Speaker 1: Welcome to a special episode of Strictly Business, the podcast
Speaker 1: in which we speak with some of the brightest minds
Speaker 1: in media today. I'm Andrew Wallenstein with Variety. No guests
Speaker 1: this week, just a roundtable of Variety hosts coming together
Speaker 1: to talk shop at a time when there's plenty of
Speaker 1: shop to talk about. Not only are we coming out
Speaker 1: of the midpoint of twenty twenty three, but the second
Speaker 1: quarter earning season will begin on the nineteenth, with Netflix
Speaker 1: among a slew of media and tech stocks ready to
Speaker 1: reveal their latest numbers in the coming weeks. We're also
Speaker 1: coming to you as many of the CEOs of those
Speaker 1: companies are convening in sun Valley for the annual Allen
Speaker 1: and Company Conference. Where there are no shortage of issues
Speaker 1: and challenges to be discussed. That gives us plenty to discuss.
Speaker 1: So I'm glad to be joined by the business partner
Speaker 1: Variety co editor in chief Cynthia Littleton, and my colleague
Speaker 1: at Variety Intelligence platform analyst, Heidi Chump. That's all coming
Speaker 1: up right after the break. Hi, this is Andrew Wallenstein
Speaker 1: with Variety's Strictly Business podcast. If you love Varieties podcasts,
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Speaker 1: Heidi is the editor of Variety Intelligence Platforms, Media and
Speaker 1: Money newsletter, which comes every Monday. It's part of a
Speaker 1: expanded slate of newsletters that VIP puts out five days
Speaker 1: a week. If you haven't checked it out, please do.
Speaker 1: It's really a labor of love for myself and my team,
Speaker 1: and I really suggest you check it out.
Speaker 2: I echo that, and I am excited to be sitting
Speaker 2: here with Heidi. Heidi's newsletter is now part of my
Speaker 2: weekly routine. It sets us off on Monday with all
Speaker 2: the news we need to know. And so Heidi, with that,
Speaker 2: let's take it away. Will give you the biggest jump
Speaker 2: ball question to start from the thirty thousand foot view.
Speaker 2: We've just completed the first half of twenty twenty three.
Speaker 2: What stands out to you in terms of themes or
Speaker 2: developments inequities as you study them every day. You don't
Speaker 2: call Heidi between nine thirty and four on weekdays.
Speaker 3: Thanks Cynthia.
Speaker 4: First, I'm so excited to make my debut on this podcast.
Speaker 4: Any excuse to talk about the markets and media and
Speaker 4: entertainment really is a great opportunity for us. To take
Speaker 4: your question. I do want to step back a little
Speaker 4: bit and look at the broader market here to really
Speaker 4: get some context into what we're seeing here in media
Speaker 4: and entertainment.
Speaker 3: As well as the tech sectors. So I'm sure you
Speaker 3: both recalled.
Speaker 4: Twenty twenty two was a brutal year for the stock market,
Speaker 4: right the SMP five hundred tumbling nearly twenty percent to
Speaker 4: finish the year. It was actually the worst year on
Speaker 4: record for the index since two thousand and eight, So
Speaker 4: I think it's safe to say a lot of folks
Speaker 4: out there were pretty bearish headed into twenty twenty three.
Speaker 4: But if you're looking at the markets now and kind
Speaker 4: of how we ended up at the first half of
Speaker 4: twenty twenty three, I think a lot of people were
Speaker 4: pretty surprised to see this bull run that we have
Speaker 4: been on also a recession with something that a lot
Speaker 4: of people were talking about. We have not seen that
Speaker 4: come to fruition, and a lot more strategists are saying
Speaker 4: we might not even see that this year or beyond.
Speaker 4: So to wrap up the first half of this year,
Speaker 4: the SMP five hundred was up fifteen percent. That was
Speaker 4: the best first half since twenty nineteen. The Dow climbed
Speaker 4: about three point eight percent, and the tech heavy Nasdaq
Speaker 4: jumped nearly thirty two percent. So I do also want
Speaker 4: to mention we've seen some data out there from research
Speaker 4: firms like CFRA. If we see a positive first half,
Speaker 4: historically for the SMP five hundred, we're much more likely
Speaker 4: to see a positive second half. Now, for additional context,
Speaker 4: when we take a look at the macroeconomic backdrop, all
Speaker 4: of this is very strange, right. We're seeing an extremely
Speaker 4: high interest rate environment. The FED is planning to raise
Speaker 4: interest rates further from here. I believe it's about a
Speaker 4: sixteen year high for these interest rate levels, right, So
Speaker 4: that's pretty dramatic, and traditionally that's not great for stocks,
Speaker 4: especially for tech stocks which are very sensitive to borrowing costs.
Speaker 4: So with inflation where it is, the labor market remaining tight.
Speaker 4: We do see that consumer confidence is pretty high as
Speaker 4: well as consumer spending. We did see a little bit
Speaker 4: of a pullback last month, but overall levels are pretty good.
Speaker 4: So I don't want to be the one betting against
Speaker 4: the markets in the second half of this year. But
Speaker 4: like I said earlier, if history is any indication we
Speaker 4: could see another positive half.
Speaker 2: Let me ask you, though, I'm sort of wondering, like
Speaker 2: what headlines is Wall Street and investors reading that we
Speaker 2: are not because I hate just I mean, it has
Speaker 2: just been unrelentlessly doom and gloom. In the media sector,
Speaker 2: it's been budget cuts, staff cuts, I mean not, I
Speaker 2: mean on a massive scale. We're seeing We're seeing we
Speaker 2: feel the tectonic plates in Hollywood shift. There's labor strife
Speaker 2: is just ever is the perfect cauldron of economic disruption.
Speaker 2: And so what do you think is driving this, you know,
Speaker 2: level of buoyancy.
Speaker 4: So when I say the markets are up, that doesn't
Speaker 4: mean every facet of the market is up. Right, So
Speaker 4: the best performing sector in the first half of the
Speaker 4: year was technology, and a lot of that was driven
Speaker 4: by the the interest by investors in the AI boom,
Speaker 4: the generative AI boom specifically, and so even though we're
Speaker 4: in a situation where interest rates are high, we had
Speaker 4: the two banks collapse back in March.
