Douglas Montgomery, Senior Advisory,

June 2, 2022

The long bull market in the entertainment industry has seemingly come to a halt in the spring of 2022. The industry’s darling, Netflix, has fallen in value by almost 60% in the past 12 months and is down 70% from its Squid Game-infused high in November 2021. 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. Hitting $160.5M over the long weekend, the film had the benefit of a massive red-carpet global marketing campaign by Paramount and its star, Tom Cruise. The movie also benefited from strong attendance of the 35+ crowd comprising of 55% of the audience. 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 crowd.

Memes Come to an End

The meme stock craze of 2021 hit its height in June at almost $70 per share for AMC. This result buoyed by the reopening theaters and a string of relative successes starting with Godzilla v. Kong in March and culminating with F9: The Fast Saga in late June. The global pandemic that started in March 2020 had shut theaters tight and they would not open (at all) until November and not fully until June 2021. During this 15-month time frame, the stock price of the world’s largest theatrical chain, AMC, would rise from around $5 per share in May 2020 to ~$70 in June 2021.

Even the well-diversified portfolio of the Walt Disney Co. (theatrical films, streaming, parks, consumer products, sports, etc.) is down in 2022, with its stock down almost 30% in 2022, despite adding 8M new streaming subscribers in Q1 2022. Have we finally reached, even passed the peak of the video 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,” creating in situation in which the ability of producers and studios “to cut through the clutter to create real buzz” was severely dampened. As with an economist’s ability to predict two of every five recessions, Landgraf was right about peak TV, though a little early in declaring 2015 the year it occurred. But his worry about growing confusion for viewers is well justified. Preventing churn has now replaced growing subscriptions as the biggest challenge facing 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 subscribers, while reporting a net loss a scant month later.

One Solution: Both!

The test for entertainment companies entering the summer of 2022 is optmizing revenue to increase profits. This will require further experimentation by Hollywood with various models, pricing, and windows.

Although day-and-date release was declared dead by NATO Czar John Fithian, a closer examination of studio release strategies begs to differ. Disney has been releasing some Pixar films such as Turning Red directly on Disney+, while also releasing films such as Encanto to the theaters, with a 30-day window. Warner Bros. Discovery appears to be returning to a traditional window strategy, after its day-and-date foray in 2021, which successfully spiked HBO Max subs. The company announced “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 the “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.

Nobody Knows Anything

Perhaps the most honest comment on the future of cinema (and entertainment in general) was Thierry Fremaux’s comment at the 75th edition of Cannes that “the future is wide open.” As Netflix and other companies realize the days of easy money and rapid growth are over, they will be forced to be more innovative, more adaptable, and more disciplined when it comes to costs. Cinemark CEO Sean Gamble announced at the J.P. Morgan Global Technology conference the company will continue to experiment with dynamic pricing, yet another one of the industry’s long-term non-starters being reconsidered.

In the spirit of “nobody knows anything,” the future is indeed wide open and decidedly uncertain.