Understanding the Entertainment Business
The entertainment industry remains highly profitable. Given the tenor of recent business press coverage of the industry, this may seem hard to believe. Gloomy stories about business model uncertainty, company layoffs and the industry’s impending downturn are both standard refrains during union contract negotiations and the predictable result of Wall Street’s narrow focus on stock price and short-term profits. Such coverage distracts from a fundamental truth: the content created for this industry has tremendous value, and the companies have demonstrated time and time again that they can and will capture that value.
Over the decades, entertainment has been a highly profitable business, weathering periodic downturns but consistently rebounding. The profits of each of the entertainment divisions for our employers is represented by a segment in the chart above. In 2000, the combined entertainment operating profits of Disney, Fox, Paramount, NBC, Universal, and Time Warner were approximately $5 billion. By 2019, adding in Netflix, they were $30 billion out of more than $50 billion in total company profits and remained almost as high through the pandemic. Even excluding news and sports networks, entertainment profits were estimated to be more than $20 billion in 2021.
2022 company profits are lower, as they occasionally are when you look at company performance over decades. Warner Bros. Discovery reported losses for 2022 as the company has taken billions in content write-downs to justify an ill-advised merger driven by Wall Street’s demand for growth. Ongoing investment in streaming also lowered 2022 profits as the companies are still building up their new services. On the other hand, streaming services continue to grow subscribers, raise prices, and diversify revenue by introducing advertising. This reflects that the fundamentals of the business—demand for valuable content—remain strong.
Faced with this picture, analysts and the mainstream press continue their nervous coverage of the entertainment business, reflecting the reality that even when industry profits are high, Wall Street demands that those profits continually grow. The unexpected boom in pandemic-fueled subscriber sign-ups fostered Wall Street’s expectations, and several companies’ stock prices benefited. Once the pandemic surge in subscriptions plateaued, Wall Street enthusiasm cooled. Our employers have responded with layoffs and content write-downs in an effort to boost their stock prices, while spending billions on stock buybacks for the same purpose. These reactions, and the attendant stock market noise, do not fully grasp the strong fundamentals of the business, which we outline next.
Decades of Entertainment Profits
Over the past 20 years, the media companies have confronted each successive technological development that challenged the status quo and ultimately found ways to expand their businesses and increase profits.
The rise of cable channels in the early 2000s was projected to fragment audiences and end the mass audience programming era of broadcast. Instead, the legacy media companies expanded into cable, creating new networks to monetize broadcast content and expanding their original production. The companies then rode the growth of cable subscriptions in the US and around the world to record profits. In the US alone, basic cable affiliate fees—the payments cable operators make to cable networks for the right to package the networks to subscribers—have grown from just $6.7 billion in 2000 to $36 billion in 2015, and then to $40 billion annually for the past several years.1
Internationally, by exporting television networks or licensing television programming to foreign networks, the media companies generated $15 billion in annual revenue by 2013.2 They even diversified revenues for broadcast networks by making cable providers pay retransmission fees; what was a virtually non-existent revenue stream in 2000 reached $6.5 billion in 2015 and more than $14 billion dollars in 2022.3
The advent of internet distribution was another challenge to the status quo that ultimately brought billions of revenue into the industry. At the bargaining table, however, the companies abandon the rosy forecasts they give Wall Street and instead see the industry’s downfall. At the beginning of the 2007 MBA negotiations, Carol Lombardini, co-chief negotiator for the studios, explained the predicament to the Guild’s negotiating committee:
How will we deliver our product to people who don’t want to watch it on a given channel at a given time on a television screen? And how much can we expect them to pay to see it? Anything? If television is no longer ad-supported, how big an audience can we expect to reach?4
What actually happened is that the rise of Hulu, Netflix, and Amazon created a new and lucrative revenue stream for television and film programming, with those services spending more than $7 billion by 2016 on licensing library film and television content.5 The combination of foreign cable and SVOD licensing led to instant profitability for many television series. As former CBS CEO Les Moonves described at the time, “Just as we did with Amazon for Under the Dome and Extant, we presold the SVOD rights for [Zoo], this time to Netflix, meaning that Zoo will also be immediately profitable for us.”6 Warner Brothers similarly estimated that under this model, domestic and international license fees exceeded production costs across all series by 23%.7
On the features side, DVDs drove theatrical profits in the early 2000s. After that market matured, the studios shifted their strategic focus to franchise films to capture more box office revenue, particularly from international box office—which grew from approximately $13 billion in 20028 to $31 billion in 2019.9 Emerging from the pandemic, the studios have leveraged the increased demand for theatrical content from streaming services to drive film profitability. As NBC Universal CEO Jeffrey Shell said last year:
Movies drive platforms and I think—it’s not just a U.S. phenomenon, but around the world, we’re having a robust licensing business for our movie content, which is making the whole business more profitable.10
Transition to a Streaming-First Model
The business has transitioned to a streaming-first model, with the legacy film and television markets representing a declining share of total revenue. The early days of this shift were met with handwringing, as Wall Street analysts forecast that the decline of home video would doom the industry. Lehman Brothers was among the skeptics, writing in 2008:
We believe the feature film and TV content businesses are on the verge of structural changes that appear destined to impact the core revenue and profits of Entertainment business models…[W]e believe "packaged media" is a declining business and find it difficult to quantify how new digital revenue streams could even begin to offset the $24 billion/year U.S. retail home video market.11
Instead, the changes documented here increased the industry’s total revenue—from box office and home video, television subscriber payments and advertising and streaming revenues—from $155 billion a decade ago to over $220 billion, driven by the rise of streaming. The chart below illustrates this increase in revenue and streaming’s growing share, with each segment of the chart representing a different source of industry revenue.