Speaker 3: That was really scary.
Speaker 4: The markets really didn't react as badly as a lot
Speaker 4: of us were thinking. But this, this sort of optimism
Speaker 4: about where technology is headed has really driven up those stocks. Though.
Speaker 4: I will say, even though there's a lot of bullishness
Speaker 4: in the market, a lot of investors right now are
Speaker 4: sort of worried that we're seeing a bit of an
Speaker 4: overbought situation. So does this market have that much more
Speaker 4: room to run? That remains to be seen. But like
Speaker 4: I said, technology was one of the best performers, and
Speaker 4: within technology, it was really companies like Nvidia, mentioning AI,
Speaker 4: Microsoft Google. On the flip side, you don't really have,
Speaker 4: you know, sectors like healthcare or industrials talking about AI.
Speaker 4: Right those companies are probably not going to see the
Speaker 4: kind of booms that we've been seeing, especially headed into
Speaker 4: Q two earning season. It's oy're all, we're not expecting
Speaker 4: earnings growth for the SMP five hundred in Q two earnings.
Speaker 4: We're actually expecting a decline of seven point two percent.
Speaker 3: So that just kind of.
Speaker 4: Gives you some context into the fact that most companies
Speaker 4: in the SNP five hundred are probably not going to
Speaker 4: report big earnings growth, and that is a result of
Speaker 4: a lot of the pressures we're seeing in the macroeconomic
Speaker 4: environment right now.
Speaker 1: On the one hand, I'm not surprised that AI is
Speaker 1: driving what I think is still kind of an irrational
Speaker 1: confidence in the tech sector. On the other hand, if
Speaker 1: you look at what to me is still the most
Speaker 1: important indicator for the tech sector, which is advertising, which
Speaker 1: is still that's the biggest revenue generator. And yes, those
Speaker 1: numbers are up, but they're nowhere near as up as
Speaker 1: they usually are. You look at that top line number
Speaker 1: and it's still a much lower number than it's been.
Speaker 1: I think it's like the lowest increase it's been in
Speaker 1: like fourteen years. It's below h ten percent for the
Speaker 1: first time in a long time. Why isn't that making
Speaker 1: investors more nervous.
Speaker 4: Because at least within the advertising market, Yes, we're seeing
Speaker 4: an overall slow down when we're taking a look at
Speaker 4: the bigger picture, but digital advertising is still growing, right
Speaker 4: It's not growing nearly the same level that it was before,
Speaker 4: but we're still expecting about eight point four percent growth
Speaker 4: within global digital advertising. I think a lot of the
Speaker 4: tech sector though we've seen tons of layoffs, which of
Speaker 4: course isn't great, but it's good for the company's bottom line, right,
Speaker 4: They're able to cut costs while they're focusing on this
Speaker 4: adversssion sort of passing. Everyone is expecting it to be cyclical,
Speaker 4: then that the ad market will bounce back at some point.
Speaker 3: No one knows when.
Speaker 4: But that being said, yes, digital advertising isn't growing at
Speaker 4: the pace it used to, but it is still a
Speaker 4: growth area, and so I think that's why investors aren't
Speaker 4: necessarily ringing the lorm for these big.
Speaker 3: Tech companies, especially social like Meta as well.
Speaker 2: Heidi, is there any kind of hangover from the predictions
Speaker 2: that there would be a more significant slowdown of economic activity,
Speaker 2: including even a recession. Did some people pull back on
Speaker 2: advertising expecting the slow down and are a little surprised
Speaker 2: to see so much activity, So we might see a bounce,
Speaker 2: a higher bounce in the second half.
Speaker 4: Yeah, I think a lot of you know, any kind
Speaker 4: of recession, whether it's an advertising recession, economic recession. It's
Speaker 4: very forward looking, right, People are expecting something to happen
Speaker 4: and thus they cut back on those costs ahead of time.
Speaker 4: And so when we were heading into twenty twenty three,
Speaker 4: twenty twenty two was so bad, everyone was out there
Speaker 4: saying we're going to see a recession for sure, doom
Speaker 4: and gloom.
Speaker 3: We saw marketers and advertisers really pulled back on those budgets.
Speaker 4: But as we see the economy sort of continue to
Speaker 4: chug along, I think right now we're in a very
Speaker 4: important wait and see approach. If the second half of
Speaker 4: twenty twenty three is again better than a lot of
Speaker 4: people were expecting, I think we could definitely see advertising
Speaker 4: start to come back. That being said, balance sheets are
Speaker 4: so important at these companies, right it's about how much
Speaker 4: money they're going to have to spend on other things
Speaker 4: aside from their day to day you know, line items.
Speaker 4: And so again, twenty twenty three has been an interesting year.
Speaker 4: The second half will I think be very indicative of
Speaker 4: where we'll be heading in twenty twenty four, recession or
Speaker 4: no recession.
Speaker 1: Cynthia, what do you think will be what we'll hear
Speaker 1: from media CEOs with regard to the advertising outlook, Because
Speaker 1: typically we hear what I think is sort of interrational
Speaker 1: exuberance with regard to the advertising market when we are
Speaker 1: hearing that the upfront pricing is not going to be
Speaker 1: looking good. Brian Steinberg's been all over that, and yet
Speaker 1: you know, Bob Backish and Bob Iger, all the bobs,
Speaker 1: they're always talking it up as if not everything's going
Speaker 1: to be fine. I got a feeling that this time around,
Speaker 1: even these guys can't possibly put lipstick on a What
Speaker 1: do you think we're going to hear from that?
