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It is shaping up to be an eventful two weeks.
Yesterday, the credit-rating agency S&P Global kicked things off by cutting Paramount Global‘s debt rating to junk status. S&P cited “the ongoing deterioration of the linear television ecosystem and the elevated investments for its direct-to-consumer (DTC) streaming model” for the downgrade. It recommended, “Paramount will need to execute its plan to substantially improve streaming losses over the next two years to mitigate further downside ratings pressure.”
This morning, AMC Entertainment said it might sell up to $250 million worth of stock “to bolster liquidity” after a low first-quarter box office. The purpose of the sale will be “to repay, refinance, redeem or repurchase its existing indebtedness (including expenses, accrued interest and premium, if any) and for general corporate purposes.”. Shares dropped 11% as of this mailing.
Three days later on Thursday, April 4th, Disney shareholders will vote on whether activist investor Nelson Peltz should have a seat on the Disney board and redefine CEO Robert Iger’s legacy. Four days after that—on Monday, April 8, 2024—Warner Bros. Discovery management will be able to begin selling assets, possibly the entire company, without triggering a big tax bill. That is the date the lock-up period of the Reverse Morris Trust—a complicated legal mechanism for tax avoidance from the merger of WarnerMedia and Discovery—will end.
If we look past the boardroom drama of Disney and Paramount, or the shameless salesmanship of Warner Bros. Discovery David Zaslav, the reality is these business models now need real solutions for monetizing their content libraries. The focus, to date, has been on linear. But, now AMC Entertainment’s stock offering suggests theatrical is at risk, too. Streaming has not proven to be the solution. So, now what?
Key Takeaway
The next two weeks will open the doors to the end of media's gerontocracy and to new gaming-first, streaming-first futures at Paramount and Warner Bros. Discovery. That vision, or lack thereof, may be the key x-factor for whether we will see a gerontocracy start heading for the exits after the next two weeks..
Total words: 1,300
Total time reading: 5 minutes
Gerontocracy
Warner Bros. Discovery management ambitiously sought to win over Wall Street with a post-linear vision of growth and profitability from gaming and streaming. Disney has recently pursued a similar sales pitch with a $1.5 billion investment into Epic Games that is big on vision and light on details, as I wrote in “Disney, Epic Games, "Steamboat Willie" and Creators”.
Bank of America’s Jessica Reif Ehrlich questioned that vision on Warner Bros. Discovery’s Q3 2024 earnings call— “Is that enough to offset these linear challenges?” It was another way of asking, if there is indeed growth in streaming and games to be found, are these the management teams that will find that growth?
Iger indirectly delivered a poor answer to this question in the Q1 2024 earnings call: “when I saw Gen Z and Gen Alpha and even millennials and I saw the amount of time they were spending in terms of their total media screen time on video games, it was stunning to me, equal to what they spend on TV and movies.” Gaming research firm Newzoo has been pushing this story for a few years now, making Iger’s sales pitch sound out-of-touch.
Peltz is making it clear that he is “not trying to fire Bob Iger.” He has actively criticized Disney’s streaming strategy and spending. But, he is also an octogenarian with no background in media, streaming or gaming. Even if he wins the seat, neither his firm’s agenda—laid out in full on a website called “Restore the Magic”—nor his skillset seem primed for answering Ehrlich’s question.
As for Paramount, it has focused the story of its pivot entirely upon streaming. Gaming has not been a part of its post-linear vision. Its future seems to be puppeteered by its controlling shareholder, National Amusements Chairwoman Shari Redstone, who will be 70 years old next month.
The struggles these businesses now face reflect not being run by digital natives and rather by a gerontocracy.
The Deeper Issue
This perspective is not new, particularly for long-time readers of The Medium or my Medium Shift column for The Information. But, now the one-two punch of declines in the linear business—with a decline in advertising revenue that seems to have caught management teams off-guard—and theatrical business raise more existential questions about what a media business model should look like.
