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The stock market has wiped over $500 billion from the media sector this year — here's what happens next

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The media industry has battled through a tumultuous 2022.

Rising costs, debt-ridden balance sheets and a renewed focus on profitability weighed on the struggling sector as investors swiftly punished companies struggling to turn a profit.

Netflix (NFLX) shares are down about 50% on the year, while companies like Warner Bros. Discovery (WBD) and Spotify (SQUARE(have sunk over 60% with Roku)ROKU) in 80% freefall.

Fox Cable Operators (FOX) and Comcast (CMCSA) fell about 20% and 30%, respectively, while Paramount Global (PARA) shares plunged more than 45%.

Disney (SAY), once a Wall Street darling, also fell 45% on the year, and the stock is heading for its worst year since 1947 after the the long-awaited sequel to “Avatar” Missed opening weekend expectations to cap off a tough year for the House of Mouse.

In this year alone, the stock market wiped out more than $500 billion in market capitalization from the world’s largest media, cable and entertainment companies, with more pain expected in 2023 amid rising interest rates. higher and an unfavorable macroeconomic environment.

So what exactly happened – and what could happen next?

Wall Street earnings push: ‘It’s time to be a real company’

2022 has been a clear year of “introspection” for the media after the industry has had a bumpy ride throughout the pandemic with shocking highs and lows.

As the the “stay at home” trade has run its coursespikes in subscriber penetration in the US and Canada meant streaming companies quickly saw their growth flatten.

Netflix, a longtime leader in the streaming wars, lost subscribers for the first time in its history as its market capitalization fell from more than $267 billion at the end of 2021 to around $130 billion.

Similarly, NBCUniversal’s Peacock saw zero growth in the second quarter, although subscribers rebounded in the third quarter with 2 million net additions.

Slowing subscriber growth has led to increased criticism of production budgets, which have risen sharply as competition intensifies. Netflix has committed $18 billion for content alone in 2022 while Disney has increased its budget by $8 billion this year to $33 billion.

Among companies that have started to transition from linear to streaming (excluding platforms like Netflix, Amazon, and Apple), spending on direct-to-consumer content fell from $2.7 billion in 2019 to $15.6 billion. billion in 2021, according to Wells Fargo data, cited by The variety.

That figure is expected to climb to nearly $24 billion this year, despite rising streaming losses.

Disney’s direct-to-consumer division lost more than $4 billion in its 2022 fiscal year, which ended Oct. 1. Meanwhile, Paramount told investors that broadcast losses will total about $1.8 billion this year, more than Wall Street expectations.

Warner Bros. Discovery, which saw its market cap cut in half amid its messy restructuring efforts, reported negative free cash flow of $192 million in the third quarter, compared to positive free cash flow of $705 million a year earlier. The company now expects to incur $3.5 billion in content impairment and development impairment by 2024.

Industry Ad-Supported “Pivot”

Amid the race for profitability, advertising has become a potential bright spot for investors, despite the global slowdown in ad spending.

Netflix and Disney jumped on the ad-supported bandwagon this year, joining Warner Bros. HBO Max from Discovery, Peacock from NBCUniversal and Paramount+ from Paramount Global.

Netflix has rolled out its $6.99 offer in Novemberwhile Disney+ followed a month later priced at $7.99. Wall Street analysts remain largely polite on the profitability aspects of advertising levels, while advertising experts have called the beginnings of decisive moment for the media industry.

“This is absolutely a pivotal moment for the industry,” Kevin Krim, CEO of the advertising measurement platform OEDpreviously told Yahoo Finance.

“I think what we’ve learned as an industry is that there’s a limit to how many consumers will pay,” Krim said. Advertising is a very smart way to subsidize these subscription fees.

Industry experts agree that offering lower-cost, ad-supported options is an important protection against churn, something all streamers want to avoid in the face of increased competition.

“I’m a big fan of giving consumers an option for an advertising tier,” said Jon Christian, executive vice president of digital media supply chain at Qvest, the largest media-focused consultancy and entertainment, at Yahoo Finance.