Speaker 2: I think we will hear a lot about a lot
Speaker 2: of emphasis in the digital sector, in the avod sector,
Speaker 2: any place where you have any green shoots of growth,
Speaker 2: We're going to hear a lot about that. I think,
Speaker 2: even as Heidi was talking, even for the macro economy
Speaker 2: outside of media entertainment, in so many sectors, it feels
Speaker 2: like twenty twenty three is a real year of just
Speaker 2: restructuring and extreme bell tightening, Like twenty twenty three is
Speaker 2: the year you clean up the messes that have probably
Speaker 2: been brewing since pandemic or even even pre pandemic. After
Speaker 2: the Q one results, I don't you know, I don't
Speaker 2: know how the spin gets better for Q two. I
Speaker 2: think it's going to be a lot of like we're
Speaker 2: investing for the long haul. We did the we've made
Speaker 2: the hard choices. Now now we're coming out of that.
Speaker 2: I think there we're going to talk company by company,
Speaker 2: but I think there will be some companies that really
Speaker 2: have to have some very specific answers to things that
Speaker 2: they probably don't want to address. And Disney has I
Speaker 2: think a few of those big questions. But I think
Speaker 2: you'll hear a lot about like cost cutting, belt tightening,
Speaker 2: downsizing of their labor forces. I just think it's going
Speaker 2: to be, you know, it's it's it's certainly not going
Speaker 2: to be no matter you know, no matter how they
Speaker 2: spend it, it's not going to be a record quarter.
Speaker 2: It's going to be it's going to be a pretty painful,
Speaker 2: I think, a pretty painful march of results for most,
Speaker 2: not everybody, but probably for most.
Speaker 3: No, absolutely I agree.
Speaker 4: If you take a look at the major media companies
Speaker 4: and sort of their performance so far this year, we
Speaker 4: have far more companies underperforming the broader market than we
Speaker 4: do having you know, outperforming the market, and so I
Speaker 4: think that says a lot about investor sentiment towards media
Speaker 4: right now. I think a lot of folks are kind
Speaker 4: of scared to jump in in the group because there's
Speaker 4: so many changes going on internally, whether it's management, whether
Speaker 4: it's figuring out profitability, whether it's dealing with linear TV declines.
Speaker 4: Think there's a lot of trouble at these companies now
Speaker 4: that you know management is going to have to clean
Speaker 4: up and figure out.
Speaker 1: Well, let's get into the individual companies. Since the gat
Speaker 1: you mentioned, Disney, uh Iger has man. I wonder whether
Speaker 1: going back into this big job that he realized just
Speaker 1: I'm sure he knew it was going to be challenging.
Speaker 1: I wonder if he saw how challenging it was going
Speaker 1: to be, if he saw, you know, Indiana Jones flopping,
Speaker 1: Elemental flopping, all the many challenges that he's that he's facing,
Speaker 1: the cuts that he's had to put in place at ESPN.
Speaker 1: Do you think that when he gets on the call,
Speaker 1: I guess in August at this point, it's it's still
Speaker 1: a bit of way that he is going to be
Speaker 1: able to project an air of confidence for Wall Street.
Speaker 2: I think Iiger will come on and he will bring
Speaker 2: every ounce of his Bob igerness to to the and
Speaker 2: of course you know he does have that measure of
Speaker 2: respect that his is a long track record, but boy
Speaker 2: does he have big questions. He's going to get questions
Speaker 2: about the departure of Disney's CFO, Christine McCarthy. That's going
Speaker 2: to be a big question for Wall Street analysts. I
Speaker 2: know reporters are often frustrated because there's big there's big
Speaker 2: headlines that are happening in the world, and analysts on
Speaker 2: these earnings calls always ask the very financial specific questions.
Speaker 2: I don't think there's any world in which he doesn't
Speaker 2: get grilled about what's going on with Christine McCarthy, given
Speaker 2: the extremely prominent role that she has played in that company.
Speaker 2: There's another, you know, another big question looming about Hulu
Speaker 2: and Disney and Comcasts have a complicated transaction that basically
Speaker 2: calls Disney to buy Hulu at a preset price that
Speaker 2: is a much bigger check than Disney probably wants to
Speaker 2: write right now. So there are some big issues that
Speaker 2: are big that have big financial dollars associated with them
Speaker 2: and deadlines that I think he's really going to have
Speaker 2: to have to address. And I think he's going to
Speaker 2: probably in the sort of the version of throwing himself
Speaker 2: on the mercy of the court, I did the layoffs.
Speaker 2: I have done the cuts, and I have done the cuts.
Speaker 2: And we know Wall Street does cheer layoffs in the
Speaker 2: sense not that they're greedy and awful, but that it
Speaker 2: does show that the company is wreck is looking at
Speaker 2: a balance sheet and saying, WHOA, we cannot continue at
Speaker 2: this pace. So I think the other the real question too,
Speaker 2: for Disney is, as always, what's the bell weather? The
Speaker 2: parks are such an interesting bell weather of consumers, and
Speaker 2: this year they have been doing a real heavy lift
Speaker 2: the park, so that will be really interesting to see.
Speaker 2: By all accounts, just my observations as a Southern California resident,
Speaker 2: the people are still going to those Disney parks.
Speaker 4: Well, not to be the bearer of bad news, but
Speaker 4: we've recently seen some reporting saying that maybe the parks
Speaker 4: are starting to see a bit of a slowdown in
Speaker 4: terms of attendance.
Speaker 3: The Wall Street.
Speaker 4: Journal citing a third party company that was tracking the
Speaker 4: wait times at Disney World, Disneyland, as well as other
Speaker 4: theme parks like Universal Studios, and they take a look
Speaker 4: at the time spent in each line and they found
Speaker 4: that during Independence Day, the actual day and the weekend
Speaker 4: before it was the lowest level of attendance for that
Speaker 4: weekend in quite some time, So that could be bad
Speaker 4: news for not just Disney, but other companies that rely
Speaker 4: on theme park revenue like Comcast.
Speaker 2: Right, let me ask you too, let me ask you
Speaker 2: to Heidi, in terms of my sense is that the
Speaker 2: Disney stock is kind of like Disney is the general
Speaker 2: motors of the entertainment sector. And I'm probably aging myself
Speaker 2: with that description, but it so.
Speaker 3: It's basically a blue chip within the entertainment space.
Speaker 2: Does Disney, you know, as goes Disney, does it drag
Speaker 2: down other stocks? If people are looking at saying there's
Speaker 2: not a lot of confidence in Disney, does that hurt
Speaker 2: everybody else down the line?
