2024 U.S. Media Outlook

Notably, Warner Bros. Discovery is on track to join Netflix in the exclusive club of positive DTC profitability in 2023. Looking forward, we expect the legacy media groups will deliver another material improvement in DTC profitability with losses dropping to ~$3.5 billion in 2024. We believe that Disney will lead the pack with a $1+ billion swing in EBITDA in the coming year and exit the September 2024 quarter with its DTC business in the black on a run-rate basis. We also expect losses at Paramount+ and Peacock will fall by ~$500 million, respectively, driven by a mix of subscriber growth, price increases and cost efficiencies. However, profitability for Paramount+ and Peacock remains elusive, with neither company willing to provide a timeline to hit break-even.

Consumers should brace for hefty rate hikes, which drop straight to the bottom line. Virtually all the major streaming video services announced or implemented meaningful (~20%) price increases during 2023. Unfortunately for consumers, we believe this is only the beginning, and we expect to see streamers lean heavily on pricing (particularly for ad-free tiers) in 2024 and beyond. Rate hikes are an effective way to quickly increase revenue, which drops straight to the bottom line at ~100% margin. While management teams argue that the services are underpriced relative to the value offered to consumers, we believe that the combination of higher prices and reduced spend on original content will undoubtedly weigh on subscriber growth. The primary strategy to address this risk is to raise prices more for the ad-free tiers relative to ad-lite, which has the added benefit of creating more advertising inventory (see Theme 2 for more details). Netflix’s crackdown on password sharing is effectively another method of price increase and we expect peers (led by Disney) to adopt similar practices in the coming year. We believe Netflix (with its expansive library and leading viewership share) and Disney (with its strong IP portfolio and dominance in the children’s market) are best positioned to push through consistent price hikes while managing churn. We also think the eventual launch of a flagship ESPN DTC service, which will likely come with a hefty price tag in the $20-30 range, may create an opportunity for sports-centric services like Paramount+ and Peacock to extract further price hikes.

Aggressive content pruning provides a tailwind to profitability. Many major media groups carried out sizable content write-downs (~$8+ billion) over the course of 2023 which included paring down the level of original content production and jettisoning under-watched library series. These (non-cash) impairments will flow through to the P&L via lower content amortization in 2024 and beyond. We believe media companies also used the production stoppage from the Hollywood strikes as a means to scale back on future production. Another major source of cost reduction is the deprioritization of expansion in international markets, which was made easier as the industry ceased to focus on subscribers as the primary measure of DTC success. We believe this is the correct strategy as most U.S. media companies were not well positioned for success in many international markets due to their lack of local programming, brand awareness and scale economies, and highlight the forecast improvement in profitability at Starz following its decision to exit nearly all of its foreign operations. However, this means that legacy media groups will operate at a permanent scale disadvantage relative to Netflix and tech players (Amazon, Apple and Google/YouTube).