Streaming is not trending to replace the lost “free money” revenues of the linear model (down 7.4% in 2023), the DVD rental model (down 55% in 2023) and the DVD sales model (down 16% in 2023). The more streamers are “working more for less” growth—research firm Antenna reported there were 17 million fewer net additions in 2023 than in 2022— the less streaming feels like an alternative to theatrical. As for the question of whether any will be able to build gaming models, too, we can use Netflix Co-CEO Greg Peters’ “crawl-walk-run” metaphor: streaming is the equivalent of walking and gaming is the equivalent of running.
All objective evidence—primarily the inability of anyone but Netflix to deliver both growth and profitability—suggests that if streaming is indeed the future, Disney, Paramount and Warner Bros. Discovery are each still solving for the walk phase. As I wrote in “A Theoretical Physicist Walks Into A Media Company…”:
…it is becoming increasingly clear we no longer may evaluate media businesses through the lenses of finance and traditional distribution models, only. There are more and newer scientific factors that need to be understood by management teams.
A Solution... Or Lack Therefore
At this point, there is an abundance of ink (now digital) spilled diagnosing what is financially, operationally and strategically wrong with these companies. The particular problem of gerontocracy persists despite the declines in linear households and theatrical attendance because there is the anticipated outcome that cord-cutting will level out at 50 million households. Meaning, assuming $100 per household and a slower churn rate, there will be over $60 billion in gross annual revenues for these cable channels.
There has yet to be a similar financial case to be made for a post-linear, streaming-and-gaming-first future for Disney, Paramount and Warner Bros. Discovery. Part of that is because the leaders who have pushed for that vision—WarnerMedia’s former CEO Jason Kilar and Disney’s previous CEO Bob Chapek—have all been sent to the sidelines by management, shareholders and staff.
It is not a straightforward case to be made. As I previously wrote in “The Daisy or The Flywheel”, “if in the wholesale model the consumer wanted TV, in the retail model the consumer's needs are far more multivariable and complicated than launching a streaming service.” And, as I wrote in “A Theoretical Physicist Walks Into A Media Company…”, we no longer may evaluate media businesses through the lenses of financial and traditional distribution models, only.
So, we find companies like Disney, Paramount and Warner Bros. Discovery increasingly adrift at sea at time when the solutions to their respective and collective futures lie in skillsets of digital-native generations (Gen X, Millenials, Gen Z,and Generation Alpha). Excluding Gen Xers J.B. Perette at Warner Bros. Discovery (President & CEO - Global Streaming & Games) and Tom Ryan at Paramount (CEO of Streaming), none seem to have a seat the C-suite table.
The looming question for these pivotal next two weeks is whether Disney, Paramount and/or Warner Bros. Discovery will make moves that open the door to new, more retail-first and consumer-first business models and the types of C-Suite executives —ideally, with an engineering and/or computer science background—to build and operate them. Disney seems least likely as Iger has until 2026 to pick a new successor, and investors do not seem to be in a rush to show him to the exit door (yet).
Paramount & Warner Bros. Discovery
Paramount is interesting because its junk bond status means the debt is effectively void and there is no obligation for an acquiror to repay or reissue debt. That opens the door to more buyers than those who were willing to take on the debt. That means the door is now open to someone with a more ambitious streaming and gaming oriented vision for Paramount's IP to acquire some or all of its assets.
As for Warner Bros. Discovery, it is struggling with both its streaming and gaming stories. It has built a story of profitability in streaming but primarily through licensing its titles to competitors. As for gaming, it told investors on its Q4 2023 earnings call, "Suicide Squad, one of our key video game releases in 2024, has fallen short of our expectations since its release earlier in the quarter, setting our games business up for a tough year-over-year comp in Q1." Management has failed to counter Ehrlich's pointed skepticism from Q3.
But, the Harry Potter title "Hogwart's Legacy" generated more than $1.3 billion in the first quarter of this year alone. So, any prospective buyer with a streaming-first, gaming-first vision for Warner Bros. Discovery will have some strong assets as a foundation. But, as long as there are currently over 70 million linear households (including virtual MVPDs) and a projected 50 million households in a few years, they are going to need to have a true vision for a post-linear future.
That vision, or lack thereof, may be the key x-factor for whether we will see a gerontocracy start heading for the exits after the next two weeks.