Frazer Harrison
Netflix (NFLX) is switching its strategy to include advertising as part of its monetization process for streaming. Disney (DIS) is doing well with the D+ service and recently used its D23 convention to promote the various branded series that will power the platform in the coming months. Warner Bros. Discovery (WBD) will eventually combine HBO Max and Discovery streaming as a way of standing out in the crowded field. Where does that leave Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA) and its Paramount+ product?
Looking forward to an expansion of its theatrical output, believe it or not.
And that is the right move at the right time. P+ will benefit from a robust multiplex strategy, and it makes sense to focus more resources on it over time.
This now points us to a recent trade article on Paramount Pictures chief Brian Robbins. The piece is peppered with quotes from a Bank of America media conference. Robbins has been in the industry for a long time, as an actor and producer/director, as well as an executive (he also leads Nickelodeon for Paramount Global) and entrepreneur (he co-founded AwesomenessTV which eventually cashed itself out to Comcast (CMCSA) and others; the latter subsequently sold the asset to his current employer).
He knows the business. It’s difficult not to agree with his call for an expansion of Paramount’s multiplex output, even as the residual effects of SARS-CoV-2 are still with us. He wants to see it reach between twelve and fifteen movies in a calendar year; I say go for the upper limit and beyond.
One of the reasons he’s bullish on theatrical is the idea that P+ can essentially act as a hedge for an expanded slate. We’ve known about this concept for a long time, as streaming today is what the DVD market was yesterday – a method of ancillary-revenue generation that allowed risks to be taken on the silver screen. It worked out well (so well, in fact, that talent always fought for a significant percentage of that backend) and incentivized capital investment in film assets. As Robbins put it, “the path to monetization now is greater” with a robust streaming industry leading the ancillary arena.
The challenge for Paramount Pictures is to find more franchises and execute. That, and keep budgets as rational as possible, of course, but that’s always a given. In fact, Robbins mentioned that expanding film output will in part rely on talent wanting to work during the pandemic, which I take to mean that compensation asks have indeed risen, thus inflating above-the-line costs.
One big factor that should allow for a higher investment in film product is the new acceptance by Hollywood for different window lengths. A window composed of forty-five days is most popular at this point as it presumably allows enough time in theaters for many films to do reasonably well while allowing other ancillary channels a sooner shot at amortizing the costs with higher-margin distribution models. Robbins touted the month-and-a-half length as being near ideal in this marketplace as the globe begins to move away from the worst of the pandemic.
There are other window lengths, too. For tentpoles, one can figure as much as three months if the business is there – certainly the new Top Gun film (actually from Paramount) falls under that category. Flexibility on window lengths is something I’ve always advocated for. Robbins and Paramount would be wise to explore all kinds of lengths depending on the movie and its reception, being careful to immediately port it over to ancillary as soon as a plateau hits, whether that be two weeks or two months, or somewhere in between or beyond. A calculus has yet to be developed that can pinpoint exactly when a film can be safely ported from the multiplex to other platforms (including physical), but it will eventually be developed, and that will allow media companies to adjust the size of a window to any X-days length that is needed for maximal ultimate profit.
Paramount is like any other studio in that it wants its streamer to be promoted by theatrical, as this news item from back in February highlights P+ being the pay-one window for the studio’s films starting in 2024; the movies will hit P+ after the theatrical window has been completed. P+ currently has 43 million subscribers, and as it looks to grow from that solid level, an expanded theatrical slate will become more important.
An advantage the company will have by programming more films (and, again, I think more than the higher end of the range should be the goal) is that a diverse slate can feed streaming and linear in very specific ways – i.e., it doesn’t have to be just P+ that gets the exclusive pay-one window. If CEO Bob Bakish was amenable to altering the stated pay-one 2024 strategy, the company could look at perhaps promoting other platforms, such as Showtime or Nickelodeon, with film product if a film’s target demographic coincided with the platform. As an example, a more independent-type film could port over to Showtime, either exclusively to or simultaneous with, P+ for purposes of giving that legacy platform a boost. An animated feature might be used on both Nickelodeon and P+. (In both cases, the window could coincide with transactional video-on-demand, which is pay-per-view.)
