Research Recap | Hollywood Strikes and the Broader Media Industry
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Jack Atherton: Thank you for joining. My name's Jack Atherton. I cover TMT specialist sales here at JP Morgan. Today, I'm joined by Phil Cusick who covers communications and media research here at JP Morgan. He's been with the firm since 2010, and prior to that, spent eight years at Bear Stearns and two at McCrory. I'm also joined by David Karnovsky who runs the media entertainment and advertising sector from research here at JP Morgan. He's been here for nearly a decade, and prior to that, covered the auto sector, which ironically, is seeing the same issues as the topic for today's show, which is the Hollywood actors and writer strikes. And we'll also be discussing the broader industry, across media. Welcome, guys.
Phillip Cusick: Thanks, Jack.
David Karnovsky: Thanks, Jack.
Jack Atherton: To start off, David, can you run us through just some background to what has caused the strikes and what's brought us to where we are today?
David Karnovsky: Yeah, sure. So I think it's important to note at the outset, so this is the first time since I think 1960 the writers and actors are on strike at the same time. So the dynamic is indicative of real structural issues facing the industry, I think, rather than just negotiations over the level of salary or benefit increases. If I think about the drivers, at a high level, you know, the distribution of content, specifically television, has really changed dramatically over the past decade. Or really since Netflix entered the market for original programming. And as a result, the artists and creatives are... the way they are paid and rewarded for their work, or in the case of writers how they progress through their careers, have shifted a lot. And that's led the guilds to step in and say, "Hey, we need some sort of reset here that shifts the ultimate economics kind of more back in our favor." Though I would assume the studios would probably take issue with that notion, given their limited profitability or lack of profitability on streaming so far. I wouldn't say generative AI caused the strikes, but platforms like OpenAI, first launched and gained pretty significant attention in the run-up to the contract explorations. And just created another point of anxiety for the actors and writers who wanna seek protections very early against this technology.
Jack Atherton: And you've touched on some of this in that answer already, but can you just walk us through what the writers and actors are arguing for?
David Karnovsky: Sure, yeah. So, I would say at a common level both guilds are asking for minimum wage rate increases, enhanced benefits, though probably the level of step-ups here is higher than we've seen in past negotiations, maybe reflecting the inflation in the economy the past few years. The guilds want to establish residuals when content is streamed on free AVOD services, like Tubi or Pluto. And then they want higher residuals for foreign streaming. One of the more complicated topics is that the guilds want to tie residual payments on the streaming to some kind of success metrics. So if you wrote or starred in a movie or show that's suddenly seeing a resurgence of interest, think Suits on Netflix right now, there should be some sort of compensation for that. And then lastly, there's artificial intelligence. So the WGA, they're adamant they don't want AI training on their work, or making scripts. And they really want to avoid a situation where studios have a large language model write 75% of the movie, and then bring in a human writer to kind of fix it or make it better. And then on the actors' side, I think they want to ensure any consent and compensation when their likeness or voice is used. And maybe a little bit of a tougher issue, I think the guild wants to limit the ability of the studios to use AI to replace background extras. Which is kind of weird since I think CGI has been doing that for, like, 20 or 30 years. Anyway, specific to the writers, and I think this is one of the big sticking points, they want to address the, quote, "Abuses of mini rooms." So over the past few years, it has been common practice for studios to employ kind of a small group of writers, maybe three or four, who write a full season of a show that may or may to be green lit. And then that's kind of it as far as the writer's role. So this is a big departure from the past, when writers would stay with the show through production, they'd do rewrites, and then they would learn, kinda crucially, how to become producers or showrunners. And so you hear this a lot on social media from popular showrunners or writers, like George RR Martin, who have said, "The concept of mini rooms kind of really prevents the next generation from advancing their careers." And then specific to actors, they wanna limit the negative effect of what are called self taped auditions. So during the pandemic, you know, shows and movies out of necessity switched to virtual auditions. As we live in a competitive world, actors responded by turning those auditions in their homes into very elaborate productions. They probably spent way too much money on this, and the guild is looking to curb that behavior.
Jack Atherton: Okay. And I should add that we're recording this on the morning of Friday, September 22nd. It seems like negotiations between the studios and the writers are making some progress. But where do you think we stand on a resolution? Have you got any view on timing of that?