Speaker 4: You know, that used to be the case and to
Speaker 4: some extent, and I would agree that that is still
Speaker 4: probably the way that a lot of folks take a
Speaker 4: look at Disney as a stock, because it is part
Speaker 4: of the doubt. It's one of those blue chip companies
Speaker 4: within the entertainment space. It has its hand in a
Speaker 4: lot of different kinds of businesses, whether it's theme parks,
Speaker 4: linear TV as well as now streaming.
Speaker 3: Right.
Speaker 4: But the reason why I think we're seeing such a
Speaker 4: big underperformance by Disney shares is because they're starting to
Speaker 4: see a little bit bit of trouble in their very
Speaker 4: profitable linear TV business and now potentially even its theme
Speaker 4: parks business. Now with streaming, it's a difficult one, right,
Speaker 4: It's not exactly profitable for a lot of these players
Speaker 4: in the space, and so they were relying on revenues
Speaker 4: from linear TV to sort of prop up streaming for
Speaker 4: the time being until they reach break even or profitability.
Speaker 4: Disney was originally planning to reach break even by twenty
Speaker 4: twenty four, I believe the fall of twenty twenty four,
Speaker 4: and management continues to say that that's the goal and
Speaker 4: that they're planning to reach that, but a lot of
Speaker 4: folks are concerned. I think last quarter, operating income from
Speaker 4: linear TV fell by a significant amount, like thirty to
Speaker 4: thirty five percent or so, and that was the sharpest
Speaker 4: year over year decline in at least three years.
Speaker 3: So not great news on that front.
Speaker 4: And then, like I mentioned, those reports about the theme
Speaker 4: parks slowing down as well, that's a cash cow for Disney, right,
Speaker 4: that's basically where all the free cash flow is coming in,
Speaker 4: and if we start to see a decline in that
Speaker 4: with all the promotions that they're putting out there for
Speaker 4: not only hotel stays, but you know, park spending on
Speaker 4: like food and things like that, that could be bad
Speaker 4: news for Disney too.
Speaker 1: I would argue the general motors as Netflix that they
Speaker 1: are the bell weather in this space, and we saw
Speaker 1: that in twenty twenty two when the subscriber declined happened,
Speaker 1: and that reset Wall Street's expectations for the entire space.
Speaker 1: We are still in that place now, and let's fast
Speaker 1: forward to now where Netflix is on a roll and
Speaker 1: their stock has been performing better than it has in
Speaker 1: the past eighteen months. Their ability to generate hit after
Speaker 1: hit is doing better than anyone else in the space.
Speaker 1: I think they are the ones to watch, and they
Speaker 1: are going to be the first out the gate in
Speaker 1: Q two, and I think they're making all the right
Speaker 1: moves right now. I think what they're doing in terms
Speaker 1: of enabling password sharing with families is the right move.
Speaker 1: I think they've gotten off on the right foot in
Speaker 1: terms of the ad supported subscriptions, and I think they
Speaker 1: are still the ones that set the agenda in this space.
Speaker 1: Wouldn't you agree?
Speaker 3: I do agree with that. I do.
Speaker 4: I think That status of potentially being the general motors
Speaker 4: of the entertainment space is a very new thing though
Speaker 4: for Netflix, because it is such a volatile stock. Right before,
Speaker 4: it used to trade so heavily on subscriber editions. You
Speaker 4: would see ten percent pops or ten percent fifteen percent declines,
Speaker 4: and that's extremely volatile for a potential blue chip stock.
Speaker 4: But recently with Netflix, as the industry has begun to
Speaker 4: grade these media giants differently, I think it has reached
Speaker 4: that status andy of potentially being the GM. That being said,
Speaker 4: I have to echo what you're saying. In terms of
Speaker 4: strategic moves by the company. Recently, we've seen you know, yes,
Speaker 4: it was off to a slow start, but the ad
Speaker 4: supporter has really started to gain momentum. And I think
Speaker 4: investors agree with you. I think investors are saying Netflix
Speaker 4: is one of those companies that it's a long term
Speaker 4: bet within media, right they have the content library. The
Speaker 4: stock is up nearly fifty percent this year, significantly outperforming
Speaker 4: the SMP five hundreds fifteen percent gain. But I do
Speaker 4: want to say that I think that a lot of
Speaker 4: those bullish sentiments are already priced into the stock. That
Speaker 4: forty five percent gain is rather massive, right, So yes,
Speaker 4: I think Q two results from Netflix will be fairly good.
Speaker 4: I think I think the market will be happy with
Speaker 4: the developments and the updates that we get from the
Speaker 4: company in terms of those two strategic initiatives. That being said,
Speaker 4: I don't know that we'll see more double digit gains
Speaker 4: like this for the next half of this year. Again,
Speaker 4: I don't want to be too contrarian here, but I
Speaker 4: do think a lot of the bullishness is already priced
Speaker 4: into the stock price.
Speaker 2: It's so interesting because with my very Hollywood centric hat on,
Speaker 2: I say, like, Netflix seems to have everything going for it,
Speaker 2: and it has, of course, it has great shows, but
Speaker 2: it hasn't There hasn't been something new that really bubbled
Speaker 2: to the surface as a big hit, something that like
Speaker 2: everybody was talking about it a certain time. And that's
Speaker 2: a very subjective and unscientific measure. But my hunches, whereas
Speaker 2: like you know, qualitatively, HBO had a really strong first
Speaker 2: half between the Last of Us and the succession for that,
Speaker 2: like they qualitatively, I felt like HBO was firing on
Speaker 2: all cylinders. Cannot say the same thing. Maybe this is
Speaker 2: our say way into Warner Brothers Discovery we did not
Speaker 2: plan this, but I really think that. So just to
Speaker 2: button up on Netflix, I think that and content I
Speaker 2: think still. I think entertainment is still a hit driven business,
Speaker 2: and they their their content is important. Although their hits
Speaker 2: now are measured in more territories than just the contiguous
Speaker 2: United States Alaska, Hawaii, So that does that really does
Speaker 2: open up the open up the world for them.
