Netflix, Comcast, Warner, Paramount and Charter: Ad-Relevant Issues From This Week's Investor Events

Sep 08, 2023

Investment bank Goldman Sachs hosted its annual technology, media and telecom conference this past week, featuring several of the biggest companies in the video industry and whose events were webcast. I thought there were several interesting points raised and important themes explored related to advertising and content distribution, especially in relation to last week’s pivotal news involving Charter and Disney. Highlights from sessions including Netflix, Comcast, Warner Bros. Discovery, Paramount and Charter follow.

Netflix

Netflix’ co-CEO Greg Peters stated during his session that “consumers spent about $620 billion in the areas that we play in, and we win about 5% of that consumer spend.” As this figure refers to an ex-China number for a space that I believe goes well beyond video services I’d argue the right way to look at their share is the percentage of consumer spending on video. Within the US, I estimate total spending on video by consumers was $145 billion. A like-for-like global figure is unlikely to be much more than 2x this number given how big the industry is in the US. For purposes of calculating Netflix’ “share of wallet” of the $37 billion spent by consumers in the US during the past quarter, Netflix accounted for approximately $3.3 billion, or 8.9% of the total. This would be slightly above their viewing share of professional content, as the company’s total TV consumption share excluding YouTube would have been under 8% according to my analysis of data from Nielsen. Of course, as they continue to invest relatively more in content and program higher quality content vs. alternatives, there’s no reason they shouldn’t be able to realize a higher share of revenue than their share of viewing. And at the same time, it’s also likely that so long as they continue to increase spending on content by more than their competitors, I believe their viewing share would likely rise as well.
Peters also stated they want to “(unlock)… the capability of connected TV to provide a different experience for both users and for advertisers. I think that means personalization when it comes to ads, increasing personalization when it comes to ads.”. I note that personalization is unlikely to matter much to marketers at small scale, unless whatever kinds of personalization Netflix envisions are also possible with other owners of video inventory. Otherwise, success in TV advertising will be all about the volume of GRPs (gross ratings points) they are able to sell as well as audience reach (more specifically, incremental reach) at cost effective prices.

Comcast

The big news in CEO Brian Roberts’ conversation was that Disney and Comcast have slightly accelerated their timeline for resolving ownership of Hulu. Roberts’ comments could only be interpreted as very positive in terms of their expectations for the realization of value, which is consistent with what I’ve been expecting for a while. However, as Roberts also stated that Comcast intends to return proceeds to shareholders, no matter how the transaction plays out it won’t meaningfully impact Comcast’s business – except to the extent that a high price might weaken Disney because of the financial consequences of deploying more capital than it wants to in order to take control of Hulu.

Warner Bros. Discovery

As part of a dialog on the Charter-Disney dispute, including the question “how do you think about the relationship that you have with the pay TV providers” CEO David Zaslav said “I still believe in linear. People over 40 are spending most of their time still with linear television…We need to have content everywhere, and we need to create an ecosystem that works for everyone.” This reflects WBD’s preferences to try and prop up the legacy business as much as possible while trying to balance investment in streaming. I would argue the company would be better off in the long-run by focusing completely on streaming, but the cashflows they depend on from legacy distributors remain particularly critical for the company given the debt they carry.
Speaking of the cable bundle, Zaslav said it “was quite a good and nourishing experience for consumers, whereas downloading all these different apps, as we talk to consumers, they find it difficult” further illustrating the concept that multiple networks might effectively offer bundles by referencing a recent event which he described as an “experiment” involving AMC content on HBO Max. Putting aside that I am doubtful any consumer would call their experience with traditional cable “nourishing” or that many actually liked force bundles (regardless of the efficency of those bundles) I would note that it’s a fundamentally different concept to offer, say, Max, Hulu, Disney+, Netflix, Prime, Paramount+ and Peacock in one combined product. There will surely be some consumers who would happily take them all together – at a discount – but it’s more likely that most will trade off more complexity and issues with churning in order to keep overall costs down
On advertising, Zaslav effectively reiterated guidance for the current quarter provided in August by stating, “I think you'll see a little improvement this quarter (relative to the second quarter’s 13% constant currency decline), but not a lot.” International is “a little bit better” than domestic advertising.

Paramount

CEO Bob Bakish referenced partnerships with distributors internationally and highlighted their “hard bundles” (i.e. making Canal+ the primary seller of Paramount+ in France, allowing Paramount to be indifferent about whether or not the product is available primarily through streaming vs. a conventional set-top box) and co-marketing agreements in the US which have effectively allowed every distributor to resell their streaming products and are practically consistent with the terms that Charter has demanded. To be sure, this approach should be a viable option for all parties involved, although I believe it only serves to create a smoother path towards a less desirable financial future relative to the past rather than leading to an industry that becomes stronger vs. 10 or 20 years ago.
Commenting on advertising, Bakish stated “the advertising market is a bit of a complex animal. It certainly has a number of moving pieces in it. That said, When we look at it, one of the things people continue to talk about is…where we are we with respect to the economic cycle.” For reference, where we are with respect to the economic cycle is that the US economy continues to grow at a fairly robust pace, with the Philadelphia Federal Reserve’s third quarter consensus estimating 5.5% nominal growth on a year-over-year basis during the third quarter, or real growth of 2.2% on an annual basis, slightly below the second quarter’s 2.5% real growth rate year-over-year, but very much in-line with growth during most of the 2010s. Put differently, declines in television advertising – such as Paramount’s enterprise-wide ~5% constant currency decline in the second quarter – are much more likely due to secular rather than cyclical factors, and the same trends are most likely dominant at the present time. However, he noted that “sports continues to be very strong”

Charter

Fleshing out some of the ideas conveyed on last week’s investor call related to the carriage dispute with Disney, Charter’s CEO Chris Winfrey said “the alternative world, when you think about it, it's pretty interesting. If you had an environment where we no longer carry Disney content, which is becoming more and more of a potential reality, you have to say, well, what other additional sports content would you renew. At that point, there's very little. And so you'd have a smaller base of customers, but you'd have a smaller package with a much better price and it would be a package of general entertainment content that customers actually wanted, watched and valued…It doesn't mean that you wouldn't sell sports…it would be self-selecting for customers who are actually looking and willing to pay that type of price for sports content. And around all of that, we could sell direct-to-consumer and SVOD products.” Notably for the advertising industry, if sports programming effectively went a la carte and lost casual viewers, sports – the only real lynchpin of TV advertising at this point in time – could see severely diminished appeal for the marketers who dominate TV advertising today.