David Karnovsky: Yeah, it's hard to say on timing. You know, just for some context, the WGA strike began on May 2nd, SAG-AFTRA strike began on July 14th. There were some talks in August, the WGA called those, uh, offers or what, what the AMPTP had brought forward, insufficient. Like you said, some things restarted this week, maybe there appears to be some traction. It could be a binary situation where if the talk's show progress it could get done very quickly. If they don't, maybe the two sides have to step away and, uh, and take another breather, uh, for a couple of weeks. As far as what a resolution kind of might look like, you know, the studios completed a deal with the Directors Guild in June. That's maybe a template for some of the major issues, like wage increases, or AVOD, or foreign residuals. On matters like mini rooms, AI, success based payments, you know, there's really gonna have to be some sort of compromise. I think the really complicated one, in my opinion, is residuals based on some sort of a success metric, because how do you even define that in streaming, right? Is success a show that generates a lot of viewership? I don't know, because outside of ad tiers, streamers don't get paid for that. Um, is success a show that leads to gross ads or limits churn? You know, until now a company like Netflix didn't really have to think about any of this, because they would just buy out backend rights. A resolution on this topic almost will certainly require disclosure of viewing data as well, which streamers have traditionally kept to themselves. And that could be really interesting, because outside of a few select press releases or top 10 lists, we have no idea how big the audience is for most shows or movies on these services, especially the ones that don't perform well and cost a lot.
Jack Atherton: The point you make on advertising is interesting, and maybe that's something we will get on to later on in the show, and just as the streamers are making that migration away from SVOD and towards AVOD. Shifting gears a little bit, you both cover companies in the entertainment space that are exposed to this. Phil, can you just talk about some of the negative implications for the companies that you cover as a result of the strikes?
Phillip Cusick: Yeah. So early on the, the companies that create content for a living, they make shows and they sell those to other companies, whether it's a TV show or a movie, are not performing. Right. So movies are being pushed out, shows are not happening, and so the performance of those on a revenue basis is being pushed out. Near term, that saves a lot of cost, because they're not paying salaries. But over the next year, as, as the, the pace of releases slows down, revenue and earnings are going to start coming down. The next piece, of course, is that products that companies are putting on their streaming services, the pace of releases is starting to come down as well. And so the number of new shows and hits available on a variety of streaming services really starting to slow, especially for companies that rely on US or European production. Netflix is a little bit less exposed, they have a lot of international production that they can sort of reissue in the US. But as those streaming services haves have less content, especially in a world where they're all raising prices, that might become less attractive for customers. And we might start seeing churn start picking up. And that would, I think, get these companies attention very quickly.
Jack Atherton: So that's interesting. You touched on the fact that there is potentially a slower release slate for some of the streaming companies, which also comes at a time that they're all raising price, one of them being Disney. They hosted an event down in Florida this week. Can you talk about the maybe disconnect between a lower amount of content alongside prices increasing for the streaming platforms?
David Karnovsky: Yeah, so first of all, from the perspective of the companies, my sense is that there's a real urgency to get the strikes done. One executive told us this week the day we're just gonna go into a room with the writers and stay there until there was deal. Press reports are sort of back and forth, so it'll be interesting to see if this is done fairly quickly. But going forward, all of these companies are A, raising prices, and B, gonna do less content. So for Disney in particular, they've done too much content over the last few years. They've gotten distracted, and I think they've decided they don't need a new Marvel release four times a year. They don't need a new Star Wars release two to four times a year. And so there's going to be less content produced over the next few years, and it's a, a strange dichotomy with the writers and actors looking to make more, because right now, the strike creates a pause and really allows all these companies to rethink what they're producing. It wouldn't surprise me if some of these productions never come back, given the pause and the cost to restart.
Jack Atherton: And thinking about potential silver linings, we saw during COVID as production was put on pause, some of the media companies, most of the media companies, saw a margin in free cash flow inflections. Do you see that as a positive now? Or is it just a phasing thing that ultimately gets wiped out by the knock on negative of fewer productions coming to air over the next year, two years?