Speaker 1: We're going to take a quick break. We'll be back
Speaker 1: with more conversations about media stocks.
Speaker 4: Hi.
Speaker 1: This is Andrew Wallenstein with Variety's Strictly Business podcast. If
Speaker 1: you love Varieties podcasts, you're going to want to try
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Speaker 1: or about their business. VIP just launched a great new
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Speaker 1: Variety dot com slash viip save for a twenty percent discount,
Speaker 1: And we're back talking about media stocks heading into the
Speaker 1: second quarter. I'm joined by my colleagues Cynthia Littleton and
Speaker 1: Heidi Chung. I'm Andrew Wallenstein. But let's talk some more
Speaker 1: Warner Brothers Discovery because that's a stock. I mean, it's interesting.
Speaker 1: On the one hand, I think there's all this headline
Speaker 1: noise about David Zaslov lurching from one pr nightmare to
Speaker 1: the other. I mean, but wouldn't you agree that there's
Speaker 1: a lot of upside to this stock.
Speaker 4: Well, I don't know about upside, but I will say
Speaker 4: despite everything that's going on headline wise with as the
Speaker 4: market is loving everything that he's doing strategically within the company. Right. So,
Speaker 4: last quarter of the company announcing that it turned up
Speaker 4: fifty million dollar profit, Yay, that's good news, and Zaslov
Speaker 4: saying that he expects that they're going to reach profitability
Speaker 4: in its US streaming business in twenty twenty three, not
Speaker 4: the original twenty twenty five. So those things got the
Speaker 4: investors really hyped up and excited about where this company
Speaker 4: is headed. They like the fact that he's aggressive, right, Like,
Speaker 4: he is not shy about making the necessary cuts, He
Speaker 4: is not shy about pulling content from the platform. He
Speaker 4: is aggressive, and I think that's what Wall Street analysts
Speaker 4: and investors like to see. We don't want to see
Speaker 4: slow moves that take years to really see the benefit.
Speaker 4: Of right, like we want to see things now. Times
Speaker 4: are rough and they have a huge debt load. Free
Speaker 4: cash flow is not great, so let's get those numbers
Speaker 4: back to where they need to be.
Speaker 3: And he's been delivering.
Speaker 2: And here I go, just interrupting our flow here. But
Speaker 2: one thing I wanted to say about Disney was they
Speaker 2: have quietly been selling rights to shows the package just
Speaker 2: shows here in different regions. They've been quietly selling content
Speaker 2: outside the US in the old fashioned way where they
Speaker 2: sell it to somebody and somebody writes them a check
Speaker 2: that they can cash in the bank, as opposed to
Speaker 2: the streaming model of we're going to everything we keep,
Speaker 2: we're going to keep on our platform, and so they
Speaker 2: don't get that vital revenue. Same thing with Warrener Brothers Discovery,
Speaker 2: they've been doing a little more loudly, but they're out
Speaker 2: there AVA channels, licensing in different territories. They don't have
Speaker 2: as big a footprint with HBO, excuse me. They don't
Speaker 2: have as big a footprints with Max as Disney does
Speaker 2: with Disney Plus internationally. So I think that both I
Speaker 2: think you will hear Eiger talk about hey, we are
Speaker 2: We're we're waking up to the need for more, you know,
Speaker 2: more cash flow to just circulate through this company. So
Speaker 2: I think you'll hear both both Iiger and Zaslav will
Speaker 2: talk about their deals in ben A Luxe and Luxembourg
Speaker 2: and other big territories to say, hey, everybody, we get
Speaker 2: we need dollars, you know, we need dollars and other
Speaker 2: currencies coming in.
Speaker 1: We should note that our VIP colleague Gavin Bridge has
Speaker 1: said that he affects both Netflix and Disney to get
Speaker 1: into the fast business, as as Max has already signaled
Speaker 1: it will do. It's just there is a lot of
Speaker 1: upside there. It's it's the future I think for anyone
Speaker 1: in the streaming business right now.
Speaker 2: Yeah, I growth what HEI do, what you know, but
Speaker 2: when you have a company, I just can't. I mean,
Speaker 2: you know, I've covered Warner Brothers and its iterations for
Speaker 2: so long. It's a thirteen dollars. I mean, the price
Speaker 2: of the real estate where Warner Brothers sits is worth
Speaker 2: thirteen You know what does it do to a company
Speaker 2: when you're no matter what you do, you know, your
Speaker 2: shares are just underwater.
Speaker 4: Yeah, and you know, I think when we talk about
Speaker 4: Warner Brothers, Discovery stock doing well this year, that's not
Speaker 4: really the whole picture, like you point out right, if
Speaker 4: you take a look at the chart over a five
Speaker 4: year period. Five years ago, it was at twenty five
Speaker 4: bucks a year, and so sitting at thirteen is far
Speaker 4: far lower than it should be on a historical basis,
Speaker 4: And so there's a lot of room to run here. Again,
Speaker 4: it's going to depend on David's aslov and what he
Speaker 4: can do, not just like fixing up the balance sheet,
Speaker 4: but also you know, all his own personal PR nightmares
Speaker 4: as well, like he needs to figure out what the
Speaker 4: message is that he's sending across to investors, like do
Speaker 4: a good job of making sure you're not in the spotlight,
Speaker 4: make sure the company's name is in the spotlight for
Speaker 4: good reason. So I think yes to your point, it's
Speaker 4: at a very historical lows in terms of market cap.
Speaker 4: It's sitting out about thirty one point four billion dollars.
Speaker 4: That's very far off from where its rivals are sitting
Speaker 4: right like Netflix and Disney, and so yeah, I we'll
Speaker 4: have to see where it ends.
Speaker 2: Up, and pretty far from where the AT and T Yes,
Speaker 2: Warner Media Discovery. That very complicated track transaction when that
Speaker 2: was done in April twenty twenty two. Off the top
Speaker 2: of my head, I know there were many more billions,
Speaker 2: tens of billions added to that market cap, and that's
Speaker 2: that's got to be tough, and it I know it's
Speaker 2: got a pain, probably David's aslov more than anyone, because
Speaker 2: I know that man loves his balance sheet.
