTV Media. That may mean more streaming players adopt a strategy of “less is more,” but still spend the big bucks to attract big names. Csathy adds, “It’s increasingly important to get in that game and spend your dollars there.”
