Can Paramount+ and Discovery+ Compete After Archegos?
(Bloomberg Opinion) -- Two plus signs were poised to supercharge the television industry’s underdogs. Then it all seemed to come crashing down. Do Paramount+ and Discovery+ have what it takes to thrive in a Netflix world, or did investors just get a preview of their fate?
Their parent companies, ViacomCBS Inc. and Discovery Inc., almost escaped the first quarter with stock price gains of 150% each — almost. The advances were probably due at least in part to the handiwork of momentum-buying day traders, much as they were for GameStop Corp. and AMC Entertainment Holdings Inc., two stocks caught in a tug of war between Reddit’s investing community and Wall Street’s short sellers. However detached from reality the programmers’ stock prices became in recent weeks, they served to gin up faith in their streaming ambitions, with ViacomCBS even using the moment to raise $3 billion through an equity offering.
Then on Friday, both stocks sank nearly 30%. The knee-jerk assumption was that investors had turned negative on their streaming strategies. In fact, something entirely different was afoot: An overleveraged investment firm, Archegos Capital, failed to meet banks’ margin calls, forcing the sale of large blocks of shares in companies including ViacomCBS and Discovery. The effects are still rippling through markets.
But another development on Friday puts the skittishness around these two stocks into perspective: The price of Disney+ went up. Bloomberg News noted that it would cost $92 a month to have access to all the main subscription video apps now, in line with a typical cable-TV package. Most households won’t be willing to pay this, especially as the world goes back to socializing and travel. So which apps get cut? The answer for viewers today may not be the same one six months or a year from now.
Paramount+ launched March 4, and as mentioned, ViacomCBS just raised $3 billion to help improve it. Remember, all the Hollywood studios are coming off a year in which they couldn’t film. The less-than-impressive catalog of new series and movies on Disney+, HBO Max and Paramount+ may be about to change as vaccines allow their studios to return to work and resources are redirected toward streaming content. Users have had only a glimpse of what these services could look like once the focus is truly on streaming and not on cable or the box office or Covid-19.
The economics of streaming also favor some smaller programmers. For years, Discovery Chief Executive Officer David Zaslav has harped on how it doesn’t earn its fair share of advertising or cable fees. Technically, that’s true. In 2019, its networks had a 17% share of U.S. TV-watching time but only a 6% cut of distributors’ payments and 12% of ad dollars, according to Michael Nathanson, an analyst at MoffettNathanson LLC. He estimates Discovery’s monthly average revenue per user is $1 higher for Discovery+ than for its traditional pay-TV networks.
Cable also had the benefit of raising prices faster than inflation. Streaming just won’t work that way — viewers are already balking at $8 a month for Disney+, $14 for Netflix and so on. And those are the only two subscription services without ads, adding to why they’re the favorites. But it seems inevitable that someday all streaming apps will contain some form of ads to create revenue growth. Bundles are being revived as well.
It’s hard to pinpoint what the future cash flows of an as-yet developed product and competitive landscape are worth today. But what the GameStop phenomenon has demonstrated is that it’s probably somewhere between Reddit’s “to the moon” price and the depths of the selloff pit. Even with the past week’s losses, ViacomCBS and Discovery are still up quite a bit this year. ViacomCBS’s forward Ebitda multiple spiked to 16.2 but has since come back down to 9.4 — yet that’s still 30% higher than its two-year average. The same goes for Discovery.
It goes to show that investors are more optimistic about this pair now than when they were merely cable’s also-rans. It’s their chance to earn what they see as their share of profits — or at least score a handsome price in the industry’s next wave of mergers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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