Speaker 1: Oh yes, I think it's going to bounce back. And
Speaker 1: I think it's going to bounce back in part because
Speaker 1: I do think they're going to sell CNN. That is
Speaker 1: my prediction, just as I think eventually we're going to
Speaker 1: see Disney sell off ESPN. I think the linear business,
Speaker 1: of course, is in a secular decline. And I think,
Speaker 1: and I'm not telling these CEOs anything they don't already know,
Speaker 1: the pay TV business, as great as these brands have
Speaker 1: been to these businesses for a very long time, if
Speaker 1: they sell these businesses now before they decline any further,
Speaker 1: and there are buyers out there, I believe, in private
Speaker 1: equity or whatnot, now is the time to unload them.
Speaker 4: No to that point, I just want to quickly bring up.
Speaker 4: The annual rate of cord cutting hit six point nine
Speaker 4: percent in the first q of twenty twenty three, and
Speaker 4: recent data from Nielsen show that summer broadcast viewing is
Speaker 4: down thirteen percent year over year, So it continues to bleed.
Speaker 4: I really don't see a scenario andy where it gets
Speaker 4: much better than where it is now, especially when we
Speaker 4: hear Q two results coming in.
Speaker 1: Here's another stat. PwC put out their annual numbers recently.
Speaker 1: They said that the pay TV business was going to
Speaker 1: shed thirty billion dollars in the next I think it
Speaker 1: was five years. That's the combination of both affiliate fees
Speaker 1: and advertising. I mean, it's just tremendous.
Speaker 2: I mean again, I have to just point out in
Speaker 2: the context of Hollywood and dealing with unions and contracts
Speaker 2: and you know, real issues of pay equity and who
Speaker 2: makes what that is, those conversations sometimes seem to happen
Speaker 2: in different worlds where you have the creative community and
Speaker 2: its concerns and then you have the financial community, and
Speaker 2: clearly there needs to be more understanding kind of in
Speaker 2: both worlds. But as we talk about these kinds of
Speaker 2: numbers and the transition, I feel like we use this
Speaker 2: sentence every day in variety stories. This industry is going
Speaker 2: through a historic transition. I think some of what's broiling
Speaker 2: Hollywood right now, if there was a greater understanding of
Speaker 2: just billions of dollars of what used to be earnings
Speaker 2: in this business are evaporating with cord cutting, I think
Speaker 2: that would put some of some of this all into context.
Speaker 2: Cut I think that would help put things into context
Speaker 2: better for for contract, for asks at the negotiating table.
Speaker 3: I mean that being said, you have been following that.
Speaker 4: I'm curious how you think the c suite of a
Speaker 4: lot of these companies are sort of going to trust
Speaker 4: the labor issues that are ongoing right now.
Speaker 2: Well, I think that these contracts are coming, these contract
Speaker 2: negotiations are coming at a time when they're dealing with
Speaker 2: the larger you know, these are these are truly existential
Speaker 2: issues they're dealing with. Cord Cutting isn't new, but it's accelerating. Streaming,
Speaker 2: which was the great hope, is clearly not going to
Speaker 2: replicate remotely. You know, a court, maybe you know some
Speaker 2: some percentage of the economics, but you'll you're never going
Speaker 2: to get We are never going to see the kind
Speaker 2: of the heyday of cable television, which really does seem
Speaker 2: to be bookended by a period of call it roughly
Speaker 2: nineteen eighty, so let's just call it the pandemic like that.
Speaker 2: That seems to be a pretty good, pretty good rough
Speaker 2: period and those you know, those were forty great years
Speaker 2: of earnings. But but what is coming in its place
Speaker 2: is very unclear. It'll be interesting to see to these
Speaker 2: third party licensing deals that you're starting to see Disney
Speaker 2: and Warners. It'll be interesting to see at what you know,
Speaker 2: long term, what dollars those are done, at what you
Speaker 2: know obviously, if they do more, if they if is
Speaker 2: is there a world someday where Disney Plus is a
Speaker 2: small thing and we're back to just kind of the
Speaker 2: same old movie licensing, TV you know, windowing of TV shows.
Speaker 2: You know, it could in ten years time we could
Speaker 2: be looking back, Oh remember when everybody lost their mind
Speaker 2: over streaming.
Speaker 4: And also a question that I have is we have
Speaker 4: quite a good amount of media giants right now that
Speaker 4: have their own identity. Right in ten years, is that
Speaker 4: going to be five media giants that have survived and
Speaker 4: after consolidation, Sure, M and A is not you know,
Speaker 4: mega deals are probably not likely for the time being,
Speaker 4: but who knows. I mean, if we get a new
Speaker 4: administration if we have people who are a little more
Speaker 4: lax in Washington about M and A cold, we see
Speaker 4: another big deal, perhaps a paramount plus and a peacock.
Speaker 4: Those names are always thrown out there right as being
Speaker 4: on the chop or not the chopping block, but the
Speaker 4: auction block.
Speaker 2: So also potential for like a CJ M or know,
Speaker 2: one of the larger conglomerates that are not based in
Speaker 2: the US. You know, that's happened before and it's usually
Speaker 2: not gone well, but it's it is truly now a
Speaker 2: different the content marketplace is truly global, and that would
Speaker 2: seem to really open up open up more opportunities. All
Speaker 2: that said, you know, the cultural issues can can often
Speaker 2: be fraught even you know, you could argue that it
Speaker 2: was a foreign entity at and T a butt time
Speaker 2: Warner a few years ago. So but that but I
Speaker 2: think the potential for an international actor to come in
Speaker 2: as a as A in an M and A context
Speaker 2: is very interesting. And it's like we didn't have enough
Speaker 2: companies to keep an eye on now now we're watching me.
Speaker 2: But it is interesting. It's one of the big dynamic things.
Speaker 4: A bunch more regulators who have to prove that too, though, so.
Speaker 1: I mean, as for the regulatory issues, I would imagine
Speaker 1: byte Dance would have taken over the entire world already. Yeah,
Speaker 1: but uh.
