There's a two-act play serving as a recurring performance this earnings season when it comes to most streaming service stocks. Whether it's a stand-alone business or a segment within a media or tech giant, it's largely the same:
- Act One: The streaming business is growing, but -- hey -- it's losing a lot of money.
- Act Two: The company expects the digital platform to be profitable or cash-flow positive by 2024 or 2025.
Losing money now makes sense. There are a lot of hungry players in this now-crowded market for your streaming attention. It's not cheap to crank out the kind of content that viewers will pay to watch. It also is expensive to stand out in this environment, so platforms trying to grow their audiences need to invest aggressively in marketing campaigns and promotional activity.
It makes sense in theory, but it shouldn't pass your sniff test. If they're almost all losing money now, they certainly won't all be rolling in the black sustainably in a year or two. There will be a shakeout. There will be failures. There will be crystal balls smashed to bits.
That's entertainment
It's been a buzzy past few weeks for media companies. Let's check in with some comments or observations made by some of the currently unprofitable players in this niche.
Paramount Global (PARA -0.47%): Paramount+ saw revenue soar 65% over the past year, topping 60 million subscribers in the process. Its ad-supported Pluto TV channel now has 80 million monthly active users.
Unfortunately, Paramount's direct-to-consumer segment clocked in with adjusted operating income before depreciation and amortization of negative $511 million for the quarter, 12% worse than the prior year's deficit. The company slashed its dividend, but it's calling 2023 its peak investment year for streaming, expecting overall earnings to start improving next year.
Comcast's (CMCSA -0.37%) Peacock: "The results we're seeing give us confidence that we are on the right path for Peacock to break even and grow from there." It's going to be a long and winding path -- earlier this year, Comcast was projecting a $3 billion loss at Peacock in 2023.
Warner Bros. Discovery (WBD -0.71%): Its U.S. direct-to-consumer business is turning the corner, and Warner now expects the segment to be profitable in 2023, a year ahead of its guidance. There is a price to pay for this fiscal prudence. Its streaming subscriber base has only grown by less than 2% over the past year to 97.7 million, and total revenue for all of Warner Bros. Discovery declined for the quarter.
Disney (DIS 0.18%): After back-to-back quarters of operating losses greater than $1 billion for its Disney+ anchored streaming services, the House of Mouse showed sequential and year-over-year improvement in Wednesday's fiscal second-quarter report.
However, its Disney+ subscriber count did contract both here and abroad in its latest report. Disney continues to expect the division to be profitable by the end of fiscal 2024. Cutting content costs and raising prices are the obvious paths, but you aren't likely to achieve both while also growing your viewer count.
Image source: Getty Images.
Beyond Thunderdome
Netflix (NFLX -3.92%) is the lucky one. It has already achieved the economies of scale to balance content investments across its massive and growing user base in a consistently profitable manner. It's the birthright of the initial disruptor in this expanding industry.
But it's not just the most popular streaming services (outside of Netflix) struggling to grow and generate positive net income. Other streaming-video hubs and services continue to struggle. Livestreaming specialist fuboTV (FUBO -3.50%) is hoping to generate positive free cash flow by 2025.
It seems highly unlikely that every platform pointing to 2024 or 2025 as the finish line in the race against losing money will get there. There could be casualties in an inevitable shakeout. Consumers can become more discerning in how they allocate their living room entertainment budgets.
It will be an interesting battle to watch, but some investors might find that the end result of the battle for viewers will be something that their portfolios would prefer not to watch.