David Karnovsky: Yeah, so the, the immediate impact is the free cash flow gets a lot better as you stop producing and you stop paying salaries. Next year as production ramps back up, that will mostly reverse, assuming you'd do the same number of things. But again, I think that the trend is toward fewer productions going forward, and that would happen whether there were strikes or not, and the strike creates an opportunity for all these companies to rethink what they're going to do. So I think all of the streaming services are struggling with profitability, and are going to be spend less per show, and create fewer shows, and raise prices, and it will be interesting to see how consumers respond.
Jack Atherton: Interesting. Moving to the box office. We've started to see a few movie release dates pushed out already due to the strikes. I think Dune two probably is the most notable. David, do you see more risks of further push out happening as a result of the strikes?
David Karnovsky: Yeah, I should say that the Dune two delay was tough for me personally, as I'm a big fan of the first film, to the point that I went out and, and bought the book Dune, read it, which by the way, also tells you the plot of Dune two, so maybe there's less pressure on me to see the movie now. You know, the rationale behind the delays is that the Actors Guild has prohibited its members from promoting their films, even posting on social media, so for certain movies, especially those that are sort of driven by star power, that can be a major problem. In the case of Dune two, Warner Brothers faced the real prospect of not having, you know, their lead actors, like Timothee Chalamet or Zendaya, be able to participate in the marketing. So, their decision to delay I think made some sense. If the strike ended this week or next, I wouldn't think we'd see any more push outs at this point. If things did extend deeper into the fall or year-end, then yes, it's at least possible that some of the kind of major tent poles kind of planned for the Thanksgiving or Christmas period could move to 2024.
Jack Atherton: To that point, we've seen fits and starts to the box office coming out of COVID. We started to see a bit of resurgence this summer with Barbenheimer. What else are you excited about, see, with the exception of Dune two. What else are you excited about for the rest of the year for, with regards to tent pole releases?
David Karnovsky: Sure. It's kind of amazing to think that the biggest opening weekend for the rest of the year could actually be Taylor Swift's Eras Tour movie. And the strike certainly poses no risk there as Taylor is distributing the film direct to theaters and the only marketing she needs to do is, is probably just to post on her Instagram. So in November, Lion's Gate is going to release Hunger Games: Ballad of Songbirds and Snakes. They're looking to reboot that franchise with some young emerging stars. So that's one, if you had an extended strike kind of through the marketing period in October and early November, could be vulnerable to delay. You know, we already saw that studio push another reboot, Dirty Dancing Two, to 2025. As far as the rest of the slate, I'm kind of paying attention to Wish. That's Disney's release for its traditional Thanksgiving animation slot. Disney struggled a bit last year at the Thanksgiving time with Strange World, and I think a lot of exhibitors are kind of eager to see their animation back on a better footing. That title's animated and just kind of given Disney always takes that Thanksgiving animation spot, I don't really see that one at risk for delay, though.
Jack Atherton: Okay. And less of a box office grosser name to be excited about, but Napoleon with Joaquin Phoenix, I thought the trailer was great for. Shifting gears to, just thinking about the broader media industry. There's lots of other threats outside of just the strikes going on at the moment. Cord-cutting is one that has been relevant for the best part of the last decade, and given the recent debate after Disney and Charter saw a carriage dispute. Phil, can you just talk a little bit about what happened there, and the ultimate resolution and how that shapes your view of the industry?
Phillip Cusick: You know, media companies for 30 years have been raising prices, and I would argue, lowering quality, while at the same time, creating an alternative universe by selling content to Netflix. And so this arbitrage that consumers have of spending less, getting almost as much or maybe more content through streamers by just going over the top, is not gonna stop. It's interesting that the arbitrage to some extent is going away as all the streaming services raise prices, but a consumer can turn Paramount on one month and Peacock on the next month and essentially watch all the content that they want. And so as the price increases go up, we think it's gonna be difficult for companies to capture all of that rather than create faster churn. So even though the Disney and Charter renegotiation last week is gonna create a little bit of a different ecosystem, where Charter is going to provide Disney+ to every one of its customers on an ad-supported basis, and pay Disney for that, I don't think this is really gonna reverse what is a long-term trend of customers cutting the cord and choosing exactly what they want month-to-month rather than paying for the entire linear bundle. And that puts a lot of pressure on smaller companies like Warner Brothers, Paramount, NBC, that are gonna have a hard time keeping customers on their service every month, like Netflix for the most part does and what we think Disney can do over time. And so those companies are gonna have a hard time keeping customers through the cycle.
