Wallstreetputs

WallStreetPuts

The long bull market in the entertainment industry has seemingly come to a halt in the spring of 2022. The Entertainment Industry’s darling, Netflix, has fallen almost 60% over the past 12 months and is down 70% from its Squid Game infused high in November 2021 (source). The bulls have become bears as the market is no longer satisfied with solely focusing on streaming subscription growth. How did we get here and what comes next?

Danger Zone

Memorial Day 2022 weekend brought new heights to the theaters with its biggest box office take

ever with the release of Top Gun: Maverick (source). Hitting $160.5M over the long-weekend, Top Gun: Maverick had the benefit of a massive and traditional, red-carpet global marketing campaign by Paramount and its star, Tom Cruise. The film also benefited from strong attendance of the 35+ crowd comprising of 55% of the audience (source). The danger for the industry is that once again headlines will scream “Theaters are back” and studios will copy Paramount’s strategy with more reboots of 80s classics. It is more likely audiences will continue to pick and choose carefully going forward, in particular the over 35-year-old crowd.

Memes come to an end

The meme stock craze of 2021hit its height in June 2021 at almost $70 per share for AMC. This was a result buoyed by the reopening theaters and a string of relative successes starting with Godzilla v. Kong in March, culminating with F9: The Fast Saga in late June. The global pandemic which started in March 2020, had shut theaters tight and they would not open (at all) until November and not fully until June 2021 (source). During this time frame (March 2020 to June 2021) the stock price of the world’s largest theatrical chain, AMC, would rise from around $5 per share at (May 2020) to the ~$70 in June 2021.

Even the well-diversified portfolio of the Walt Disney Co. (theatrical films, streaming, parks, consumer products, sports) is down in 2022, with its stock dropping almost 30% in 2022, despite adding 8m new subs in Q1 2022 (source). Have finally reached and passed the peak of the entertainment business?

Too much of a good thing

John Landgraf at FX Networks first commented about “peak content” in 2015, stating there was “simply too much television”, with his thoughts on the 400 or so scripted series planned for that year, up from the 370 the year before. The “ability of everyone’s (producers/studios) ability to cut through the clutter to create real buzz” would be a problem. As with an economist’s ability to predict 5 of every 2 recessions, Landgraf is right, but just little early and his worry about confusion for viewers, is well justified. Churn has now replaced adding subscriptions as the biggest issue for streamers, as the TAM (Total Addressable Market) of one billion subscriptions now seems much smaller and companies are forced to think about how to keep customers, not just add them. Netflix in March 2022 was forecasting eventual growth to 500M sub while reporting a net loss a scant month later (source).

One solution: Both!

The present challenge for entertainment companies entering the summer of 2022, is to grow streaming and be profitable. This will require further experimentation by Hollywood with various models, pricing, and windows. Although day-and-date release were declared dead by NATO Czar John Fithian, a closer examination of studio release strategies beg to differ. Disney has been releasing some Pixar films such as Turning Red directly on Disney+ (source), while also releasing films such as Encanto to the theaters, with a 30-day window. WB (Discovery) is seemingly back to a traditional window strategy, after its day-and-date foray in 2021 which successfully spiked HBO Max subs. WBD announced that “All of these movies share one thing in common: they were all made for and can only be fully experienced on your big screens first”. The general strategy is a 45-day window, with WBD able to hold off moving films to HBO Max if it is doing “well” in the

theater. No mention were the movies being made for HBO Max specifically. Clint Eastwood’s Cry Macho, brought in a disappointing $4.4M in its opening weekend with a day-and-date release on HBO Max causing new CEO David Zaslav to dismiss this release and remark “it’s not show friends, it’s show business”. Adding to the uncertainty, Comcast CFO Tom Cavanagh declared that “flexibility that has now been brought to the movie business is making it more valuable”. Not the emphatic agreement that John Fithian was likely looking for. At the same time, further strengthening the theater-first experience was the Motion Picture Academy restoring the theatrical qualifying requirement that a film must have theatrical release date between Jan 1 through Dec 31, and that streaming only films will no longer qualify (source).

Nobody Knows Anything

Perhaps the most honest comment on the future of Cinema (or even Entertainment in general is that the “future is wide open” as declared by Thierry Fremaux at the 75th edition of Cannes (source). As Netflix and other companies find the days of easy money and growth are over, they will be forced to be more innovative, more adaptable, and more disciplined around cost. Cinemark CEO Sean Gamble declared at the J.P. Morgan Global Technology conference that they will continue to experiment with dynamic pricing (source) yet another one of the industries long-term non-starters being reconsidered. In the spirit of “nobody knows anything” “the future is indeed wide open and certainly uncertain.