Hollywood's 2021 Investor Forecast Outlined in Analyst Report

HBO Max WarnerMedia
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A MoffettNathanson report addresses pressure on content creators, the fallout of the coronavirus pandemic and a possible merger of Comcast's NBCUniversal with AT&T's WarnerMedia.

"In late December, we spent two days (albeit virtually this year) touring Los Angeles to get an inside update on the quickly evolving state of the TV and film industries," MoffettNathanson analyst Michael Nathanson wrote in a Tuesday report, entitled "Our Virtual Visit to an Altered Universe."

In it, he covered Warner Bros.' 2021 film slate plans, the fallout of the coronavirus pandemic on Hollywood, pressure on content creators and a possible merger of Comcast's NBCUniversal with AT&T's WarnerMedia.

Nathanson isn't starting the year off with more optimism for the sector though. He reiterated his "neutral" ratings on shares of the Walt Disney Co., ViacomCBS, Discovery, AMC Networks, and exhibitor Cinemark, as well as Netflix and Roku. "Fox (price target $38) remains the sole 'buy'-rated name in our media coverage," he highlighted.

"Our thoughts about the logical combination of NBCUniversal and WarnerMedia to give the combined companies the needed scale to compete with Disney and Netflix were reinforced by other conversations across town," Nathanson wrote about his check-in with his Hollywood contacts.

He said many discussions have focused on "further roll-ups of the smaller studios" via deals. "While Lionsgate is a frequently discussed takeover candidate, it was not among the companies discussed this year," he noted. "MGM is the one traditional studio most expect to get acquired eventually only if it was finally willing to sell (this was before recent press reports the company is exploring strategic options)."

Added Nathanson: "Sony Pictures Entertainment also is discussed as a strong candidate for consolidation, but will likely still look to exploit its unique position as an independent not tied to any direct-to-consumer platform with its upcoming pay 1 deal and licensing to external direct-to-consumer platforms that need a bevy of content. Additionally, Sony’s parent seems to lack interest in selling, which has historically made a deal tough."

Another "overarching theme" from his meetings was how "the shift to streaming has been poor value transfer for Hollywood creatives and middlemen," the Wall Street analyst highlighted. "Massive media entities control the pipes through which content is self-produced and distributed, reaping more benefits than the creators and middlemen. In the traditional distribution models, box office revenues and television ratings were clear indicators of success (or failure), ensuring talent was properly compensated for their work. On the film side, movies going to streaming services day-and-date immediately cannibalizes the box office, negatively impacting downstream revenues and limiting profit participation for creators while benefiting media companies in the form of direct-t0-consumer subscriber growth and retention. For episodic content, a severe lack of disclosure around user engagement is leaving creators in the dark while shows living on streaming in perpetuity eliminates backend compensation."

And some giants, like Comcast, AT&T and Apple, "are carving out a greater share of the upside by using owned and operated streaming services to drive connectivity plans and hardware sales," meaning sector companies’ metrics for success "are becoming more divergent from creators’, making it difficult to align economic interests."

With premiums in cost-plus production models falling from 140 percent of content costs several years ago to 110-120 percent today, according to Nathanson, "this limits the margin for middleman studios producing content for streaming platforms, making the 'arms dealer' approach less appealing than in the past," he argued. "Nimble independent studios are able to operate at these levels by right-sizing production and overheads."

While traditional film release models are under pressure amid the streaming shift, tentpole films "will still be best served through traditional theatrical release, with slightly shorter home video and pay-1 windows, while all other film releases will be evaluated on a case-by-case basis using a new set of tools," Nathanson suggested in his report.

"To no surprise," he found Hollywood "abuzz over the WarnerMedia move to shift its full 2021 theatrical slate to day-and-date with HBO Max." While the analyst noted "a full spectrum of views on the implications of this move longer-term, there was a clear unanimity about how poorly the process was handled and the immediate and likely expensive need to mend relationships." Explained Nathanson: "The crux of the problem revolves around how WarnerMedia went about announcing the shift without properly informing key creative and financial partners. While early notification would have meant inevitable leaks in the press, that seems like a small price to pay to contain the damage that followed. Some Hollywood insiders believe this indelicate handling of the news potentially caused irreparable damage to relationships with many in the content creator industry."

Interestingly though, the analyst mentioned "less pushback on the business rationale for WarnerMedia to go all-in on HBO Max, even if it means blowing up their own economics." While noting that long-established relationships and money count, he concluded: "While this might change, the immediate reaction across Hollywood is that Warner Bros. went from being the most creative-friendly studio to the bottom of the list."

The MoffettNathanson analyst also discussed the state of the streaming wars, arguing that "there is a clear hierarchy with Netflix and Disney at the top of the food chain in terms of how quickly they can move and how much they spend on projects." Their scale and reach gives them "a unique advantage, as talent is motivated to create content that is still widely seen and talked about," he argued.

And although COVID-19 is likely to have a lasting impact across the sector, Nathanson argued that "there is pent-up demand for live experiences coming out of this pandemic." He added: "As a vaccine gets widely distributed, there is an expected 'Roaring 20s'-style demand for concerts, theme parks and even theaters as early as the second half of 2021 and into 2022. This may impact streaming trends in the short term as people flock to get out of their homes. Yet in the long-term, video consumption is set to increasingly move to subscription VOD platforms and away from the traditional media ecosystem."