Jack Atherton: And Disney is Disney. Disney has ESPN, and we've seen through these negotiations that sports command more power with consumers, with advertisers, than basically any other content that's on the air at the moment. You touched on the risk to the longer tail of media networks out there that might find it more difficult. Do you think they'll be able to reach similar agreements that Disney have with Charter, or is it going to ultimately be more difficult for them to get similar sorts of deals?
Phillip Cusick: Well, I think the Charter deal with, with Disney is interesting for a couple reasons. One is, as I said, Charter's gonna distribute Disney+ to every customer. Every video customer. They're also gonna be able to sell Disney+ to their broadband customers for a near-retail price. And I think their desire is to be able to do that with every streaming service out there, so they want to become the distributor for streaming services to their broadband customers. But from a perspective of a, again, Peacock or Paramount or Warner, you need to have enough content there to keep customers interested every month. I don't think Charter is gonna want to force people to stay on the service all the time. The other interesting thing about that Disney deal was that Disney's dropping nine channels with Charter, which is gonna save Charter about two dollars a month. If you look at some of these other companies, Paramount in particular, they have dozens of channels that have very little viewership but cost money, and I think you're gonna see those going away over the next few years as the contracts are renewed. That will save Charter some money. They'll see a price increase on the core services, but a lot of those sort of non-relevant channels are gonna start to disappear.
Jack Atherton: So MTV, Nickelodeon?
Phillip Cusick: Not MTV and Nickelodeon, but MTV four, Nick three.
Jack Atherton: Yeah.
Phillip Cusick: Things like that are gonna fall away.
Jack Atherton: Okay. And then coming back to sports, in a cord-cutting world, as I mentioned, sports really feels like the main reason linear still have relevance. David, can you talk a little bit about some of the upcoming rights renewals, um, that we're looking forward to? There was one announced just yesterday with WWE. Where do we stand there?
David Karnovsky: Yeah, sure. So there's probably two kind major rights renewals coming up that we're paying a little bit of attention to. The first obviously is the NBA. That's the largest rights renewal up for at least the next decade, and the league has been kind of forward with the media that they are looking for a big increase. I think every major sports buyer is going to be interested in this package, and the resulting distribution, I think, is a potential preview of how future rights may be divided up. In particular, we're going to be interested to see how much game inventory the NBA decides to allocate exclusively to streaming. Companies like Apple and Amazon, I think, are going to be interested. And then also how much they lean back into broadcast television, right? Which has seen a resurgence in interest from leagues and conferences given its reach. The other renewal that I'm paying attention to actually is NASCAR, which is in the market right now. This is a rights package that was arguably expensive when it was negotiated in 2013. And in the interim period, you've seen viewership for the sport decline pretty significantly. And its linear television partners have come under pressure. Um, the NBC Sports Network, for instance, even shut down. So until recently, every league, conference, or promotion that came to the market to sell their sports rights has seen an increase, including the one that you just mentioned that was out in the press yesterday. That started to break recently with the Pac-12, which is a college conference that was nearly or might be decimated from not finding a sufficient rights contract. Um, and so it'll be interesting to see can NASCAR be another promotion that sees an increase, or are kind of the facts of the ecosystem right now going to result in a decline?
Phillip Cusick: What I would add to what we talked about earlier is that, as you think about the, the sports ecosystem, if you're a viewer and you have Peacock, Paramount, and, and soon, if you have Max, you're going to get all the sports content that those companies provide: NBC, CBS, and Turner, and TBS. You're going to be able to see those over-the-top. Sports has been sort of a, a reason for people to stick around in the linear ecosystem, and that's starting to fade. I would argue that Fox, which doesn't have a streaming product, and ESPN, which so far doesn't stream, are holding up the, the ecosystem. But within the next two years, we expect to see ESPN over-the-top. And if you're a sports viewer, at that point, all you'll really be missing is Fox, and they probably will go that way at some point as well. So that pace of linear decline is going to keep going and maybe accelerate as people can get sports other ways than just paying for broadcast.