Christian added that data will be a big driver (and potential revenue stream) when it comes to more targeted advertising in 2023: “Data can drive up the price of the various ads they run on the platform. “

Nevertheless, the benefits of advertising will likely take time to mature.

Netflix’s advertising level already seems to be suffering a few severe growing pains – including insufficient registration reports and non-respected audience guarantees. Analysts, however, watch out, it’s still early.

Analysts eye upcoming media merger

In addition to focusing more on content spending and advertising, investors should also Expect More Media Fusion Activities Next year.

Wells Fargo analyst Steve Cahall wrote in a recent note, “Our forecast for 2023 indicates that the media and cable industries are responding to generally tougher times, both cyclical and structural. Tough times mean tough decisions.”

Possible acquisition targets in 2023 and beyond include Warner Bros. Discovery.

Lionsgate’s film and TV studio, which the entertainment giant plans to turn into a separate company, will also be up for sale, while AMC Networks (amcx) continues its restructuring which could lead to an acquisition.

Laura Martin of Needham written in a recent client note Paramount could be attractive to offload, while smaller players like WWE (WWE), Curiosity Flow (CURIW) and Chicken Soup for the Soul (CSSE) will likely sell because of their size.

Disney CEO Bob Iger, who She returned to the media conglomerate to much fanfare in Novemberalso goes face a multitude of decisions – including what to do with notable assets like Hulu (sell it to Comcast?) and sports giant ESPN (turn it?).

Layoffs and Hiring Freeze Hit Major Media

Layoffs hit media giants like CNN in surge in profitability

Layoffs hit media giants like CNN in surge in profitability

Amid heightened profitability concerns, media giants have carried out mass layoffs and hiring freezes in an attempt to stem the bleeding. More than 3,000 jobs have been lost through October this year, according to data from Challenger, Gray & Christmas, cited by Axios.

netflix about 150 positions made redundant of the streamer’s 11,000 employees in May, attributing the downsizing to “slowing revenue growth” and a greater decrease in expenses.

Earlier this month, Warner Bros. Discovery revealed prominent Discovery executives will start the company after that CNN+ removed, more CNN employees and slashed 14% of its HBO Max workforce this year.

So far, the company has cut more than 1,000 unit jobs, like WBD CEO David Zaslav. redouble its efforts to restructurewhich also included discarded projects and programs.

Paramount Global began cutting jobs in November, targeting its ad sales group, according to Deadlinewhile the AMC networks (amcx) announced plans to lay off about 20% of its U.S. workforce amid CEO Christina Spade’s exit.

AMC Chairman James Dolan reportedly told employees that the network was struggling to make up for cable decline as the cord cut accelerated, referring to company-owned streaming entities like AMC+ and the horror platformer Shudder.

Similarly, Comcast’s cable unit made job cuts in November, while Roku (ROKU) cut 200 jobs, or 5% of its workforceshortly after its third quarter results.

Return to theaters yet to be determined

Avatar: The Way of the Water

Avatar: The Way of the Water

The theater industry has continued to recover from pandemic-related losses in 2022 – although it remains to be seen whether a full comeback will take place.

Movies like “Top Gun: Maverick” broke recordswhile Marvel “Black Panther: Wakanda Forever” and “Doctor Strange in the Multiverse of Madness” easily nabbed domestic openings of over $100 million.

Yet Disney’s “Avatar: The Way of Water” got only 134 million dollars in domestic markets over its three-day opening weekend, missing expectations and sending Disney shares to their lowest level since March 2020.

Despite the failure, theater executives have defended the debut, assuming the film will steadily add box office dollars over the holidays and into 2023.

Streaming giants have also embraced drama, with Netflix’s ‘Knives Out: Glass Onion’ enjoying a successful limited theatrical release during Thanksgiving week, while Amazon would have invest $1 billion produce 12 to 15 films a year exclusively for theatres.

Overall, the domestic box office is expected to gross around $7.4 billion for the year, according to Box Office Pro. While that number is still about 30% behind pre-pandemic figures, it is hoped that next year’s larger release schedule will help close the gap.

Alexandra is a senior entertainment and media reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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