The Bottom Line: Entertainment Giants Close Books on a Tough 2020 With Transformative Moves

The hard evidence of the transformation of Hollywood’s largest studios into the direct-to-consumer platform arena can be found in the current media earnings cycle.

In closing the books on the fourth quarter of a difficult year, entertainment behemoths are documenting the costs and the long-term impact of massive restructuring efforts. As Disney, NBCUniversal, WarnerMedia, ViacomCBS and Discovery re-engineer content and distribution operations for the future, Netflix logged another quarter that blew investors’ socks off.

The quarantine conditions of the past year have been nothing less than an accelerant to profitability for the company that spent its way to market dominance.

“They have been saving money on marketing, since new subscribers have been easy to come by during shelter-in-place, and they have conserved capital on new content, since it has been hard to get it produced with pandemic restrictions,” Michael Pachter, managing director of equity research for Wedbush Securities, tells Variety. He thinks the natural next step for Netflix is acquiring more content assets, such as MGM or Lionsgate, which are ripe for picking.

In many respects, Comcast is the most all-encompassing bellwether for the health of the content business because it is active on both sides of the digital ledger, providing broadband and Wi-Fi connectivity through its cable pipes that were once focused on delivering video programming. Today Comcast cares more about attracting and retaining high-end broadband subscribers who can no longer live without the high-speed connection that makes it possible to watch Netflix, listen to Spotify, post on Instagram and access all the other bandwidth-hungry apps out there competing for consumer attention.

Comcast’s fourth-quarter numbers were welcomed by the industry, demonstrating strong growth in the broadband services that are the foundation of Hollywood’s next iteration of exhibition. Comcast added a record 2 million net broadband subscribers for 2020, including a whopping 538,000 in the fourth quarter alone. No wonder the company isn’t too worried about losing 248,000 video subs in the quarter.

NBCUniversal’s massive shakeup of its TV operations — streamlining the management of broadcast and cable networks under two distinct leaders — was reflected in the $590 million write-down for severance costs that parent company Comcast took for the quarter.

“While our restructuring definitely took a lot of cost out of the business, which you’re starting to see in the numbers, the real purpose of it was to allow us to grow in the future and really run it as one business,” NBCUniversal CEO Jeff Shell told investors on Jan. 28.

Disney will begin a new era of financial reporting on Feb. 11 when it delivers its fiscal first quarter 2021 earnings. The company has been re-engineered over the past two years, following the 21st Century Fox acquisition, with new leadership and reporting lines.

The entertainment giant has split into two major units: Disney Media and Entertainment and Disney Parks, Experiences, and Products. Film and TV production and distribution operations will be combined into one round number, although it remains to be seen how much color Disney and Comcast will offer investors on distinct lines of business. But the changes in the financial reporting are symbolic of the larger push within Disney to tap all of the company’s internal resources to power content-hungry new streaming platforms as much as possible.

Disney chief financial officer Christine McCarthy told investors in December that starting with the company’s fiscal first-quarter report on Feb. 11, internal transactions between Disney’s production and distribution units would no longer be treated as deals between separate entities. Instead, Disney will determine the costs and share of the combined unit’s overhead that will be shouldered by each project. That means executives in production and distribution shouldn’t have competing interests to make their own bottom lines look better.

The circumstances of the pandemic have benefited Netflix at the same time they’ve had the effect of making fledgling streamers Disney Plus and AT&T’s HBO Max more competitive. Netflix remains the dominant streaming service in the U.S. with 73.9 million subscribers (and 195.2 million worldwide), although Disney Plus (73 million worldwide) is gaining ground.

Jason Kilar, CEO of AT&T’s Warner-Media, shook the firmament in entertainment with a sweeping decision to have Warner Bros.’ 2021 film slate have day-and-date premieres in theaters and on HBO Max, upending decades of theatrical exhibition precedent. The first such effort by the studio, “Wonder Woman 1984,” which had simultaneous bows on Dec. 25, drove a net gain of about 4 million subscribers for HBO Max in the fourth quarter, AT&T disclosed.

The limitations on moviegoing forced by the pandemic have sent other film titles to streamers. Disney has experimented with several offerings, including the latest Pixar feature, “Soul.” ViacomCBS is hoping Paramount Pictures’ family animated film “The SpongeBob Movie: Sponge on the Run,” originally destined for theaters, will bring some sizzle to the launch of Paramount Plus on March 4. More high-profile Paramount titles that have been in the can for months may join “SpongeBob” in a streaming debut, depending on how quickly multiplexes reopen in major markets this year.

Ted Sarandos, Netflix co-CEO and chief content officer, pointed to the intensified competitive landscape in talking up the streamers’ success with “Bridgerton,” the period drama from Shonda Rhimes’ Shondaland banner. The fact that Netflix served up one of its most-sampled original series ever was impressive, since it bowed the same day as “Wonder Woman 1984” and “Soul.”

“It does point to people having a tremendously big appetite for great entertainment and all different kinds of it,” Sarandos says. “And the fact that they’re willing to pay more for more programming is very encouraging.”

Wedbush Securities’ Pachter says Netflix’s torrid growth means that the company generated about $3 billion more in revenue last year than analysts expected. Netflix in the hunt for black ink raises the table stakes for everyone, Pachter predicts.

“That gives them a lot of leeway to keep spending a lot on content and to get to breakeven,” he says.

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