Jack Atherton: And does that over-the-top product ultimately stay within the cable bundle? And, we talked about the charter renewal that kind of keeps the cable bundle alive, is that how you think ultimately we end up?
Phillip Cusick: I don't think the cable bundle stays alive. I think the arbitrage is too real and customers are too interested in getting exactly what they want, when they want it for most people to pay for the bundle. It's not going to go away. It's not going to be a step change. But we've been seeing the linear ecosystem go down by 8% a year for the last five years, and I think it will probably stay at that pace for a really long.
Jack Atherton: And, and David touched on Big Tech getting involved in sports rights. We saw the Sunday Ticket this season move over to YouTube TV. Where does that shake out? And you've obviously got Thursday Night Football on Amazon Prime. These are sort of edging their way into big tent pole type licenses in sports. Does that just continue? Do they keep investing more? Do they potentially start to think about taking stakes in some of these big networks, as has been intimated around ESPN? Where does this shake out?
Phillip Cusick: So it's interesting. The, I thought Amazon did a good job with Thursday Night Football last night, but Amazon in general has pulled back somewhat from some of their higher spending efforts. There's been a lot of headlines in their media efforts that they've pulled back on some shows. They actually introduced a price increase for Amazon Prime this morning at three dollars a month if you want an ad-free Prime Video service. And so it feels like some of these companies are evaluating how important the media ecosystem is for them, whereas Apple still seems very invested in video. YouTube just signed up for Sunday Ticket, which is a tremendously expensive product with historically low viewership. And so it will be interesting as ESPN wants both distribution and content, it seems like those big three tech companies are really the only possible partners. And so among them, Google and Apple seem more viable today than Amazon. But if I were Amazon, Google, or Apple, buying 20% of ESPN is probably not my long-term focus. I would imagine that would be an entry and probably a push toward a longer term, larger ownership rather than their sort of final position.
Jack Atherton: Before we wrap up, are there any last minute comments that you guys would like to make that we didn't get the chance to touch on?
David Karnovsky: I think it's important to remember that strikes will, at some point, end, and then the focus is going to shift to what the long-term consequences for the industry will be. There is a case to be made that if the studios see increased costs and then there's sort of greater transparency on how shows are performing, that you could see a reduction in the amount of content that studios put out. Um, so it's, it's potentially inevitable that you'll also see a, a greater push for advertising as well. We talked about that a little bit earlier. Um, so maybe this period of time that we've all enjoyed as consumers over the past five years, where we've had access to a ton of content relatively cheaply without ads, often at promotional rates, may sadly be coming to an end.
Phillip Cusick: Yeah. I would add that the subscription plus advertising ecosystem business model has been there for a long time. And for the most part, consumers will accept ads in exchange for a lower price. I think we're going to see all these services go to a much more of ad-supported ecosystem than we've seen in the past. Even Netflix has gone that way, and I think it's going to continue down that path. But I agree with David in that the amount of content being produced is clearly going to start coming down. And the amount that companies are spending on this is probably going to come down as well. And so from a consumer perspective, the wealth of video content available is probably going to fade a little bit over the next few years.
Jack Atherton: Well, thank you both for joining today. Just to summarize, we talked about the strikes. We talked about what the Writers and the Actors Guilds are looking for and their potential path to the resolutions. I thought that the comments on AI was particularly interesting as part of that debate. We touched on the box office and potential further disruptions that are coming as a result of the strikes. David voiced his frustration with Dune 2 being pushed out, having watched the the first movie and read the books. We discussed the changing media landscape more broadly with regard to some of the carriage disputes that have been ongoing, and what that means for the broader industry. And the potential that over time there is going to be less content, we're gonna be paying more money, we're gonna be receiving more ads. And lastly we talked about the increasing importance of sport within the media landscape, and how that is evolving with the shift towards OTT and the, the mega-cap tech companies getting more involved here. Thank you gentleman for joining. I've thoroughly enjoyed this session. And thank you to the listeners for tuning in, and we hope you join us again next time.
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