2023 Could Be a Make-or-Break Year for Streaming Services

Media companies are facing a lot of pressure in 2023.

Cord cutting is accelerating and ad spending on linear networks is expected to decline. That's putting pressure on businesses with significant exposure to legacy television, like Walt Disney (DIS 0.49%) and Warner Bros. Discovery (WBD 3.37%), to show a path to profitability from their streaming businesses. Investors notably punished Disney stock when streaming losses topped $4 billion last year.

The push toward streaming profits can be seen throughout the industry, and Morgan Stanley analysts said, "If these moves do not deliver meaningful streaming profits, we see two options (not mutually exclusive): give up and/or consolidate."

2023 will be a make-or-break year for many streaming services stocks.

Pulling back on content spending

A recent analysis from Ampere suggests content spending growth will slow to just 2% next year.

The details show a marked slowdown for both linear programming and streaming programming. Commercial broadcasters will spend 3% less on content in 2023 and streaming content spending will grow just 8% after media companies grew their streaming content investments by 25% in 2022.

The new analysis is in line with Ampere's previous report showing a decline in scripted series orders across the industry. One way to save money on content is with unscripted reality series, which can cost a lot less per hour of entertainment.

The pullback on big-budget streaming is well underway. Warner Bros. Discovery has already made some high-profile cancellations and axed productions before they see the light of day. Disney, under Bob Iger, likewise will likely see some significant changes to its streaming strategy.

Even Netflix (NFLX -0.14%) has said it will maintain its content budget at around $17 billion for 2023, the same as 2021 and 2022. It does, however, believe it can spend that money more efficiently than it could in the prior two years without sacrificing subscriber engagement.

Advertising and price hikes

There's a growing focus on generating higher revenue per user for many of the new streaming media companies in 2023. Meanwhile, Netflix is moving downmarket with its new ad-supported tier. Both strategies are aimed at maximizing total revenue growth.

Disney has already implemented its price hike, and many other streamers are planning to raise prices as well if they haven't already. Warner Bros. Discovery is planning to merge HBO Max and Discovery+, which may come with a price hike too.

Charging more while providing less is a tough sell for media companies. Consumers were already showing price sensitivity in 2022, hopping from one streaming service to another. Netflix, in particular, found subscriber growth hard to come by after raising its prices at the start of the year.

Meanwhile, there's greater pressure on streaming media companies to grow ad businesses. Netflix and Disney just launched ad-supported tiers, and both companies project average revenue per account will be the same or better than the equivalent ad-free subscription. But the market is facing a severe downturn in advertising spending, so it may not provide the same boost in revenue as the management teams were thinking back when they made the plans.

Where to invest in streaming

Investors interested in the growth of streaming media companies have a lot of options now.

It's a very challenging environment for smaller media companies with a lot of exposure to traditional linear television. If they cannot show profits from streaming to offset declines in cable network revenues, it could be difficult for them to survive in the current landscape. They may need to switch to becoming a content licensor or look for a buyout.

But the big media companies like Disney and Warner Bros. Discovery aren't out of the woods either. Both have huge exposure to the cable bundle, and curbing spending on streaming and increasing prices could curb subscriber growth to the point where it stymies long-term profitability.

Netflix remains one of the best ways to invest in streaming. It's already profitable and now generating significant free cash flow for investors. That opens it up to remain opportunistic to grow the business and invest in content that may produce outsized value. It's a significant advantage in an environment where the competition is under pressure to show short-term financial results.