Yahoo Finance Media giants struggle with ad slowdown as writers' strike poses added risks
It's been a busy and rather harrowing week in the media world.
Paramount Global (PARA) stock sank nearly 30% on Thursday after the company reported disappointing earnings and cut its dividend to $0.05 a share from $0.24. Warner Bros. Discovery (WBD) also reported an earnings miss on weak ad revenue, despite a surprise profit within its streaming division.
The results came after Hollywood writers began a strike on Tuesday in protest of higher wages and other demands amid the streaming boom. The walkout, which triggered a production shutdown, adds further risks in an already difficult environment. Moody's warned in a research note that if the strike goes on more than three months, some companies could see their credit ratings suffer.
Ad environment 'continues to be challenging'
Advertising has been a notable pain point this earnings season for legacy media giants that own television networks as businesses pull back on spending.
Paramount reported a 7% decline in ad revenue in the first quarter from the year-earlier period. Advertising within the company's TV media unit fell 11%.
Meanwhile, Warner Bros. Discovery's network advertising revenue tumbled by double digits, falling 15% in the first quarter from the year-earlier period, or 14% excluding foreign exchange.
"There's no doubt the environment continues to be challenging. We're working against pretty significant reductions in ad sales," Warner Bros. Discovery CEO David Zaslav said on Friday's earnings call.
Still, Zaslav signaled better days ahead.
"While our results for Q1 continue to reflect the current soft ad market, we are optimistic for a gradual improvement and an eventual upturn in the second half of the year," he told investors on the call. The company is aggressively pursuing advertisers for its Max streaming product and expects growth from CNN with the presidential cycle kicking off soon.
Paramount CEO Bob Bakish echoed a similar sentiment.
"We are seeing signs of stabilization in the ad market," Bakish said following its results on Thursday. "We like what we are seeing in many categories, and we like what we're seeing in the direct side of digital."
He added, "As the market continues to turn, ad growth will improve."
There was one bright spot in media earnings so far: In a surprise beat bucking competitors' results, Warner Bros. Discovery saw streaming losses reverse in the first quarter as subscriber growth came in above consensus estimates.
The company revised previous guidance, saying it now expects its U.S. direct-to-consumer business to be profitable by this year. Previously, the company said the streaming division will break even by next year before hitting profitability in two years.
The high stakes of Hollywood's writer's strike
Against the backdrop of earnings, the ongoing writer's strike will likely be a further headwind for studios.
Paramount's Bakish admitted the longer the strike continues, the bigger the impact it will have on the company's financials.
"In terms of financial impact, it really ultimately depends on duration of strike," he said on the earnings call. "But at this point, we think it's probably slightly dilutive to revenue, flat on [operating income before appreciation and amortization] and accretive [to cash spend.]"
A new report from Moody's estimated strike negotiations will likely result in higher costs for studios, especially for more diversified companies transitioning to streaming.
"We estimate an improved three-year contract for writers will ultimately cost media companies for which we have credit ratings $250 million to $350 million per year," Moody's Senior Vice President Neil Begley wrote in the report.
"We believe this standstill could last three months or more, with the stakes being larger," Begley added. "If it lasts longer, weakly positioned media companies with limited financial flexibility could see their credit suffer."
Zaslav added Warner Bros. Discovery wants the strike to end as fairly and quickly as possible.
"In order to create great storytelling, we need great writers. We need the whole industry to work together," he said in an interview with CNBC on Friday. "Everybody deserves to be paid fairly so our number one focus is let's try to get this resolved and let's do it in a way that the writers feel like they're valued."
Still, the executive admitted the industry is in the middle of "very significant disruption" as concerns mount over streaming profitability. Those hurdles could stall negotiations.
"People are changing the way they consume content so it's very difficult to figure out how does that work, what's the right value for it ... it's fair that we're trying to figure it out," he explained.
The Writers Guild of America (WGA), which represents thousands of television and movie writers, had been negotiating with the Alliance of Motion Picture and Television Producers (AMPTP), which bargains on behalf of studios including Netflix, Amazon, Apple, Disney, Warner Bros. Discovery NBCUniversal, Paramount, and Sony.
The 6-week talks centered on pay concerns brought on by the streaming boom. Streaming shows often have fewer episodes and less residual income compared to traditional network television, which often means less money in the pockets of writers.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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