This thought experiment would assume, of course, that Showtime remains its own independent entity. According to the following SA item, Paramount Global is weighing the value of combining Showtime with P+.
Placing both these services together might make some sense as the streaming industry evolves. I don’t see anything disadvantageous about keeping them apart – separate platforms do make for a synergistic ecosystem – but let’s continue on this concept since it seems to be a possibility, especially against the backdrop of Disney thinking about doing a similar move with Hulu. If Showtime became a branded section within P+, then the idea of sending parts of a film slate to Showtime itself would represent an even more value-added strategy. It could bolster the idea in a consumer’s mind that the price for a streaming subscription is well worth it considering it promotes the perception that the service has a critical mass of content comprised of hit theatrical film output. Especially in that type of strategy, flexible window strategies based on X number of days would be particularly attractive. An example might be a low-budget horror film that exists on Showtime after a two-week window, and thus makes subscribers of the combined streamer glad to pay a premium to access a film that would have gone there instead of P+.
Another argument for a bigger film slate to propel P+ centers on the whole tentpole strategy in which every studio invests, and Paramount certainly has a fresh roadmap with the recent $1.4 billion global box-office success of the Top Gun continuation.
I would fully expect that another entry is in the offing, and that spin-off series as well as spin-off movies could turn this trademark into another cinematic universe.
Robbins obviously wants to seed more franchises and reboot extant but latent IP (e.g., Top Gun) and continue with current IP (e.g., Star Trek), but one thing I wish he would consider is not handing over any of the spoils in terms of co-finance deals. The Tom Cruise juggernaut has Skydance Media as a partner, and while that does mitigate risk, a studio such as Paramount would want to increase its investment in risk to keep the profits in-house. It represents a contradiction in the stated thinking: if streaming allows a studio to recoup costs of a film slate via recurring monthly revenue from a growing subscriber base, then said studio should have the confidence to be more aggressive with the economic structure of each project. Skydance was even involved with some of the recent Trek movie reboots – Paramount doesn’t even want to go it alone on that IP? Would Disney co-finance Star Wars?
Paramount could leverage new window strategies along with a deeper film slate to make the most of its deal with Walmart (WMT). The retailer, wanting to compete with Amazon (AMZN) and its Prime shipping/video service, will offer P+ to subscribers of the Walmart shipping service. I’ve often said that retailers such as Wal-Mart should really start movie/television studios of their own, but the risk profile of the Hollywood business model always creates a psychological impediment in the boardroom. Sure, making movies is risky, but it can be done in such a way so as to reduce risk, but that’s a story for another article. That’s okay, though, because Walmart seeking out the services of an already established streaming service is actually a solid solution. It will allow P+ to grow and will presumably yield a lot of data for Paramount as well as Walmart on consumer behavior/interaction with the service. Walmart will certainly be invested in promoting the service, so it helps P+ in that cost-regard, and considering merchandising is part of any total multiplex model, one has to assume there will be synergies there as well with the retailer (the corporate press release indicates the P+ version offered is the one with advertising support).
To conclude, an expanded film slate will help to stimulate the entire Paramount Global ecosystem, from linear to streaming. And I stress to Brian Robbins: go for more than fifteen films per year, even if many are lower-budget and not in direct competition with the lucrative tentpole model that Disney employs; smaller films can still lead to big results.
The Stock
Paramount Global shares currently possess an attractive valuation. The forward P/E ratio is especially attractive at just under 10. The 52-week price range is from $21 to $41, and at the time of this writing, shares could be had for just under $23.
The volatility in the overall markets is going to continue, so I expect the $21 end of that range to trend lower. Adding over time and averaging a good cost basis will work to generate capital gains over the longer term. Paramount Global is a major media company that has the IP and the linear/streaming ecosystem to effectively compete with Disney and Netflix.
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