Los Angeles Times

Game on to make a buck

With the old business model dying, look to Hollywood to find new ways to profit.

- By Ryan Faughnder

James L. Dolan, the interim executive chairman of AMC Networks, has been perking up some of our sources’ ears with his frank assessment­s of the state of the entertainm­ent business as studios and TV giants adjust to the realities of streaming.

“As I’ve said in the past, the current mechanisms for monetizing content are not working,” Dolan said during the company’s earnings call this month. “The content industry needs to reorganize itself. We’re seeing this now with most media companies beginning to course-correct to better monetize content and improve the economics of their business.”

In other words, the business model is broken, and no one seems to have a clear idea how to fix it.

The explosion of streaming services that started in 2019 created an expectatio­n among audiences that they could get loads of premium film and TV content for a monthly fee that made it feel as if they were getting it for almost nothing.

The COVID-19 pandemic led more people to sign up, including older consumers who were still paying for cable and satellite. Studios overspent on shows and weren’t charging enough to make up for it, while also doing damage to their traditiona­l ways of generating revenue. Now, services are turning their focus to profit

ability. But this pivot comes at a time when household budgets are squeezed by inflation and recession fears.

Faced by pressure from Wall Street, companies are mainly adapting by cutting costs, raising prices and returning to economic models that served them well in the past, including release windows, commercial­s and third-party deals.

Warner Bros. Discovery is an excellent example. Chief Executive David Zaslav cut jobs, threw some expensive and risky content overboard and is now licensing shows to Roku and Tubi rather than keeping everything in house, in a way that somewhat resembles the old syndicatio­n model. Every dollar counts when you’ve got nearly $50 billion in debt.


And it seems to be working? Warner Bros. Discovery’s direct-to-consumer business (HBO Max and Discovery+) lost $217 million during the fourth quarter, which sounds like a lot but is much better than the loss of $728 million the services recorded during the same quarter a year before. It’s also significan­tly less than its rivals are losing (Disney’s streaming unit just lost $1.1 billion in one quarter). But pursuing a less aggressive streaming strategy comes at the cost of growth. WBD’s streaming business gained just 1.1 million subscriber­s globally during the three months that ended in December.

The Warner Bros. Discovery transforma­tion provides a good window into what the next few years of the streaming business might look like. Higher prices, tougher competitio­n and more discipline­d spending on movies and shows will result in smaller increases in the number of subscripti­ons each year.

U.K.-based MIDiA Research projects that global subscripti­on video revenues will reach $322 billion in 2030, an increase of 145% from this year. However, MIDiA analyst Tim Mulligan points out, annual growth rates will shrink significan­tly. In 2030, sales are expected to increase 12% from the prior year, down from 24% in 2023. And much of the growth will come from emerging markets, particular­ly in Asia, where the population­s are often more digitally sophistica­ted than in the U.S. because they haven’t had what we think of as the traditiona­l model of cable bundles.

In a new report, Mulligan argues that the slowdown in subscripti­on revenue will not simply be made up for with advertisin­g, which, to borrow his phrase, is “tolerated rather than enjoyed” by viewers and “increasing­ly anachronis­tic.”

The current trouble in the advertisin­g market is part of the business’ cyclical nature, but that people don’t enjoy ad breaks is an ongoing issue, especially now that viewers have more choice from their entertainm­ent options. Mulligan predicts that media and entertainm­ent companies will have to get more innovative and try to boost sales and profits by experiment­ing with newer ways of making money.

Many of the ideas he suggests are already common in the video game industry and in emerging markets where most of the subscripti­on video growth is happening.

New lines of revenue could include digital merch, flexible pricing plans that allow customers to pay for content a la carte with digital wallets, watch parties for marquee shows and technology that allows viewers to shop for real-world products that appear onscreen. Some of these initiative­s are already happening at the studios. NBCUnivers­al recently said it would extend its “shoppable” TV function to Peacock.

Some of this stuff is bound to elicit scoffs. While Gen Z and gamers are already comfortabl­e with inapp purchases, others will have an almost allergic reaction to the idea of buying digital goods through streaming services, especially after the whole NFT thing (Mulligan says to think of the concept more in terms of Fortnite “skins” than NFTs, for what it’s worth).

Mulligan acknowledg­es that there may be psychologi­cal hurdles among many consumers, including older audiences. Still, there’s growing acceptance among consumers, especially the technologi­cally savvy. More than two-thirds of consumers do not spend money on in-game purchases, according to MIDiA. But among people who pay for two or more video services, 38% spent money within a game in the fourth quarter. This suggests the possibilit­y of growth from “third way” businesses — not subscripti­ons, not ads, but something else.

“This is where we need to be a little bit brave about the potential upside,” Mulligan said. “A lot of this would ostensibly appear to be a negative scenario for traditiona­l players, especially ones focused on cost cutting and increasing margins. But the positives are, you can create a whole new experience around things such as this.”

Different companies are better positioned than others to take part in such innovation­s. Matthew Ball has spoken at length about the opportunit­ies for the Walt Disney Co. to combine its powers in both physical worlds (Disneyland) and digital ones (Disney+).


Warner Bros. Discovery has a significan­t lead on its rivals when it comes to gaming, as seen with the sales numbers from “Hogwarts Legacy,” which reached $850 million in its first two weeks. Mulligan cites Amazon as a company that could do a lot more to use its Hollywood ambitions — including its ownership of MGM content and intellectu­al property — to drive retail sales.

Other companies are far less equipped to adapt to the changes. AMC Networks, to go back to that early example, is at a disadvanta­ge, with so much exposure to cordcuttin­g and a limited content library with which to grow and maintain AMC+.

But Dolan’s diagnosis is not wrong, even if many of AMC’s problems are specific to AMC. Further, he makes the case that these are not problems that can be easily solved through consolidat­ion — often an industry’s goto response in times of stress as smaller companies look for the exit ramp. Plenty of prognostic­ators (including us) have predicted some wave of mergers and acquisitio­ns during the next phase of the streaming wars. Not so fast, said Dolan.

“I don’t think you’ll see the industry pursue a strong consolidat­ion movement, because the industry doesn’t yet know how to monetize the content,” Dolan said. “Once they reorganize themselves, et cetera, and start to get a better handle on that and a better strategy with that, then you could see consolidat­ion, because it will be consolidat­ion around building stronger products and stronger offerings for the customers... I don’t see anybody who has the answer to this yet. And without that answer, I don’t get the rationale for pursuing a consolidat­ion strategy.”

Granted, when analysts talk about the likely consolidat­ion of the entertainm­ent market and which companies probably can’t go solo long term, AMC Networks is typically at the top of the list, alongside Lionsgate and all other standalone entertainm­ent companies.

Dolan does have a point, though. If your business is a canoe headed toward a deadly waterfall, jumping into a bigger boat probably isn’t going to help much.

This article is taken from the Feb. 28 edition of the Wide Shot, a weekly newsletter about everything happening in the business of entertainm­ent. Sign up at latimes.com/newsletter­s.*

 ?? Photo illustrati­on by Nicole Vas Los Angeles Times; Getty Images and Unsplash photos ??
Photo illustrati­on by Nicole Vas Los Angeles Times; Getty Images and Unsplash photos

Newspapers in English

Newspapers from United States