Speaker 2: Up between byte Dance and and Meta basically yeah.
Speaker 1: Yeah. But you know, Heidi, you wrote this week in
Speaker 1: VIP's coverage of Sun Valley that, uh, this is a
Speaker 1: conference that is famous or maybe infamous for uh M
Speaker 1: and A and deal making that goes on there. But
Speaker 1: because of the regulatory world and the fact that you know,
Speaker 1: at the FTC right now, Lena Khan is a real
Speaker 1: hawk on the monopoly front, that we just don't expect
Speaker 1: there to be any imminent activity. But in the long term,
Speaker 1: do you think that seeds are being planted this week
Speaker 1: for perhaps M and A in the long term?
Speaker 4: Oh?
Speaker 3: Absolutely.
Speaker 4: We have Sherry Redstone there and she's previously held talks
Speaker 4: with Comcast and there was a lot of chatter at
Speaker 4: the time that oh, maybe they're working on something just
Speaker 4: more than a partnership, maybe there could be a potential merger.
Speaker 4: So if she's caught, you know, canoodling with with Comcast
Speaker 4: again or in the non romantic sense, yes yes, what
Speaker 4: a sexist time, then who knows, maybe they're having conversations
Speaker 4: about what could possibly on the horizon down the line.
Speaker 4: But that being said, for taking a look at where
Speaker 4: MNA is now, it's really really.
Speaker 3: At low's compared to where it was the past couple
Speaker 3: of years.
Speaker 4: I think SMP Global Market Intelligence said that overall MNA
Speaker 4: in Q one globally was about twenty three percent lower
Speaker 4: than where it was last year, and that's because a
Speaker 4: lot of folks are one scared to spend that kind
Speaker 4: of capital right now and may not have that kind
Speaker 4: of capital unless they're PE or PC or whatever. But
Speaker 4: also because the regulatory stuff. When we look at Activision
Speaker 4: Microsoft that is still very much not been approved and
Speaker 4: we still don't know what's going to happen there.
Speaker 3: So it's hard to say. I think I mentioned.
Speaker 4: This earlier, but unless we have a more lax administration
Speaker 4: that comes in after the election, it's probably not likely
Speaker 4: we'll see a mega deal to this scale of Warner
Speaker 4: Brothers Discovery or even the Amazon MGM deal. Right, So
Speaker 4: those are some of the biggest recent ones that we've
Speaker 4: seen within media. But I don't know, but these are
Speaker 4: being planted for sure.
Speaker 2: Not that you know, not that the CEOs needed, but
Speaker 2: you kind of have to fit like it's hard out
Speaker 2: here for a CEO right now, just every single thing
Speaker 2: and deal making. Let's face it, we've all seen companies
Speaker 2: and CEOs that were just deal junkies and just kept
Speaker 2: it going. Like even that solution, like even the solution
Speaker 2: of well, I'll float a potential for you know, company
Speaker 2: X merged with company. Why we've all seen that juice
Speaker 2: of stock price or type, like, you can't even do
Speaker 2: that now because there is an understanding, and I think
Speaker 2: that will also, certainly for business, will cast an interesting
Speaker 2: tone on the presidential race because you know, I mean,
Speaker 2: the Biden administration signaled where it was when it blocked
Speaker 2: the merger of the oldest form of media books, when
Speaker 2: it blocked Simon and Schuster from from merging with Penguin
Speaker 2: Random House. Now, granted Penguin Random House is the number
Speaker 2: one publisher. Would they have locked you know, Simon Schuster's
Speaker 2: number four? Would they have blocked number three and number
Speaker 2: four from cutting together? But that was a pretty big signal.
Speaker 2: They've also been saying, you know, they've been you know,
Speaker 2: saying that they're looking at higher regulation in the tech sector.
Speaker 2: So that regulatory threat is bigger than in median entertainment
Speaker 2: and now tech. I think certainly bigger than it's been
Speaker 2: since like the early nineties in terms of a factor
Speaker 2: in moving markets and stuff.
Speaker 1: And yet beet is a piece of paramount that I
Speaker 1: don't hear any regulatory issues there that I think is
Speaker 1: going to get unloaded. So to my thesis of ESPN CNN,
Speaker 1: I do think there's going to be an unwinding of
Speaker 1: the PayTV business that is going to happen. And I
Speaker 1: also wonder, you know, we saw rumors reports a year
Speaker 1: ago about Comcast and EA, and I still think there's
Speaker 1: an evitability to the video game business which we have
Speaker 1: not mentioned yet in this conversation and makes so much
Speaker 1: sense because that is where the eyeballs are. I've got
Speaker 1: to imagine somehow the video game business is going to
Speaker 1: assert itself in the entertainment business somehow, some way. Don't
Speaker 1: you think there's logic there?
Speaker 2: Yeah?
Speaker 4: And I think, you know, with the whole generative AI stuff,
Speaker 4: with mixed reality headsets, there's a lot of opportunity within
Speaker 4: gaming as well, and so a lot of folks are
Speaker 4: saying that gaming is really a next opportunity. We see
Speaker 4: Netflix trying to get in on that space. I don't
Speaker 4: know though, that regulators would be okay with a purchase
Speaker 4: of a Take to Interactive or a merger of those
Speaker 4: big names either. I feel like the Microsoft Activision Blizzard again,
Speaker 4: the regulatory framework for that is basically like it's you
Speaker 4: would be in charge of such a big part of
Speaker 4: the video game market that we don't think it's it
Speaker 4: aligns with you know, whatever antitrust's laws that are out there.
Speaker 4: And so I think if Microsoft Activision Blizzard gets through,
Speaker 4: then that's good news for potential video game acquisitions or mergers.
Speaker 4: But I really don't see a situation where a big
Speaker 4: company like you know, like I said, a Take two
Speaker 4: Interactive and EA is really going to be bought out,
Speaker 4: do you? And no?
Speaker 1: I think it does go back to the regulatory front.
Speaker 1: If Biden loses next year, the floodgates of M and
Speaker 1: A are going to open like nothing we have ever
Speaker 1: seen before.
