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John Harrison, media-entertainment chief at accounting firm EY, also shares his outlook on cord-cutting and his expectations for studios’ next moves as they target streaming profitability.
By Georg Szalai
Global Business Editor
From strikes and streaming losses to prominent box office disappointments, 2023 was another challenging year for many in Hollywood. But there was also the success of “Barbenheimer,” Taylor Swift’s blockbuster concert movie and signs that the streaming tide was starting to turn.
John Harrison, America’s media and entertainment leader at accounting and consulting firm EY, has followed the ups and downs of the industry, disruptions in the sector, as well as the challenges and opportunities for key players. “Feature films are tracking to a healthy 20 percent-plus year-over-year growth at the box office,” Harrison and his team wrote in a 2024 forecast. “Yet, despite decent performance in 2023, results remain 19 percent below the comparable period in the pre-COVID 2019.”
The Hollywood Reporter spoke with Harrison about what is next for the box office in 2024 and beyond, where cord-cutting is going and his expectations for media giants’ next moves as they target reaching streaming profitability.
Hollywood companies really started putting profitability at the center of their streaming strategies over the past year. Where do you see things standing at the end of 2023 and what do you expect going into 2024?
This was really the year where the path to streaming profitability came truly under the spotlight. Prior to 2023, it was how do we launch our platforms, how do we grow our subscriber base, how do we push content onto the streaming services and just drive activity, awareness and subscriber sign-ups.
In 2023, really driven by investors, candidly, there was just sort of a screeching halt on growth and a much greater focus on when are we going to get these services to break even and what’s the long-term profit potential here? And then how does that compare to the business that we’re leaving behind that we’re transitioning away from — linear, because there is a long-running transition that’s taking place from linear to streaming.
In 2024, I think, the focus will continue to be on profitability. And I think the investor base in media is forcing the issue and saying, “you know, you can’t keep burning billions of dollars a year in unprofitable streaming, especially when your profit engine of linear is in structural decline.” And so I think that’s driving some of the actions that we’re seeing right now. Obviously, with the launch of the ad tiers, there’s a view that the average revenue per user of a streaming subscriber that’s on an ad tier at a lower subscription rate, but also getting monetized through advertising, is a more profitable customer than just a pure SVOD customer. So everyone has launched ad tiers.
And then we’re getting early signs of a rebundling, of a new type of bundle or next-generation bundle, at least in the U.S. through some of the agreements between the media companies and the distributors, where the distributors are saying, “why should our consumers pay for pay TV and then also pay again, for the same content that’s a direct-to-consumer service? We want to rebundle those and offer the same on both platforms to our subscribers.” That’s going to be the template for 2024 as [carriage] renewals come up, and that has the benefit of extending the life of the cash flows generated by linear businesses longer than they probably would otherwise go. For media companies, it has the benefit of getting access to more streaming subscribers, especially for the ad tiers where you need reach.
Am I right that you were referring to the big Disney-Charter carriage deal as the blueprint for future deals? I know you usually can’t mention specific companies…
I think we can just mention it, because it has been so well covered. We believe the deal between Charter and Disney will serve as a template because it does protect the linear cash flow and the linear ecosystem.
I don’t believe that the pay TV universe will return to growth. But I think a transaction where you bundle linear with streaming at a single price point for consumers to really highlight the value you’re delivering, could very well slow the rate of cord-cutting. And that has very long-term benefits for media companies in terms of cash flow generation, and that lets them extend the runway as they bring their streaming services to break even. Assuming this thesis holds out, it takes some of the financial pressure off and allows them more time to drive profitability in their streaming service, and then ultimately figure out how the industry organizes itself.
What’s EY’s expectation for very small cable networks that distributors have grown less enthusiastic about carrying?
There are longtail networks, which are poorly viewed with low ratings. There’s not a lot of fresh content being invested into those networks by the media companies, because their best content is getting put in other places. So I do think in 2024, similar to what we saw at the end of 2023, we will see a rationalization of some of these very large network portfolios, where the distributors are saying, “we’re not driving value for this in the market with our pay TV customers,” the advertisers are saying “we aren’t really getting much value, because there’s no viewership here,” and the media companies aren’t investing much.
There just needs to be a shrinkage of that portfolio. I don’t think those networks today drive any strategic value for the media companies in an asset sale scenario or in a merger scenario. So the likelihood is, as distribution deals come up for renewal, companies will have a package of networks that is smaller than what they have today. And those longtail networks will get shut down.
You could reallocate the content to one of the networks that is a primary network, you could reallocate the content onto a streaming service or onto a FAST service.
What’s your forecast for the box office and if and when it can get back to pre-COVID levels?
Long-term, we’re bullish on the box office. The levels are still below pre-COVID, but we also need to understand that the shock to the system that COVID was, with the shutdown in production, and the strikes added another layer of disruption, is going to kick the recovery down the road a little bit.
But one of the things that I view as a positive is that there’s a lot of commentary coming out of the major studios right now about their understanding that we need to focus on quality over quantity. We’ve had some tremendous success in 2023 with original films and fresh storytelling, maybe some lackluster performance out of some of the bigger franchises that many viewed as surprising. But there is a willingness by consumers to get back into the movie theater when there is exciting, fresh content. And the studio leaders are fully aware of this and are investing in a future slate that hopefully will take advantage of consumers’ willingness to be in the theater to be entertained. And so I think it’s going to take some time, but I think the box office recovery is trending in a decent way.
It will be difficult to get to that pre-COVID level in 2024, just because of the strike and the disruption that will flow through the slate. But if you look at performance in the back half of 2024 and into 2025, I think that will be a pretty good indicator of long-term health.
Do you expect concert films to become a big lasting engine for the box office?
The concert films that we saw this year were truly unique events, but I think it’s hard to call that a trend.
Taylor Swift is an economic engine in and of herself. But I don’t think she is indicative of a normal path forward.
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