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2015 may well be remembered as the year cord-cutting millennials wreaked havoc on Wall Street.
Investors had grown used to reaping the rewards of big entertainment stocks that regularly outpaced the broader market. But this past summer, those Hollywood stalwarts fell victim to a wave of near-panic selling on concerns that digital disruption would eviscerate their bottom lines.
Media giant Viacom reported weaker cable networks profit figures for its latest fiscal year, and Walt Disney and others acknowledged subscriber declines, fueling worries that consumers are cutting the cable cord and tapping the Internet for entertainment. The mad scramble on trading floors left the seven big entertainment conglomerates — Disney, Viacom, CBS Corp., Time Warner, 21st Century Fox, Sony Corp. and NBCUniversal owner Comcast — some $50 billion poorer this year.
The question is: Can Hollywood stage a big comeback? Some say not too soon if the industry is overly reliant on traditional TV business models and doesn’t keep step with the industry’s streaming future and the need to maximize audiences and financial results across platforms. Some on Wall Street have, for example, said Hollywood players must weigh the shorter-term benefits of added revenue from licensing TV shows to streaming services against the risk of losing pay TV subscribers longer-term.
“These stocks tend to trade in long positive/negative sentiment cycles,” Cowen analyst Doug Creutz tells THR. “I expect more generally underwhelming performance from the group.”
Others are also predicting more challenges ahead. “We entered 2015 with a negative bias on TV businesses, and the respective stocks, which only got worse as the year went on,” said Sanford C. Bernstein analyst Todd Juenger in an end-of-year research note. “TV revenues will eventually begin to decline — not decelerate, decline. Ouch.”
The trend of people canceling pay TV subscriptions to embrace the likes of Netflix, Amazon, Hulu and other streaming video services has spooked investors. A recent industry report from Pew Research said 15 percent of Americans have already cut the cord — a number, some observers contend, might be too high.
But, any way you slice it, those fears caused a financial hangover in 2015. More than half of the top 49 media and entertainment stocks tracked by The Hollywood Reporter suffered year-over-year declines. And shares at four of Hollywood’s seven biggest conglomerates underperformed the broad Standard & Poor’s 500 stock index, which is set to finish the year roughly unchanged.
That’s been startling to Wall Street, which had come to rely on entertainment and media companies to provide steady returns. The sector has outperformed the broader market for years, even cashing in when major indices were roiled in 2011 by global economic concerns during the European debt crisis.
Analysts believe Wall Street has started to more thoroughly question the outlook for Hollywood giants’ cable network units, which make up a bulk of profits. Needham & Co. analyst Laura Martin said in a recent report that there are three issues investors are trying to assess after the recent market upheaval: “trends in revenue per content hour viewed, added costs and valuation multiple risk.”
One big event that intensified investor worries came in early August when Disney CEO Bob Iger acknowledged some subscriber losses at sports juggernaut ESPN and the company lowered its financial expectations for its cable networks unit. In the most recent fiscal year, its “media networks” segment, which includes ESPN, the Disney Channel and other networks, accounted for more than half of its $14.7 billion in operating income.
Though Iger argued that Nielsen’s estimate of a 3.2 million drop in subscribers for ESPN over the course of a year was overstated, Disney’s stock still declined more than 9 percent the following day — its worst single-day run in almost four years. Other entertainment stocks followed suit.
“The market has been discussing cord-cutting for a while. It just took the Disney announcement in August to make everyone decide they should care,” Creutz tells THR. He and others on Wall Street also cite lower ratings at various networks, slowing TV advertising revenue trends, increasing digital advertising and increased competition for programming as further concerns about the traditional TV networks business.
Juenger downgraded his ratings on the stocks of Disney and Time Warner in late August and suggested a new way of valuing Hollywood’s TV units.
“The most frequent question we hear from investors in the aftermath of the media implosion is ‘at what multiple should the sector trade?'” Juenger wrote. “We believe a whole new framework is necessary. Historical multiples are irrelevant. We believe the market is now valuing U.S. ad-supported TV businesses as structurally impaired assets.”
Entertainment stocks have recovered somewhat from the depths hit over the summer, but most are finishing 2015 below their year-end 2014 prices. Many analysts remain cautious at best.