Speaker 4: You think, so, I mean, let's say Donald Trump, who
Speaker 4: is you know, currently trying to run for a president.
Speaker 4: He has also been tough on tech regulation, and so
Speaker 4: let's say we get a Republican in office, will they
Speaker 4: be more locks.
Speaker 3: I don't know that that's going to be true.
Speaker 1: You know, that's a whole other ball of wax, because
Speaker 1: with Trump it was if you think back to his
Speaker 1: personal issues with CNN, and I think that's a different thing.
Speaker 2: We reference cord cutting Heidi a little bit ago. I
Speaker 2: wanted to get back to that. So you know, you
Speaker 2: can't say you can't spell cord cutting without Comcasts. I
Speaker 2: don't know if that's true, but I just made that.
Speaker 2: But you know, Comcast is another one of these companies
Speaker 2: that is really betwixt in between in terms of its
Speaker 2: core business is undergoing a lot of a lot of shift.
Speaker 2: But I think people would give Comcast credit of the
Speaker 2: big cable system operators, and they're the biggest. They have
Speaker 2: done the most investment R and D to try to
Speaker 2: keep that core cable system's business relevant, up to speed
Speaker 2: in terms of technology and features and functions. They you know,
Speaker 2: every single Comcast earnings call, we hear, we hear about
Speaker 2: the voice controlled remote. What is your thinking just both
Speaker 2: how the stock has been, but just long term, what
Speaker 2: do you see for Comcast?
Speaker 3: Comcast is doing okay, It's still outperforming the broader market.
Speaker 3: Not by a huge margin, but it is.
Speaker 4: And but the is with Comcast is it's not immune
Speaker 4: to cord cutting. Right last quarter, it also lost I
Speaker 4: think six hundred thousand PayTV subscribers excuse me.
Speaker 3: And if you take a look at the chart of
Speaker 3: losses quarter over quarter, the chart is very much in
Speaker 3: a downward trend. So it's not immune.
Speaker 4: But it does have a broadband which is something that
Speaker 4: was propping up the company, especially during the pandemic and
Speaker 4: even now because people do need high speed internet and
Speaker 4: Exfinity is one of those providers of that kind of internet,
Speaker 4: and Comcast is also in the media business. It has
Speaker 4: theme parks. It's planning on expanding those theme parks. Again,
Speaker 4: I don't know if the timing of that kind of
Speaker 4: expansion is great. Sure it wants to capitalize on this
Speaker 4: pent up demand amongst consumers, but it's a capital intensive endeavor, right.
Speaker 4: It takes a lot of money and investment into building
Speaker 4: out these parks. And so it's been propped up again
Speaker 4: also by its theme parks business, which is a big
Speaker 4: free cash flow generator, not just for Comcasts but for
Speaker 4: Disney as well. So I think those things have been
Speaker 4: keeping it afloat. But Peacock is one of those companies
Speaker 4: that's still sure. It had its growth quarter over quarter,
Speaker 4: but it's still not at a scale that's comparable to
Speaker 4: some of its larger rivals. So being in the media
Speaker 4: business is exceptionally hard, and I think, especially with the
Speaker 4: continued cord cutting acceleration, Comcast is not going to be immune.
Speaker 4: But yeah, the stock is still doing fairly well compared
Speaker 4: to last year. Last year it was underperforming dramatically. But
Speaker 4: I think what we hear from Q two results from
Speaker 4: management in terms of how it's dealing with those losses
Speaker 4: in traditional TV and how it's investing further and broadband
Speaker 4: five G even those will be indicative of how the
Speaker 4: company could potentially do going forward.
Speaker 1: I think there's a question of whether Comcast even needs
Speaker 1: to be in the media business, especially at a time
Speaker 1: where this is a year they've had some key executive
Speaker 1: exits in Jeff Schell and Lindya Karita, who my guess
Speaker 1: is regretting leaving NBC Universal right now for Twitter, and
Speaker 1: now they've got a new guy in place in Mike Cavanaugh,
Speaker 1: who has got to prove himself right now. It's a
Speaker 1: really critical time for Brian Roberts, who I think people
Speaker 1: have wondered whether he's got to make another big deal
Speaker 1: and maybe has sort of sat on his on his
Speaker 1: you kept the gunpowder dry for perhaps a little too
Speaker 1: long in terms of what that next big deal is
Speaker 1: going to be. They thought EA was going to be
Speaker 1: a deal last year. He didn't pull the trigger on that.
Speaker 1: He's got to do something, and I don't know what
Speaker 1: that is going to be.
Speaker 2: Except for back to our other other thread of this conversation,
Speaker 2: Comcast was has long been in the crosshairs regulators because
Speaker 2: broadband is so important, because broadband really is the utility
Speaker 2: now that powers you know, the powers everything in our homes.
Speaker 2: And I think they have an extra layer of scrutiny
Speaker 2: in DC because they are so big and you know,
Speaker 2: remember hard to believe, like ten years ago they were
Speaker 2: mixed for you know, the FDC nixed them from buying
Speaker 2: Time Warner Cable, which would have really made them bigger
Speaker 2: in cable. I'm sure there's a lot of you know,
Speaker 2: what if scenarios, if that could have if that could
Speaker 2: have happened. So I think that they are also I
Speaker 2: think they have always shot down any suggestion that NBC
Speaker 2: Universal might be somehow spun off from the cable but
Speaker 2: that just boy, that does that seem to like create
Speaker 2: more flexibility. So when something is that logical, it feels like,
Speaker 2: you know that it may sort of carry away on
Speaker 2: its own logical weight. But you know, then again, the
Speaker 2: Roberts have preferred The Roberts family has preferred shares. They
Speaker 2: have pretty firm control of comcasts, so it's good to
Speaker 2: have preferred shares.
Speaker 1: I guess, well, whether it's Brian Roberts, Bob Backish, Bob Iger,
Speaker 1: Ted Sarandos, a lot of people we got to keep
Speaker 1: an eye on in the coming quarter. Thank you Cynthia
Speaker 1: and Heidi for walking through some really interesting issues as
Speaker 1: we head into what's going to be a really interesting
Speaker 1: period for the media sector.
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