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Disney Drop sends media stocks to worst drop in 30 years

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(Bloomberg) – Walt Disney Co. just suffered its worst one-day rout in 21 years. Warner Bros. Discovery Inc., Lions Gate Entertainment Corp. and AMC Entertainment Holdings Inc. all trade under $10. Paramount Global – home of MTV, CBS and Top Gun: Maverick – has lost half its value this year.

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Within months, Hollywood’s feel-good streaming story turned into a horror show.

Consumers are streaming more movies and shows, and watching less in theaters and on traditional channels. To encourage change and attract subscribers, media companies put some of their best programs online. But the new services are losing tons of money, even as viewers are abandoning traditional channels in droves. Executives who promised a smooth transition to the digital age are being punished by Wall Street, with media stocks heading for their biggest annual loss since at least 1990.

“The media and entertainment industry is going through a major transition,” said Porter Bibb, a longtime investor and business watcher. “They entered the tunnel, and no one knows where they will exit.”

The change is evident in the number of consumers canceling their pay-TV subscriptions. Cable TV giants Comcast Corp. and Charter Communications Inc. together lost nearly 800,000 TV subscribers last quarter. At this rate, that will mean millions less customers to help pay for MTV, CNN and ESPN.

The only bright light this quarter was Netflix Inc., whose loss of subscribers in the first half of the year prompted a reassessment of business models and industry stock values. The streaming industry pioneer reported a higher-than-expected 2.41 million new subscribers last quarter. Its shares are still down 57% this year.

Losses from Disney’s direct-to-consumer arm, driven by the Disney+ streaming service, more than doubled to $1.47 billion in the company’s fourth fiscal quarter, due to higher programming spending and the cost of deploying the service in new countries.

Weak cable TV ad revenue also hurt the company’s performance, as it has for other media giants. Disney ended the day down 13%, the biggest one-day loss since Sept. 17, 2001, when trading resumed after the Sept. 11 terrorist attacks.

Losses in media stocks are not for all Hollywood entertainment companies. The biggest loser on the S&P 500 Media & Entertainment Index this year is Meta Platforms Inc., Facebook’s parent company, which derives almost all of its revenue from advertising. Meta is down 70% this year.

The deterioration in Disney’s traditional TV business could be the biggest shock to this week’s earnings, according to MoffettNathanson analyst Michael Nathanson. The company forecast high-single-digit earnings growth next year, well below what it expected.

“Rarely have we been so incorrect in our forecasts of Disney earnings,” Nathanson wrote in a research note Wednesday. “It appears that the negative economic strength of the cord-cutting (plus a weakened advertising market) has finally begun to manifest itself in Disney’s fiscal year 2023 results,”

Disney’s sales of $20.2 billion were about $1 billion lower than analysts’ forecasts. Earnings, excluding certain items, fell to 30 cents, missing the average estimate of 51 cents from analysts polled by Bloomberg.

Disney told investors this week that losses from its streaming business have peaked.

At the Paley International Council summit in New York on Wednesday, Disney CEO Bob Chapek acknowledged Wall Street’s frustration with massive investments in online TV, including ESPN+ and Hulu.

“Our investors expect us to get a return on that,” he said.

The company, he noted, will celebrate its 100th anniversary next year. There will be speed bumps, Chapek said, especially when trying out a new business model.

“But it’s definitely better than the other option, which is to disappear,” he said.

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