Just as 2015 ended, Juenger called it “an awful year for media stocks,” and Jefferies analyst John Janedis wrote “there appears to be a buyers strike in the media sector.”
Among the worries that could hinder a recovery is the recent and possible further consolidation among TV operators, giving them more leverage when negotiating carriage deals with networks groups. “2016 may prove to be a year for distribution’s revenge,” wrote Benjamin Swinburne of Morgan Stanley.
Investors also worry about what Apple might be up to with its Apple TV product, which is in the midst of a radical upgrade. “Apple’s possible TV streaming service could accelerate the pace of cord-cutting,” wrote Nomura analyst Anthony DiClemente.
Naturally, all the angst about cutting the cord and defecting to online services benefited streaming-media giant Netflix, whose stock soared 144 percent in 2015 as of Tuesday’s market close, making it the top performer in the S&P 500. Fellow streamer Amazon.com, whose financials are driven by its core e-commerce business though, saw its stock rise 124 percent.
Stock markets will also be open for trading on Wednesday and a half day on Thursday, but that typically won’t change the year’s final tallies much.
Here’s how big entertainment companies and other sector players finished the year:
Viacom was the biggest loser among the major conglomerates as of Tuesday’s market close, as its stock closed in on a 44 percent drop this year amid ratings struggles at MTV, Comedy Central, Nickelodeon and elsewhere.
Disney neared a 14 percent jump, spurred by Star Wars: The Force Awakens but held back by the revelation ESPN lost 7 million subscribers in two years.
Sony — more than a year removed from a devastating computer hack — was up 21 percent.
CBS Corp. has declined 14 percent, even though CEO Leslie Moonves assures investors that the network will be a part of any bundle, no matter how skinny they get as consumers whittle at their cable and satellite bills.
Time Warner sunk 23 percent, after helping lead the sector in 2014 with a 30 percent gain.
21st Century Fox lost 28 percent amid worries about ratings at its Fox broadcast network and myriad cable channels — though the Fox News Channel remains a powerhouse.
The stock Comcast, a unique company because it combines cable distribution assets with NBCUniversal, was nearly unchanged.
Among pure-play cable networks operators, Scripps Networks Interactive (parent of HGTV, Food Network etc.) was off 26 percent, but Starz was up 11 percent and AMC Networks gained 19 percent amid speculation that both are in play for a deal.
Among pay TV providers, Dish Network was off 21 percent, but Charter Communications, which is positioning itself as a consolidator, and Cablevision Systems, which agreed to be acquired by European telecom and cable giant Altice, were up 9 percent and 58 percent, respectively.
Among the smaller studios, DreamWorks Animation fared best, rising 19 percent as the movie Home and success with TV shows helped to erase memories of Turbo and Mr. Peabody and Sherman, two money-losing films that led to a 37 percent decline in DWA’s stock last year.
Lionsgate scored $616.7 million worldwide for The Hunger Games: Mockingjay — Part 2, but the stock was up just 2 percent in 2015 as investors wonder if there might be more to come from that massive franchise (there are already theme park attractions and prequel films are rumored to be in the works).
Impressive box-office results didn’t seem to help the movie exhibition industry. Regal Entertainment was off 8 percent, Cinemark was down 5 percent and Carmike Cinemas lost 13 percent.
Imax was an exception, gaining 18 percent in 2015. The exhibitor said on Monday that The Force Awakens surpassed $100 million on its gigantic screens faster than any other film in its history.
In new media, Activision Blizzard was up 98 percent. Its video-game rivals, Electronic Arts and Take-Two Interactive Software, were up 49 percent and 28 percent, respectively.
Google restructured as a division of a company called Alphabet in 2015 and its stock was up 48 percent while rival Yahoo was down 33 percent as CEO Marissa Mayer struggles with a restructuring of her own.
In social media, Facebook rose 38 percent, but Twitter fell 37 percent as it struggles to grow amid increased competition from Snapchat and others.
Apple, the purveyor of iTunes, saw its stock gain less than 1 percent in 2015, though its value still towers over those companies laboring in traditional media. On Wednesday, Apple’s market capitalization was $602 billion, more than Disney, Time Warner, Comcast, Sony, Fox, Viacom and CBS — combined.
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