Did Hollywood Give Up On Its Legacy Golden Geese Too Soon?

After a disastrous week that saw its shares drop 37%, Netflix is in full damage-control mode—cutting spending and planned programming, trying to retain anxious employees with underwater stock options, and figuring out how to both reduce password freeloaders and launch an ad-based tier.

For just about every other media company in streaming, however, there’s a much bigger question: did they jump into online video too deep, too fast? Should they have done more to protect their profitable-but-declining legacy operations in broadcast and cable for as long as possible, rather than shifting their top new shows into the web?

It’s a question particularly sharpened by the other news of the week—the decision by Warner Bros. Discovery to kill off the just-launched subscription service CNN+ as of the end of this week. CNN+ was supposed to be CNN’s future as its cable birthplace continues to decay. So now what? Investors are trying to figure that out.

“You gotta look for good management,” said long-time tech investor Morris Mark of Mark Asset Management about WBD during a Monday CNBC appearance. “They have a lot of legacy businesses and those businesses aren’t going away. Cutting CNN+ was a gimme, and something they had to do. We’re looking at cash flow, looking at the prospects for the business. We want to be mindful of a business environment that doesn’t show any near-term prospect of turning up.”

We’ll know a bit more about the state of streaming over the next couple of weeks, as most other media companies will be reporting their own quarterly progress. We’ve already heard about HBO Max, whose last quarter as part of AT&T generated a combined 3 million additional subscribers for HBO Max and HBO.

And Tuesday morning, HBO Max’s new boss, David Zaslav used WBD’s first earnings report (technically featuring only Discovery Communications’ last quarter) to declare that his company “will not overspend to drive subscriber growth.” He went on to promise the company would “invest in scale smartly” and won't try “to win the direct-to-consumer spending war.”

This week will feature earnings reports from most of the tech titans, including both Amazon and Apple, neither of which is likely to say much about their respective streaming operations/side hustles, given the much bigger questions they face, such as production issues in pandemic-clogged Shanghai and market losses in Ukraine and Russia.

That said, you can bet Oscar Best Picture winner CODA will get at least one more trip around the highlight reel before heading to Apple TV+’s back library.

And if Apple adds the NFL Sunday Ticket package of games to go with its precedent-setting Friday Night Baseball package with MLB, as the latest reports suggest is likely, you can bet TV+ will finally get some additional attention.

As for everyone else, we still have earnings reports due for the quarter, beginning with Comcast (Peacock/Pluto) later this week, followed by Disney (Disney+, Hulu, ESPN+), Paramount Global (Paramount+), Fox (Tubi, Fox Nation) and some smaller fish.

The question the non-titans must all address is how fast do they intend to move their notable remaining broadcast and cable shows to a streaming-first footing, given the evaporation of that sweet, sweet Wall Street premium on shares for streaming initiatives

As early as three weeks ago, Disney signaled it was still all-in on streaming, announcing that reality competition series Dancing With The Stars was moving to Disney+ for its 31st season, after 16 years on ABC.

Does that, and a lot of other explicit moves to shift flagship content to streaming outlets, still look smart? Is there any way Disney considers putting ABC’s newest hit, Abbott Elementary, on any of its streaming services first?

To be sure, there are plenty of signs of continuing erosion in the traditional cable bundle. though the rate of decline eased in recent months. Nonetheless, The Trade Desk reports that, of those who still subscribe to cable, 44% plan to end or reduce their package in the next year.

And though the bell cows of Hollywood—major movie releases—are once again lumbering onto screens near you, entire genres still aren’t attracting audiences. A shakeout there continues, even if the occasional Spider-Man sequel hits a home run.

With the theater industry’s annual CinemaCon gathering this week, there will be plenty of talk about the future place of traditional theatrical releases, whose nine-figure marketing campaigns helped drive awareness and interest throughout the rest of a film’s subsequent distribution windows.

But even some of 2021’s highest-grossing films — franchise tentpoles No Time to Die and F9, for example — likely didn’t make back their prodigious production and marketing costs. That’s not a sustainable situation.

Add to that the functional closing of two of the largest international markets — China and Russia — and shortening of theatrical exclusive windows to 45 days or less, and it’s hard to see even a revived theatrical window being as significant to industry bottom lines as it was for a century.

So, sooner or later, we’re getting to streaming mostly. But maybe it should have been later.

Media companies were enticed by that delicious Wall Street multiple for streaming, but should they have jumped in so hard over the past three years? In a research note Thursday, the analysts at LightShed Partners asked if it was “time to sound the SVOD alarm and reverse course to arms dealers?”

That means: make like Sony, the lone major holdout in Hollywood’s streaming stampede. Sony even sold off its holdings in AVOD service Crackle, and started signing a remarkable array of co-production deals with other media companies desperate for content.

“Unlike the bundled linear TV world, where just enough content was the winning strategy, in the SVOD world, you need a constant supply of fresh content to attract new subscribers and keep subscribers because churning off is as easy as clicking a button,” LightShed analysts Richard Greenfield, Brandon Ross and Mark Kelley wrote. “In turn, being an arms dealer has become an incredible business for Sony, not to mention talent agencies such as Endeavor.”

In a separate note last week, they wrote about the suddenly hard reality now facing owners of all the streaming services: “It is becoming clear that the profitability of SVOD may not be nearly as compelling as investors hoped and certainly nowhere near as profitable as the legacy businesses that streaming is replacing.”

So what to do? Having jumped into the deep end, here are some strategies we’re likely to see:

• Reduce program spending for streaming. Netflix has signaled it’s backing off its vast spending plan. HBO Max, under a new management team that’s facing $55 billion in inherited debt, is likely to be more judicious too.

• Slow the shift from legacy outlets to streaming. That doesn’t mean stop the migration, but slow it down, eking as much revenue as possible from the older platforms for the near term. There’s no longer a good argument for forcing a legacy platform collapse any sooner than absolutely necessary.

• Make more impactful shows. It’s hard to predict hits, especially these days, but the interest in pure filler content is declining fast in an era of broad choices.

• Consider the Arms Dealer approach. Sure, keep making content, but maybe try the Sony way on some projects with co-financing, split rights and other approaches that reduce costs while providing a chance to get profitable. “While it feels hard to fathom abandoning streaming ambitions with so much capital committed to original streaming programming over the next several years, we wonder if that is the hard decision management teams such as NBC Universal and Paramount should make,” LightShed wrote.

• Define your service. Not everyone can be a general site with something for just about everyone. Perhaps it’s time for more specialization, or at least less gooey branding. Being everything for everybody in the streaming era can be ruinously and unsustainably expensive. For Disney, that might mean selling Hulu to Comcast instead of buying it, then adding family-friendly general-interest shows to Disney+, and selling other content as an arms dealer.

It’s a complicated time, no doubt. To his credit, WBD’s Zaslav made a strong decision to cut costs on a service that wouldn’t make money for probably years to come. It’s possible other management teams are going to need to reconsider their prospects going forward.

All of which brings us back to one last pair of related strategies: bundling with other companies’ services in something that looks a lot like, yes, cable TV… or just merging with another mid-size company. The fearsome antitrust hawks at the U.S. Department of Justice and Federal Trade Commission have already waved on the Amazon-MGM deal, and the WBD merger. Would they block, say, a Comcast-Paramount deal?

And while investors aren’t giving extra credit to media companies for streaming initiatives, they can be won back by smart management making tough decisions in a more complex environment.

“We don’t want to give up on the great names,” Mark said. “I don’t think that would be too smart.”