The increased emphasis on streaming-first has had a short-term impact on company profits, the result both of the increased investment required to build original programming libraries for streaming services and of streaming’s current lower price point.
Company executives have been explicit since announcing their streaming plans that the early years would require more upfront investment and foregone revenues from content they would otherwise have licensed to third parties. Disney’s Sr. EVP and CFO, Christine McCarthy, noted in April 2019 that:
[F]rom a financial perspective, we expect Disney+'s operating results during the first couple of years post-launch to reflect the aggressive early investments we're making because we want to set the business up for long-term success.12
Despite the current clamor on Wall Street, the legacy media companies fully anticipated a transitional stage before their streaming services reached profitability. And the industry remains in the business of successfully monetizing the highly in-demand content writers create. As Warner Bros. Discovery Sr. EVP and CFO Gunnar Wiedenfels said in September 2022:
I do, as I said earlier, believe that over time, there is going to be pricing power in these services because I fundamentally believe that they're underpriced and that the content is undervalued right now.13
All subscription streaming services are now offering tiers with commercials, a shift projected to add $13 billion in revenue by 2025.14 Services are also raising subscription prices which, coupled with subscriber growth, is projected to increase domestic streaming revenues by another $7 billion by 2025. These developments will chart the companies’ path to profitability in streaming. Disney and Warner are projecting profits from their streaming services in 2024 or 2025.15 Netflix reported $6 billion in operating profits in 2021 and $5.6 billion in 2022, demonstrating how lucrative the streaming market can be. Warner Bros. Discovery was even recently named Goldman Sachs’ “favorite media stock” for 2023.16
Building successful and profitable services requires the companies to continue to offer new, original programming that attracts and retains subscribers. As shown in the chart below, streaming content spending on original programming across eight streamers is anticipated to grow to $19 billion this year, up from $5 billion in 2019.17 The chart below outlines the original content spending from each major streaming service.
In addition to these figures, the legacy companies are also spending billions on the original content they continue to make for traditional media, much of it making its way onto their streaming services. As Pearlena Igbokwe, Chairman of Universal Studio Group, said in January 2023:
I’ve been asked the question, are people going to stop buying TV shows? People are not going to stop buying TV shows, they need TV shows. The streamers need things for you to watch because you’re subscribing and you’re paying, and so they’re going to be making things.18
Conclusion
While Wall Street criticizes the media companies for failing quickly enough to generate short term profits from a still-nascent streaming market, the fundamental truth remains: the content writers create has tremendous value. The companies have demonstrated time and time again that they can and will capture that value, but writers and the WGA must work to ensure that success is shared.
Learn about how writers are doing in the next negotiations bulletin.
1 S&P Global Market Intelligence.
2 Morgan Stanley, Media: Diving Deep into Int’l Pay-TV: A Secular Growth Story (Dec. 19, 2012) and WGAW analysis.
3 S&P Global Market Intelligence.
4 Producers’ Responses to WGA Proposals, Opening Remarks from Carol Lombardini, EVP, Business & Legal Affairs (July 18, 2007).
5 S&P Global Market Intelligence.
6 Les Moonves, CBS Corporation Q2 2014 Earnings Call (Aug. 7, 2014).
7 Warner Brothers Investor Materials.
8 Pricewaterhouse Coopers, Global Entertainment and Media Outlook: 2007-2011.
9 MPA 2021 Theme Report.
10 Jeffrey Shell, CEO of NBC Universal, Remarks at Credit Suisse Communications Conference (June 14, 2022).
11 Lehman Brothers Equity Research, Entertainment (July 7, 2008).
12 Christine McCarthy, The Walt Disney Company Sr. EVP and CFO, Remarks at The Walt Disney Company Investor Day (Apr. 11, 2019).
13 Gunnar Wiedenfels, Warner Bros. Discovery Senior EVP & CFO, Remarks at Goldman Sachs Communacopia & Technology Conference 2022 (Sept. 13, 2022).
14 MoffettNathanson.
15 Disney and Warner Bros. Discovery investor materials.
16 Jennifer Maas, Warner Bros. Discover Shares Climb 8% on Goldman Sachs Analyst’s ‘Favorite Media Stock’ Label, Variety (Jan. 10, 2023).
17 S&P Global Market Intelligence.
18 Pearlena Igbokwe, Chairman of Universal Studio Group, Remarks at Variety’s Entertainment Summit at Consumer Electronics Show (Jan. 6, 2023).